This Week In Securities Litigation (Week ending May 15, 2015)
The Commission filed and insider trading case in tandem with the Manhattan U.S. Attorney’s Office against a father and son based on repeated trades in advance of deal announcements even after FINERA initiated an investigation this week. The agency also filed a settled administrative proceeding against an insurance company based on the pricing of variable insurance contracts and a financial fraud case centered on an educational firm. In addition, the SEC brought actions based on: An advance fee scheme, misappropriation, an offering fraud and an investment fund fraud. Finally, another stop order proceeding was initiated.
SEC
Remarks: Marc Wyatt, Acting Director, Office of Compliance Inspections and Examinations, delivered remarks titled “Private Equity: A Look Back and a Glimpse Ahead,” New York, New York (May 13 2015). His remarks reviewed recent activities of the Office, its enhanced experience with private equity and influence beyond exams (here).
Remarks: Andrew Ceresney, Director, Division of Enforcement, delivered remarks titled “The SEC’s Cooperation Program: Reflections on Five Years of Experience,” at the University of Texas School of Law’s Government Enforcement Institute, Dallas, Texas (May 13, 2015). His remarks reviewed the cooperation program and benefits to individuals (here).
Remarks: Andrew Ceresney, Director, Division of Enforcement, delivered the Keynote Speech at the New York City Bar 4th Annual White Collar Institute, New York, New York (May 12 2015). His remarks provided an overview of the enforcement program, reviewed recent trial results and discussed admissions, remedies and the use of administrative proceedings (here).
CFTC
Remarks: Commissioner J. Christopher Ciancario delivered the Keynote Address to the EnergyRisk Summit USA program, Huston, Tx. ( May 13, 2015). The Commissioner discussed position limits in the energy markets, potential liquidity challenges in some markets, bona fide hedging and guiding principles (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 6 civil injunctive cases and 2 administrative actions, excluding 12j and tag-along proceedings.
Pricing: In the Matter of Nationwide Life Insurance Company, Adm. Proc. File No. 3-16537 (May 14, 2015) is a proceeding centered on the pricing of orders and redemptions of variable insurance contracts and underlying mutual funds. The Order alleges that beginning in 1995, and continuing for the next sixteen years, Nationwide intentionally delayed picking up its first class mail for these orders from its PO Box until after 4:00 p.m. The orders were then processed and priced at the next day’s price. These repeated acts were willful violations of Investment Company Act Rule 22c-1. Nationwide resolved the proceeding, consenting to the entry of a cease and desist order based on Rule 22c-1. The firm also agreed to pay a civil penalty of $8 million. The Commission considered the prompt remedial efforts and cooperation of the company.
Insider trading: SEC v. Stewart, Civil Action No. 15 cv 03719 (S.D.N.Y. Filed May 14, 2015) is an action naming as defendants a father, Robert Stewart, and son, Sean Stewart. The son was employed at two different investment banks between 2010 and 2014. During that period he furnished material non-public information regarding pending deals that he obtained through his employment to his father who profitably traded. After the first transaction FINRA began an inquiry. Nevertheless, the trading continued. At one point R. Stewart began trading through the account of another with whom he shared profits. During the scheme the two men also talked in code at times in order to try and avoid detection. R. Stewart had over $1 million in trading profits. The SEC’s complaint alleges that the son gifted the information to his father and that the father became an insider with an obligation not to trade. A parallel criminal complaint alleges that there is a cooperating witness who recorded conversations with Robert Stewart. The SEC’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e) . The Manhattan U.S. Attorney’s Office filed the parallel criminal case. Both cases are pending.
Insider trading: SEC v. Jorgenson, Civil Action No. 13-cv-02275 (W.D. Wash.) is a previously filed action against Brian Jorgenson, a former Senior Portfolio Manager in Microsoft’s corporate finance and investments division, and his friend Sean Stokke. After pleading guilty to parallel criminal charges both men admitted to unlawful conduct which is the basis for the Court entering final judgments as to each of permanent injunction prohibiting future violations of Exchange Act Section 10(b) and directing that they pay, on a joint and several basis, over $400,000 in disgorgement and prejudgment interest stemming from their illegal trading. See Lit. Rel. No. 23261 (May 14, 2015).
