This Week In Securities Litigation (Week ending February 27, 2015)
Four SEC Commissioners addressed the annual SEC Speaks Conference, reviewing recent agency initiatives and tracing potential paths for the future. The SEC also brought another FCPA action, a misappropriation case and an action centered on a failed audit of a broker-dealer that is now defunct.
SEC
Remarks: SEC Chair White and Commissioners Kara Stein, Michael Piwowar and Daniel Gallagher each addressed the SEC Speaks Conference (here and here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 1 civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along-actions.
Illegal distribution: SEC v. Lefkowitz, Civil Action No. 8:12-cv-1210 (M.D. Fla.) is a previously filed action against, among others, Unico, Inc., Mark Lopez, Steven Peacock and Shane Traveller. The complaint alleged that the defendants engaged in the unregistered distribution of billions of shares of penny stocks through the repeated misuse of the exemption from registration contained in Section 3(a)(10) which permits a public company to issue common stock to public investors without a registration statement to settle bona fide debts and other claims. This week the Court entered final judgments against the four defendants prohibiting future violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 13(d). In addition, Unico will pay disgorgement of $9,350,000 along with prejudgment interest for which payment of all but $250,000 is waived along with any penalty based on financial condition; Mr. Lopez agreed to a penny stock bar but no penalty was imposed based on financial condition; Mr. Peacock will pay disgorgement of $609,763 and prejudgment interest, all of which was waived along with any penalty based on financial condition and he will return certain shares of stock; and Mr. Traveller agreed to the entry of a penny stock bar and will pay disgorgement of $169,369 and a civil penalty of $52,000. See Lit. Rel 2206 (February 24, 2015).
Fraudulent scheme: SEC v. Heart Tronics, Inc., Civil Action No. 11-1962 (C.D. Cal.) is a previously filed action against the company, attorney Mitchell Stein and others centered on a fraudulent scheme. This week the Court granted partial summary judgment against Mr. Stein and in favor of the SEC based on his criminal conviction on 14 counts of conspiracy to commit mail fraud and wire fraud, mail fraud, wire fraud, securities fraud, money laundering and conspiracy to obstruct justice. The court found violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). It entered permanent injunctions, officer and director and penny stock bars and ordered the payment of a civil penalty of $5,378,581.61, and disgorgement and prejudgment interest of $6,076,415.52. See Lit. Rel. No. 23205 (February 23, 2015).
Improper professional conduct: In the Matter of Halpern & Associates LLC, Adm. Proc. File No. 3-16399 (February 23, 2015) is a proceeding which names as Respondents the audit firm and its owner and president, Barbara Halpern. She also served as the engagement partner for the 2009 audit of Lighthouse Financial Group, LLC, a registered broker-dealer that is now in liquidation. The Order alleges that the financial statements of Lighthouse for the year ended December 31, 2009 were materially inaccurate. Those statements overstated the firm’s assets since the value of its securities inventory was erroneous and inflated. In addition, its liabilities were understated because obligations to a broker-dealer through which the firm engaged in proprietary trading was omitted. As a result the firm’s net capital was overstated by about 350%. Respondents audit failed to detect these errors and failed to conform to GAAS. The Order alleges violations of Exchange Act Section 17 and Rule 17a-5(a)(iv)(B) as well as various auditing provisions relating to planning the engagement, exercising due professional care, confirmations and professional conduct. The matter will be set for hearing.
Investment fund fraud: SEC v. GLR Capital Management LLC, Civil Action No. 12-cv-2663 (N.D. Cal.) is a previously filed action against John Geringer and the company. It alleged the operation of a Ponzi scheme. Following the entry of a guilty plea by Mr. Geringer in a parallel criminal action the two defendants resolved the case with the SEC. The Court entered, by consent, permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26 along with Advisers Act Sections 206(1), 206(2) and 206(4). The Court also ordered the payment of disgorgement and prejudgment interest, on a joint and several basis, of $2,772,475 which will be satisfied by the restitution and forfeiture order in the parallel criminal case. In a related action Mr. Geringer consented to the entry of a bar from the securities business. See Lit. Rel. 23204 (February 23, 2015).
