SEC ISSUES REPORT TO CONGRESS ON DISCLOSURE RULES FOR PUBLIC COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission issued a staff report to Congress on its disclosure rules for U.S. public companies, as part of agency’s ongoing efforts to modernize and simplify disclosure requirements and reduce compliance costs for emerging growth companies.

The report, mandated by Congress in the 2012 Jumpstart Our Business Startups (JOBS) Act, offers an overview of the SEC’s Regulation S-K that governs public company disclosure, as well as the staff’s preliminary conclusions and recommendations.

“This report provides a framework for disclosure reform,” said SEC Chair Mary Jo White.  “As a next step, I have directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings.  We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented. The ultimate objective is for the Commission to improve the disclosure regime for both companies and investors.”  

“Updating our rules is only one step – albeit an important one – in improving company disclosures,” said Keith F. Higgins, Director of the SEC’s Division of Corporation Finance.  “For their part, companies should examine how they can improve the quality and effectiveness of their disclosures and how our rules can be improved to facilitate clear and effective communications to investors.  Better disclosure benefits everyone in the marketplace, and we plan to work with companies and investors to achieve this common goal.”    

As part of this effort, the SEC’s Office of the Chief Accountant will coordinate with the Financial Accounting Standards Board to identify ways to improve the effectiveness of disclosures in corporate financial statements and to minimize duplication with other existing disclosure requirements.

Chair White added, “I look forward to working with the staff and market participants as we continue to refine the disclosure system to provide investors with the information they need to make informed investment and voting decisions.”

SEC CHARGES ALABAMA RESIDENTS WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Alabama Based Defendants with Securities Fraud and Reporting Violations

On November 22, 2013, the Securities and Exchange Commission filed an action in federal court in the Northern District of Georgia, charging Charles H. Merchant, Sr. (Merchant), an Anniston, Alabama resident, and his company Southern USA Resources, Inc. (Southern USA), a Delaware corporation based in Ashland, Alabama, with violations of the antifraud provisions and various reporting violation of the federal securities laws.

The complaint alleges that in 2012, Southern USA, a company purportedly focused on the exploitation of gold mining rights in Alabama, and Merchant, the company’s CEO, CFO, president, secretary, treasurer and director, filed materially false reports with the Commission that misrepresented the value of the company’s land. During 2012, Merchant also filed with the Commission certifications that contained false statements about the company’s internal controls and his understanding of those controls. Southern USA is currently delinquent with respect to its 2012 Form 10-K and its two most recent Forms 10-Q. Defendant Merchant has resigned his CEO and CFO positions with no successors named, and the company’s outside auditor also has resigned – none of which has been disclosed by Southern USA in a Form 8-K.

The complaint alleges that Merchant by virtue of his conduct, directly or indirectly, has engaged in and unless enjoined, will engage in violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14 and 13b2-1 thereunder. Further, Merchant also aided and abetted defendant Southern USA’s violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 13a-1, 13a-11, 13a-13, and 13a-15 thereunder; and is liable as a “control person” under Section 20(a) of the Exchange Act for defendant Southern USA’s violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 13a-1, 13a-11, 13a-13, and 13a-15 thereunder.

The complaint further alleges that Southern USA by virtue of its conduct, directly or indirectly, has engaged in and unless enjoined, will engage in violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-1, 13a-11, 13a-13, and 13a-15 thereunder.

The Commission has also filed signed consents with the Court from the two defendants to proposed orders of permanent injunction and other ancillary relief. The Commission acknowledges the assistance and cooperation of the Alabama Securities Commission in the investigation of this matter.

FORMER INVESTMENT BANKER AT LEVEL GLOBAL IS CHARGED WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Former Level Global Investment Banker with Insider Trading

On November 14, the Securities and Exchange Commission filed a civil injunctive action in federal court in the Northern District of Georgia against Mark Megalli (“Megalli”), a former investment banker at Level Global Investors, L.P. (“Level Global”), then a New York based hedge fund. The Commission alleges that Megalli caused Level Global to trade in the securities of Carter’s Inc., the Atlanta-based clothing marketer, on the basis of material non-public information provided by a former Carter’s executive.

