SEC: Navistar International and Former CEO Misled Investors About Advanced Technology Engine

The Securities and Exchange Commission today charged Navistar International Corp. with misleading investors about its development of an advanced technology truck engine that could be certified to meet U.S. emission standards.

Navistar, without admitting or denying the charges, has reached a settlement with the SEC and agreed to pay a $7.5 million penalty.  Separately, in a complaint filed in federal court in the Northern District of Illinois, the SEC charged former Navistar CEO Daniel C. Ustian with misleading investors and with aiding and abetting violations by Lisle, Illinois-based Navistar.

The SEC alleges that Navistar and Ustian failed to fully disclose the company’s difficulties obtaining Environmental Protection Agency (EPA) certification of a truck engine able to meet stricter EPA Clean Air Act standards that took effect in 2010.  Navistar and Ustian also are alleged to have repeatedly misled investors about Navistar’s development of the engine, which used exhaust-gas-recirculation (EGR) technology.  Navistar later abandoned the effort and adopted the selective catalytic reduction (SCR) technology used by its competitors.

“When public companies and top executives discuss important regulatory developments with investors, they must tell the whole truth,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Here, we allege that Navistar and its former CEO misled investors about their dealings with the EPA and the likely approval of its new emissions technology."

David Glockner, Director of the SEC’s Chicago Regional Office added, “We allege that in 2011 and 2012, the EPA repeatedly raised serious concerns with Navistar about its applications to certify an engine using EGR technology and that top Navistar officials knew the company had not succeeded in developing a commercially viable engine that would meet EPA standards.  Navistar and its then-CEO misled investors about these difficulties in numerous SEC filings, press releases, and public conference calls, and today we seek to hold them accountable for that misconduct.”

According to the SEC’s order instituting a settled administrative proceeding against Navistar:

• In early 2011, in an effort to reassure investors about its emissions control strategy, Navistar applied for certification of an engine it knew was not ready for production and sale even if the EPA certified it.  The EPA did not approve the application and by summer 2011, Navistar decided not to pursue it any longer.
• In late 2011, Navistar began preparing another application for EPA certification.  Four days after a meeting in which the EPA staff told Navistar that the proposed engine did not appear to meet the certification requirements, Navistar filed its 2011 annual report on Form 10-K, which stated that it planned to apply to have the EPA certify the engine and that it believed the engine met EPA’s certification requirements.
• After Navistar submitted a new application in early 2012, EPA staff raised  “several serious concerns” that it said would need to be resolved before it could approve the application.  Nevertheless, in a press release and filings in March 2012, Navistar characterized the application as a “milestone,” and in a conference call with analysts and investors, Ustian indicated that certification was proceeding in a typical timeframe and that Navistar could begin production on the engine in June 2012.
• In May 2012, Navistar withdrew its January 2012 application and submitted a third one incorporating changes to lower emissions at the expense of fuel economy and other engine performance features.  In a June 4, 2012 meeting, EPA staff told Navistar that it had serious concerns about this application as well and the next day informed Navistar in writing that the engine as currently designed was “unlikely” to be certified.  Despite this, Navistar’s June 2012 quarterly filing and conference call suggested that Navistar was unaware of any concerns by the EPA regarding the May 2012 application – one of several misstatements in the filing and call regarding the application.
• In July 2012, Navistar announced that it was withdrawing its application and would begin work on an engine using SCR technology.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Morgan Team with More than $200M AUM Joins Stifel

Stifel hired a team from Morgan Stanley that oversaw more than $200 million in client assets, according to a person familiar with the move.



 The team will open a new office for Stifel in Sioux Falls, S.D., according to the person. They report to John F. Lee, managing director.



 The team includes advisors Jennifer Sherman, Greg Risse, Mary Steiner and Troy Rames."



Morgan Team with More than $200M AUM Joins Stifel | IAG Breaking News:

SEC: Biotech Venture Capitalist Stole Investor Funds for Personal Use

The Securities and Exchange Commission today announced that a San Francisco-based biotech venture capitalist has agreed to settle charges that he siphoned money from a fund managed by his firm in order to prop up other struggling businesses he owned and finance his lavish lifestyle.

An SEC investigation found that G. Steven Burrill concealed from investors that he took money from the Burrill Life Sciences Capital Fund III under the guise of “advanced” management fees and spent it on family vacations to St. Barts and Paris as well as jewelry, gifts, car service, and private jets.

Burrill and his firm Burrill Capital Management agreed to the disgorgement of $4.785 million in investor money he stole for personal use plus a $1 million penalty.  Burrill also agreed to be permanently barred from the securities industry.  The fund’s investors included state pension funds, public companies, and other institutional investors.

“Even though they are exempt from registration, venture capital advisers like Burrill have fiduciary obligations to their clients that we will enforce,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Burrill spent his fund’s capital on whatever he pleased, and elevated his own interests above those of investors.”

The SEC’s order instituting a settled administrative proceeding also finds that Burrill Capital Management’s chief legal officer Victor A. Hebert and controller Helena C. Sen played integral roles in Burrill’s scheme.  Hebert led investment committee meetings and agreed to call in additional capital from fund investors while knowing the money would be spent on expenses unrelated to the fund.  Burrill and Sen on at least two instances delayed distribution of payments owed to fund investors so money could instead be used to continue paying Burrill’s personal expenses as well as the salaries of Hebert and Sen.

Hebert and Sen agreed to settle the charges by paying penalties of $185,000 and $90,000, respectively.  They also are barred from the securities industry.

“Gatekeepers play an essential role in every company.  Rather than take a stand for the fund’s investors, Hebert and Sen allowed Burrill’s scheme to perpetuate and their salaries were paid out of money Burrill misappropriated from investors,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Burrill and his firm, Hebert, and Sen agreed to the settlements without admitting or denying the findings in the SEC’s order.  In addition to their industry bars, Burrill, a former audit partner, and Sen are permanently suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies.  Hebert is permanently suspended from appearing and practicing before the SEC as an attorney.


SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Former TV Commentator Settles Penny Stock Fraud Charges

The Securities and Exchange Commission today announced that a former market analyst and TV news commentator has agreed to settle charges that he and his company fraudulently promoted a penny stock to investors.
The SEC alleges that Tobin Smith and NBT Group Inc. were paid to prepare and disseminate e-mails, online blogs, articles, and other communications touting the stock of IceWEB Inc., a data storage company.  Smith and NBT did not fully disclose their compensation to investors, who did not have the benefit of knowing that part of their pay was tied to a sustained increase in IceWEB’s share price.  The promotional material also contained false and misleading statements intended to artificially increase the trading volume and share price of IceWEB’s stock.
Smith and NBT agreed to be barred from involvement in any future penny stock offerings and must pay disgorgement of $165,900 plus $16,893 in interest.  Smith also must pay a $75,000 penalty.
“Smith and NBT claimed IceWEB was a ‘perfect tech stock’ in order to manipulate the market and enrich themselves with illicit stock promoter fees,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.
According to the SEC’s complaint filed in U.S. District Court for the District of Columbia:

• Smith entered into two separate agreements on NBT’s behalf to promote IceWEB and its stock in exchange for $330,000 in cash and IceWEB stock. 
• NBT could earn incentive fees of more than $250,000 if the marketing campaigns succeeded in increasing share price.
• Smith and NBT only disclosed some of their compensation and never informed investors that they would earn incentive fees if the stock price increased above a certain amount.
• Smith and NBT falsely stated in communications to subscribers that Smith discovered IceWEB when he was “searching for a solution” to his own company’s “rapidly growing cloud data storage problem.” 
• In fact, Smith only “found” IceWEB after he was retained to promote the company.  He did not actually use IceWEB for NBT data storage.
• Smith and NBT also falsely touted that IceWEB “provides the cheapest storage box and more important the lowest cost/highest performance solution to”  public and private data storage centers including “Amazon cloud drive, Dropbox, Evernote, iCloud, Microsoft SkyDrive, Google Drive,  SugarSync” and Facebook.
• Smith did not know whether any of these companies were actually IceWEB customers.
• Smith touted he could “easily make the case” for “10X Return -- $200 million valuation” on IceWEB given “what has been already paid for its competitors.” 
• But Smith made these projections despite being well aware of IceWEB’s poor financial condition and knowing that no company was contemplating a purchase of IceWEB.  