Misappropriation: SEC v. Premier Power, LLC, Civil Action No. 15-cv-1248 (S.D.N.Y. Filed February 20, 2015) is an action against the company, its Chairman, Jerry Jankovic, and his son, CEO John Jankovic. After raising about $1.95 million for energy related projects for the company, the defendants diverted about $1 million to cover the costs of an unrelated lawsuit against Jerry Jankovic and a business associate, Sandra Dyche. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also alleges control person liability as to Jerry Janovic under Exchange Act Section 20(a). The case is pending. See also In the Matter of Sandra Dyche, Adm. Proc. File No. 3-16398 (February 20, 2015)(Ms. Dyche settled the action, consenting to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a) and agreeing to pay disgorgement and prejudgment interest of $1,164,000 and a civil penalty of $250,000; the settlement also prohibits her from soliciting or accepting funds in any unregistered securities offering for five years in addition to other restrictions). See Lit. Rel. No. 23203 (February 20, 2015).
Criminal cases
Investment fund fraud: U.S. v. Perkins (E.D. N.Y.) is an action in which Frank Perkins, formerly the CFO of Harbor Funding Group, Inc., was sentenced to serve 9 years in prison after pleading guilty to two counts of conspiracy to commit wire fraud and conspiracy to commit securities fraud and wire fraud. The charges were based on two schemes. In one victims of Hurricane Katrina were defrauded out of over $9 million through a claimed loan arrangement which required the investors to put 10% of the loan in a supposedly secure account. The funds were immediately misappropriated. In the second he engaged in a gold mine investment scheme. Investors were told that the firm would mine gold and other precious metals on Sitkinak Island in Alaska. Through various presentations, cold calls and webinars Mr. Perkins and others convinced investors to purchase shares in their firm. Almost $1 million was raised which went to Mr. Perkins and his confederates.
FCPA
In the Matter of Goodyear Tire and Rubber Company, Adm. Proc. File No. 3-16400 (February 24, 2015). The action focuses on the period from 2007 through 2011 and involves the payment of bribes by two subsidiaries, one in Kenya and the other in Angola. In Kenya Goodyear acquired a local business by purchasing a minority stake in 2002 and later taking control. During the period the management regularly authorized and paid bribes to employees of government owned or affiliated entities and private companies to obtain business beginning before the firm was acquired. Overall about $1.5 million in bribes were paid in connection with the sale of tires. Goodyear did not detect or prevent the payments because it failed to conduct adequate due diligence when acquiring the firm.
In Angola the company set up a subsidiary in 2007 Over the same time period the subsidiary paid over $1.6 million in bribes to employees of government owned or affiliated entities and private companies to obtain tire sales. The bribes were paid to a variety of entities. The scheme was instituted by the former general manager of the subsidiary. To conceal the payments the firm falsely marked-up the costs of its tires by adding to the invoice price phony freight and customs clearing costs. The scheme was not detected because Goodyear failed to implement adequate FCPA compliance training and controls over the subsidiary. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the order. It also agreed to pay disgorgement of $14,122,525 along with prejudgment interest. No penalty was imposed in view of Goodyear’s cooperation. The firm will, however, report to the Commission for three years and submit a report within one year which includes a complete description of its FCPA and anti-corruption remedial efforts.
Australia
Disclosure/advertising: Equity Trustees Ltd. and Como Financial Services Pty Ltd. were each fined $20,400 in relation to the promotion of the Good Super superannuation fund. The Australian Securities and Investment Commission was concerned that investors would be mislead by solicitations for Good Super and were not being told about fees to exit and withdraw and current insurance entitlements that might be lost.
Suitability: The ASIC banned David Wilkins, formerly of RBS Morgans Ltd., Romad Financial Services Pty Ltd and later MDS Financial Planning Pty Ltd. During the period he solicited clients to participate in his Options Strategy. He represented to clients that trading options carried little or no risk while failing to evaluate their personal circumstances for such trading.
Hong Kong
Internal controls/AML: He Zhi Hau, the former CEO of Ping An of China Securities (Hong Kong) was barred from the securities business for 12 months, reprimanded and fined $6 million. The Securities and Futures Commission concluded that the firm failed to have in place sufficient AML procedures or to provide adequate training to its staff and that there were insufficient procedures in place to protect client funds.