The Commission’s complaint alleges that, on several occasions from September 2009 through July 2010, Megalli, who was then working at Level Global, caused Level Global to trade in advance of market-moving news concerning Carter’s after Megalli was tipped concerning the information by a former Carter’s executive, who in turn was receiving tips from a current Carter’s executive. A number of these trades occurred while Megalli was on the phone with his source. The total profits and losses avoided on the trades placed or directed by Megalli are in excess of $3 million dollars.

The Commission’s complaint alleges that Megalli violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction, disgorgement with prejudgment interest and civil monetary penalties pursuant to Section 21A of the Exchange Act.

This is the third case that the Commission has brought alleging insider trading in connection with its ongoing investigation of trading in the securities of Carter’s (see SEC v. Eric Martin, et al, .

SEC GET SUMMARY JUDGEMENT AGAINST DEFENDANTS OFFERING FICTITIOUS INVESTMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Summary Judgment Against Defendants Charged with Defrauding Investors in Fictitious Offering

The Securities and Exchange Commission announced that United States District Court for the District of Columbia granted the SEC's motion for summary judgment against all primary defendants and certain relief defendants in a civil action arising from a prime bank investment scheme that defrauded at least 13 investors out of more than $2 million from August 2010 to November 2011.  Pursuant to the court’s ruling and judgment issued on August 26, 2013, the court permanently enjoined Washington D.C. attorney Brynee K. Baylor, her law firm Baylor & Jackson, P.L.L.C., and their former “client” The Milan Group, Inc. from violations of the antifraud and other securities law provisions, and from engaging in similar investment schemes. The court also required these defendants to pay disgorgement and penalties, required the Estate of Frank L. Pavlico to pay disgorgement, and barred Baylor from acting as an officer or director of any public company.  The court required relief defendants Patrick T. Lewis and The Julian Estate to disgorge illegally obtained investor funds.  The court granted in part or denied summary judgment against two other relief defendants, but declined in September 2013 to reconsider that ruling.

The SEC’s complaint, filed on November 30, 2011, alleged that Pavlico and Baylor operated a prime bank scheme, offering investors risk-free returns of up to 20 times the original investment within as few as 45 days through the purported “lease” and “trading” of foreign bank instruments, including “standby letters of credit” and “bank guarantees,” in highly complex transactions with unidentified parties and secretive international “trading platforms.”  However, the bank instruments and trading programs were entirely fictitious.  As the complaint alleged, Pavlico and Baylor provided investors with phony contracts and legal documents, digitally-created computer screen shots, and copies of fictitious foreign bank instruments as purported proof of the ongoing success of the transactions.  Baylor and her law firm acted as “counsel” for Pavlico’s company Milan, vouching for Pavlico and acting as an escrow agent that in reality was merely receiving and diverting the majority of investor funds.

In furtherance of the scheme, the complaint alleged that Baylor provided investors with “attorney attestation” letters that assured them the investments were legitimate, and investor contracts that promised investment profits would be shared among investors, Milan, and Baylor & Jackson.  Meanwhile, Pavlico was using a fake name of “Frank Lorenzo” to conceal his 2008 money laundering conviction from investors.  The complaint also alleged that Pavlico and Baylor used investor funds to pay Baylor & Jackson business expenses as well as personal expenditures.

The court held in its summary judgment ruling that Baylor, an experienced lawyer, “acted with extreme recklessness” in the scheme, carrying out Pavlico’s bidding while failing to exercise even a “modicum of lawyerly interest in the legal implications of” Pavlico’s and Milan’s activities.  The court found that Baylor “encouraged others to invest in unregistered securities, aided and abetted Milan’s fraud, and knowingly allowed investors’ monies—placed for safekeeping in her firm’s IOLTA account—to be dispersed to Milan and then back to her”, with 71% of investor funds paid out to Baylor and Pavlico and no funds being used in any investment.  Finding the record clear despite Baylor’s claimed ignorance of the fraud, the court ruled that she made “extensive material misrepresentations and omissions....   Ms. Baylor knew that she omitted telling investors about the disbursements from her IOLTA account without any investment; she knew that she told investors that Milan was just closing a deal and/or that all would be well with multiple investments when, in fact, no profits were ever returned to an investor; she knew that she told investors that investments through Milan were outside federal oversight when, at best, she had not researched the question; and she knew that she was assuring investors that she had ‘validated’ aspects of the transactions, as an attorney, when, in fact, she had not.”  The court found that “Baylor’s attempt to use her role as an attorney as a shield is particularly pernicious because, as an attorney, she was in the position to lead investors to believe that their money was safe.”

