This Week In Securities Litigation (Week ending October 6, 2017)
Insider trading was a key focus this week. The Commission brought three cases, one involving a doctor tipped by a friend at the company; a second involving a going private transaction were a tip from an insider to his long time friend turned into a series of trades as the information was passed on to another trader in return, typically for a promised cut of the trading profits; and another case centered on an acquisition by SanDisk. In addition, the agency brought an action against a trader who used a non-existent hedge fund to lure investors, two offering fraud cases, a manipulation action and one centered on scalping.
SEC
Cyber intrusion: Chairman Clayton provided an update and review of the 2016 cyber intrusion involving EDGAR. The identities of two individuals were obtained in the breach; investigations are on-going and steps are being taken to upgrade the systems (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 11 civil injunctive cases and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Investment fund fraud: SEC v. Scronic, Civil Action No. 7:17-cv-07615 (S.D.N.Y. Filed Oct. 5, 2017) is an action which names as a defendant Michael Scronic who is a former registered representative at Morgan Stanley. He claimed to be an investment adviser to a non-existent hedge fund, Scronic Macro Fund. Since 2010 he has obtained over $20 million from investors for a claimed option trading strategy. Contrary to his representations, the funds were placed in a brokerage account. Most were lost in trading, while other portions were used to pay brokerage fees and fund redemptions from investors. Despite the losses defendant furnished investors reports showing that the fund had substantial assets. As of June 30, 2017, for example, those reports told investors that the fund had over $21 million when in fact it had very little cash and securities. By July 31, 2017 only about $6,000 remained. 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 pending. A parallel criminal case was filed by the Manhattan U.S. Attorney’s Office.
Virtual currency: SEC v. Garza, Civil Action No. 15-cv-1760 (S.D.N.Y.) is a previously filed action against Homero Joshua Garza and others centered on fraudulent claims about mining virtual currency. After pleading guilty in a parallel criminal case defendant Garza settled with the Commission. The court entered a final judgment prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also directed Mr. Garza to pay disgorgement of $9,182,000 the payment of which is deemed satisfied by the order of restitution in the parallel criminal case. See Lit. Rel. No. 23960 (Oct. 4, 2017).
Offering fraud: SEC v. N1 Technologies, Inc., Civil Action No. 17-cv-23618 (S.D. Fla. Filed Oct. 3, 2017) is an action which names as defendants: the firm, a Belize corporation which claimed to be a global leader in nano and bio technology research; Nanosave Technologies, Inc., which also claimed to be a leader in nano and bio tech research; Rocky Hatfield, a securities law recidivist; and Steve Lovern, the CEO of both entity defendants. Over a period of about two years beginning in early 2015 defendants raised about $2.5 million from at least 77 investors selling unit trusts in patents supposedly held by the entities. The sales were made through cold calls by unregistered brokers using a script written by Mr. Hatfield that touted the value of the claimed patents and huge potential returns. Ultimately the capital raised was not used as promised but rather was diverted to pay sales commissions and the expenses of defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b), 15(a)(1) and 20(a). The case is pending. See Lit. Rel. No. 23958 (Oct. 3, 2017).
Insider trading: SEC v. Singh, Civil Action No. 3:17-cv-07786 (D.N.Y. Filed Oct. 3, 2017) names as a defendant Doctor Arun Singh. The action centers on the acquisition of UTi Worldwide Inc. by DSV Air & Sea Holdings A/V, announced on October 9, 2015. Prior to that date an executive at DSV told his friend, defendant Singh, about the proposed deal. Dr. Singh purchased shares of UTi prior to the announcement which, when made, caused the share price to increase by over 50%. Defendant had trading profits of $8,330. The complaint alleged violations of Exchange Act Section 10(b). To resolve the case defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay disgorgement in the amount of his trading profits, prejudgment interest, and a penalty of $24,990. See Lit. Rel. No. 23957 (Oct. 3, 2017).
