This Week In Securities Litigation – JD Supra (press release)

The Commission settled one other FCPA motion centered on the efforts of a Chilean airline to resolve its labor points. The company additionally filed 4 providing fraud actions: one based mostly on an web fraud; a second centered on the sale of bonds for a resort complicated; a 3rd involving the sale of oil providers gear; and a fourth based mostly on clean examine corporations. Finally, the SEC additionally introduced two settled insider buying and selling actions, one the place the CFO of the agency being acquired traded and one other the place an accountant misappropriated inside info and tipped a securities skilled.

SEC

Settlement: The Commission introduced in a press launch a settlement with State Street Bank and Trust Company for deceptive mutual funds and different custody shoppers relating to hidden markups on overseas foreign money trade trades. The agency can pay $382.four million as a part of a worldwide settlement. In addition, the agency can pay $167.four million in disgorgement to the SEC, a $155 million penalty to the DOJ and at the very least $60 million to ERISA plan shoppers underneath an settlement with the DOL. The SEC Order won’t be filed till the courtroom approves the settlements within the personal class actions. The DOJ made an identical announcement.

SEC Enforcement – Filed and Settled Actions

Statistics: During this era the SEC filed 5 civil injunctive motion and four administrative continuing, excluding 12j and tag-alongside proceedings.

Offering fraud: SEC v. Traffic Monsoon LLC, Civil Action No. 2:16-cv-00832 (D. Utah Filed July 26, 2016) is an motion towards the agency and Charles Scoville, its solely member. Mr. Scoville started working Traffic Monsoon in late 2014 as a mixture web visitors change and pay-per-click on program. The agency is marketed as being very profitable. Over 162,000 buyers from around the globe have been solicited. Those buyers have been the supply of nearly all the agency’s funds, opposite to its claims. The grievance alleges violations of Securities Act Sections 5(a), 5(c) and every subsection of 17(a) and Exchange Act Section 10(b). The courtroom entered a freeze order on submitting. The case is pending. See Lit. Rel. No. 23604 (July 28, 2016).

Offering fraud: SEC v. White, Civil Action No. 16-cv-02715 (N.D. Ga. Filed July 28, 2016) is an motion which names as defendants Matthew White, Rodney Zehner, Daniel Merandi and a number of other shell entities. For almost a decade the defendants have tried to develop a resort and amusement park complicated outdoors of Atlanta referred to as Grand Empire Palace and Resorts. In 2013 they started promoting company bonds to fund the venture. While that they had vital problem promoting the bonds, about $5.6 million was raised. The defendants misappropriated the funds relatively than utilizing the cash to buy a portfolio of securities to safe the bonds as represented to buyers. The grievance alleges violations of every subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

EB-5: SEC v. Luca International Group, LLC, Civil Action No. 23606 (N.D. Cal.) is a beforehand filed motion towards Luca International Group, LLC and different associated entities. The grievance alleged that the defendants, together with CEO Bingoing Yang and Lily Lei orchestrated a fraudulent providing scheme. The defendants portrayed their agency as extremely profitable and informed buyers that they might obtain giant returns. Some of the buyers have been Chinese residents in search of a everlasting inexperienced card by means of the EB-5 program. The Luca entities are in Chapter 11. The courtroom entered a ultimate judgment towards the entity defendants, prohibiting them from violating Securities Act Sections 5(a) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(four). In addition, the companies can pay disgorgement equal to the Commission’s declare in chapter which is $68.Three million. See Lit. Rel. No. 23606 (July 28, 2016).

Offering fraud: SEC v. McCollum, Civil Action No. 7:16-cv-00282 (W.D. Tex. Filed July 27, 2016). Defendant Jeffery McCollum shaped JNL Oilfield Instruments, LLC to offer providers to oilfield corporations in West Texas. The enterprise struggled, leaving him in need of money. Changing his enterprise mannequin, Mr. McCollum targeted on buying used oilfield providers gear. To increase capital he started soliciting buyers who have been informed in the event that they bought a selected half a fast revenue might be made. From 2009 by way of mid – 2015 he raised over $12 million from about 30 buyers. Parts weren’t bought. Much of the cash was misappropriated whereas parts have been used to repay different buyers. The grievance alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants resolved the motion, consenting to the entry of everlasting injunctions based mostly on the Sections cited within the grievance. They additionally agreed to pay disgorgement and prejudgment curiosity in quantities to be decided later and a penalty of $160,000. See Lit Rel. No. 23603 (July 27, 2016).

