Statistics for case filings at the end of the second calendar quarter reflected a continuation of earlier trends regarding the filing of SEC enforcement actions. Over the first half of this year the number of cases declined significantly compared to the same period one year earlier. Likewise, the number of cases brought in the second quarter of 2013 dropped substantially compared to the same period last year.
The Commission issued rules this week under the JOBS Act, lifting a solicitation ban for certain private offerings. Earlier this month, however, a district court vacated the Commission’s rules requiring the disclosure by resource extraction issuers of certain payments made to foreign governments, concluding that the SEC misread the enabling legislation.
The Commission brought another “suspicious trading” insider trading case against unknown traders, quickly filing its case and securing an asset freeze. The agency also filed an insider trading action against the wife of a corporate insider, his long time friend and the friend’s broker.
Finally, in a ruling which may have a significant impact in FCPA cases, Judge Gleeson in the Eastern District of New York held that the court has the authority to approve and monitor a deferred prosecution agreement filed by the parties with the court. The ruling was made in the HSBC money laundering case.
Rule making: The Commission adopted a new rule to implement a JOBS Act requirement, lifting the ban on general solicitation or advertising for certain private securities offerings (here). At the same time the agency adopted amendments to rules implemented disqualifying felons and other “bad actors” from reliance on Rule 506 of Regulation D (here). The SEC also proposed amendments to Regulation D, Form D and Rule 156 to permit enhance its ability to evaluate the development of market practices in Rule 506 offerings (here). See also the statement of Commissioner Louis A. Aguilar, posted on the Harvard Law School Forum on Corporate Governance blog, Thursday, July 11, 2013 arguing that additional investor protections are required (here).
New task forces: The Commission announced the formation of two new task forces and an analytics group. The task forces will focus on financial statement fraud and microcap fraud. A new Center for Risk and Quantitative Analytics is being initiated to support the groups (here).
Remarks: Commissioner Elisse B. Walter delivered remarks titled Corporate Disclosure: The State, the Audience and the Players, at the Stanford Directors College, Palo Alto, CA (June 25, 2013). Her remarks focused on providing investors with the full picture in disclosure, not just the regulatory minimum (here).
SEC Enforcement: Filings and settlements
Half year statistics: In the first half of 2012 the Commission filed 150 enforcement actions (excluding tag-a-long proceedings, which are really an additional remedy adjunct to another action, and delisting proceedings). During the same period this year the SEC filed a total of 116 enforcement actions. Similarly, in the second quarter of 2012 the Commission initiated 99 enforcement cases compared to just 51 in the most recent quarter.
Two week statistics: This week the Commission filed 7 civil injunctive actions and no administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Offering fraud: SEC v. Arias, Civil Action No. 12-cv-2937 (E.D. N.Y.) is a previously filed action against Martin Hartmann and Laura Ann Tordy, among others, relating to the sale of interests in Agape World, Inc. which engaged in an offering fraud and Ponzi scheme. The two defendants, who sold interests in the fund, settled with the Commission and judgment was entered. Each consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). In addition, Mr. Hartmann was ordered to pay $3,591,388 in disgorgement along with prejudgment interest and a penalty in the amount of the disgorgement. Ms. Tordy was ordered to pay $1,048,485 in disgorgement along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. See also Lit. Rel. No. 21748 (July 11, 2013).
False statements: SEC v. Merkin, Civil Action No. 1:11-cv-23585 (S.D. Fla.) is a previously filed action against attorney Stewart A. Merkin. The Commission prevailed on a summary judgment motion in an action which alleged that Mr. Merkin wrote letters on four occasion that he permitted to be posted on the website for the Pink Sheets stating that StratoComm Corporation was not under investigation by the SEC. At the time he was representing the company and others in the inquiry. Mr. Merkin consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and requiring him to pay a total of $125,000 in disgorgement, prejudgment interest and civil penalties. He is also barred from participating in any penny stock offering. Mr. Merkin retains his right to appeal the summary judgment ruling. See also Lit. Rel. No. 22746 (July 9, 2013).