Investment fraud: SEC v. Tweed Financial Services, Inc., Civil Action No. 2:17 –cv-07251 (C.D. Cal. Filed Oct. 2, 2017) is an action which names as defendants the state registered investment adviser and its owner and president, Robert Tweed. In 2008 defendants formed and managed an investment fund as a “feeder” to invest in specific, unrelated fund that claimed to employ a quantitative stock trading strategy. By 2010 about $1.7 million had been raised from 22 investors. Initially the money was invested as represented. Later the investor money was moved to a second fund operated by a business acquaintance. Only a portion of the money was invested as represented. Other portions were used for a loan to a third party. Eventually the funds were moved to another investment. Mr. Tweed learned that the manager had been indicted for bank fraud and that some of the investments failed, requiring a write down. Rather than notify the investors, defendants continued sending statements falsely claiming profitable investments. The complaint alleges violations of Advisers Act Section 206(4). The case is pending. See Lit. Rel. No. 23959 (Oct. 4, 2017).
Insider trading: SEC v. Fleming, Civil Action No. 1:17-cv-07049 (N. D. Ill. Filed Sept. 29, 2017). The action centers on a going private transaction for Life Time Fitness, Inc., announced in a press release on March 16, 2015 following a Wall Street Journal article which broke the story on March 5, 2015. Named as defendants are: Shane Fleming, a vice president of Life Time; his friend, Bret Beshey; three friends of Mr. Beshey, Peter Kourtis, Christopher Bonvissuto and Individual A; and four friends of Mr. Kourtis – Alexander Carlucci, Austin Mansur, Eric Weller and Dimitri Kandalepas. Mr. Fleming first learned about the negotiations for the going private transaction on or before February 23, 2015 from an in-house lawyer with whom he was working. The same day Mr. Fleming called his friend, Bret Beshey, and told him about the deal. Mr. Fleming understood that his friend would trade and share the profits. The next day Mr. Fleming called a brokerage firm and asked about trading in options and going private transactions. The same day Mr. Beshey called his friend, Christopher Bonvissuto. Mr. Beshey told his friend about the Life Time deal and that he had learned the information from an insider who was a friend. The two men agreed that Mr. Bonissuto would trade and split the profits. Mr. Beshey also tipped his friend Peter Kourtis who agreed to kick back part of his profits and Individual A. In late February 2015 Mr. Kourtis tipped his friends, Alexander Carlucci, Austin Mansur, Eric Weller and Dimitri Kandalepas. Messrs. Carlucci, Mansur and Weller agreed to split the profits in return for the tip. Following the publication of the Wall Street Journal article about the proposed transaction the share price for Life Time stock increased 11%. The trading defendants sold most of their holdings. The share price increased again when the company later confirmed the transaction in a press release. The trading defendants then sold their remaining shares, realizing a total of about $866,629, except Individual A who had profits of $48,492. Portions of the trading profits were paid to Defendants Beshey and Fleming. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Northern District of Illinois filed a parallel criminal case.
Offering fraud: SEC v. Recoin Group Foundation, LLC, (S.D.N.Y. Filed Sept. 29, 2017) is an action which names as defendants: the firm, supposedly in the business of investing in real estate; DRC World Inc., an investor in diamonds; and Maksim Zaslavskiy, the sole owner of the entity defendants. The action centers on offerings of claimed investments in digital “token” or “coins.” To date about $300,000 has been raised. The claimed tokens or coins were actually illegal offerings of securities. Investors were told they were purchasing the digital tokens or coins, that over $2 million had been raised, that a team of lawyers and professions would invest the proceeds into real estate or diamonds and that returns of 10 to 15% could be expected. The representations were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending.
