This Week In Securities Litigation
The SEC filed a series of actions in the last two weeks which included a break for the Thanksgiving holiday. One action focused on a Swiss investment firm giving advise in the U.S. without registering with the Commission. That case was resolved in a settlement that included admissions of violating the securities laws as well as of specific facts.
Other actions included one that centered on a pump-and-dump scheme; a disclosure fraud by the CEO and CFO of an assisted living firm; a misappropriation claim; two new insider trading cases filed in district court rather than as administrative proceeds as has been the practice over the past several weeks; an action seeking the collection of penalties imposed in an administrative proceeding; an investment fund fraud case; two manipulation cases; and an offering fraud action.
Remarks: Commissioner Kara Stein addressed the Consumer Federation of America’s 27th Annual Financial Services Conference, Washington, D.C. (Dec. 4, 2014). Her remarks reviewed the history of the SEC as the investor’s advocate, the current disclosure policy review and the recent limited waiver given from the bad-boy provisions which was conditioned on certain undertakings (here).
Remarks: Commissioner Kara M. Stein delivered the keynote address at Columbia Law School Conference on Current Issues in Securities Regulation: The ‘Hot’ Topics, New York, New York (Nov. 21, 2014). Her remarks focused on the importance of transparency (here).
Remarks: Andrew Ceresney, Director, Division of Enforcement, addressed the ABA’s Business Law Section Fall Meeting, Washington, D.C. (Nov. 21, 2014). His remarks included a review of the past year’s enforcement actions; future cases which may focus on market structure, brokers and FCPA; and the increasing use of administrative proceedings and admissions (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 9 civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along-actions.
Pump-and-dump: SEC v. Carley, Civil Action No. 1:14-cv-01643 (E.D. Va. Filed Dec. 4, 1014) is an action which names as a defendant Matthew Carley. The defendant is alleged to have gained control of Red Branch Technologies, located in Ashburn, Va. The firm, which has no real business, was claimed in two e-mail campaigns orchestrated by Mr. Carley, to be in the airport security business. The promotions resulted in a significant rise in the price of the stock. Following that price increase Mr. Carley sold several million shares, reaping profits of $789,478 in profits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Carley settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and to a penny stock bar. The settlement will hold him liable for the disgorgement of his trading profits and prejudgment interest, totaling $921,232. It is anticipated that sum will be paid in the parallel criminal case brought by the U.S. Attorney’s Office for the Northern District of Virginia. See Lit. Rel. No. 23147 (Dec. 4, 2014).
Manipulation: SEC v. Rooney, Civil Action No. 9:14-cv-81224 (S.D. Fla.) is a previously filed action, naming as defendants Patrick Rooney, John Rooney and Positron Corporation, alleging market manipulation. The defendants partially resolved the action with the entry of an order by the Court, by consent, permanently enjoining the defendants from future violations of Exchange Act Section 10(b). The two individual defendants are also barred from participating in any penny stock offering. Patrick Rooney is, in addition, barred from serving as an officer or director of a public company. The Court will determine penalties on motion by the Commission. See Lit. Rel. No. 23148 (Dec. 4, 2014).
Disclosure fraud: In the Matter of Laurie Bebo and John Buono, Adm. Proc. File No. 3-16293 (December 3, 2014). Ms. Bebo and Mr. Buono were, respectively, the CEO and CFO of Assisted Living Concepts, Inc., a publicly-traded assisting living and senior residence firm based in Wisconsin. In 2007 Ms. Bebo and the board sought to expand the firm’s operations. The firm was offered the opportunity to acquire the operations of Ventas, Inc. which had similar operations in several states. Effective January 1, 2008 Assisted Living made the acquisition and entered into a lease to operate those facilities. The lease contained onerous provisions regarding the financial information the firm had to provide each quarter and occupancy. When occupancy began to decline, Ms. Bebo decided to include employees who stayed over night at the facilities as occupants. To ensure compliance with the lease covenants, she directed Mr. Buono and his staff to essentially reverse engineer the lease requirements and back out the numbers. Using this approach, beginning in the first quarter of 2009, the firm avoided default. This also resulted in false filings with the Commission since they contained representations that Assisted Living was in compliance with the lease covenants. Similar statements were included in the representation letters provide to the auditors. The scheme unraveled over the settlement of an unrelated lawsuit brought by Ventras when the board of Assisted Living sought to include a provision in the settlement agreement that would extinguish any liability for the practices used to comply with the lease covenants. Ventras amended its complaint to include a claim based on the practice. The suit was settled on favorable terms to Ventras. The Order alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)B) and 13(b)-5. The proceeding will be set for hearing.