The court granted the SEC’s motion for summary judgment against all of the principal defendants—Baylor, Baylor & Jackson, The Milan Group, and Frank Pavlico, as substituted by his Estate following his death in December 2012 during the litigation—that they violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that Pavlico, Baylor, and Baylor & Jackson aided and abetted violations of these provisions; that they violated Sections 5(a) and 5(c) of the Securities Act and that Baylor and Baylor & Jackson aided and abetted such violations; and that Baylor and Pavlico violated Section 15(a) of the Exchange Act.

The judgment permanently enjoins Baylor, Baylor & Jackson, and Milan from violating and aiding and abetting violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and from violating Section 5 of the Securities Act and Section 15(a) of the Exchange Act.  The judgment also prohibits Baylor, Baylor & Jackson, and Milan from soliciting or accepting funds from investors in investment programs relating to bank instruments or bank instrument trading programs, or in any other investment program.  The judgment holds the Estate of Frank Pavlico, Milan, Baylor & Jackson, and Baylor jointly and severally liable for disgorgement of their ill-gotten gains of $2,665,000, together with prejudgment interest thereon of $157,414, for a total of $2,822,414.  The judgment orders Baylor to pay the remaining obligation of $2,752,758 and directed the Estate of Pavlico to make payments as directed in the future by the court as the Estate collects estate assets and pays estate costs.  The judgment also orders Milan to pay a civil penalty of $1,318,734 and orders Baylor and Baylor & Jackson to pay, jointly and severally, a civil penalty of $746,266.  The judgment permanently bars Baylor from acting as an officer or director of any public company.

The court also granted summary judgment against two relief defendants, Patrick Lewis and The Julian Estate, an entity Pavlico formed to purchase a residence using investor funds.  The judgment orders Lewis to pay $375,000 and orders The Julian Estate to pay $437,250, with the amount to be satisfied by the sale of the property it purchased with investor funds.

The court also granted in part the SEC’s motion for summary judgment against relief defendant Mia Baldassari with respect to $13,156 she received from Milan, but denied further relief against her.  The court also denied summary judgment against relief defendant Brett Cooper, whom the SEC alleged received investor funds from Milan through his company Global Funding Systems, LLC.  In September 2013, the court denied the SEC’s request to reconsider its summary judgment rulings as to Cooper and Mia Baldassari and, therefore, the litigation as to them is pending.

The court previously entered default judgments against two other relief defendants:  on November 14, 2012 the court ordered Patrick Lewis’ company GPH Holdings, LLC to pay a total of $399,743, consisting of $375,000 it received in investor funds plus $24,743 in prejudgment interest; and on January 23, 2013, the court ordered Brett Cooper’s company Global Funding Systems, LLC to pay a total of $238,253, consisting of $225,000 it received in investor funds plus $13,253 in prejudgment interest.

In addition, the SEC previously settled with relief defendant Dawn Jackson, Baylor’s law partner, and the court entered a final judgment against her on March 21, 2013.  Without admitting or denying the allegations in the SEC’s complaint, Jackson agreed to the final judgment that held her liable for disgorgement of $153,000 and $9,410 in prejudgment interest, for a total of $162,410, the payment of which is to be made from the sale, if any, of a Bahamian property but is otherwise waived based on Jackson’s sworn statement of financial condition.

The SEC previously dismissed its case against three other relief defendants, Susan C. Kevra-Shiner, the Law Office of Susan Kevra, and Elmo Baldassari, upon satisfaction that they no longer held any improperly gained investor funds.

