by T. GormanPosted on Posted in SECActions

Internal controls are key to helping ensure that the funds raised by corporate entities are used for a proper purpose. Those controls, if properly configured and implemented, help the firm account for the money obtained from investors and other sources. Absent proper and fully implemented controls, the company may not be in a position to properly account for the funds obtained from investors or other sources. The Commission’s most recent case in this area centers on a CEO, Director and founder who looted his firm, taking millions of dollars for himself over a period of years, SEC v. Fat Brands Inc., Civil Action No. 2:24-cv-03913 (C.D. Ca. Filed May 10, 2024).

Named as defendants in the case are: the firm, a holding company that owns 17 restaurant brands, including Fatburger, Johnny Rockets and Twin Peaks; Andrew Wiederhorn, the chief executive officer of FAT and Fog Cutter Capital Group, Inc. (“FCCG”) which eventually merged with FAT; Ron Roe, CFO of FAT for a period; and Rebecca Hershinger, also a CFO of FAT for a time.

Beginning in October 2017, and continuing for the next four years, Defendant Wiederhorn, the controlling shareholder of FAT, took almost $27 million of FAT’s cash. The funds were used for his personal expenses. Mr. Wiederhorn lied to the company board of directors and investors, repeatedly telling them that neither he nor his family had any direct or indirect interest in FAT cash.

The impact on FAT was significant. Mr. Wiederhorn took about 40% of the firm’s cash during the period. This impaired the ability of the company to pay its creditors. To facilitate the scheme Mr. Wiederhorn enlisted the assistance of Ron Roe, the CFO of FAT. The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(k) and 14(a). The U.S. Attorney’s Office for the Central District of California announced parallel criminal charges have been filed against Mr. Wiederhorn, FAT, Ms. Hershinger, and another individual. See Lit. Rel. No. 26001 (May 10, 2024).

by T. GormanPosted on Posted in SECActions

Last week the Commission filed seven new administrative proceedings. They included actions based on an offering fraud, a scheme based on retirement accounts, unregistered securities, pricing, PCAOB audit rules stock promotion, an investment scheme and insider trading.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 6 new civil injunctive actions and 1 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Pison Stream Solutions, Inc., Civil Action No. 1:24-cv-00816 (N.D. Oh. Filed May 7, 2024). Named as defendants are the company and Joseph James, Jr. Defendant James is a resident of Bratenahl, Ohio, a wealthy enclave in Cleveland, Ohio. He formed Defendant Pison Stream and has served as its CEO since inception. Prior to Pison, Mr. James worked as a chemist for various companies. The company, based in Broadview Heights, Ohio, a suburb of Cleveland, engages in researching and developing products in the chemical coatings industry. Over a five-year period, beginning in 2017 Defendants James and Pison raised about $32.5 million by selling the securities of the company. Investors were told that their funds would be used for the development of Pison and its business and expanding its chemical coatings operations. In dealing with investors Mr. James presented himself as an independently wealthy investor – he did not need their money. He did not take a salary from the company for all of his work, apparently part of the sales pitch. This approach, coupled with the opulent life style of Mr. James apparently convinced investors that he was the real thing – a promotor of the company and its business who did not need the money for himself. The image Defendant James created was bolstered by relocating the headquarters of Pison from suburban Cleveland to Manhattan and One World Trade Center in 2019. Mr. James finished off his image by maintaining an expensive Manhattan apartment for his personal use. Unfortunately, the company never moved past being a start-up. Its only recognized income for the period was $6,800 — a testament to its lack of success. The company also did not appear to benefit from the millions of dollars raised by selling its securities. Mr. James, however, did. Over $10 million of those funds were used to create the successful lifestyle Defendant James used to build the image that helped sell Pison’s securities. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25999 (May 8, 2024).

Microcap securities offering: SEC v. Sason, Civil Action No. 19-cv-1459 (S.D.N.Y.) is a previously filed action which named as defendants: Magna Group LLC, Magna Equities II, LLC and MG Partners, Ltd, Joshus Sason (founder of Magan entities) and Marc Manuel (head of research and due diligence for group). The complaint, filed in February 2019, centered on the unregistered offering of microcap securities. Each entity Defendant resolved the matter, consenting to the entry of permanent injunctions based on Securities Act Sections 5(a) and 5(c) and, as to Magna Group, in addition Section 17(a)(3). In addition, each Defendant agreed to pay: Mr. Sason: disgorgement of $450,000 and prejudgment interest of $38,610.54; Mr. Manuel: $90,000 penalty and an agreement to be barred from participating in any penny stock offering for two years; Magna Group: disgorgement of $394,032. 86 and prejudgment interest of $33,808.50 and a penalty of $70,000; Magna Entities: disgorgement of $692,983.57 and a penalty of $65,000; and MG Partners: disgorgement of $692,983.57, prejudgment interest of $59,958.83. and a civil penalty of $65,000. See Lit. Rel. No. 25997 (May 7, 2024).