Advanced fee scheme: SEC v. North Star Finance LLC, Civil Action No. 23262 (D. Md. Filed May 14, 2014) names as defendants the firm, Thomas Ellis, Yasuo Oda, Thomas Vetter, Michael Martin, Sharon Salinis, Capital Source Funding LLC and Capital Source Lending LLC. The complaint alleges that the defendants have collected about $5 million from investors since 2013 through an advanced fee scheme. Specifically, the SEC alleged that North Star and the Capital Source entities promised investors that in return for an advance fee to be held safely in escrow they could monetize bank guarantees to generate millions of dollars. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 15(a). See Lit. Rel. No. 23262 (May 14, 2015).
Misappropriation: SEC v. Ahmed, Civil Action No. 3:15-cv-00675 (D. Conn. Filed May 5, 2015). Defendant Iftikar Ahmed is an investment professional who was a partner at Oak Investment Partners, a multistage venture capital firm. It advises several funds, each of which invest investor funds in various entities. Those investors range from individuals to institutions and pension funds. As a general partner at Oak Investment Mr. Ahmed identified and recommended investment opportunities for the funds advised by the firm. Beginning in October 2013, and continuing through the end of 2014, Mr. Ahmed recommended that Oak Investment funds make significant investments in three companies where he benefited either by misappropriating part of the claimed price or from undisclosed conflicts: 1) In August 2014 Mr. Ahmed recommended an investment in a Chinese e-commerce company where he inflated the share price from $1.5 million to $3.5 million – the increase went to him; 2) He recommended the purchase of shares of an Asia based joint venture for $20 million that were actually offered for $2 million, pocketing the extra $18 million; and 3) he recommended the purchase of shares in another e-commerce company without disclosing that his firm owned a significant stake in the company at the time of the first purchase or that the second was actually from his firm. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2), 206(3) and 206(4). The case is pending. See Lit. Rel. No. 23260 (May 13, 2015).
Financial fraud: SEC v. ITT Educational Services, Inc., Civil Action No. 15-cv-00758 (S.D. Ind. Filed May 12, 2015) names as defendants: ITT Educational, a higher education company with over 50,000 students, whose shares are trade on the NYSE; Kevin Modany as ITT’s CEO; and Daniel Fitzpatrick, the firm’s CFO. Most of ITT’s revenue is generated by tuition. Students generally pay that tuition with federal and state student loans. In 2009 ITT formed two private student loan programs known as PEAKS and CUSO. PEAKS was structured as a trust that sold securities to investors. The CUSO student loan program was funded by a group of credit unions organized by ITT. Both were designed to be held off the books. Together over $400 million in loans were made to ITT students. Guarantees were extended by ITT to mitigate the risk. By 2012 the loans in the programs had extremely high default rates. ITT’s guarantee obligations increased. The defendants took steps to conceal that and avoided consolidating PEAKS as required. They also concealed the poor loan performance from the auditors. The scheme unraveled in early 2014. The auditors began to discover previously undisclosed information about the programs. Eventually ITT was required to restate its financial statements to consolidate PEAKS for periods beginning in the first quarter of 2013 and to reclassify and disclose the timing for CUSO liabilities. In March 2014 ITT paid $40 million to settle claims by PEAKS program participants tied to the firm’s circumvention of the guarantees through the POBOB program. Overall ITT paid millions of dollars on the guarantees because of poor loan performance. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2), 13(b)(5) and control person liability under 20(a) and Securities Act Section 17(a) and a failure to reimburse under SOX 304. The case is pending.
Insider trading: SEC v. McGee, Civil Action No 12-cv-1296 (E.D. Pa.) is a previously filed insider trading action. This week the Court entered by consent, judgment against Michael Zirinsky, enjoining him from future violations of Exchange Act Section 10(b). He was also required to pay disgorgement of $46,396, prejudgment interest and a penalty of $192,054. The action was based on the merger of Philadelphia Consolidated holding corp with Tokio Marine Holdings. See Lit. Rel. No. 23257 (May 11, 2015).