CELLULAR TELEPHONE CO. PRESIDENT TO PAY $100,000 PENALTY FOR VIOLATION OF SECURITIES LAWS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Permanent Injunction and $100,000 Civil Penalty Against Cellular Telephone Company President for Role in Fraudulent Scheme

The Securities and Exchange Commission today announced that on October 24, 2013, the Honorable James E. Boasberg, United States District Judge for the District of Columbia, entered a final judgment against defendant Paul V. Greene, President of privately-held Americas Premiere Corporation (APC), a former vendor of InPhonic, Inc. (InPhonic), a now-bankrupt online retailer of cellular phones. The final judgment permanently enjoins Greene from violating the antifraud, books and records and reporting provisions of the securities laws and orders him to pay a $100,000 penalty.

According to the Commission's complaint, starting in the third quarter of 2005, and in each quarter of 2006, Greene and Len A. Familant, then an InPhonic Senior Vice President, engaged in a series of undisclosed "round-trip transactions" to help InPhonic artificially inflate its financial results. After the end of the quarters, but before InPhonic publically reported its financial results, Familant obtained APC credits from Greene. At the same time, however, Familant and Greene entered into an oral side agreement under which InPhonic would repay the credits through future purchases of certain cell phone models at inflated prices and by paying for inflated and fake repairs. The complaint further alleges Greene hid the scheme from InPhonic's independent auditors even after APC's accountant had informed Greene that APC's sham credit transactions with InPhonic were illegal. InPhonic improperly recorded a total of almost $10 million in credits from APC as a decrease in cost of goods sold, which allowed InPhonic to materially understate its losses and meet its quarterly and annual financial targets in reports filed with the Commission. A final judgment against defendant Len Familant was previously entered by the Court.

Without admitting or denying the allegations in the Commission's complaint, Greene consented to the entry of the final judgment permanently enjoining him from violating the antifraud provisions, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), and books and records provision, Exchange Act Rule 13b2-1, and aiding and abetting violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), books and records provision, Section 13(b)(2)(A) of the Exchange Act, and reporting provisions, Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, and ordering him to pay a $100,000 civil penalty.

FINAL JUDGEMENTS ENTERED IN "EXPERT NETWORKS" SEC CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

The SEC announced that on Friday, October 4, 2013 the Honorable George B. Daniels, United States District Judge, United States District Court for the Southern District of New York, entered Final Judgments on Consent against Tai Nguyen and ThanhHa Bao in SEC v. Nguyen et al., 12-Civ.-5009 (GBD) (S.D.N.Y.)., an insider trading case stemming from the SEC's ongoing investigation of so-called "expert networks."

The SEC's complaint alleges that from 2006 through 2009, Nguyen frequently traded in the securities of Abaxis, Inc. based on inside information that he received from his sister and co-defendant, Bao, who was then an employee at Abaxis. Nguyen repeatedly traded for himself in advance of the company's quarterly earnings announcements while in possession of key data disclosed in those announcements, reaping tens of thousands of dollars in illicit profits. In addition, Nguyen, the owner of California-based research firm Insight Research, passed that same information to hedge fund clients of his firm, who used the inside information to make millions of dollars in profits from trading Abaxis securities.

According to the SEC's complaint, Nguyen regularly obtained material nonpublic information about Abaxis's quarterly earnings - including revenues, gross profit margins and earnings per share - from Bao, who worked in Abaxis's finance department. Nguyen used the information to trade Abaxis securities in his own account and reaped $144,910 in illicit trading profits from 2006 through 2009.

The final judgment against Nguyen requires him to disgorge $144,910 in profits that he reaped from the alleged insider trading and to pay prejudgment interest of $23,887. (Nguyen's disgorgement and prejudgment interest obligations will be credited against the amount he is required to pay in the parallel criminal case against him, in which he was also sentenced to a year of incarceration.) Nguyen's settlement with the SEC also requires him to pay a penalty of $144,910 and permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933.

The final judgment against Bao requires her to pay penalty of $144,910, bars her from serving as an officer or director of a public company for five years, and permanently enjoins her from future violations of the federal securities laws.

SEC ANNOUNCES THAT TWO BROTHERS WILL PAY ALMOST $5 MILLION TO SETTLE INSIDER TRADING ALLEGATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that two brothers in Brazil have agreed to pay nearly $5 million to settle charges that they were behind suspicious trading in call options for H.J. Heinz Company the day before the company publicly announced its acquisition.