Investment fund fraud: SEC v. Fowler, Civil Action No. 8:13-cv-1747 (M. D. Fla. Filed July 8, 2013) is an action against John Fowler, his son Jeffrey and Julianne Chalmers. Beginning in January 2011, and continuing over the next several months, John and Jeffrey Fowler raised about $4.3 million from 70 investors who purchased promissory notes in a fund that was supposedly affiliated with a prominent hedge fund. Investors were told that the returns for the fund were guaranteed. False promissory notes were issued along with related security materials. The fund was in fact a Ponzi scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). A parallel criminal case was brought against John and Jeffrey Fowler. Both men were convicted and are serving prison sentences. See also Lit. Rel. No. 22744 (July 8, 2013).
Insider trading: SEC v. One or More Unknown Traders in the Securities of Onyx Pharmaceuticals, Inc., (S.D.N.Y. Filed July 3, 2013) is a “suspicious trading” action centered on the proposed acquisition of Onyx Pharmaceutical by Amgen, Inc. On Sunday, June 30 Onyx, announced that it had received but rejected a bid to purchase the outstanding shares of the company from Amgen, Inc., priced at $120 per share.
The transaction began on June 13, 2013 when Amgen’s CEO met with his counterpart from Onyx. At the meeting Amgen’s CEO made an unsolicited oral offer to acquire Onyx. The offer was followed by a written proposal the next day, forwarded to the board that same day. On June 26, 2013, Onyx’s board met and rejected the offer. Two days later on Friday, June 28, 2013, that decision was conveyed to Amgen. The same day an article appeared in the Financial Post, a Canadian publication, regarding the offer. Amgen, however, did not issue an announcement about the proposal until Sunday, June 30, 2013. Unknown purchasers began buying call options in Onyx on June 26, the day the Onyx board met to consider the offer. The purchases continued until Friday through accounts at Citigroup Global Markets, Inc. and Barclays Capital, Inc. On Monday, July 1, 2013, the first trading day after the announcement of the rejected deal, Onyx shares closed at $131.33, an increase of $44.51 or about 51% over the prior day’s closing price. The options in the two accounts, purchased for about $305,000, were worth about $4.6 million, an increase of almost 14,200% in three trading days. Those profits are now frozen under the court’s order. The case is in litigation.
Unregistered securities: SEC v. Tavella, Civil Action No. 13 civ 4609 (S.D.N.Y. Filed July 3, 2013) is an action against two groups of defendants. The first, denominated the selling defendants, includes Magdalena Tavella, Andres Horacio Fieicchia, Gonalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari. The second includes Mariano Graciarena and Fernando Loureyro. All the defendants are citizens of Argentina. In the last thirty days the selling defendants deposited about $34 million worth of shares of Biozoom, Inc. into their brokerage accounts and sold them. About $17 million of those proceeds have been wired out of the country. The other two defendants have deposited about 4.4 million shares of the company into their accounts. Biozoom was previously known as Entertainment Arts. When the name was changed the company altered its business model from making leather goods to developing biomedical technology. No registration statement is in effect for the shares. Papers purporting to demonstrate that the shares are free trading furnished by the selling defendants are false, according to the allegations in the court papers. The Commission’s complaint alleges violations of Securities Act Section 5 and 20(b). The Commission obtained a freeze order over all of the accounts. The case is in litigation.
Investment fund fraud: SEC v. Franquelin, Civil Action No. 1:13-cv-00096 (D. Utah Filed July 2, 2013) is an action against Armand Franquelin and Martin Pool alleging that from January 2006 through August 2010 the two men raised about $12 million by selling interests in the Elvia Group to about 130 investors. Elvia was supposed to invest in real estate and pay returns of 10% to as much as 240% per year. In fact the funds were diverted to the personal use of the defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Mr. Pool settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. He also agreed to pay disgorgement of $970,510 and prejudgment interest. Payment of those sums and a civil penalty were waived based on financial condition. See also Lit. Rel. No. 22740 (July 2, 2013).