Stop order: In the Matter of the Registration Statement of Sand International, Inc., Adm. Proc. File No. Three-17363 (July 27, 2016). The Order alleges that Respondent is a revoked Nevada corporation that claims to be headquartered in Zvirka, Ukraine. The agency failed to answer a employees subpoena for paperwork. That constitutes a failure to cooperate, in line with the Order. Accordingly, the Commission ordered the establishment of a public administrative continuing underneath Securities Act Section eight(d).

Insider buying and selling: In the Matter of Vi Chen, CPA., Adm. Proc. File No. Three-17361 (July 26, 2016). Respondent Chen is a CPA licensed to apply in California. Prior to becoming a member of Oplink Communications Inc.she labored as an accountant for quite a lot of publicly-traded companies. In August 2016 she turned the controller of Oplink, a agency that sells optical networking elements and subsystems. In August 2014 Koch Industries Inc. and Oplink executed a non-disclosure settlement following preliminary discussions. Over the next months the 2 corporations engaged in due diligence. Ms. Chen first discovered concerning the proposed transaction at an October 13, 2014 assembly with the agency’s CFO. She then labored on the due diligence, collaborating in conferences and calls with Koch representatives. Ms. Chen ready deal associated work product relating to her employer’s monetary situation. During the interval she bought shares of her employer’s agency in brokerage accounts within the identify of kinfolk. Following the deal announcement on November 19, 2014 the share worth elevated 14%. Ms. Chen liquidated the shares, realizing income of $34,678.44. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the motion Respondent consented to the entry of a stop and desist order based mostly on the Sections cited within the Order. In addition, she will probably be denied the privilege of showing and training earlier than the Commission as an accountant with the proper to request reinstatement after 5 years. She can also be denied the privilege of serving as an officer or director of a public firm for 5 yr. Ms. Chen can pay disgorgement of $34,678.44, prejudgment curiosity and a civil penalty equal to the quantity of the disgorgement.

Insider buying and selling: SEC v. Melvin, Civil Action No. 12-cv-2984 (N.D. Ga.) is a beforehand filed motion towards Thomas Melvin and Michael Cain, a registered consultant. The motion alleged that Mr. Melvin traded on inside info furnished to him by his accountant relating to a company acquisition that had been misappropriated from a shopper. This week the courtroom entered a last judgment towards Mr. Cain completely enjoining him from future violations of Exchange Act Sections 10(b) and 14(e) and ordering that he pay a penalty of $36,991.20. See Lit. Rel. No. 23601 (July 25, 2016).

Offering fraud: SEC v. Brennan, Civil Action No. 1:16-cv-00307 (E.D. Tenn. Filed July 20, 2016). The defendants on this motion are James Brennan, Douglas Dyer and Broad Street Ventures, LLC. Beginning in 2008 Messrs. Brennan and Dyer, by way of Broad Street, constantly provided shares of inventory in eight separate however comparable corporations referred to as Scenic City F101, Inc. via Scenic City F10 VIII, Inc. Each funding was apportioned equally among the many Scenic City Companies. The Scenic City choices have been for clean verify or shell corporations that have been to merge with a small, personal agency that needed to go public. A Form 10 registration assertion was presupposed to be filed with the SEC. The shares can be traded within the over-the-counter market. Total quantity to be raised within the providing was $800,000. In the top every merged entity can be value about $20 million and the shares would initially commerce at about $1.00 per share. Collectively the transactions would give buyers a return of over 800%. A collection of false representations have been made by the defendants to induce buyers to buy shares. Much of the investor cash was diverted to the private use of the defendants. The particular person defendants additionally did not disclose their regulatory historical past, together with the truth that Mr. Brennan had been barred by FINRA. More than 240 buyers bought shares, paying hundreds of thousands of dollars to the defendants. The Commission’s grievance alleges violations of every subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). A freeze order has been obtained by the Commission. The case is pending. See Lit. Rel. No. 23600 (July 25, 2016).