Insider trading: SEC v. Jayapalan, Civil Action No. 2:17-cv-07186 (C.D. Cal. Filed Sept. 29, 2017) is an action which names as defendants: Anand Jayapalan, an employee of SanDisk Corporation; Ananda Kumar Ananda, a pediatrician and neonatologist; Rajni Nair, the wife of defendant Jayapalan; and Vijaya Ananda, the aunt of co-defendants Jayapalan and Nair. The action centers on the acquisition by SanDisk of Fusion, Inc., announced on June 16, 2014. Defendant Jayapalan learned about the proposed deal in late May 2014 through his position at SanDisk. He was cautioned to keep the information confidential. In breach of that obligation he told each of the other defendants. At the time defendant Ananda Kumar’s medical practice had significantly declined and he had a substantial credit card debt. Defendants Kumar and Vijaya, who had never purchased shares of Fusion, began buying after learning about the proposed deal and eventually accumulated about 78,900 shares of Fusion stock using eight brokerage accounts at a cost of $665,778.26. Defendants Vijaya and Nair agreed to split a 1,000 share purchase of Fusion stock, acquired through a joint account. Defendant Vijaya purchased an additional 1,200 shares for her own account. Following the deal announcement on June 16 the share price increased about 22%. Defendants liquidated their holdings at a profit of about $215,086.01. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending. See Lit. Rel. No. 23952 (Sept. 29, 2017).
Insider trading: SEC v. Krishnamoorthy, Civil Action No. 17-cv-02953 (S.D.N.Y.) is a previously filed action against Avaneesh Krishnamoorthy, a former vice president in the risk management department of a New York based investment bank. He was charged with insider trading based on information he obtained from his employment about the acquisition by a private equity firm of a publicly traded technology company. The court entered a final judgment by consent enjoining the defendant from future violations of Exchange Act Section 10(b). He was also ordered to pay disgorgement of $78,712.80 which will be deemed satisfied by either the entry of a forfeiture order in the parallel criminal action or proof of payment to the Manhattan U.S. Attorney’s office. The court also ordered the defendant to pay prejudgment interest and barred him from the securities business. See, Lit. Rel. No. 23954 (Sept. 29, 2017).
Manipulation: SEC v. McDiarmid, Civil Action No. 2:17-cv-07201 (C.D.Cal. Filed Sept. 29, 2017) is an action which names as defendants Jason McDiarmid, Kenneth Telford and Interactive Multi-Media Auction Corp. The complaint alleges a manipulation that took place in steps. First, the individual defendants, who controlled Multi-Media, filed an S-1 registration statement that falsely stated Mr. McDiarmid’s friend ran the company. Second, defendants McDiarmid and Telford furnished the same false information to a market maker to secure quotations in the over-the-counter market. Third, the two men opened nominee brokerage accounts, using false representations about how much stock they owned. Finally, from October 2014 through May 2015 promotional campaigns were conducted that moved the share price from about $0.93 to $1.62. When the two individual defendants dumped their stock they reaped about $3.1 million. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23953 (Sept. 29, 2017).
Unregistered broker: In the Matter of Daniel C. Caravette, Adm. Proc. File No. 3-18240 (Sept. 29, 2017) named the former employee of several broker-dealers as a Respondent. From August 2013 to February 2015 he sold 473,5000 share of Accelera Innovations, Inc. which claims to be a healthcare service company. Respondent was to receive commissions on a sliding scale, ranging from 15% to 21%. From September 2014 through April 2015 he was also responsible for selling 1,269,500 shares of Advantameds Solutions, Inc., a medical marijuana firm. In return he earned 795,850 shares of stock and $83,564.25 in commission. The shares sold were not registered. The Order alleges violations of Exchange Act Section 15(a)(1) and Securities Act Sections 5(a) and 5(c). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He was also barred from the securities business and from participating in any penny stock offering with the right to apply to reenter after three years. He will also pay disgorgement of $243,322.13, prejudgment interest and a penalty of $40,000.
