This Week In Securities Litigation (Week ending Feb. 24, 2017)
NERA issued a report this week on Canadian class actions. Although the number of those actions filed last year increased compared to the year before, over the last several years the number of securities class actions filed in Canada has declined. That contrasts to the U.S. where the number of actions has increased significantly in recent years.
The Commission filed three enforcement actions this week. One was brought against an insurance executive for acting as an unregistered broker in soliciting investors to purchase shares in a fund; a second centered on an offering fraud in which investors were solicited to purchase shares in a firm that supposedly furnished tech services to hotels but in fact was largely worthless; and a third centered on a investment adviser who misappropriated client funds.
SEC
Bulletin: The Commission staff issued guidance update and an investor bulletin on robo-advisers (here).
Agenda: The Commission announced the agenda for the March 9, 2017 Investor Advisory Committee Meeting (here).
Canadian Securities Class Actions
Securities class actions: In Canada the number of securities class actions filed last year increased. Over the last two years in Canada however, the number of those actions filed has not matched that of earlier years. This is in contrast to the U.S., according to a new report by NERA Economic Consulting titled Trends in Canadian Securities Class Actions, 2016 Update (Feb. 22, 2017)(here). Last year nine securities class actions were filed in Canada. That more than doubled the four brought in 2015. At the same time, it is less than the 13 brought in 2014, 11 in 2013, 10 in 2011 and 15 filed in 2010. This contrasts with the U.S. where the number of these cases has increased significantly in recent years.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive cases and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Unregistered broker: In the Matter of Gregory J. Smith, Adm. Proc. File No. 3-17657 (Feb. 22, 2017) is a proceeding which charges Mr. Smith, who provides insurance and retirement planning services in California, with acting as an unregistered broker. Specifically, from December 2008 through September 2013 Mr. Smith solicited at least 31 investors in three states to purchase about $3,750,000 in promissory notes from a fund. Mr. Smith solicited the investors, advised them on the merits of the investment, took customer orders, collected investor paperwork and was paid about $384,712 in transaction-based compensation. Before the time period here Mr. Smith had been a registered representative at a registered broker-dealer for about 15 year. The state of California previously entered a cease and desist order against Mr. Smith for acting as an unregistered broker. The Order alleges violations of Exchange Act Section 15(a). To resolve the proceeding Mr. Smith consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, he was barred from the securities business and from participating in any penny stock offering. He was also ordered to pay disgorgement of the sum he was paid along with prejudgment interest. That sum will be paid to the estate of the fund whose shares he sold.
Misappropriation: SEC v. Carlson, Civil Action No. 17-cv-01328 (N.D. Ill. Filed Feb. 21, 2017) is an action against William P. Carlson, an investment adviser representative associated with a registered investment adviser. Beginning in late 2012, and continuing until late 2016, Mr. Carlson misappropriated over $900,000 from a client by variously forging checks, account documents and others until he nearly depleted the funds entrusted to him. At times he furnished false account statements to the client. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 23755 (February 21, 2017).
Offering fraud: SEC v. Hardaway, Civil Action No. 4:17-cv-00529 (S.D. Tx. Filed Feb. 17, 2017) is an action which names as defendants Darrell Hardaway and his controlled entity, Hardaway Net-Works, Inc. Since late 2010 the defendants have raised about $4.7 million from over 100 investors nationwide who bought shares in the firm. Those investors were told that the firm would make tremendous profits and was headed for an IPO. In fact the company – supposedly a provider of tech support to hotels – had almost no revenue and huge debts. Much of the offering money was misappropriated. A portion was used to purchase a public shell for which Mr. Hardaway filed a quarterly report without consulting with the auditors who later demanded its withdrawal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13b-5. Each defendant agreed to the entry of a permanent injunction and deferred questions regarding disgorgement, prejudgment interest and penalties to a later date. See Lit. Rel. No. 23753 (Feb. 17, 2017).
FINRA
Excessive fees: The regulator directed Purshe Kaplan Sterling Investments, based in New York, to pay nearly $3.4 million in restitution to a Native American tribe that was charged excessive sales fees on the purchase of non-traded REITs and Business Development Companies. From mid-2011 through early 2015 the account executive – Gopi Vungarala – was the registered representative for the tribe and served as its Treasury Investment Manager. He told the tribe there were no sales charges on the instruments to induce the purchase, although he received at least $9 million in commissions. He also did not give them certain volume discounts to which they were entitled, informing the firm that the tribe did not want them. The firm was also fined $750,000 in connection with its failure to supervise. Charges are pending against Mr. Vungarala.
Criminal Cases
Insider trading: U.S. v. Stewart (S.D.N.Y.). Sean Stewart, formerly an investment banker at Perella Weinberg Partners LP, was sentenced to serve three years in prison followed by three years of supervised release which includes one year of home detention. Restitution will be set at a later hearing. Mr. Stewart was previously convicted of insider trading following a jury trial. Mr. Steward, formerly vice president in the healthcare section of the firm, was alleged to have repeatedly tipped his father prior to mergers. His father traded. Mr. Stewart was convicted of one count of conspiracy to commit securities fraud and fraud in connection with a tender offer, one count of conspiracy to commit wire fraud, six counts of securities fraud and one count of fraud in connection with a tender offer. Previously, Robert Stewart, his father, pleaded guilty to one count of conspiracy to commit securities fraud and fraud in connection with a tender offer. He was sentenced to serve four years probation with the first year in home detention and to pay a $150,00 forfeiture.
PCAOB
Audit failure: In the Matter of KAP Puwantono, Sungkoro & Surja, PCAOB Release No. 105-2017-002 (February 9, 2017) is an action which names as Respondents: the firm, the Indonesian affiliate of the Ernst & Young global network; Roy Iman Wirahardja, a public accountant under the laws of Indonesia who was an EY-partner in the firm’s Jakarta office who served as the professional practice director and was the engagement partner on the audit involved here; and James Randall Leali, a U.S. C.P.A who is currently a partner with Ernst & Young LLP who served at the time as the EY Area Professional Practice Director in the firm’s Hong Kong affiliate. He authorized the release of the audit. The action is based on the audit of PT Indosat Tbk, an Indonesian telecommunications network and service provider based in Jakarta. The proceeding centered on the 2011 audit of the firm. During the audit the U.S. reviewing partner informed engagement partner Wirahardza that there was insufficient evidence to support the accounting for more than 4,000 leases for spaces on cellular towers. The engagement partner contacted Mr. Leali who, despite the concerns, authorized the release of the audit. The failure to gather sufficient evidence precluded a proper evaluation of the severity of an identified deficiency related to the tower slot lease classification controls. Respondents failed to gather sufficient evidence to provide an assurance that the firm’s ICFR was effective as required by PCAOB standards. Respondents resolved the matter. The firm agreed to pay a $1 million penalty. Mr. Wirahrdja was censured, fined $20,000 and barred for five years from association with a PCAOB registered public accounting firm. Mr. Leali, was also censured, fined $10,000 and restricted for one year from serving as an engagement partner, engagement review partner or professional practice director.