The SEC’s complaint charges Smith and NBT with violating the anti-touting and anti-fraud provisions of Section 17(b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Smith and NBT neither admitted nor denied the allegations in the settlement, which is subject to court approval.

*   *   *

SEC Investor Alert: Fraudulent Stock Promotions


SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC: Biotech Company Misled Investors About New Drug's Status With FDA

The Securities and Exchange Commission today announced fraud charges against a Massachusetts-based biotech company and three former executives for misleading investors about the company’s efforts to obtain Food and Drug Administration (FDA) approval for its flagship developmental drug to treat kidney cancer.

The SEC alleges that AVEO Pharmaceuticals Inc. concealed the FDA’s level of concern about Tivozanib in public statements to investors by omitting the critical fact that FDA staff had recommended a second clinical trial to address their concerns about patient death rates during the first clinical trial.  When the FDA made public months later that it had recommended an additional clinical trial, the company’s stock price declined 31 percent.  AVEO never conducted an additional trial, and the FDA later refused to approve Tivozanib.

AVEO agreed to pay a $4 million penalty to settle the SEC’s charges without admitting or denying the allegations in the complaint filed today in federal court in Boston.  The SEC’s case continues against three of the company’s former officers: CEO Tuan Ha-Ngoc, chief financial officer David Johnston, and chief medical officer William Slichenmyer.

“We allege that AVEO and its executives hid from investors the reality of their communications with the FDA on Tivozanib while suggesting they had identified a simpler route to FDA approval,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office. “Companies must be forthcoming about their communications with regulators so investors can make informed investment decisions while knowing what challenges may lay ahead.”

According to the SEC’s complaint:

• AVEO raised $53 million in a public offering of its stock in January 2013 while failing to disclose that the FDA staff had explicitly recommended during a May 2012 meeting that AVEO conduct an additional clinical trial for Tivozanib. 
• AVEO and its officers understood that the FDA’s concerns were serious and an additional clinical trial is an expensive and time-consuming proposition.  While AVEO went so far as to design a second trial and present trial designs to the FDA, it was never conducted. 
• In corporate communications, AVEO and its officers suggested that they intended to satisfy the FDA by presenting new analyses of the data that had been gathered in the previous clinical trial.  In doing so, AVEO concealed the FDA staff’s level of concern about Tivozanib’s impact on patient survival and the recommendation that AVEO conduct a second clinical trial.
• Ha-Ngoc and Johnston knowingly approved and certified a press release and public filings that failed to disclose the FDA staff’s recommendation for an additional clinical trial. 
• Johnston also made public statements during investor conferences suggesting the FDA staff had asked only for an explanation of the survival results.  In reality, the FDA staff had recommended a second trial. 
• Slichenmyer misled investors in an investor conference call when he falsely stated he could not “speculate” on what the FDA “might be thinking” and “might want [AVEO] to do in the future.”  He actually knew that the FDA staff had recommended an additional trial.

The SEC’s complaint charges AVEO, Ha-Ngoc, Johnston, and Slichenmyer with violations of the antifraud provisions of the federal securities laws and various other violations.  The settlement with AVEO is subject to court approval.  The SEC is seeking disgorgement plus interest and penalties, permanent injunctions, and officer-and-director bars against Ha-Ngoc, Johnston, and Slichenmyer.

The SEC’s investigation was conducted by Susan Cooke Anderson and Michele T. Perillo of the Enforcement Division’s Market Abuse Unit in the Boston Regional Office.  The SEC’s litigation will be led by Rachel E. Hershfang and Ms. Anderson.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Bond Holdings Deserve Close Look as Fed Ponders Rates

FINRA's investor alert on bond investing is worth a look:

For many of us, when we think of retirement savings, we think of bonds, because as one nears the conclusion of a career or the end of full-time work, fixed income securities become the subject of greater focus as investors shift away from stocks toward more yield-oriented asset

Bond Holdings Deserve Close Look as Fed Ponders Rates:

Securities Professional Charged With Defrauding Institutional Investors

The Securities and Exchange Commission today charged a New York-based securities professional with defrauding two institutions he solicited to invest in a shell company he controlled whose name was deceptively similar to that of a legitimate private equity fund.

According to the SEC complaint filed in federal district court in Manhattan, Andrew W.W. Caspersen, a New York City resident, solicited approximately $95 million from two institutional investors by offering promissory notes issued by Irving Place III SPV LLC. 

The complaint alleges that Irving Place III SPV LLC is a shell entity formed and controlled by Caspersen with no legitimate business operations, unlike the similarly named Irving Place Capital Partners III SPV, a legitimate private equity fund not associated in any way with Caspersen.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Caspersen.

“As alleged, Caspersen engaged in a brazen fraud by raising money under false pretenses and simply stealing the funds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “This action amply demonstrates that even sophisticated institutional investors are not immune to financial scams.”

The SEC complaint also alleges that:

·         Caspersen obtained a $25 million investment in November 2015 from an institutional investor by falsely representing that the investment would be secured by approximately $900 million of assets of Irving Place Capital Partners III SPV.
·         Shortly after the investor wired its $25 million investment to Irving Place III SPV LLC’s bank account, Caspersen simply took control of the funds for his personal use.
·         Using similar false and misleading statements, Caspersen later solicited an additional $20 million from the first investor and $50 million from a second, in both cases unsuccessfully.
The SEC is seeking a permanent injunction, return of allegedly ill-gotten gains with interest, and monetary penalties.


SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Halts Fraud by Manager of Investments in Pre-IPO Companies

The Securities and Exchange Commission today announced fraud charges and asset freezes obtained in a case filed against a New Jersey-based fund manager and two firms he controls that marketed shares in promising pre-IPO tech companies in the Bay Area. The SEC alleges they stole $5.7 million from investors and diverted millions more to other improper and undisclosed uses.

Specifically, the SEC alleges that John Bivona used money raised through Saddle River Advisors and SRA Management Associates to pay off earlier investors, prop up other funds, and pay family-related expenses.  He secretly steered the lion’s share of misappropriated funds to his nephew Frank Mazzola, who was barred from the securities industry in a prior SEC enforcement action and is charged along with Bivona and his firms in the complaint filed Monday in federal district court in California.

“We allege that Bivona preyed on investors seeking to invest in popular pre-IPO technology companies and hid the scheme by avoiding outside reviews of the funds and depriving investors of financial statements despite promises to do so,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

According to the SEC’s complaint:

• Bivona raised more than $53 million from investors, and the money he was siphoning away for undisclosed uses left his firms continuously short of the cash needed to buy the shares promised to investors.
• Bivona kept the scheme going by indiscriminately transferring money among more than a dozen bank accounts associated with an array of different entities. 
• Bivona used investor money to pay Mazzola’s credit card bills, income taxes, a car loan, attorney fees, and the mortgage on a Jersey Shore vacation home.
• Investors were told they would receive financial statements for the funds on an annual basis.  But no financial statements were ever prepared.
• Bivona and Mazzola failed to register the offering with the SEC and thereby violated the bad actor rules of the federal securities laws, which prohibit companies from relying on registration exemptions under Rule 506 of Regulation D if a promoter or investment manager like Mazzola has a disqualifying event like his fraud-based injunction.

Investors can learn more about the risks involved with investing in unregistered offerings by reading such SEC investor bulletins as 10 Red Flags That An Unregistered Offering May Be A Scam and Private Placements Under Regulation D.