Misappropriation: SEC v. Bahgat, Civil Action No. 1:17-cv-00971 (W.D.N.Y. Filed Sept. 28, 2017) is an action against investment adviser Tarek Bahgat who was a managing member of WealthCFO and WealthCFO Advisors, LLC, and Lauramarie Colangelo, Mr. Bahgat’s assistant. Between December 2014 and September 2016 defendant Bahgat misappropriated about $378,000 from his advisory clients by obtaining internet access to their brokerage accounts and transferring funds from their accounts. In some instances he used bill paying privileges. Mr. Colangelo assisted. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 23951 (Sept. 29, 2017).
Scalping: SEC v. Skerry, Civil Action No. 17-cv-415 (N.D. Ind. Filed Sept. 28, 2017) is an action against Michael Skerry. In May 2014 he entered into an agreement with Success Holding Group, International, a penny stock firm, to provide investor relations services and purchase shares of its stock. The next month he paid $36,000 for 360,000 shares of stock and immediately began to promote the stock. After posting misleading messages on public websites, email blasts and personal solicitations which contained false statements about the stock, he sold his shares from July 2014 to December of that year, reaping $950,000 in profits. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 23950 (Sept. 29, 2017); See also In the Matter of Success holdings Group Int., Adm. Proc. File No. 3019230 (Sept. 28, 2017)(action alleging sale of unregistered securities and violations of Exchange Act Section 13(d); settled with a cease and desist order based on Securities Act Section 5 and Exchange Act Section 13(d) and the payment of disgorgement in the amount of $36,0000, prejudgment interest and a penalty of $100,000); In the Matter of Success holding Group International, Inc., Adm. Proc. File No. 3-18231 (Sept. 28,2017)(proceeding under Section 12j to bring the filings current or be delisted).
Kickbacks: SEC v. Jensen, Civil Action No. 17-cv-5563 (E.D.N.Y. Filed Sept. 22, 2017) is an action which names as a defendant accountant Brian Jensen. Mr. Jensen was charged with having solicited over 25 of his accounting clients and attendees of investment conferences to buy more than $2 million in private placements of ForceField Energy, a firm previously traded on NASDAQ Capital Market. Richard St. Julien, then chairman of ForceField paid Mr. Jensen kickbacks of 10% of the value of the investments to solicit the investors. Mr. Jensen was not registered to sell investments. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a). Mr. Jensen partially resolved the action, agreeing to the entry of a permanent injunction based on the Sections cited in the complaint and to a penny stock bar. The court will determine disgorgement and penalties at a later date. See Lit. Rel. No. 23949 (Sept. 29, 2017).
Criminal cases
Pay-to-play: U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.). Deborah Kelly, a former Sterne Agee & Leach managing director, was sentenced to serve three years of probation, including six months of home confinement and to pay a fine of $50,000, forfeit $187,991.19 and to complete 1,000 hours of community service. Restitution will be determined in the future. Ms. Kelley bribed Navnoor Kang, the Director of Fixed Income and Head of Portfolio Strategy of the Pension Fund. In that capacity Mr. Kang was responsible for investing over $53 billion in fixed-income securities on behalf of the Fund. Policies of the Pension Fund precluded him from receiving gifts, benefits or consideration of any kind. The bribes were in the form of travel and entertainment from 2014 to 2016. In return for the gifts Mr. Kang used his position to direct the fixed income business to Ms. Kelly’s firm. Ms. Kelly pleaded guilty to one count of conspiracy to commit securities fraud and honest services wire fraud.
Offering fraud: U.S. v. Liburdi, No. 1:16-cr-00110 (S.D.N.Y.) is an action in which Maryse Liburdi was sentenced to serve 49 months in prison following her guilty plea to a criminal complaint for defrauding investors in a technology company. Beginning in 2010 Ms. Liburdi solicited investors to purchase shares of a technology company based on representations that the firm was profitable. In fact the company had ceased operations in 2008 and Ms. Liburdi continually manipulated its bank accounts while misappropriating the investor funds. The court also ordered defendant Liburdi to serve three years of supervised release, forfeit $7,069,904.46 and to pay $7,079,904.46 in restitution to the victims of the scheme.