The Commission issued its long discussed rules reforming money markets this week, requiring that institutional prime money market funds have a floating NAV. The vote was 3-2.
In the Court of Appeals the SEC lost its effort to compel SIPIC to cover certain losses related to the Stamford Ponzi scheme. SEC Enforcement filed six actions this week. Two were tied to a prior actions centered on the sale of unregistered securities; one is a market crisis action tied to the sale of RMBS; another centered on a microcap fraud; and one alleged insider trading charges by an IR adviser.
Rules: The Commission adopted money fund reform rules which require a floating net asset value for institutional prime money market funds. The agency also issued a related notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds and proposed amendments to certain related rules regarding references to credit ratings (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive actions, DPAs, NPAs or reports and 1 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Unregistered securities: SEC v. DDBO Consulting, Inc., (S.D. Fla. Filed July 24, 2014) is an action against the company, DBBG Consulting, Inc., Dean Baker, the president of both entities, and Bret Grove, a vice president of DBBG. Defendants sold unregistered shares of Thought Development, Inc. to at least 100 investors from July 2011 through November 2012. Thought Development, a defendant in a previously filed enforcement action, supposedly developed a laser-line system that can be used in professional and collegiate sporting events as described more fully here. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The defendants have agreed to settle but the terms were not disclosed. This action is related to the next case. The U.S. Attorney for the Southern District of Florida also filed criminal charges against Messrs. Baker and Grove as well as two individuals named in the initial complaint against Thought Development.
Unregistered securities: SEC v. Calpacific Equity Group, LLC, Civil Action No. 2:14-cv-05754 (C.D. Cal. Filed July 24, 2014) is an action against the firm, Daniel Baker, its managing director, and Demosthenes Dritsas, a managing member of the firm. This action alleges that during about the same time period as the action against DDBO Consulting the defendants sold unregistered shares in Thought Development, Inc. to at least 34 investors. The complaint alleges violations of the same Sections as the DDBO complaint. The defendants have agreed to settle with the Commission. The terms were not disclosed. The U.S. Attorney for the Central District of California brought criminal charges against Messrs. Baker and Dritsas who have entered guilty pleas in the case.
Market crisis: In the Matter of Morgan Stanley & Co. LLC, Adm. Proc. File No. 3-15982 (July 24, 2014) is a proceeding naming the firm, a registered broker-dealer, as a Respondent along with two of its subsidiaries. The action centers on two subprime residential mortgage-backed securities transactions in 2007. The two transactions had an aggregate principal value balance of over $2.5 billion. At the time of the offerings the subprime residential real estate market was unraveling and delinquency rates were spiking upward. The firm had a practice of making RMBS offerings with delinquency rates of 1% or less. In the two offerings involved here the disclosure documents recited that the delinquency rates for 30 to 60 days were 1% or less as to each pool’s aggregate principal balance as of the date on the documents. At the time Morgan Stanley had historical delinquency data for the one offering showing a 17% delinquency rate at some point since origination. For that same offering the bank used payment data that post-dated the closing date in the documents which also impacted the delinquency rate. As to the other offering, after the closing date in the documents Morgan Stanly learned that the rate was actually 4.5%. As a result the information given to investors was incorrect, according to the Order. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceeding, Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition they agreed, on a joint and several basis, to pay disgorgement of $160,627,852, prejudgment interest and a civil penalty of $96,376,711. The payments will be placed in a fair fund. Respondents agreed that in any private action they would not claim an offset based on the civil penalty paid in this proceeding.
Investment fraud: SEC v. International Stock Transfer, Inc., Civil Action No. 14-cv-4435 (E.D.N.Y. Filed July 23, 2014) is an action against the firm, a transfer agent, and its owner, Cecil Franklin Speight. The defendants raised about $3.3 million from over 70 investors who were induced by boiler room tactics to purchase shares which were supposed to be safe and have a high rate of return. The appearance of safety was bolstered by having payments sent to attorneys. What investors received was fake stock certificates. The defendants misappropriated the investor funds. The complaint alleges violations of Securities Act Sections 17(a), Exchange Act Sections 10(b) and 17(a)(3). To partially resolve the action each defendant consented to the entry of judgments permanently enjoining them from future violations of the securities laws and requiring them to pay disgorgement, prejudgment interest and penalties in amounts to be determined by the Court. Defendant Speight also consented to the entry of an officer and director bar and a penny stock bar. In a parallel criminal case he also pleaded guilty to a criminal charge. See Lit. Rel. No. 23050 (July 24, 2014).
Insider trading: SEC v. McGrath, Civil Action No. 14 CV 5483 (S.D.N.Y. Filed July 22, 2014) is an action against Kevin McGrath, a partner at investor relations firm Cameron Associates. The complaint alleges that Mr. McGrath traded in the shares of two firm clients after working on their press releases but before those releases were issued. The clients are Misonix, Inc. and Clean Diesel Technologies, Inc. First, in April 2009 Mr. McGrath purchased 10,000 shares of Misonix stock. Later that same month he began communicating with the company on an Earnings Release which contained disappointing news. After learning when it would be issued he immediately sold his shares. When the share price dropped about 36% after the release was issued he avoided losses of $5,400.