The SEC filed an emergency enforcement action earlier this year to freeze assets in a Swiss-based trading account used to reap more than $1.8 million from trading in advance of the Heinz announcement.  The SEC’s immediate move the day after the announcement ensured the illicit profits could not be released out of the account while the investigation into the then-unknown traders continued.

In an amended complaint filed today in federal court in Manhattan, the SEC alleges that the order to purchase the Heinz options was placed by Rodrigo Terpins while he was vacationing at Walt Disney World in Orlando, and the trading was based on material non-public information that he received from his brother Michel Terpins.  The trades were made through an account belonging to a Cayman Islands-based entity named Alpine Swift that holds assets for one of their family members.  Rodrigo Terpins purchased nearly $90,000 in option positions in Heinz the day before the announcement, and those positions increased dramatically by nearly 2,000 percent the next day.

The Terpins brothers and Alpine Swift, which has been named as a relief defendant for the purposes of recovering ill-gotten gains, have agreed to disgorge the entire $1,809,857 in illegal profits made from trading Heinz options.  The Terpins brothers also will pay $3 million in penalties.  The settlement is subject to court approval.

“Rodrigo and Michel Terpins obtained confidential information prior to any public awareness that a Heinz deal was in the works, and they exploited it to the disadvantage of all other traders in the marketplace,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “Those who use foreign accounts to commit insider trading in the U.S. markets should know that their activities can still be tracked and they will be held accountable by the SEC for their actions.”

According to the SEC’s amended complaint, Alpine Swift’s brokerage account was used to purchase 2,533 out-of-the-money June $65 calls.  This was effectively a wager that Heinz’s stock would increase in value by approximately $5 per share.  The trade was then executed through an omnibus account at Goldman Sachs’ Zurich office.  An omnibus account has the aggregate positions and transactions of a firm and its underlying customers without disclosing the identities of the beneficial owners or customers.

The SEC alleges that prior to the February 14 announcement that Berkshire Hathaway and 3G Capital agreed to acquire Heinz in a deal valued at $28 billion, Michel Terpins learned that an investment consortium including 3G Capital was about to announce a major acquisition.  He found out that Heinz was the target.  Michel Terpins then provided the non-public information to Rodrigo Terpins, who placed the trades on February 13.  Rodrigo Terpins communicated with a broker who cautioned him that his firm rated Heinz a “sell.”  But Rodrigo Terpins instructed the broker to place the trade anyway.  The timing, size, and profitability of the trades as well as the lack of a prior history of Heinz trading in the Alpine Swift account made the transactions highly suspicious in the wake of the Heinz announcement, hence the SEC’s emergency action at the time.

In addition to the monetary sanctions, the proposed final judgments to which Rodrigo and Michel Terpins consented without admitting or denying the allegations permanently enjoin them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation, which is continuing, has been conducted by Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles office with assistance from Charles D. Riely in the New York office.  They are members of the SEC Enforcement Division’s Market Abuse Unit.  The case has been supervised by Daniel M. Hawke, chief of the unit, and Sanjay Wadhwa.  The SEC appreciates the assistance of the Swiss Financial Market Supervisory

SEC CHARGES FIRM AND A PARTNER WITH BOTCHED AUDITS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
The Securities and Exchange Commission today charged a New Jersey-based audit firm and one of its founding partners for their roles in the botched audits of a China-based company that failed to disclose related party transactions by its CEO and others.

An SEC investigation found that Patrizio & Zhao LLC (P&Z) and Xinggeng (John) Zhao, who is head of the firm’s China practice, failed to comply with U.S. auditing standards and exercise appropriate professional care and skepticism in conducting audits and interim reviews for Keyuan Petrochemicals, which was charged with accounting and disclosure violations by the SEC earlier this year.

P&Z and Zhao agreed to settle the SEC’s charges.  They will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC, and P&Z is required to pay a $30,000 penalty.

“P&Z and Zhao failed to subject Keyuan’s related party transactions to appropriate scrutiny and contributed to the company’s false and misleading financial statements,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. “Auditors play an important role as gatekeepers to the securities markets, and they must adhere to professional standards whenever they perform audit engagements.”