Fraudulent retirement account scheme: SEC v. Red Rock Secured, Civil Action No. 2:23-cv-3682 (C.D. Cal.) is an action which named as defendants: Red Rock a/k/a American Coin Co., Sean Kelly, firm CEO and managers Anthony Spencer and Jeffry Ward. Defendants operated a scheme in which they convinced investors, beginning in 2017 and continuing until 2022, to sell their interest in retirement accounts to invest in precious metal coins sold to the investors by defendants. Over 700 investor were defrauded out of more than $50 million. To resolve the action Defendants consented to the entry of a final judgment which permanently enjoined them from future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 2062). Red Rock was ordered to pay disgorgement in the amount of $50,150,000 plus prejudgment interest of $6,110,000 and a penalty of $10 million. Defendant Kelly was ordered to pay disgorgement of $1,841,727.89 plus prejudgment interest of $224,241.37 and a penalty of $1.5 million. He is also barred from serving as an officer or director of a public company; Defendant Spencer was directed to pay disgorgement in the amount of $2,156,905.15, prejudgment interest of $262,616.15 and a penalty of $580,478.70; and Defendant Ward was ordered to pay disgorgement of $1224,215.28 plus prejudgment interest of $149,055.46 and penalties of $200,484. The CFTC , the Hawaii State regulators and the California Department of Financial Protection and Innovation also obtained final judgments. The amount owed by Red Rock to the SEC will be offset by amounts any payments to the CFTC in connection with the final judgment. See Lit. Rel. No. 25996 (May 15, 2024).

Unregistered broker: SEC v. Power Up Lending Ltd., Civil Action No. 1:24-cv-03498 (S.D.N.Y.) is a previously filed action which names as defendants: Curt Kramer, Power Up Lending Ltd., Geneva Roth Remark Holdings, Inc. and 1800 Diagonal Lending LLC, each owned by Mr. Kramer. Defendants are alleged to have operated since at least January 2018 and continuing until 2023, as unregistered dealers in violation of Exchange Act Section 15(a)(1). During the period Defendants purchased convertible securities from penny stock issuers, converted them into common stock at a large discount and quickly sold the shares, reaping large profits. Defendants were not registered as dealers with the Commission or associated with a registered broker-dealer as required. The case is in litigation. See Lit. Rel. No. 25995 (May 7, 2024).

Unregistered securities: In the Matter of Easton Equities, LLC, Adm. Proc. 3-21930 (May 7, 2024) is a proceeding which names as respondents the firm, and Kevin Yu. The company is a commercial real estate venture based in New York City. Mr. Yu is its sole owner. Respondents raised about $1.4 million from investors supposedly to fund the operations of Easton affiliate. Investors were not told that most of the funds were used to repay debts owed to Easton and its affiliates. The order alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3). To resolve the proceedings Respondents retained a consultant. Each also consented to the entry of a cease-and-desist order based on the sections cited in the Order and agreed to pay a penalty of $125,000.

Pricing: SEC v. Korb, Civil Action No. 2:22-cv-04031 (C.D. Cal.) is a previously filed action against Mark Korb, the former chief financial officer of Petrote Energy whose chairman is Aleksandr Blyumkin, also a Respondent in In the Matter of Petroteq Energy, Inc., Adm. File No. 3-20898. Mr. Korb is also a Respondent in In the Matter of Mark Korb, CA, Adm. Proc File No. 3-21920. In the administrative proceeding for Petroteq, the Commission issued an order in June 2022 concluding that from 2017 through May 2019 Pertrotequ raised $7.39 million through the sale of unregistered shares. The order requires Respondent Blyumkin to pay a civil penalty $450,000, and imposed a cease-and-desist order and an officer/director bar; it order the payment of disgorgement and prejudgment interest the amount of $1.791 million in disgorgement and $210,20126 in prejudgment interest. The civil action against Mr. Korb claimed that he failed to consider if Petroteq’s mining rights were appropriately priced, analyze impairment and ultimately concluded that he was at least negligent in not inquiring into, or disclosing, multiple transactions benefiting Mr. Blyumkin. On April 10, 2024, the Court entered a final judgment against Mr. Korb. An order was entered precluding future violations of Securities Act Section 17(a)(3) and Exchange Act Section 13(b)(5) and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and related rules. Mr. Korb is precluded from appearing and practicing before the Commission as an accountant with a right to reapply after 2 years in the administrative proceeding. See Lit. Rel. No. 25994 (May 6, 2024).