The SEC’s complaint seeks permanent injunctions plus disgorgement with prejudgment interest and monetary penalties from Bivona and the firms as well as Mazzola. The SEC obtained a court order to freeze the assets of Frank Mazzola and his wife, a relief defendant, and ordering the appointment of an independent monitor over Saddle River Advisors, SRA Management, the SRA Funds, and other affiliated entities. The order also preliminarily enjoins Bivona, Saddle River Advisors, and SRA Management from violating the antifraud provisions of the federal securities laws and raising money from investors.

The SEC’s investigation was conducted by Jessica W. Chan and Ellen Chen of the San Francisco office, and the case was supervised by Jeremy E. Pendrey.  The SEC’s litigation will be led by John Yun, Marc Katz, and Ms. Chan.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Investor Alert: Zika Crisis May Give Rise to Investment Scams

Investment scam artists often exploit the latest crisis to line their own pockets and Zika is no exception.  The SEC staff is aware of increased stock promotion of companies that claim to be developing products or services relating to the Zika virus.

Investor Alert: Zika Crisis May Give Rise to Investment Scams: "Investor Alert: Zika Crisis May Give Rise to Investment Scams"

Whistleblower Suit Filed Against Morgan Stanley

A former risk officer at Morgan Stanley Smith Barney LLC has filed suit claiming he was fired for reporting a variety of infractions by the firm's registered representatives, including the churning of preferred securities by a star broker the firm recruited last year from rival Bank of America Merrill Lynch.

Chief among the claims was that late last year, he discovered that one of the firm's newest wealth managers “was flipping preferred securities in a manner that was generating tens of thousands of dollars in commissions but causing losses or minimal gains for his clients and exposing (them) to unnecessary risks,” according to the complaint, which was filed in U.S. District Court in the Southern District of New York.

---

Financial professionals and investors who have issues with the securities industry or their investments call Sallah Astarita & Cox, LLC at 212-509-6544. The attorneys at Sallah Astarita & Cox, LLC have decades of experience representing investors, brokers and other financial professionals in a wide array of matters.

The Ultimate Cheat Sheet On FINRA Firm Culture

FINRA will be looking for firms to focus on their culture and whether it is putting customers first and promoting risk management adaptable to a changing business environment.

The Ultimate Cheat Sheet On FINRA Firm Culture - great summary from Leon Morales

Look Before You Invest - Non-Traded REITs

If you are looking for yield, and considering a REIT, make sure you understand the investment. FINRA has issued a release  which states, in part "while non-traded REITs and exchange-traded REITs share many features in common, they differ in several key respects. Most significantly, as the name implies, shares of non-traded REITs do not trade on a national securities exchange. For this reason, non-traded REITs are generally illiquid, often for periods of eight years or more."

Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.

The periodic distributions that help make these products so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges, which are typically derived solely from earnings.

Read more: FINRA REIT Alert

Related articles

• Cetera Fined For Failing to Apply REIT Discounts 
• Misunderstood ETFs are Getting New SEC Rules 
• UBS Puerto Rico Investment Problems Expand 

Keith E. Cassidy Named Director of Legislative and Intergovernmental Affairs Office

The Securities and Exchange Commission today announced that Keith E. Cassidy has been named Director of the agency’s Office of Legislative and Intergovernmental Affairs.  Mr. Cassidy succeeds Tim Henseler, who was named Office Chief in the Division of Corporation Finance’s Office of Enforcement Liaison.

Mr. Cassidy has served as Deputy Director of the Office of Legislative and Intergovernmental Affairs since 2011.  He advises the Chair, Commissioners, and SEC staff on legislative matters, provides technical assistance on securities-related legislation to congressional committees and staff, and assists in preparing SEC testimony for congressional hearings.

“Keith is a committed public servant and dedicated member of our military. His tremendous knowledge of both the securities laws and Congress are real assets to the SEC,” said SEC Chair Mary Jo White.  “Keith consistently provides wise counsel, and I look forward to continuing to work with him in protecting America’s investors and markets.”

Mr. Cassidy added, “Working with Chair White, the Commissioners, and the talented staff of the SEC has been an honor.  I am grateful for the opportunity to continue to do so and look forward to further advancing our critical mission.”

Mr. Cassidy began his career at the SEC as an Attorney Advisor in the Office of Legislative and Intergovernmental Affairs in 2010 before being promoted to Deputy Director in 2011.  He is a Captain in the United States Marine Corps Reserve where he serves as the Operations Liaison Officer for B Company, 4th Reconnaissance Battalion and has earned numerous awards.  Mr. Cassidy previously worked as Chief of Staff and Counsel at the Department of Justice’s Office of Legislative Affairs from 2008 through 2009.  He also has experience on Capitol Hill, having served as a legislative assistant in the United States Senate from 2005 to 2007.

Mr. Cassidy received his J.D. from the George Washington University Law School in 2005 and his LL.M. from Georgetown Law Center where he graduated with distinction in 2016.  He received his B.A. from the University of Virginia in 2002.

The SEC also announced that in addition to being Deputy Director of the Office of Legislative and Intergovernmental Affairs, Anne-Marie Kelley was named Senior Adviser to the Chair.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

FINRA May Create Fund for Unpaid Arbitration Awards

According to On Wall Street, FINRA's CEO Richard Ketchum expressed interest in having FINRA cover unpaid arbitration awards for some of the many investors unable to collect them from the brokers who harmed them.

This should be interesting. Certainly unpaid awards are a problem. So are unpaid judgments. Part of being a good attorney is knowing who to sue, and making sure that there is a pot at the end of the case.

And this is true whether you are in court, or in arbitration.

But more to the point, if FINRA wants to fund a pool, lets do it from their multi-million dollar salaries. FINRA has plenty of money to finance a pool. The real question is what is FINRA going to do about arbitrators who award a million dollars in punitive damages against a firm that defaults? They are going to pay that award?

SEC Charges Operator of Ponzi Scheme That Claimed to Offer “Bridge Loans” to Jamaican Businesses

The Securities and Exchange Commission today charged a former Boston resident with operating a $10 million Ponzi scheme that claimed to generate profits from “bridge loans” to businesses in Jamaica.
The SEC complaint charges former Boston resident Mark A. Jones, who now lives in Miami and has a second home in Jamaica.  Jones was arrested Sunday by the Federal Bureau of Investigation and the U.S. Attorney for the District of Massachusetts filed related criminal charges against him on Monday.
According to the SEC complaint filed in federal court in Boston:

• Jones began soliciting investors starting around 2007 and said their money would be pooled and used for “bridge loans” to Jamaican businesses awaiting funds from approved commercial bank loans.  Jones told investors the bridge loans would generate approximately 15 percent to 20 percent interest a year.
• Jones raised about $10 million from at least 21 investors in six states and Washington, D.C., including three of his own relatives.  
• Jones appeared in YouTube videos touting investment opportunities in Jamaica and met with some investors in Jamaica to show local projects they had purportedly funded.
• Jones used investors’ money to pay other investors – the hallmark of a Ponzi scheme.  He also used some investors’ money to pay his personal expenses.
• Many of those that Jones defrauded are retirees who are now in financial straits because of their investments with him.

“We allege that Jones enticed investors with the idea that they were investing in loans to Jamaican businesses that already had been approved for bank loans.  Instead, we charge that Jones used investor money for other purposes, including making payments in Ponzi scheme fashion,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office.    

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Municipal Advisor Charged for Failing to Disclose Conflict

The Securities and Exchange Commission today charged Kansas-based Central States Capital Markets, its CEO, and two employees for breaching their fiduciary duty by failing to disclose a conflict of interest to a municipal client.  The case is the SEC’s first to enforce the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act, which requires these advisors to put their municipal clients’ interests ahead of their own.