According to the SEC’s order instituting settled administrative proceedings, P&Z is registered with the Public Company Accounting Oversight Board (PCAOB).  With Zhao acting as the engagement partner, the firm conducted audits and interim reviews during the time periods when Keyuan failed to disclose the material related party transactions.  P&Z’s audit workpapers and other documents reflect many of the same types of related party transactions that Keyuan failed to disclose.  Zhao, who determined that related party transactions were an audit risk area, reviewed audit documentation reflecting that Keyuan was engaged in such transactions. Nonetheless, Zhao approved the issuance of unqualified audit opinions as well as interim review reports on Keyuan’s financial statements that violated U.S. Generally Accepted Accounting Principles by failing to include the disclosure of material related party transactions.

The SEC’s order further identifies significant audit documentation violations by Zhao, including his failure to document key audit procedures, evidence his review and sign-off on audit workpapers, and ensure preparation of required audit documents.

The SEC’s order finds that P&Z and Zhao engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the SEC’s Rules of Practice.  The order further finds they violated Section 10A(a)(2) of the Exchange Act, and caused the reporting and disclosure violations by Keyuan.  Without admitting or denying the SEC’s findings, P&Z and Zhao agreed to a cease-and-desist order in addition to the monetary penalty and prohibition from practicing before the Commission, with the right to apply for reinstatement after three years.

The SEC’s investigation was conducted by Fuad Rana, Avron Elbaum, Janet Yang, and Melissa A. Robertson.

SEC FILES FRAUD CHARGES AGAINST UNIVERSAL TRAVEL GROUP

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Files Fraud Charges Against Universal Travel Group, Its Former CEO and Chair, Jiangping Jiang, and Its Former Director, Secretary and Interim CFO, Jing Xie

The Securities and Exchange Commission today announced the filing of fraud and related charges against Universal Travel Group (UTG), a China-based travel services company, its former CEO and Chair, Jiangping Jiang (Jiang), and its former Director, Secretary and Interim CFO, Jing Xie (Xie). UTG, Jiang and Xie have agreed to settle the SEC's claims against them.

The Commission alleges that UTG, Jiang and Xie failed to disclose cash transfers of approximately $41 million to thirty-four unknown entities in Hong Kong and China between September 2008 and March 2011. The transferred cash derived from private and public stock offerings in the U.S., and UTG claims it was returned to Chinese accounts of its subsidiaries as part of a currency exchange. The complaint alleges that the undisclosed transfers rendered false and misleading the risk factor and liquidity discussions in UTG's public disclosure. The Commission alleges further that the defendants failed to disclose further risks arising from UTG's receipt and usages of cash revenues, and from its inadequate controls over cash and its failure properly to document cash transactions. Further, prior to June 2011 the Commission alleges that the defendants falsely described UTG's business organization, failing to disclose that UTG had transferred certain subsidiaries to third parties pursuant to agreements designed to give UTG the economic benefits of ownership, and UTG materially overstated its revenues and profits in its quarterly reports in 2010. In 2010, UTG is also alleged to have failed to obtain an auditor's attestation to its assessment of internal controls. Jiang and Xie are alleged to have knowingly failed to establish proper internal controls at UTG, caused documents to be falsified, and falsely certified to UTG's internal controls for 2010.

In the settled complaint, the Commission alleges that UTG, Jiang and Xie violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The Commission further alleges violations of, or aiding and abetting violations of, the reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-14 and 13b2-1 thereunder. Without admitting or denying the allegations, UTG, Jiang and Xie have consented to the entry of final judgments that: (i) permanently enjoins them from future violations of the federal securities laws; (ii) orders UTG, Jiang and Xie to pay civil penalties of $750,000, $125,000 and $60,000, respectively; and (iii) bars Jiang and Xie from serving as an officer or director of a public company for five years. The proposed settlement is subject to approval by the court.

The Commission also announced today the entry of an order revoking the registration of each class of registered securities of UTG for failure to make required periodic filings with the Commission. See Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Universal Travel Group, Administrative Proceeding File No. 3-15528, Exchange Act Release No. 34-70536 (September 27, 2013).