Misappropriation: SEC v. Kumar, Civil Action No. 23145 (N.D. Cal. Filed December 2, 2014) is an action against Vinay Kumar Nevatia. In August 2008 Mr. Kumar and eight other investors purchased 179,900 shares in CSS Corp. Technologies (Mauritius) Limited, a privately held technology company. Mr. Kumar, who knew one of the co-founders of the company, told investors that the shares were only available to those with personal connections to the firm. This was represented to be an exclusive, pre-IPO, opportunity. To simplify the transaction, according to Mr. Kumar, the shares would be held through VRSBS Investments, LLC. The investors, who contributed $899,500, became the sole members of the firm along with Mr. Kumar who invested $25,000 or less than 3% of the total funds. Beginning in 2011 Mr. Kumar resold virtually all of the CSS shares in three separate transactions. He then convinced the transfer agent to reissue the shares to cover the new sales. While the shares were being reissued, Mr. Kumar told the original investors that he was going to have new certificates issued in the name of each investor. He also told them that CSS was planning to conduct a potentially lucrative IPO.
When some of the original investors learned that the shares had been reissued, Mr. Kumar claimed that he had only temporarily transferred the shares to protect them from his creditors. He then stopped communicating with the investors. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23145 (December 2, 1014).
Insider trading: SEC v. Donnelly, Civil Action No. 4:14-cv-01970 (E.D. Mo. Filed November 25, 2014) names as a defendant D. Michael Donnelly, the COO of Solutia, Inc. This action centers around the acquisition of Solutia by Eastman Chemical Company, announced on January 27, 2012. At a dinner on October 25, Eastman’s CEO made an offer of $23 per share for Solutia to its CEO. On the same day Mr. Donnelly and a small group of company executives were made aware of Eastman’s offer to purchase the company. Although that offer represented a 46% premium to market on the day it was made, on November 2, 2011 Solutia’s CEO told Eastman’s CEO that the company was not for sale at that price. Eastman expressed continuing interest. On November 18, 2011 Eastman’s CEO sent a letter to Solutia’s CEO proposing that the acquisition be completed at an implied value of $25.75 per share. The offer was composed of cash and stock. It represented a 60% premium over the prior day’s closing price. That same day Mr. Donnelly learned that an improved offer was going to be submitted. He began purchasing shares of the firm in the brokerage accounts of his children. The two CEO’s continued to negotiate. By the end of January 2012 the parties arrived at a price of $27.65 in cash and securities. On the evening of January 26, 2012 the boards of each company approved the deal. The next morning a joint press release announcing the transaction was issued. The stock price close up 41% at the end of the day. Mr. Donnelly sold all of the shares he had purchased early in February 2012, yielding a profit of $104.391. The complaint alleges violations of Exchange Act Section 10(b). Mr. Donnelly settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, he agreed to pay disgorgement in the amount of his trading profits, prejudgment interest and a penalty equal to the amount of the disgorgement. He also agreed to the entry of a bar prohibiting him from serving as an officer and director of a public company. See Lit. Rel. No. 23142 (Nov. 25, 2014).
Unregistered broker/adviser: In the Matter of HSBC Private Bank (Suisse), SA, Adm. Proc. File No. 3-16288 (November 25, 2014). Respondent HSBC Private Bank is the product of a 2009 merger between HSBC Private Bank and HSBC Guyerzeller Bank, both of which were based in Switzerland. Both were part of Group Private Banking which was ultimately governed by HSBC Holdings. From at least 2003, and continuing until 2011, the two banking entities engaged in broker-dealer and investment adviser activities in the United States. Each unit had relationship managers who solicited, established and/or maintained brokerage and investment advisory accounts in this country. They also solicited, accepted and executed orders for securities transactions. During the period the two banking entities had as many as 368 U.S. client accounts. The U.S. client accounts had as much as $775 million under management and were serviced by as many as 100 relationship managers located in Geneva and Lugano. Those managers made more than 40 trips to the U.S. to meet with clients during the period. Despite the fact that both units received legal advice on conforming its operations to U.S. law, and repeated efforts, neither completed that process until 2011 in the wake of enforcement actions against UBS and the exit of that firm from the U.S. market. The Order alleges violations of Exchange Act Section 15(a) and Advisers Act Section 203(a). To resolve the proceeding, Respondent admitted to violating the federal securities laws and to the facts detailed in the Order and consented to the entry of a cease and desist order based on Exchange Act Section 15(a) and Adviser Act Section 203(a) as well as a censure. In addition, the firm will pay $5,723,193 in disgorgement, prejudgment interest and a civil penalty of $2.6 million.