According to the SEC’s order, while Central States served as a municipal advisor to a client on municipal bond offerings in 2011, two of its employees, in consultation with the CEO, arranged for the offerings to be underwritten by a broker-dealer where all three worked as registered representatives.  The order found that Central States CEO John Stepp and employees Mark Detter and David Malone did not inform the client, identified in the order as “the City,” of their relationship to the underwriter or the financial benefit they obtained from serving in dual roles.

Municipal advisors advise municipal and conduit borrowers about the terms of offerings, including interest rates, the selection of underwriters, and underwriting fees.  In the three offerings, Central States collected fees from the City for the municipal advisory work and received 90 percent of the underwriting fees the City paid to the broker-dealer.  The SEC’s order found that Central States, Stepp, Detter, and Malone, breached their duty to the City by failing to disclose the conflict of interest.  The order found that Detter and Malone were aware of the conflict and that Detter emailed Malone that “we should resign” as municipal advisor to serve solely as underwriter on the offerings.

“By failing to disclose their financial interest in the underwriting of the City’s offerings, Central States -- the City's municipal advisor -- and its employees deprived the City of the opportunity to seek unbiased financial advice,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “A municipal advisor’s first duty should be to its municipal client, not its own bottom line.”
Jessica Kane, Director of the SEC’s Office of Municipal Securities said, “As fiduciaries, municipal advisors must identify and address all material conflicts of interest by eliminating or disclosing such conflicts.  Municipal entities rely on the advice of their municipal advisors and must feel confident that those advisors are working in the municipal entity’s best interests.”

Without admitting or denying the findings, Central States, Detter, Malone, and Stepp consented to the SEC’s order that they cease and desist from similar future securities-law violations and violations of Rule G-17 of the Municipal Securities Rulemaking Board (MSRB) that requires advisors to deal fairly with their clients.  Detter, Malone, and Stepp also agreed to cease and desist from future violations of MSRB Rule G-23 that bars those acting as municipal advisors on a bond offering from underwriting that offering.

Central States agreed to settle the SEC’s charges by paying $289,827.80 in disgorgement and interest and an $85,000 civil penalty.  Detter agreed to settle the charges by paying a $25,000 civil penalty and agreeing to a bar from the financial services industry for a minimum of two years.  Malone agreed to settle the charges by paying a $20,000 civil penalty and agreeing to a bar from the financial services industry for a one-year minimum.  Stepp agreed to settle the charges by paying a $17,500 civil penalty and agreeing to a six-month suspension from acting in a supervisory capacity with any broker-dealer, investment adviser, or municipal advisor.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Microcap Company CEO for Touting Bogus “Clean Energy” Contracts With Foreign Governments

The Securities and Exchange Commission today charged a microcap company CEO for falsely claiming to have a lucrative relationship with the United Nations and billions of dollars in clean energy contracts with foreign governments.

The SEC alleges that RVPlus Inc. CEO Cary Lee Peterson made bogus claims in the company’s public filings and in statements to private investors, and that he and RVPlus participated in an unlawful distribution of RVPlus’s stock.  The SEC temporarily suspended trading in RVPlus securities in July 2013, citing “material deficiencies” in the company’s financial statements.

“We allege that Peterson inflated RVPlus’s finances and expected profitability,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “We also allege that using a pseudonym, he posted hundreds of messages to an online investors’ forum calling RVPlus stock ‘undervalued,” and urging investors to ‘buy up as much as possible.’”

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Peterson.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey:

• Starting in May 2012, Peterson filed periodic reports with the SEC claiming that RVPlus had a lucrative relationship with the United Nations and clean energy agreements with governmental bodies in Nigeria, Haiti, and Liberia worth $2.8 billion.  RVPlus had no relationship with the U.N. and the contracts were fictitious.
• Peterson repeatedly claimed in RVPlus’s SEC filings that RVPlus had issued invoices and was owed millions of dollars in accounts receivable on the bogus contracts.
• RVPlus and Peterson gained control of more than 90 percent of RVPlus’s free trading shares and gave them to individuals who unlawfully sold them into the market.

The SEC’s complaint charges RVPlus and Peterson with violating the antifraud provisions of the securities laws and an SEC antifraud rule.  It also charges RVPlus and Peterson with violating the registration provisions of the securities laws and Peterson with aiding and abetting RVPlus’s violations of the antifraud provisions.  The SEC is seeking a permanent injunction, return of allegedly ill-gotten gains with interest, and penalties.  In addition, it is seeking to bar Peterson from serving as a corporate officer or director and from participating in the penny-stock business.


SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

AIG Affiliates Charged With Mutual Fund Shares Conflicts

The Securities and Exchange Commission today announced charges against three AIG affiliates for steering mutual fund clients toward more expensive share classes so the firms could collect more fees.  The firms agreed to pay more than $9.5 million to settle the SEC’s charges.  

An SEC investigation found that the firms placed clients in share classes that charged fees for marketing and distribution despite the clients being eligible to buy shares in fund classes without those additional charges.  As a result, the firms collected approximately $2 million in extra fees. The firms failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them.

“Investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, which has been actively probing conflicts of interest and disclosure around mutual fund share class selection.

According to the SEC’s order instituting a settled administrative proceeding, the AIG affiliates also failed to monitor advisory accounts on a quarterly basis to prevent reverse churning.  The firms had compliance policies and procedures to ensure that fee-based or “wrap” advisory accounts that charged an inclusive fee for both advisory services and trading costs remained in the best interest of clients that traded infrequently, but failed to implement those policies and procedures.  

The three firms – Royal Alliance Associates, SagePoint Financial, and FSC Securities Corporation – consented to the SEC’s order without admitting or denying the findings that they violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  The firms agreed to disgorgement of more than $2 million in improper fees plus prejudgment interest and a $7.5 million penalty. 

The SEC’s investigation was conducted by John Farinacci and supervised by Panayiota K. Bougiamas of the Asset Management Unit.  The SEC examination that led to the investigation was conducted by Joseph P. DiMaria, Edward R. Perkins, John Camardo, and Mary Beth Lynch of the New York Regional Office as well as Jon M. Wieman and Sang Lee of the Los Angeles Regional Office.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC: California Businessman Attempted Cover Up of Stolen Investor Funds

The Securities and Exchange Commission today announced fraud charges against a California businessman accused of stealing investor assets and then trying to cover it up once the SEC caught onto his scheme.

The SEC alleges that Daniel R. Nase raised money from investors through an unregistered offering of common stock in his Bakersfield, California-based company, BIC Real Estate Development Corp., and used the funds for personal expenses.  According to the SEC’s complaint filed in U.S. District Court for the Eastern District of California:

• Nase told investors that BIC would invest in real estate and promissory notes.  With money he used to purchase real estate and notes, Nase improperly titled most of the properties in his name or his wife’s name or their family trust, not BIC.
• Nase used some investor funds to pay for clothing, vacations, student loans, and other personal expenses.
• Nase tried to cover up his theft after learning of the SEC’s investigation by investing stolen assets back into the company to make it appear he was increasing his equity stake in it.

Nase was not registered with the SEC or any state regulator to sell investments.  Investors can quickly and easily check whether people selling investments are registered by using the SEC’s investor.gov website.  

“Those raising money for a business venture must use it as promised and not to simply enrich themselves,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “As alleged in our complaint, time and again Nase used investor funds for an illicit personal benefit.”

The SEC’s complaint charges Nase and BIC with violating federal antifraud laws and rules and securities registration provisions.  The complaint seeks emergency relief in the form of a temporary restraining order, asset freeze, and a preliminary injunction.  It also seeks return of allegedly ill-gotten gains along with interest, penalties, and permanent injunctions and other relief against Nase and BIC.