Second, in May 2011 Mr. McGrath was involved in drafting a release for Clean Diesel. It announced a new contract. After learning its release date he immediately purchased 1,000 shares of Clean Diesel stock. After the issuance of the release the share price increased 95%, giving Mr. McGrath profits of $6,376. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. McGrath resolved the matter, consenting to the entry of an injunction which prohibits future violations of the Sections cited in the complaint. It also contains provisions to implement the order. In addition, he agreed to pay disgorgement of $11,776, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23049 (July 22, 2014).
Insider trading: SEC v. Canas, Civil Action No. 13-cv-5299 (S.D.N.Y.) is a previously filed action against Cedric Canas Maillard, an executive advisor to the CEO of Banco Santander, and his friend, Julio Marin Ugedo. It alleged that the two men traded on inside information about the acquisition of Potash Corporation by BHP Billiton in which the bank was involved. Both men traded in advance of the deal announcement. Mr. Canas had profit of $917,239 while his friend had $43,566. Mr. Canas settled, and the Court entered an order prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Canas also agreed to pay disgorgement in the amount of the total profits of both defendants, and a civil penalty equal to that amount which is $960,806. See Lit. Rel. No. 23048 (July 22, 2014).
Microcap fraud: SEC v. Plummer, Civil Action No. 14 CV 5441 (S.D.N.Y. Filed July 18, 2014) is a microcap fraud action which names as defendants: Christopher Plummer, the CEO of Franklin Energy and Madison & Wall Investments, LLC, and a recidivist fraudster currently in prison; Lex Cowset, the CEO of CytoGenix, Inc., a microcap pharmaceutical company; and GyroGenix. The complaint centers on two schemes involving joint ventures with Franklin Energy. In the first, Company A, supposedly a successful securities company, claimed to be transforming into renewable energy through a joint venture with a Franklin subsidiary. Despite a series of web postings and releases touting the venture, neither company had the resources to implement it. Yet it had market impact. The second scheme was similar, but involved CytoGenix which had lost all of its intellectual property in the pharmaceutical area through litigation. Again a joint venture was touted with Franklin. Its purpose was to identify and develop biologically based technologies for energy production. About $330,000 was raised through an offering. Again, neither company had the resources to implement the venture. The investor funds were misappropriated. The complaint alleges violations of Exchange Act Sections 10(b) and 20(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23047 (July 18, 2014).
Insider trading: U.S. v. Wang, 3:13-cr-03487(C.D. Calif. Filed Sept. 20, 2013) is a case in which former Qualcomm Inc. executive Jing Wang pleaded guilty to insider trading and money laundering. In three instances beginning in 2010 he traded on inside information obtained from his employer. The trades resulted in over $250,000 in profits. His broker and longtime friend, Gary Yin, placed the trades and in two instances also traded for his own account. The money laundering charge was based on the efforts of Mr. Wang to transfer over $525,000 from an offshore account he controlled that included about $250,000 from the insider trading to another nominee brokerage account in the British Virgin Islands. As part of the plea agreement Mr. Wang also admitted to fabricating evidence and a false cover story in conjunction with his brother Bing Wang and Mr. Yin. Mr. Wang’s sentencing has not been scheduled. See also SEC v. Wang, Civil Action No. 3:13-cv-02270(S.D. Cal. Filed Sept. 23, 2013).
Bernd Kowaleski, formerly the CEO of BizJet, a subsidiary of Lufthansa Technik, AG, pleaded guilty to one count of conspiracy and one substantive FCPA violation. Mr. Kowaleski is the third company executive to plead guilty. The underlying scheme involved the payment of bribes, in some instances through shell companies, to officials in Mexico and Panama to secure contracts for aircraft maintenance repair and overhaul contracts. Previously the company entered into a deferred prosecution agreement. U.S. v. Bizjet International Sales & Support Inc., Case No. 12-cr-61 (N.D. Okla. March 14, 2012).
MOU: The Board announced that it had entered into a cooperative agreement with the Danish Business Authority for the oversight of audit firms subject to the regulatory jurisdictions of both regulators. It takes effect immediately. The agreement provides a framework for inspections and provides for cooperation and the exchange of confidential information.
Court of Appeals
SIPIC coverage: SEC v. SIPC, No. 12-5286 (D.C. Cir. Decided July 18, 2014) is an action in which the SEC sought to compel SIPIC to provide coverage for those who purchased CDs from Stanford International Bank, LTD, an offshore bank that was part of the Stanford empire. Those who purchased CD’s did so on the recommendation of the Stanford Group Company, a Huston-based broker-dealer registered with the SEC.