Audit failure: In the Matter of EFP Rotenberg, LLP, Adm. Proc. File No. 317356 (July 22, 2016) names as Respondents the audit agency and companion Nicholas Bottini. The Order alleges that Mr. Bottini served because the engagement companion for the audit of the monetary statements of Continuity X Solutions, Inc. for the fiscal yr ended June 30, 2012. During the engagement the audit staff failed: to appropriately reply to dangers of fabric misstatement, to determine associated get together transactions, acquire adequate audit proof, carry out procedures to resolve and correctly doc inconsistencies and to research administration representations that contradicted different proof and train due skilled care. Respondents additionally failed to take care of satisfactory insurance policies and procedures relating to documentation. The Order alleges violations of Exchange Act Sections 10A(a)(1) and 10A(a)(2) and Rule 2-02(b)(1) underneath Regulation S-X. To resolve the matter Respondents consented to the entry of a stop and desist order based mostly on the Sections and rule cited within the Order. The agency additionally agreed to the entry of a censure and to implement sure undertakings, together with not accepting any new audit shoppers registered with the Commission or for the aim of registering securities with the company for a interval of twelve months. The agency may also retain an unbiased marketing consultant for 2 years who will conduct sure evaluations. The agency can pay a penalty of $100,000. Mr. Bottini can pay a penalty of $25,000 and is denied the privilege of showing and working towards earlier than the Commission as an accountant.

FCPA

In the Matter of LAN Airlines S.A., Adm. Proc. File No. Three-17357 (July 25, 2016). LAN was a publically traded airline agency based mostly in Santiago, Chili. LAN Argentina S.A. was a subsidiary of LAN through the interval. Prior to 2004 the agency explored choices for increasing into Argentina. In 2005 officers from the Argentine Transportation Secretary’s Office contacted LAN to find out if the corporate can be curious about buying Lineas Aereas Federales S.A. or LAFSA, a state owned airways. While initially LAN declined, later within the yr the vice chairman of enterprise improvement met with the president of Argentina, the Transportation Secretary and different officers relating to LAFSA. Eventually LAN bought a 49% stake within the airline – Argentinean law didn’t allow a overseas agency to personal a controlling curiosity.

After buying LAFSA LAN confronted a collection of challenges one in every of which centered on the native labor unions which demanded giant pay and profit will increase. The unions additionally threatened to implement a so-referred to as single perform rule which might restrict the work of every worker to at least one service. Strict software of the rule would require LAN to considerably improve its payroll.

In early 2006 a advisor who had initially contacted LAN earlier than the LAFSA deal once more provided his providers. By this level the advisor was a Cabinet Advisor to the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. The marketing consultant provided to barter instantly with the unions. LAN’s CEO was knowledgeable that the advisor was properly related with the unions and will strike a deal.

The CEO permitted the retention of the advisor, agreeing to funds totaling $1,150,000. At the time the CEO understood that “it was possible the consultant would pass some portion” of the cash to union officers in Argentina. Subsequently, the advisor reached an oral settlement with the unions. LAN then entered right into a consulting settlement calling for a research of airline routes for the cost of $1,150,000. The CEO accepted the settlement and LAN made the required funds together with one other to a agency owned by the advisor’s spouse and son.

The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the motion the agency undertook a collection of remedial acts. The firm entered right into a deferred prosecution settlement with the DOJ and agreed to pay a legal fantastic of $12,750,000. In view of that wonderful the Commission didn’t impose a penalty. LAN additionally consented to the entry of a stop and desist order based mostly on the Sections cited within the Order. The agency can pay disgorgement of $6743,932 together with prejudgment curiosity.

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