The SEC’s investigation was conducted by Manuel Vazquez, Matthew Montgomery, Roger Boudreau, and Robert Conrrad, and the litigation will be led by John Berry, John Bulgozdy, Mr. Vazquez, and Mr. Montgomery.  

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Oregon-Based Investment Group and Executives With Defrauding Investors

The Securities and Exchange Commission today charged an Oregon-based investment group and three top executives with hiding the rapidly deteriorating financial condition of its enterprise while raising more than $350 million from investors.  Aequitas Management LLC and four affiliates allegedly defrauded more than 1,500 investors nationwide into believing they were making health care, education, and transportation-related investments when their money was really being used in a last-ditch effort to save the firm.  Some money from new investors was allegedly used to pay earlier investors

The SEC’s complaint, filed today in federal district court in Oregon, alleges that CEO Robert J. Jesenik and executive vice president Brian A. Oliver were well aware of Aequitas’s calamitous financial condition yet continued to solicit millions of dollars from investors to pay the firm’s ever-increasing expenses and attempt to stave off the impending collapse.  Former CFO and chief operating officer N. Scott Gillis allegedly concealed the firm’s insolvency from investors and was aware that Jesenik and Oliver continued soliciting investors so that Aequitas could pay operating expenses and repay earlier investors with money from new investors.

“We allege that Aequitas had severe and persistent cash flow shortages and top executives knew they weren’t using money raised from investors like they said they would.  But they refused to disclose the true financial condition, continued to draw lucrative salaries, and roped even more unknowing investors into a losing venture,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. 

According to the SEC’s complaint:

• From January 2014 to January 2016, Aequitas raised money from investors by issuing promissory notes with high rates of return typically ranging from 8.5 to 10 percent.
• While Aequitas did use some investor money to acquire trade receivables in health care, education, transportation, and other consumer credit sectors, the vast majority was concentrated in student loan receivables of for-profit education provider Corinthian Colleges.  Corinthian defaulted on its recourse obligations to Aequitas in mid-2014, which significantly exacerbated the firm’s already severe cash flow problems.
• The executives continued to draw their lucrative salaries, use a private jet, and attend posh dinner and golf outings, all at the expense of investors.  They used the outings to raise more money from investors.  Jesenik, Oliver, and Gillis took home at least $2.5 million in combined salaries during this period.
• By November 2015, Aequitas could no longer meet scheduled redemptions.  Last month, the firm dismissed two-thirds of its employees and hired a chief restructuring officer.   

The SEC’s complaint charges violations of the federal securities laws by Aequitas Management, Aequitas Holdings LLC, Aequitas Commercial Finance LLC, Aequitas Capital Management Inc., and Aequitas Investment Management LLC as well as Jesenik, Oliver, and Gillis.  The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and monetary penalties from all defendants as well as bars prohibiting Jesenik, Oliver, and Gillis from serving as officers or directors of any public company.

Aequitas and the affiliated entities have agreed to be preliminarily enjoined from raising any additional funds by offering and selling securities, and agreed to the appointment of a receiver to marshal and preserve remaining Aequitas assets for distribution to defrauded investors.  The stipulated orders are subject to court approval.

The SEC’s continuing investigation is being conducted in the San Francisco office by Brent Smyth, Crystal Boodoo, and Tracy Combs and supervised by Steven Buchholz.  An examination of Aequitas’s registered investment advisory affiliate, and examinations of other registered investment advisers that recommended Aequitas investments to their clients, contributed to the investigation and were conducted by Thomas Dutton, Bradley Cline, Edward Haddad, Matthew O’Toole, Caroline Smith, Bernice You, Marc Valle, and Alice Schulman.  The SEC’s litigation will be led by Sheila O’Callaghan and Wade Rhyne.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Company and Executives for Faulty Evaluations of Internal Controls

The Securities and Exchange Commission has settled charges against Texas-based oil company Magnum Hunter Resources Corporation and several individuals, including a company consultant, for deficient evaluation of the company’s internal controls over financial reporting, and failures to maintain internal control over financial reporting between Dec. 31, 2011 and Sept. 30, 2013. 

Internal control over financial reporting (ICFR) refers to a company’s process for providing reasonable assurance to the public regarding the reliability of its financial reporting.  SEC rules require company management to evaluate and annually report on the effectiveness of ICFR, including disclosing any identified material weaknesses that creates a reasonable possibility that the company will not timely prevent or detect a material misstatement of its financial statements.  Management may not conclude ICFR is effective if a material weakness exists.

The SEC alleges that MHR and two senior officers – former CFO Ronald Ormand and former chief accounting officer David Krueger – failed to properly evaluate and apply applicable ICFR standards and improperly concluded that MHR had no material weaknesses.  The SEC also charged former MHR consultant Joseph Allred, and former MHR audit engagement partner Wayne Gray, with improperly evaluating the severity of MHR’s internal control deficiencies and misapplying relevant standards for assessing deficiencies and material weaknesses.  Accordingly, the public was not told that MHR had a material weakness in its ICFR.

According to the SEC’s orders:

• MHR’s rapid growth, which included multiples of revenue growth in 2010 and significant acquisitions in 2010 and 2011, strained its accounting resources.  The acquisition and revenue growth caused Magnum Hunter to be unable to complete its standard monthly close process on time.
• Ronald Ormand and David Krueger knew of the stresses placed on Magnum Hunter’s accounting department as a result of its rapid growth.  Nonetheless, they failed to apply appropriate standards when determining the severity of MHR’s internal control deficiency.
• Joseph Allred, a partner at a PCAOB-registered public accounting firm that provided consulting and internal auditing services to Magnum Hunter, led consulting engagements to document and test Magnum Hunter’s controls and identified problems in the company’s accounting department that exhibited “inadequate and inappropriately aligned staffing.”  These problems caused delays in Allred’s testing. 
• Despite identified problems, and his belief that “[t]he potential for error in such a compressed work environment presents substantial risk,” Allred concluded that the staffing deficiency in the company’s accounting department did not rise to the level of a material weakness.
• Wayne Gray, an engagement partner at a PCAOB-registered public accounting firm that served as Magnum Hunter’s independent auditor, recognized during his audit that MHR lacked “adequate internal control over financial reporting due to inadequate and inappropriately aligned staffing” which “increases the possibility of a material error occurring and being undetected.”  Despite this assessment, Gray concluded that the weakness did not rise to the level of material weakness and failed to adequately document the basis for his conclusion.

“Effective internal controls are a critical safeguard against false and inaccurate information that may harm shareholders,” said Shamoil T. Shipchandler, Director for the SEC’s Fort Worth Regional Office.  “This action emphasizes that all those involved in ICFR assessments – companies, management, external auditors and consultants – must take their responsibilities seriously and rigorously assess controls, including those over financial reporting.”

Without admitting or denying the findings in the cease-and-desist orders covering various reporting and internal control provisions of the federal securities laws, MHR agreed to pay a penalty of $250,000 subject to bankruptcy court approval, Ormand and Allred agreed to pay penalties of $25,000 and $15,000 respectively, and Krueger and Gray agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits them to apply for reinstatement after one year.

The SEC’s investigation was conducted by David Whipple, David King, and Chris Davis and supervised by Jessica Magee and David Peavler of the Fort Worth office.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Anthony Kelly Named Co-Chief of Asset Management Unit

The Securities and Exchange Commission today announced that Anthony S. Kelly has been named Co-Chief of the Enforcement Division’s Asset Management Unit, which focuses on misconduct by investment advisers, investment companies, and private funds.  He joins Marshall Sprung as Co-Chief of the unit and succeeds Julie Riewe, who left the agency last month.