Insider trading: SEC v. Murrell, Civil Action No. 2:13-cv-12856 (E.D. Mich. July 1, 2013). The case centers on the acquisition of Rohm & Haas Co. by The Dow Chemical Company, announced on July 10, 2008. The defendants are Mack Murrell, now husband of Stacey Murrell, an administrative assistant to Dow’s CFO, his longtime friend, David Teekell and Mr. Teekel’s broker, Charles Adams. In early June 2008 Rohm began discussions about the possible sale of the company with Dow and two others.
On July 2, 2009 Dow held a special board meeting which approved a cash offer for Rohm at a price of up to $78 per shares. The next morning Mr. Murrell emailed David Teekell asking him to call, noting he had lost the phone number. Later that day the two men spoke in what became a series of telephone calls. That same day Mr. Teekell called his broker, Defendant Adams. Between the date of the email and the deal announcement the two men had multiple contacts, although Mr. Murrell was traveling in the Middle East.
As the two men communicated they acquired significant options positions. Following the deal announcement, Rohm closed at $73.62, up 64%. Mr. Teekell had profits of $534,526. Mr. Adams had profits of $64,450. Two customers for whom Mr. Adam traded through discretionary accounts had profits of $42,596. The complaint alleges violations of Exchange Act Section 10(b). David Teekell agreed to settle with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits, pay prejudgment interest and a penalty equal to the amount of the disgorgement. The other defendants did not settle. See also Lit. Rel. No. 22738 (July 1, 2013).
Investment fraud: SEC v. Madison, Civil Action No. 3:13-cv-2499 (N.D. Tex. Filed June 28, 2013) is an action naming as defendants Matthew Madison, Dwight McGhee and Infinity Exploration, LLC. The complaint alleges that the two men conducted a fraudulent offering of interests in Infinity by assuring investors that they would obtain an interest in the firm’s two oil and gas joint ventures. In fact Infinity did not own the ventures but only indirect interests. The offering materials also erroneously described Mr. Madison’s experience and omitted his federal felony conviction. About $2 million was raised from 40 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also Lit. Rel. No. 22736 (July 1, 2013).
Financial fraud: SEC v. JBI, Inc., Civil Action No. CA. No. 1:12-cv-10012 (D. Mass. Filed Jan. 4, 2012) is a previously filed action against the firm, John Bordynuik, the CEO of the firm, and Ronald Baldwin, Jr., its CFO. Mr. Bordynulk and the firm settled with the Commission. The complaint alleged that in 2009 JBI materially falsified its financial statements by overstating the value of certain assets. Those financial statements were then used in two PIPE offerings to raise over $8.4 million. Each settling defendant consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm will also pay a penalty of $150,000 while Mr. Bordynulk will pay $110,000 and be barred for five years from acting as an officer or director of a public company. See also Lit. Rel. No. 22735 (June 27, 2013).
Internal controls: SEC v. Fuqi International, Inc., Civil Action No. 1:13-cv-995 (D.D.C. Filed July 1, 2013). Fuqi is a PRC based jewelry company whose chairman, president and CEO is defendant Yu Kwai Chong, a Chinese national. While completing a restatement, the outside auditors discovered that between September 2009 and November 2010 Mr. Chong had directed the transfer of about $134 million in over 50 transactions from firm bank accounts to accounts at other banks for three jewelry companies in China. The transfers were booked as “other payables” or “prepaids.” The board of directors was unaware of the transactions. An internal investigation was conducted during which Mr. Chong explained that he authorized the transactions at the request of a local bank manager despite the fact that he did not know the three companies to which the funds were transferred. Few records were available, although the funds were returned. The company lacked adequate internal accounting controls, according to the SEC’s complaint. Fuqi’s treasury controls, for example, did not require that internal fund transfer applications identify any specific business purpose or be supported by documentation and there was no effective reconciliation process. The SEC’s complaint alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Fuqi and Mr. Chong settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of the federal securities laws. In addition, the company and Mr. Chong were directed to pay civil penalties of, respectively, $1 million and $150,000. Mr. Chong was also barred from serving as an officer and director of a public company for five years. See also Lit. Rel. No. 22739 (July 1, 2013).