Undisclosed conflicts: In the Matter of Gavornki, Adm. Proc. File No. 3-16286 (Nov. 24, 2014). The proceeding centers around the relationship between registered investment adviser Concord Equity Group Advisers, LLC, Executing Broker and Tore Services, LLC, another broker-dealer. The owner of Concord is Concord Capital which is majority owned indirectly by the three Respondents, Lee Argush, Alan Gavornik and Nicholas Mariniello. Tore, formed in 2008, is owned by Concord Capital. Mr. Argush was the CEO and CFO of Concord and Tore. Mr. Gavornik served as Concord’s executive managing director and CCO while Mr. Mariniello was Concord’s and Tore’s executive managing director and president. In 1999 Respondents initiated the Concord Platform. It was intended to guide Concord’s clients through customized portfolio research, design and selection. Tore was formed to execute trades for clients and sub-advisers on the Platform. In 2008 Executing Broker contacted Concord regarding execution services. Under an agreement entered into with Executing Broker clients would be referred to that broker who would charge a commission of $0.04 to $0.06 per share. Of that amount $0.01 per share would remain with Executing Broker while the balance would be paid to Tore as a referral fee. Under the agreement most of the client paid commissions went to Tore. Indeed, from the time the arrangement was entered into until 2011 when Concord was acquired, Tore received $1,005,000 in revenues from the arrangement – about 90% of the commissions collected by Executing Brokers. The terms of the agreement were never fully disclosed in the filings made by Concord with the SEC. The Order alleges willful violations of Advisers Act Sections 204(a), 206(2) and 207. Respondents resolved the proceeding, with each consenting to the entry of a cease and desist order based on Advisers Act Section 206(2). The order as to Mr. Gavornik is also based on the other Sections cited in the Order. In addition, he agreed to the entry of an order barring him from serving in any capacity with an investment adviser or registered investment company for a period of twelve months and suspending him from participating in any penny stock offering for the same period. Respondents were also ordered to pay disgorgement of $41,005,000 and prejudgment interest on a joint and several basis and each was directed to pay a penalty of $150,000.
Insider trading; SEC v. Redmond, Civil Action No. 23138 (November 21, 2014). The action centers on the acquisition of GenTek, Inc., a manufacturer of chemical products and commercial engine components, by a subsidiary of investment funds managed by American Securities, through a tender offer announced on September 28, 2009. The defendants are William Redmond, Jr., a member of GenTek’s board and its CEO, and Stefano Signorastri, the manager of a Manhattan restaurant. Messrs. Redmond and Signorastri met in about 2004 and became friends, frequently discussing personal and business matters. GenTeck had engaged in discussions regarding a possible sale of the firm for a number of years. In 2008 there were discussions with two competitors regarding a possible business combination. Between August 19 and September 18, 2008 Mr. Signorastri purchased 10,000 shares of GenTeck in accounts he opened at the time. Individual A, who worked at Restaurant A, purchased 100 shares of GenTeck after Mr. Signorastri furnished him with material non-public information obtained from Mr. Redmond. By the end of September 2008 the negotiations terminated. Mr. Signorastri continued to hold his shares in the firm. Subsequently, GenTeck entered into negotiations with American Securities which eventually resulted in the tender offer. Mr. Redmond told the manager that there were merger negotiations. Mr. Signorastri purchased 2,000 additional shares. Individual A also purchased 250 additional shares.
After the transaction was announced, the share price closed up nearly 40%. On October 30, 2009 Mr. Signorastri tendered his shares as did Individual A. They had profits of, respectively, $164,260 and $3,672. Individual B, an employee at another restaurant who was tipped by Mr. Signorastri, had trading profits of $2,490. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To settle the charges, Mr. Redmond agreed to pay disgorgement of $149,139 representing the illicit profits of the two traders and most of the trading profits by Mr. Signorastri. Mr. Redmond will also pay prejudgment interest, a penalty of $64,821 and be barred from serving as an officer or director for five years. Mr. Signorastri agreed to pay the remaining disgorgement of $21,283 and a penalty of $59,609. See Lit. Rel. No. 23138 (November 21, 2014).
Collection: SEC v. Hold Brothers On-Line Investment Services, LLC, Civil Action No. 2:14-cv-7286 (D.N.J. Filed Nov. 21, 2014) is an action to enforce a consent decree entered in a Commission administrative proceeding. Specifically, the defendants, consented to the entry of an order which requires them to pay over $2 million in disgorgement in an action that charged the defendants failed to monitor off-shore traders who used their facilities. The action is pending. See Lit. Rel. No. 23143 (Nov. 25, 2014).
Manipulation: SEC v. Benou, Civil Action No. 3:14-cv-07284 (D.N.J. Filed Nov. 21, 2014) is an action which names as defendants Robert Benou and Marc Benou, father and son, and penny stock company Conolog Corporation. Robert was at the time the COB and CEO of the firm. Robert retained a public relations firm to promote the firm. A series of false statements were made which caused the stock price to sore. During the period the father and son sold shares of the company into the inflated market, reaping profits of $81,000. The complaint alleges violations of Exchange Act Sections 10(b), 16(a) and 13(d). To resolve the action Robert Benou agreed to pay disgorgement of $77,490, prejudgment interest and a penalty of $177,490. He will also be barred from serving as an officer or director of a public company and from participating in penny stock offering. Marc Benou agreed to pay disgorgement of $4,191, prejudgment interest and a penalty of $51,250. He will be barred from serving as an officer or director of a public company or participating in penny stock offerings for at least two years. See Lit. Rel. No. 23141 (Nov. 25, 2014).