PCAOB audit rules: In the Matter of BF Borgers CPA PC. Adm. Proc. File No. 3-21926 (May 3, 2024). Named as Respondents in the proceeding is the firm and Benjamin F. Borgers, CPA. The firm is based in Colorado and registered with the Commission. Mr. Borgers is the managing partner and a certified public accountant licensed in Colorado. The proceeding centers on a two-year period, beginning in early 2021. During the period the firm had about 350 clients who were required by Commission rules to have their financial statements audited in accord with PCAOB standards to incorporate their financial statements into filings made with the Commission.

Respondents in the proceeding were required to comply with the requirements of the Board in conducting audits and reviews. For engagements Mr. Borgers typically served as the engagement partner. During the period the Order claims that Respondents deliberately and systematically failed to audit and review public companies and SEC registered broker-dealer clients in accord with the applicable PCAOB standards. Specifically, Respondents are alleged to have not complied with three standards. The first is PCAOB Auditing standard 1220; the second and third are PCAOB Standards 1201 and 1215. PCAOB Standard 1220 governs the Engagement Quality Review. It requires that audits and reviews of interim financial information be approved by an engagement quality reviewer. Here Respondents failed to comply with this requirement in at least 1,625 public filings and disclosures during the period. PCAOB Standards 1201 and 1215 provide for Supervision of the Audit. These provisions provide for supervision and control with regard to the work of the engagement teams. They also ensure that workpapers are properly prepared. Respondents failed to comply with these requirements in their engagements during the period. Nevertheless, Respondents stated in their engagement letters that the audits and quarterly reviews would be in accord with PCAOB standards. They also issued reports which falsely certified that the audits were completed in accord with the pertinent standards. Respondents resolved the proceedings. An order was entered prohibiting each Respondent from committing or causing violations in the future of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 15(d), 17(a) and 17(e). A censure was also entered. In addition, each Respondent is denied the privilege of appearing and practicing before the Commission as an accountant. The firm will pay a penalty of $12 million. Mr. Borgers will pay a penalty of $2 million.

Stock promotion: SEC v. Alomari, Civil Action No. 25993 ((May 3, 2024) is an action which names as defendants Ahmed Alomari, a stock promoter, and his firm, MCM Consulting. Over a three-year period, beginning in 2019, Mr. Alomari used Twitter, Instagram, Facebook and investor Chatroom to promote microcap stocks. In promoting these stocks he did not disclose the source or amount of his compensation. He also personally invested in some of the shares while secretly promoting them. In addition, he directed his wife, an officer of MCM, to sign false representation letters used to promote the shares. The complaint alleges violations of Securities Act Sections 17(a) and 17(b) and Exchange Act Sections 10(b) and 20(b). The case is in litigation. See Lit. Rel. No. 25993 (May 3, 2024).

Investment scheme: SEC v. Thompson, Civil Action No. 3:24-cv-05032 (W.D. Mo. Filed May 3, 2024) is an action which names as defendants: Robert M. Thompson and Financial Freedom Foundation d/b/a F3 Mastermind. Over a period of about three years, beginning in early 2019, Defendants marketed member investments in trading programs run by third parties. The programs offered risk free returns ranging from 20% to 4,000% per year. During the period Defendants recommended at least three investment programs in a manner similar to a prime bank investment fraud scheme. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is in litigation. See Lit. Rel. No. 25992 (May 3, 2024).

Insider trading: In the Matter of John M. Moretz, Adm. Proc. File No. 3-21927 (May 3, 2024) is a proceeding which names as respondent Mr. Moretz, then the chairman of the board of Neptune Wellness Solutions, Inc. On May 9, 2019, the firm announced ,the acquisition of SugarLeaf, a hemp processor in North Carolina. Prior to the deal announcement the COB told a close friend about the deal who purchased shares of Neptune. The friend’s spouse opened an investment account that was used for the transactions. The friend had profits of $78,618. The Order alleges violations of Exchange Act Section 10(b). To resolve the Matter Mr. Morertz consented to the entry of a cease-and-desist order based on the Section cited. He also agreed to pay a penalty of $115,000.

Hong Kong

Remarks: Ms. Christina Choi, Executive Director, Hong Kong Securities & Futures Commission, addressed the Listing Ceremony of the first Bitcoin and Ether spot ETFs listed, April 30, 2024. Her remarks are available here.

Singapore

Statement: The Monetary Authority of Singapore published a Declaration of the Financial Action Task Force on May 8, 2024 (here). It focused on the meeting of ministers held in April 2024, in Washington, D.C. There was a review of recent achievements.


 

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