Mr. Kelly has investigated or supervised enforcement cases that addressed a wide range of misconduct across the asset management industry.  Mr. Kelly supervised the SEC’s first cases under its authority to bring anti-retaliation enforcement actions, which included charges against a hedge fund adviser, and arising from an initiative to protect mutual fund shareholders from bearing the costs when firms improperly use fund assets to pay for distribution-related services.  Mr. Kelly also helped secure a $39 million settlement with three private equity fund advisers within The Blackstone Group for their failure to properly disclose accelerated monitoring fees as well as discounts on legal fees and a settlement from a mutual fund adviser, its principal, and three mutual fund board members charged with failing to satisfy their statutory obligations in connection with the evaluation and approval of mutual fund advisory contracts.  Mr. Kelly also has extensive experience in insider trading investigations, including the SEC’s case against a former private equity firm associate over whom the SEC prevailed at trial.

“Anthony’s wide-ranging experience in enforcement and examinations, along with his exceptional judgment and dogged investigative skills will be tremendous assets in rooting out fraud in the asset management industry,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “I am confident that he and Marshall will be strong leaders in the Asset Management Unit bringing significant actions against investment advisers, investment companies, and other asset management participants who engage in unlawful conduct.”

“As someone who joined the Asset Management Unit at its inception, I have a great sense of pride in the unit and all that it has accomplished in its first six years,” said Mr. Kelly.  “I am truly honored for this opportunity to lead the unit with Marshall, and I look forward to working with our talented and dedicated colleagues throughout the country as we build on the many successes the unit has achieved in protecting investors across the asset management industry.”

Mr. Kelly joined the SEC in 2000 as a securities compliance examiner in the Office of Compliance Inspections and Examinations’ Broker-Dealer Group.  Mr. Kelly attended law school while working as an examiner and he joined the Enforcement Division following graduation and served as a staff attorney and senior counsel.  In May 2011, Mr. Kelly served as a special counsel in the Division of Trading and Markets’ Office of Trading Practices before re-joining the Enforcement Division in April 2012.  He was promoted to Assistant Director in the Asset Management Unit in August 2012.  

Mr. Kelly received the agency’s Chairman’s Award for Excellence in 2010 and Ellen B. Ross Award in 2009.  Mr. Kelly earned his law degree from Georgetown University Law Center in 2004 and his undergraduate degree with highest honors from George Washington University in 1999.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Wells Fargo Loses Termination Case for Over $1.5 Million

As I have said, brokers can win promissory note cases. It is not easy, but with the right attorney, and the right set of facts, a broker's counterclaim can wipe out the obligation under the note; and then some.

Just last week, an arbitration panel awarded an ex-advisor more than $1.7 million from Wells Fargo for wrongful termination and other misconduct, and the panel rejected the firm's claims under the note.

The promissory note had about $200,000 left to repay and Wells Fargo terminated the broker, claiming on his U-5 that he failed to follow procedure with regard to "contacting customers prior to entering orders."

That didn't fly with the arbitrators who awarded a variety of damages, including $1.1 million representing what the broker"would have earned in commissions, commission bonuses, and other compensation and benefits, between his termination date and the date that he likely would have
actually retired, but for the termination at issue."

The lesson? If you are forced to leave your firm, or terminated, don't simply agree to pay the firm. Call our office, and let us see if we can help you recover your damages.

Related articles

Brokers Can Win Promissory Note Cases

---
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including promissory note cases and employment disputes. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC to Hold National Compliance Outreach Seminar for Investment Companies and Investment Advisers

The Securities and Exchange Commission today announced the opening of registration for its compliance outreach program’s national seminar for investment companies and investment advisers.  The event is intended to help Chief Compliance Officers (CCOs) and other senior personnel at investment companies and investment advisory firms to enhance their compliance programs for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and the Asset Management Unit of the Division of Enforcement jointly sponsor the compliance outreach program.  The national seminar will be held on April 19 at the SEC’s Washington, D.C., headquarters from 8:30 a.m. to 5:30 p.m. ET.  In-person attendance is limited to 500; a live webcast will be available at www.sec.gov.

The seminar agenda is here. Topics to be discussed include OCIE’s program priorities in 2016, private fund adviser issues, compliance, and rulemaking.

“We look forward to the participants discussing ideas that will be beneficial for both senior officers and their firms,” said OCIE Director Marc Wyatt.  “Attendees will learn what other firms are doing to comply with certain regulations and the SEC staff’s perspective regarding interpreting, examining, and enforcing these regulations.”

"The national compliance outreach program provides an important opportunity for the investment management compliance community to hear directly from SEC staff and for regulators to gain a better understanding of the issues and concerns facing compliance professionals,” said Division of Investment Management Director David Grim. 

Investment adviser and investment company senior officers may register online for the event here.  Registration instructions also will be sent to SEC-registered advisers using the e-mail account on the adviser’s most recent Form ADV filing.  For more information, contact: ComplianceOutreach@sec.gov

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC: Tech Company Misled Investors About Key Product

The Securities and Exchange Commission today announced that a developer of technologies for touchscreen devices has agreed to pay $750,000 to settle charges that it misled investors about the production status and sales agreements for a key product.

Two former company executives face related charges in an SEC complaint filed today in U.S. District Court for the Southern District of Texas.  The SEC entered into a deferred prosecution agreement with the company’s former chairman of the board, who has agreed to cooperate and be barred from serving as an officer and director for five years.

The SEC alleges that Uni-Pixel Inc. began publicly touting sales of a touchscreen sensor product supposedly in speedy high-volume commercial production when in fact only a few samples had been manually completed.  The misrepresentations caused Uni-Pixel’s stock price to more than double, enabling then-CEO Reed Killion and then-CFO Jeffrey Tomz to make more than $2 million in personal profits from selling their own shares of company stock.  Killion and Tomz allegedly knew the company’s statements were untrue and Uni-Pixel’s manufacturing process was still incapable of mass producing commercial quantities of sensors.

“We allege that Uni-Pixel and top executives portrayed a company whose technology had arrived when in truth it was still in the developmental stage,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “Tech companies and their officers must be honest with investors about the state of their products and cannot portray them as something they are not.”

According to the SEC’s complaint:

• Uni-Pixel announced “multi-million dollar” sales agreements in 2012 and 2013 that highlighted potential revenues but omitted material conditions the company had to meet to actually receive those revenues.
• Uni-Pixel announced in April 2013 that its high-volume production line was “qualified and production ready” and its capacity “started at fifty moving to hundreds and then thousands over the next several months.”  At the time, Uni-Pixel had yet to produce any functional sensors through its high-speed process.
• Uni-Pixel issued a press release in November 2013 touting a “purchase order” for its sensors that expected to ship an initial “commercial run” of sensors by year-end.  The company concealed that the order was for a mere $10 worth of sensors for the customer to review as samples.

Without admitting or denying the SEC’s charges, Uni-Pixel consented to entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities and Exchange Act of 1934 as well as Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13.  The settlement is subject to court approval.  The SEC’s litigation continues against Killion and Tomz.

The deferred prosecution agreement with former board chairman Bernard T. Marren alleges that he became aware that information in Uni-Pixel’s press releases was inaccurate but failed to ensure that the company corrected the releases.  The agreement requires him to cooperate with the SEC’s continuing case while complying with certain undertakings in order to avoid civil charges against him. 

The SEC’s investigation was conducted by David Whipple, Carol Hahn, and David King, and the case was supervised by Jessica Magee in the SEC’s Fort Worth Regional Office.  The SEC’s litigation will be led by Matt Gulde.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Insider Traders Returning Illegal Profits and Kickbacks

The Securities and Exchange Commission today announced that a Florida man trading on inside information ahead of a pharmaceutical company merger and a friend who tipped him have agreed to settle enforcement actions against them.

Jay Y. Fung has agreed to pay back more than $700,000 in illegal profits plus more than $60,000 in interest earned after allegedly purchasing stock and call options in Pharmasset Inc. based on his friend’s tip that it was about to be acquired.  The SEC alleges that Fung cashed in when Pharmasset’s stock rose 84 percent after its acquisition by Gilead Sciences was publicly announced, and he paid kickbacks to his friend who provided the nonpublic information. 