Manipulation: SEC v. Thompson, Civil Action No. 1:14-cv-09126 (S.D.N.Y. Filed Nov. 17, 2014) is an action which names as defendants Anthony Thompson, Jay Fung and Eric Van Nyuyen. The complaint alleges that the three men distributed newsletters to the public to promote four companies in five pump-and-dump schemes using false statements to manipulate the share price. As a result they made over $10 million in trading profits. The complaint alleges violations of Securities Act Sections 17(a), 17(b) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23137 (Nov. 21, 2014).
Offering fraud: SEC v. Downey, Civil Action No. 1:14-cv-00185 (N.D. Tex. Nov. 20, 2014) is an action against Paul Downey, Jeffry Downey (father and son) and the principals of Quest Energy Management Group, Inc., and John Leonard who acted as a salesman for the other defendants. From January 2010 through May 2011 the father and son sold preferred stock of Quest and limited partnership units in Permaian Advanced Oil Recovery Investment Fund I, LP. Investors were told that the LP would acquire working interests in oil and gas leases from Quest and receive revenue from those leases. About $4.8 million was raised from 17 investors. In fact the representations were false. The PPM did not provide accurate financial information or fully describe the use of the proceeds. 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 Lit. Rel. No. 23144 (Nov. 26, 2014).
Investment fraud: U.S. v. Staltare (S.D.N.Y. Plea entered Dec. 2, 2014) is an action in which Steven Staltare pleaded guilty to two counts of securities fraud and two counts of wire fraud based on defrauding victims out of over $600,000 from 2011 through 2012 in two schemes. In the first, Mr. Staltare defrauded two investors in connection with the transfer of shares of Dematco stock. Mr. Staltare convinced Investor 1 to transfer his shares in the company to him for $70,000. At the same time Mr. Staltare’s partner convinced Investor 2 to loan him abut $150,000 to purchase Dematco shares. Investor 2 would be paid $200,000 at the conclusion of the transaction. He would also be paid about one third of the profits from the eventual sale of the shares. Victim 2 furnished the money. Ultimately the shares were transferred to Victim 2. Neither Victim was paid any money. In a second scheme Mr. Staltare convicted Victim 3 and Victim 4 to invest, respectively, $25,000 and $375,000 to acquire various securities. The funds were misappropriated. Sentencing is scheduled for March 12, 2015.
Remarks: Leslie R. Caldwell, Assistant Attorney General, addressed the Launch of the Organization for Economic Co-operation and Development Foreign Bribery Request, Paris, France (Dec. 2, 2014). The remarks highlighted the impact of international cooperation on FCPA enforcement (here).
Analysts: The regulator fined Citigroup Global Markets Inc. $18 million for supervisory failures related to its research analysts stemming from actions that took place between January 2005 and February 2014. During that period the firm issued about 100 warning regarding communications by equity research analysts but there were length delays before disciplinary action was taken. An example of the firm’s failure to supervise is the so called “idea dinners” attended by analysts, institutional clients and sales and trading personnel. At these dinners analysts discussed recommendations that were at times contrary to published reports. The firm failed to adequately monitor these events or provide appropriate guidance. In another instance a senior equity research analyst assisted two companies in preparing presentations for investment banking road shows. Citigroup did not expressly prohibit analysts from participating such events.
Unlicensed business; The Australian Securities Investment Commission banned Dimitri Amargianitakis through an enforceable undertaking from providing financial services for eight years. He will also be banned from serving in the management of a company for eighteen months. The actions were taken because he provided financial services without holding an Australian financial services license, made investment recommendations without a license and signed financial statements under circumstances from which he knew they were not accurate. He will also be required to pass the Australian Institute of Company Directors’ course.
Misappropriation: The ASIC announced that Andrew Sigalla will stand trial on 24 counts of dishonestly using his position as a corporate director. Specifically, he is charged with using over $8.7 million from the accounts of TZ Limited between December 8 2006 and March 2, 2009 for his personal benefit and that of his private companies.
Misappropriation: The ASIC announced that Todd Michael King, a registered representative, has been convicted by a jury after a four week trial of stealing two parcels of Wesfarmers Ltd shares valued at over $1.4 million from a client account. He used the funds to meet margin calls in his mothers account. Mr. King has been sentenced to serve two year in prison.
Remarks: David Green, Serious Frauds Office, delivered remarks at the Pnisent Masons Regulatory Conference (Oct. 23, 2014). His remarks reviewed recent cases and those which are pending.