The SEC's investigation was conducted by Robert Wilson, Brad Mroski and Melissa Robertson.

SEC ANNOUNCES ASSET FREEZE OF FIRM CHARGED WITH PERPETRATING PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced an emergency action to freeze the assets of a Las Vegas-based firm and its sole owner charged with perpetrating a Ponzi scheme against thousands of investors living primarily in Japan.

The SEC alleges that Edwin Fujinaga and his company MRI International raised more than $800 million from investors who were told that their money would be used to buy accounts from U.S. medical providers with outstanding balances to collect from insurance companies.  Fujinaga and MRI falsely represented that they purchased the accounts at a discount so they could recover the full amount and turn a profit for investors.  They purchased no such accounts in reality, and merely used investor money to pay the principal and interest due to earlier investors in typical Ponzi fashion.  Investor funds also were used to buy luxury cars and pay Fujinaga’s credit card bills, alimony, and child support.

“Fujinaga deceived and exploited his Japanese investors into believing that they were buying safe investments with a steady return,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “Instead, Fujinaga operated a Ponzi scheme on an enormous scale that financed his own extravagant lifestyle.”

The SEC’s complaint was filed under seal in U.S. District Court for the District of Nevada two weeks ago and unsealed yesterday by the court.  The Honorable James C. Mahan granted the SEC’s request for a temporary restraining order, asset freeze, and other emergency relief against MRI, Fujinaga, and CSA Service Center LLC, which is a company controlled by Fujinaga that is the nominal owner of homes that he occupies in Las Vegas, Beverly Hills, and Hawaii.  CSA Service Center is named as a relief defendant in the SEC’s complaint for the purposes of recovering any ill-gotten assets from the fraud that may be in its possession.

The SEC closely coordinated its investigation with the Financial Services Agency of Japan (JFSA) and the Japanese Securities and Exchange Surveillance Commission (SESC), exchanging documents and other evidence critical to the case.

“Cross-border cooperation can successfully halt fraudsters who attempt to use international boundaries to avoid prosecution,” said Gerald W. Hodgkins, Associate Director in the SEC’s Division of Enforcement.  “The close coordination between the SEC and Japanese regulators was critical to freezing Fujinaga’s assets and foiling his scheme.”

According to the SEC’s complaint, the Ponzi scheme began in October 1998.  Fujinaga, who lives in Las Vegas, operated from there but also had a sales office in Tokyo.  MRI and Fujinaga hosted Japanese investors in the U.S. for solicitation presentations and tours of MRI’s Las Vegas offices.  They told investors they could invest in either U.S. dollars or Japanese yen, and promised returns ranging from 6 to 10.32 percent depending on the size and duration of the investment.  Fujinaga and MRI falsely represented that they used investor money solely and exclusively to buy medical accounts receivable.  Besides misappropriating money between investors, Fujinaga illicitly transferred investor money to MRI’s operating accounts, where it was used to pay for general operating expenses instead of medical accounts.  He also transferred money to other entities he owned that were not in the business of collecting medical account receivables.  Investor funds also were siphoned to another company owned by Fujinaga called The Factoring Company, which bought Fujinaga’s cars and paid his bills.

The SEC’s complaint charges Fujinaga and MRI with violations of the antifraud provisions of the federal securities laws, and the SEC seeks disgorgement of ill-gotten gains, financial penalties, permanent injunctions, and other emergency relief.

The SEC’s investigation, which is continuing, has been conducted by Danette R. Edwards and Thomas C. Swiers and supervised by Gregory G. Faragasso.  The JFSA’s Yuichiro Enomoto, who was detailed to the SEC, provided valuable assistance.  The SEC’s litigation is being led by Richard E. Simpson and Robert I. Dodge.  The SEC appreciates the assistance of the JFSA, SESC, and the State of Nevada Division of Mortgage Lending.