The SEC filed a complaint against Fung today in federal district court in Newark, N.J., and the U.S. Attorney’s Office for the District of New Jersey today announced parallel criminal charges.

The SEC previously charged Fung’s friend and tipper Kevin Dowd, who learned the nonpublic information during his employment at an investment advisory firm where a Pharmasset board member maintained an account and confidentially sought financial advice in advance of the acquisition.  Dowd has since cooperated with the SEC’s investigation and agreed to pay back the cash kickbacks he received from Fung and be barred from the securities industry and penny stock offerings.  Dowd also pleaded guilty in a parallel criminal case.

“SEC enforcement staff continue to develop and refine analytical tools to uncover illicit trading activity and hold accountable those abusing the markets for their own financial gain,” said Joseph G. Sansone, Co-Chief of the SEC’s Market Abuse Unit, which has an Analysis and Detection Center dedicated to crunching trading data to identify suspicious trading patterns.   

The SEC’s settlements with Fung and Dowd are subject to court approval. 

The SEC’s investigation was conducted by Paul T. Chryssikos and Scott A. Thompson of the Market Abuse Unit and the Philadelphia Regional Office with assistance from John Rymas in the Analysis and Detection Center and Christopher R. Kelly of the Philadelphia office.  The investigation was supervised by Mr. Sansone.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey and the Federal Bureau of Investigation.  

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

California Water District to Pay Penalty for Misleading Investors

The Securities and Exchange Commission today charged California’s largest agricultural water district with misleading investors about its financial condition as it issued a $77 million bond offering.  

In addition to charging Westlands Water District, the SEC charged its general manager Thomas Birmingham and former assistant general manager Louie David Ciapponi.

According to the SEC’s order instituting a settled administrative proceeding:

• Westlands agreed in prior bond offerings to maintain a 1.25 debt service coverage ratio, which is a measure of an issuer’s ability to make future bond payments.
• Westlands learned in 2010 that drought conditions and reduced water supply would prevent the water district from generating enough revenue to maintain a 1.25 ratio.
• In order to meet the 1.25 ratio without raising rates on water customers, Westlands used extraordinary accounting transactions that reclassified funds from reserve accounts to record additional revenue.
• Birmingham jokingly referred to these transactions as “a little Enron accounting” when describing them to the board of directors, which is comprised of Westlands customers. 
• When Westlands issued the $77 million bond offering in 2012, it represented to investors that it met or exceeded the 1.25 ratio for each of the prior five years.
• Not only did Westlands fail to disclose that wouldn’t have been possible without the extraordinary 2010 accounting transactions, but also omitted separate accounting adjustments made in 2012 that would have negatively affected the ratio had they been done in 2010. 
• Had the 2010 reclassifications and the effect of the 2012 adjustments been disclosed, Westlands’ coverage ratio for 2010 would have been only 0.11 instead of the 1.25 reported to investors.
• Birmingham and Ciapponi improperly certified the accuracy of the bond offering documents.

Westlands agreed to pay $125,000 to settle the charges, making it only the second municipal issuer to pay a financial penalty in an SEC enforcement action.  Birmingham and Ciapponi agreed to pay penalties of $50,000 and $20,000 respectively to settle the charges against them.

“The undisclosed accounting transactions, which a manager referred to as ‘a little Enron accounting,’ benefited customers but left investors in the dark about Westlands Water District’s true financial condition,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.   “Issuers must be truthful with investors and we will seek to deter such misconduct through sanctions, including penalties against municipal issuers in appropriate circumstances.”

The SEC’s order finds that Westlands, Birmingham and Ciapponi violated Section 17(a)(2) of the Securities Act of 1933 and must cease and desist from future violations.

The SEC’s investigation was conducted by Brian P. Knight, Creighton L. Papier, Monique C. Winkler, and Deputy Chief Mark R. Zehner in the Municipal Securities and Public Pensions Unit with assistance from John Yun in the San Francisco office.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Money Returning to Investors Harmed by Unregistered Broker

The Securities and Exchange Commission today announced that a Cyprus-based company has agreed to pay $11 million to settle charges that it illegally sold binary options to U.S. investors.  A judge signed a court order late yesterday authorizing the distribution of this money to harmed investors through a Fair Fund.

The SEC filed a complaint in 2013 against Banc de Binary Ltd., its founder Oren Shabat Laurent, and three affiliates alleging that they failed to register the offering before soliciting U.S. customers through YouTube videos, spam e-mails, and other Internet advertising.  They failed to register as a broker-dealer before communicating directly with U.S. clients by phone, e-mail, and instant messenger chats.

Binary options differ from more conventional options contracts because the payout typically depends entirely on whether the price of a particular asset underlying the option will rise above or fall below a specified amount.

Banc de Binary, Laurent, and the affiliates agreed to jointly pay $7.1 million in disgorgement and $1.95 million in penalties to the SEC as well as $2 million in penalties to the Commodity Futures Trading Commission (CFTC), which filed a parallel action.  The court has established a Fair Fund that will be administered by the National Futures Association to compensate harmed investors.  Banc de Binary, Laurent, and the affiliates also agreed to be suspended from the securities industry for a year and permanently barred from issuing any penny stock offerings.  The settlement has been approved by the U.S. District Court for the District of Nevada.

“Banc de Binary and its affiliates completely disregarded U.S. laws and registration requirements, and as a result they must surrender millions of dollars and be suspended from the industry,” said Michele Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC’s investigation was conducted by Leslie Hakala, and the litigation was handled by John Berry, Amy Longo, and Ms. Hakala.  The SEC appreciates the assistance of the CFTC.

*   *   *

Investor Alert

The SEC has become aware of some impersonators claiming to be affiliated with the SEC or other government agencies who have contacted harmed investors in this Banc de Binary case and asked them to pay a fee to facilitate their settlement payout.  It’s important for all investors to know that the SEC never makes people pay to get their money back.  The SEC’s Office of Investor Education and Advocacy today issued an investor alert warning investors about phony communications that may appear on official-looking documents purportedly from the SEC offering paid legal services to investors who are fraud victims.  Read the investor alert for more information about how to avoid these scams.

Investors in Banc de Binary binary options who have questions about the settlement distribution should contact the National Futures Association at 800-621-3570 or BDBRestitution@nfa.futures.org.  SEC enforcement staff on the case can be reached at LA4238@sec.gov.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Awarding Nearly $2 Million to Three Whistleblowers

The Securities and Exchange Commission today announced the payment of almost $2 million to three whistleblowers.

Three Awards - $1.8 Million, and Two for $65,000

The largest of the three awards will go to a whistleblower who voluntarily provided original information that prompted the SEC to open its investigation.  That whistleblower, who will receive about $1.8 million, continued to provide valuable information throughout the investigation.  The other two whistleblowers will receive approximately $65,000 each for providing information after the investigation started.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

Whistleblowers have received $57 Million

The SEC’s whistleblower program has now paid more than $57 million to 26 whistleblowers since the program’s inception in 2011.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money is taken or withheld from harmed investors to pay whistleblower awards.

“We’re seeing a significant uptick in whistleblower tips over prior years, and we believe that’s attributable to increased public awareness of our program and the tens of millions of dollars we’ve paid to whistleblowers for information that helped us bring successful enforcement actions,” said Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Announces Charges Against Unregistered Fund Manager Accused of Hiding Criminal Past

The Securities and Exchange Commission today announced fraud charges against an unregistered fund manager accused of hiding his checkered past while providing false and misleading data to investors and an independent research firm.

“We allege that Steven Zoernack deceived investors by spreading false and misleading fund information while doing everything possible to bury his criminal history and troubling financial record,” said Antonia Chion, Associate Director of the SEC’s Enforcement Division.