Stop order: In the Matter of the Registration Statement of First Xeris Corp., Adm. Proc. File No. 3-16530 (May 11, 2015) is a proceeding regarding the firm’s registration statement which is alleged to contain false and misleading statements by the one director/officer company. It will be set for hearing.
Offering fraud: SEC v. Novinger, Civil Action No. 4:15-cv-00358 (N.D. Tex. Filed May 11, 2015). The defendants are: Christopher Novinger, licensed by the Texas Department of Insurance; Brady Speers, also licensed by the Texas Department of Insurance; NFS Group, LLC, d/b/a Novers Financial which is the name Messrs. Novinger and Speers conduced business under prior to the firm’s formation in late 2012; Ican Investment Group, LLC, a firm formed by Mr. Novinger in the Fall of 2013; and Speers Financial Group, LLC formed by Mr. Speers, which then established Speers Financial to receive commissions on the sales of life settlement interests to investors. Messrs. Novinger and Speers hosted a weekly radio show called the “Retirement Experts Radio Show” in the Dallas/Fort Work area. They represented themselves under titles such as “licensed consultants.” From February 2012 through January 2014 Defendants Novinger, Speers and NFS Group, d/b/a Novers Financial, offered and sold life settlement interest. In soliciting investors the two men assured them that: 1) the interests were safe and guaranteed; 2) had annualized average returns of 7-11%; 3) were as safe as a CD; and 4) they were federally insured. Investors were not told that despite their claimed titles the two men had little experience in the area or that they had a checkered regulatory history with the Oklahoma Department of Securities, the Texas Attorney General, the FCC and the State of California based on wrongful securities activities. While investors were supposed to be accredited, in fact their finances were falsely inflated to make it appear they met the appropriate tests. Messrs. Novinger and Speers and Novers sold more than $4.3 million of life settlement interests to 26 investors. At least three were not accredited investors. These sales generated about $515,000 in commissions that were paid directly to Ican Investment and Speers Financial. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.
Investment fund fraud: SEC v. ClearPath Wealth Management, LLC, Civil Action No. 15-cv-00191 (D.R.I. Filed May 7, 2015) is an action which names as defendants Patrick Churchville, the president and owner of ClearPath, and ClearPath Wealth Management, L.L.C., a state registered investment adviser. Beginning in December 2010 the defendants diverted deposits from new investors to pay prior investors, used proceeds from selling certain investments to pay other investors and misappropriated about $2.5 million in investor funds. These actions were concealed from investors and the auditors. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 23255 (May 8, 2015).
Criminal cases
Investment fund fraud: U.S. v. Huggins (S.D.N.Y.) is an action against Charles Huggins. He is alleged to have conducted a years long, $8 million investment fraud which victimized dozens of investors. Following a two week trial he was convicted. The Court imposed a ten year prison sentence followed by three years of supervised release. Previously, two co-defendants pleaded guilty. They are awaiting sentencing.
Investment fund fraud: U.S. v. Valente (N.D.N.Y.) is an action in which Scott Valente pleaded guilty to one count of securities fraud, one count of mail fraud and one count of obstructing and impeding the due administration of the I.R.S. The plea was based on his conduct from December 2010 through June 2014. During that period Mr. Valente, operating investment company ELIV Group LLC, raising over $10.5 million from over 100 investors. Investors were solicited with falsified investment returns for the firm. Mr. Valente also falsely represented that the firm was eligible to receive IRA funds.
Australia
False claims: The Australian Securities Investment Commission cancelled the license of Australian Financial Services, an FX dealer. The firm falsely promoted a number of websites as insurance compensation scheme, raising about $2.5 million. The website used the ASIC logo. The scheme does not exist in Australia. This investigation was part of a sweep of the FX industry.
Hong Kong
Unlicensed activity: Hong Kong Game Theory Association Ltd. and Sze Ching Lok , its sole proprietor, were convicted after a ten day trial of advertising futures contracts without a license and rendering investment advice. They were acquitted of selling securities without a license. A sentence of one month in prison and a suspension for two years was imposed on Mr. Sze while the firm was fined $7,000.