The District Court concluded that SIPIC was correct in determining that the CD purchasers are not customers of the broker-dealer within the meaning of the Act, a prerequisite to coverage.
The Circuit Court affirmed. The critical question here, according to that Court, is whether those who purchased bank CD’s at the suggestion of the broker-dealer are customers for purposes of the Securities Investor Protection Act. A customer is generally defined as a person who has deposited cash with the broker for the purpose of purchasing securities. A claimant must generally demonstrate that the broker received or held the claimant’s property and that the transaction gave rise to the claim and contained the indicia of a fiduciary relationship between the customer and the broker.
In this case the purchasers of SIBL CDs are not customers within the meaning of the Act, the Court held. It is undisputed that the investors did not deposit cash with SGC. Since “SGC had no custody over the investors’ cash or securities, the investors do not qualify as SGC ‘customers’ under the ordinary operation of the statutory definition” the Court concluded.
The SEC argued, however, that given the interrelation of the Stanford operations, funds deposited with SIBL should be viewed as effectively on deposit with SGC – the entities should be viewed as one. This theory is grounded on the bankruptcy doctrine of “substantive consolidation” which, under equitable principles, would view the entities as one. Even assuming this is correct, the Court held, it does not support the position of the SEC since the CDs are a contractual investment in the entity which added to the capital of SIBL. Such instruments are excluded from coverage under the Act. While the plight of these investors is unfortunate, the Court noted, they are not covered by the statute.
Unauthorized transactions: The Australian Securities & Investment Commission banned financial adviser Adam David Joyner from providing financial services. The regulator found that Mr. Joyner had used client funds for purposes other than as instructed, had failed to implement trades and tried to cover-up his conduct. He caused client losses of over $1 million.
Investment fund fraud: Criminal charges were initiated against Frederick L. Hansen, formerly a director of Global Rule Pty Ltd, following an investigation by the ASIC. The agency had a receiver appointed for the company and found that Global Rule had raised about $16.3 million from 170 investors with promises of returns at 21.6% from early 2009 to the fall of 2010. Mr. Hansen is facing criminal charges which carry a maximum of 12 years in prison.
Misappropriation: The Securities and Futures Commission revoked the licenses of Union Securities Limited and its two responsible officers, Ma Kin Chung and Cheng Tai Ha. The two individuals were also banned for life from the securities business. The action is based on the misappropriation of $400,000 from two clients who deposited funds with the firm for securities trading. Both individuals have fled Hong Kong.
Manipulation: The SFC secured the conviction of registered representative Wong Pok Wang on 13 counts of manipulating the indicative equilibrium price or IED for eight derivate warrants and callable bull/bear contracts during the pre-opening session. The conduct took place from October 2010 to February 2011.
Asset freeze: The SFC obtained an injunction and freeze order over 107,290,000 shares of Hisense Kelson Electrical Holdings Ltd., up to a sum of $1.2 billion. The shares were held by, or for the benefit of Gu Chujun, the former chairman and CEO of Greencool Technologies Holdings Ltd. Hisense was an exchange listed company. The action is based on market misconduct by Mr. Chujun.
Corruption: The Serious Frauds Office charged Alstom Network UK Ltd. with three offenses of corruption. The charges are based on actions which took place from June 2000 to November 2006. They concern large transport projects in India, Poland and Tunisia. The investigation began with a report from the Attorney General in Switzerland concerning the Alstom Group.
Corruption: The SFO announced that Bruce Hall, formerly the CEO of Aluminium Bahrain B.S.C. or Alba, was sentenced to serve 16 months in prison on a charge of conspiracy to corrupt. The charges stem from his receipt from 2002 to 2005 of about £2.9 million in corrupt payments in connection with allowing a corrupt arrangement to continue in which Sheikh Isa bin Ali Al Khalifa, a member of the royal family, had been involved. Mr. Hall also has to pay a related confiscation order of over £3 million within seven days or face serving an additional term of 10 years in prison. His sentence was reduced for cooperation. U.S. enforcement authorities brought a related FCPA actions which resulted in payments that put the case at number 5 in the top ten largest FCPA settlements. U.S. v. Alcoa World Alumina LLC (W.D. Pa. Jan. 9, 2014); In the Matter of Alcoa, Inc., Adm. Proc. File No. 3-15673 (January 9, 2014).
Supervision: The Financial Conduct Authority used its suspension power for the first time, banning two subsidiaries of the Financial Group Limited from recruiting new appointed representatives and individual advisers for a period of four and a half months. The FCA found that from August 2008 through April 2013 the firm had a systematic weakness in the design and execution of its systems and controls and risk management framework. These failings were directly attributable to the firm’s cultural focus.
Investment fund scheme: The FCA commenced a criminal proceeding against Phillip Harold Boakes for 13 alleged offences related to an unauthorized forex investment scheme that took place between October 2004 and June 2013. The charges include fraud and theft.
For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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