Other SEC litigation
Rulemaking: American Petroleum Institute v. SEC, Civil Action No. 12-1668 (D.D.C. Opinion issued July 2, 2013) is an action centered on the rules issued by the Commission under Section 13(q) of the Exchange Act, added under Dodd-Frank. The section requires the disclosure of certain payments made to foreign governments by resource mineral extraction issuers. Subsection (2)(A) of the section provides that: “the Commission shall issue final rules that require each resource extraction issuer to include in an annual report any payment made . . . to a foreign government .. . for the purpose of the commercial development of oil, natural gas, or minerals . . . “ Subsection (3)(A), concerning the public availability of this information, states in part that “To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules issued under paragraph (2)(A).” (emphasis added). The Commission’s implementing rules require that the annual report of the issuer be made public. The agency also refused to grant an exemption for countries which barred such disclosures despite acknowledging prohibitive costs.
On cross-motions for summary judgment, the district court ruled in favor of plaintiffs and against the Commission. First, the rule requirement that the annual report be made public is not supported by the plain language of the provision dispositive, according to the court. There is nothing in Subsection (2)(A) which mandates filing an annual report which specifies that it is to be made public.
Second, the SEC’s refusal to grant the requested exemption was “arbitrary and capricious.” By summarily stating that it could not grant an exemption the Commission ignored the plain meaning of the term “exemption.”
Investment fund fraud: U.S. v. Walji (S.D.N.Y. July 2, 2013) is an action against Abdul Walji and Reniero Francisco, respectively, the CEO and President of Arista LLC, an investment fund. Mr. Walji pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud, one count of commodities fraud and one count of securities fraud. Mr. Francisco pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud and one count of securities fraud. The guilty pleas were based on two fraudulent schemes. First, as to Arista, both defendants solicited investors in 2010 and 2011. In doing so they misrepresented the nature of the investments and furnished investors with false accounting documents concealing their actual operating losses. About $2.7 million in investor funds were misappropriated. In a second scheme, conducted by Mr. Walji from early 2008 through June 2013, the defendant used pension plan funds he administered to defraud investors through a series of misrepresentations regarding their investments and the performance of the funds. In addition, Mr. Walji misappropriated about $300,000 of investor funds. There were about 35 victims of each scheme. Losses for each were about $10 million.
Deferred prosecution agreements
Deferred prosecution agreements: U.S. v. HSBC Bank USA, N.A., Case No. 12-CR-763 (E.D.N.Y. Order dated July 1, 20130) is an action in which Judge Gleeson held that parties submitting a deferred prosecution agreement to the court have placed “a criminal matter on the docket of a federal court [and have thus] . . . subjected their DPA to the legitimate exercise of that court’s authority.” While Judge Gleeson approved the deferred prosecution agreement, he will continue to monitor it despite the arguments of the parties. The case is based on violations of the Bank Secrecy Act and the International Emergency Economic Powers Act by HSBC Bank and HSBC Holdings Plc. To resolve the charges the defendants entered into a deferred prosecution agreement. The government filed a criminal information alleging the violations along with the deferred prosecution agreement with the court and the parties requested that the court exclude for purposes of the Speedy Trial Act, the term of the DPA.
The critical question here was the authority of the Court with respect to the DPA. Judge Gleeson held that “This Court has authority to approve or reject the DPA pursuant to its supervisory power.” Here the parties chose to initiate a proceeding before the Court by placing on the docket a federal criminal case and requesting a ruling as to the Speedy Trial Act. This implicated the powers and authority of the Court. “By placing a criminal matter on the docket of a federal court, the parties have subjected their DPA to the legitimate exercise of that court’s authority,” the court held. After reviewing the terms of the DPA Judge Gleeson approved it. He also held that “my approval is subject to a continued monitoring of its execution and implementation.”
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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