SEC Wins Summary Judgment in Two Fraud Actions

SEC Wins Summary Judgment in Two Fraud Actions

 The SEC prevailed on summary judgment motions in two fraud actions. One is a pump-and-dump manipulation scheme. The other is a prime bank fraud. First, SEC v. Farmer, Civil Action No. 4:14-cv-02345 (S.D. Tx. Filed August 14, 2014) is an action against Andrew Farmer, Charles Grob, Jr., Carolyn Austin, Baldemar Rios and Chimera Energy Corporation. The complaint alleged that from August 2011 through November 2012 the defendants engaged in a pump and dump manipulation scheme. Specifically, Mr. Farmer conducted an IPO for Chimera, a shell company, and gained control of its outstanding stock. Then a series of false press releases were issued touting the company as having a revolutionary new technology that supposedly enabled the production of shale oil and gas without the perceived environmental impact of hydraulic fracturing. As the stock price increased Mr. Farmer sold his shares, reaping at least $4.58 million in profits. The complaint alleged violations of Securities Act Sections 5(a) and (c) and 17(a) and Exchange Act Sections 10(b) and 15(d).

Last week the Court granted the Commission’s motion for summary judgment as to Mr. Farmer. The Court concluded that Mr. Farmer gained control of Chimara at nominal cost. At the time the firm had virtually no assets. Subsequently, he conducted an aggressive public relations barrage designed to push up the stock price despite the fact that the company was little more than a shell. Indeed, the so-called “non-hydraulic fracturing technology” touted by the company was little more than an illusion. Mr. Farmer made about $4.1. The Court concluded that Mr. Farmer violated Securities Act Section 17(a) and Exchange Act Sections 10(b). Remedies will be determined at a future hearing. See Lit. Rel. No. 2345 (October 9, 2015).

Second, SEC v. Smith, Civil Action No. 1:14-cv-192 (D.N.H. May 2, 2014) is an action against attorney Allen Ross Smith. Mr. Smith was charged with having participated in a scheme orchestrated by Swiss-based Malom Group AG that centered on a prime bank fraud. The underlying scheme centered on Malom traces to 2009 when six individuals are alleged to have engaged in two schemes, raising approximately $11 from investors, according to the court papers. Overall 30 persons put funds in the schemes.

In the first scheme investors were solicited to participate in joint ventures that were to place funds in European equity and debt offering represented to have very high rates of return. Under the plan investors would use the resources of the Malom group in exchange for an up front fee which ranged from $200,000 to $1.2 million per investor. Investors would propose a trading program that had to be approved under the terms of the joint venture agreements. None of the proposed programs were approved although various defendants knew of some of the proposals at the time the investors were solicited. The defendants kept the fees paid. Under the second proposal, Malom would to invest in structured notes that would be listed on Western European exchanges. As in the first scheme, investors were required to pay an up front fee. Once the fees were paid, the defendants simply pocketed the investor funds.

Mr. Smith used his position as an attorney to facilitate the scheme and made several false statements in connection with offerings of securities. He also allowed his attorney trust account to be used to implement the scheme. Specifically, his account was used to collect about $2.4 million, acting as the “Paymaster.”

The Court concluded that Mr. Smith violated the antifraud and registration provisions of the securities laws. A permanent injunction was entered against Mr. Smith. In addition, the Court directed, on reconsideration, that a penalty be paid equal to the disgorgement. See also In re USA Springs, Inc. 1:08-bk-11816 ); Bank. D.N.H.)($60 million judgment entered against Malom); U.S. v. Brandel, No. 2:13-cr-439 (D. Nev. Unsealed Dec. 16, 2013)(parallel criminal action); SEC v. Malom Group AG.,Civil Action No. 2:13-cv-2280 (D. Nev. Dec. 16, 2013). See Lit. Rel. No. 23383 (October 8, 2015).

 For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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