The SEC’s Enforcement Division alleges in an administrative proceeding against Zoernack and his firm EquityStar Capital Management:

• They fraudulently offered and sold at least $5.6 million of interests in a pair of private investment funds (Global Partners Fund and Momentum Growth Fund) to more than 40 investors from May 2010 to March 2014.
• Zoernack secretly made more than $1 million in unauthorized withdrawals from the funds’ accounts without informing investors.
• Zoernack and EquityStar took extensive measures to hide Zoernack’s background that included two felony fraud convictions, a bankruptcy filing, and other money judgments and liens against him.
• Zoernack even hired a firm to manipulate search results on his name by flooding the Internet with misleading information indicating he was a successful fund manager, investor, and philanthropist.  This made it harder for investors to discover Zoernack’s criminal convictions and other negative information in Internet searches.
• Zoernack used at least three false identities while communicating with investors to make Equity Star sound like more than a one-man operation.  For example, he created a nonexistent woman named Amanda Sutton who carried the title: Investor Relations Professional.
• Zoernack and EquityStar provided false and misleading data to Morningstar Inc. so the Momentum fund could attain the title of “Morningstar Five-Star-Rated Fund” under false pretenses and Zoernack could market the fund as highly-rated.
• For example, Zoernack misrepresented to Morningstar that the fund existed longer than it actually did, and falsely claimed the assets were 40 times higher than they actually were.
• Zoernack and EquityStar created and distributed false and misleading investment marketing materials that didn’t adequately indicate that results were hypothetical and not based on actual fund performance. 

Neither Zoernack nor his funds were registered with the SEC or any state regulator.  Investors can quickly and easily check whether people selling investments are registered by using the SEC’s investor.gov website.

The matter involving Zoernack and EquityStar will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The investigation was conducted by Douglas Gordimer and supervised by Deborah Tarasevich.  The litigation will be led by Joshua Braunstein and Dean M. Conway.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Robert M. Fisher Named Managing Executive of the Office of Compliance Inspections and Examinations

The Securities and Exchange Commission today announced that Robert M. Fisher has been named Managing Executive of the Office of Compliance Inspections and Examinations (OCIE).  In this role, Dr. Fisher will oversee OCIE’s business operations, technology services, examiner training, and Tips, Complaints and Referrals programs.  He succeeds Peter B. Driscoll who has been named Chief Risk and Strategy Officer of OCIE’s new Office of Risk and Strategy.

“Rob has terrific experience and brings proven skill sets to the position of Managing Executive,” said OCIE Director Marc Wyatt. “I look forward to working with him to further advance the effectiveness of our National Exam Program.”

“I am extremely proud to be working with such a great and dedicated team in OCIE to support the vital mission of protecting investors,” said Dr. Fisher.

Dr. Fisher came to the SEC in 2002 as an Economic Fellow in the Office of Economic Analysis, now the Division of Economic and Risk Analysis.   He was named an Assistant Director in the Office of International Affairs (OIA) in 2005, with responsibility for the SEC’s technical assistance program for emerging markets.  He became OIA’s Deputy Director in 2012 and later served as the office’s Acting Director.  In 2014, Dr. Fisher joined OCIE as an Associate Director within its Office of the Director.

Before coming to the SEC, Dr. Fisher was a Washington, D.C.-based attorney in private practice and clerked for Judge Stephen F. Williams of the U.S. Court of Appeals for the D.C. Circuit.  His academic experience includes serving as an Adjunct Professor of Law at the Georgetown University Law Center, Associate Professor at the College of Holy Cross, Visiting Fellow at Cambridge University, and Research Fellow at the Australian National University. 

Dr. Fisher holds a Ph.D. and bachelor’s degree in Economics from Duke University and a J.D. from Harvard Law School (magna cum laude).

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Announces Creation of Office of Risk and Strategy for its National Exam Program

The Securities and Exchange Commission today announced the creation of the Office of Risk and Strategy within its Office of Compliance Inspections and Examinations (OCIE).  The new office will consolidate and streamline OCIE’s risk assessment, market surveillance, and quantitative analysis teams and provide operational risk management and organizational strategy for OCIE.

Peter B. Driscoll will lead the office and has been named as its first Chief Risk and Strategy Officer.  In this role, Mr. Driscoll will manage the new office and the Investment Adviser/Investment Company examination staff based in Washington, D.C. 

“The Office of Risk and Strategy will lead our exam program’s risk-based, data-driven, and transparent approach to protecting investors,” said OCIE Director Marc Wyatt. "Pete brings exceptional industry and operational knowledge, strategic leadership, and a track record of innovation to his new role.”

“I am honored to have the opportunity to lead such a talented staff and am excited to advance our development of new tools and techniques that strengthen OCIE’s risk analysis, surveillance, and strategic abilities on behalf of investors,” said Mr. Driscoll.

OCIE conducts the SEC’s National Examination Program through examinations of SEC-registered investment advisers, investment companies, broker-dealers, municipal advisors, self-regulatory organizations, clearing agencies, and transfer agents.  It uses a risk-based approach to examinations to fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.

Mr. Driscoll has been OCIE’s Managing Executive since 2013.  He started at the SEC in 2001 as a staff attorney in the Division of Enforcement in the agency’s Chicago Regional Office.  He joined OCIE in 2004 as a branch chief in the Investment Adviser/Investment Company program in the Chicago office and later served as the Chicago office’s Ethics Liaison Officer and Assistant Regional Director.  

Mr. Driscoll began his career as an auditor with Ernst & Young LLP and held several accounting positions in private industry.  He has a bachelor’s and law degree from St. Louis University.  Mr. Driscoll is a licensed certified public accountant in the state of Missouri and a member of the Missouri Bar.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Regulatory Investigations Require Experienced Counsel

A broker who receives a FINRA OTR notice, or a subpoena from the SEC must be aware that his prior customer and disciplinary history may significantly impact how the investigation is conducted, what charges will be brought and what penalties may apply. For this reason, it is imperative that anyone called to give testimony or documents to financial regulators seek the advice and counsel of an experienced lawyer as soon as possible after receiving the OTR letter or subpoena

The securities regulatory system is structured so as to increase punishment on repeat offenders. FINRA believes that disciplinary sanctions should be more severe for recidivists and has structured the disciplinary process so as to impose progressively escalating sanctions on recidivists up to and including a permanent bar and expelling firms.

FINRA has clearly stated that sanctions imposed on recidivists should be more severe because a recidivist, by definition, already has demonstrated a failure to comply with FINRA’s rules or the securities laws. The imposition of more severe sanctions emphasizes the need for corrective action after a violation has occurred, discourages future misconduct by the same respondent, and deters others from engaging in similar misconduct. Adjudicators should always consider a respondent’s relevant disciplinary history in determining sanctions and should ordinarily impose progressively escalating sanctions on recidivists. FINRA also encourages more severe sanctions when a respondent’s disciplinary history includes significant past misconduct that: (a) is similar to that at issue; or (b) evidences a reckless disregard for regulatory requirements, investor protection, or market integrity.

HIRE AN EXPERIENCED ATTORNEY

FOR YOUR FINRA OR SEC INVESTIGATION

An investigation by FINRA, the SEC, or a state securities administrator can become a life changing event, with significant fines and suspensions. If you find yourself faced with a FINRA 8210 Request, or an SEC subpoena, you need an experienced, qualified, time-tested FINRA attorney who has the experience to provide excellent representation. I am proud of my reputation as an aggressive defense attorney, who has represented dozens of brokerage firms and hundreds of individual brokers across the country, in securities investigations.

Every case is defensible, and that defense starts with the initial contact with the regulators.

Mark J. Astarita, Esq.

Sallah Astarita & Cox, LLC

100 Park Avenue, Suite 1600

New York, New York 10017

212-509-6544