SEC CHARGES INVESTMENT ADVISER WITH FABRICATING STATEMENTS AND MAKING UNAUTHORIZED INVESTMENTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Tampa-Based Adviser with Fabricating Statements and Making Unauthorized and Undisclosed Investments

The Securities and Exchange Commission today charged a formerly SEC-registered Tampa-based investment adviser, OM Investment Management LLC, its principal, Gignesh Movalia, and its director of investments, Edwin V. Gaw, with fraudulently raising money and making material misrepresentations and omissions relating to OM Global Investment Fund, LLC, an unregistered hedge fund.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of Florida, OM Investment Management, Movalia, and Gaw made material misrepresentations and omissions concerning the fund's holdings and investments, the identity and duties of the fund's auditor, sub-adviser, and administrator, and failed to register the offering and sale of securities. The complaint further alleges that Movalia and OM Investment Management made material omissions concerning the fund's entry into related party transactions, distributed fabricated account statements, misappropriated investor funds, made false statements in regulatory filings with the Commission, and failed to comply with federal securities laws and rules concerning the operation of an advisory business and an investment company.

The defendants have consented to the entry of judgments enjoining them from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, with OM Investment Management and Movalia further consenting to be enjoined from violating Sections 203A and 207 of the Investment Advisers Act and Rule 206(4)-2 thereunder and Section 7(a) of the Investment Company Act. OM Investment Management and Movalia also consented to judgments freezing their assets, preventing the destruction of documents, and requiring them to provide an accounting to the Court. The SEC's complaint seeks disgorgement, prejudgment interest, and civil penalties from OM Investment Management and Movalia in an amount to be determined by the Court, while Gaw has agreed to pay a civil penalty of $100,000. Separately, Movalia and Gaw consented to the entry of orders barring them from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.

The SEC's investigation was conducted by Salvatore Massa, Christine Lynch, and Jeffrey Finnell of the Asset Management Unit and Tonya Tullis, Patrick Costello, and Robert Levenson of the Miami Regional Office. Alvaro Soto, Luisa Lipins, and Glen Richards conducted a related SEC examination.

SEC FILES COMPLAINT ALLEGING MISREPRESENTATION OF FINANCIAL PERFORMANCE OF IMAGEXPRES CORPORATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

On September 25, 2013, the Securities and Exchange Commission filed a complaint in the United States District Court for the Western District of New York against ImageXpres Corporation (“ImageXpres”), a publicly traded microcap company based near Rochester, New York, its President and CEO, John Zankowski and its CFO, Kevin Zankowski. The Commission’s complaint alleges that ImageXpres, John Zankowski and Kevin Zankowski violated the antifraud provisions of the Securities Exchange Act of 1934 (“Exchange Act”) by engaging in a scheme to misrepresent the financial performance of ImageXpres.  Through material misstatements in press releases, unaudited financial statements and other public documents, they falsely portrayed ImageXpres as an increasingly profitable small technology company with growing sales when, in fact, it was a failing start-up venture that had little revenue and lacked the financial means to commercially produce the digital products it claimed to be selling to national retail customers. All three defendants have agreed to a proposed settlement of the Commission’s action on the terms described below.

Specifically, the complaint alleges that over a multi-year period, ImageXpres made numerous materially false and misleading statements about its operations and revenue in the company’s press releases, financial statements and other documents that the Zankowskis prepared and disseminated to the public.  Beginning with the year ended December 31, 2008 and continuing through the second quarter of 2011, ImageXpres reported substantial sales revenue and dramatic revenue growth in numerous press releases and financial statements even though it lacked the financial resources to produce on a commercial scale the products that it touted and failed to secure the customer orders that it claimed to have received.  For example, ImageXpres reported revenue growth rates in excess of 300 percent during this period for some products in spite of the absence of virtually any bona fide sales of those products. Despite the Zankowskis’ efforts to portray ImageXpres as an increasingly profitable small technology company, ImageXpres is essentially dormant now with little or no capital.

Simultaneous with the filing of the Commission’s complaint, ImageXpres, John Zankowski, and Kevin Zankowski have consented, without admitting or denying the allegations in the complaint, to the entry of final judgments: (i) permanently enjoining each of them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5; (ii) barring John Zankowski and Kevin Zankowski from acting as officers or directors of a public company and from participating in an offering of penny stock; and (iii) imposing civil monetary penalties of $50,000 against John Zankowski and $25,000 against Kevin Zankowski. The proposed settlement is subject to the Court’s approval.

The staff’s investigation was conducted by Charu A. Chandrasekhar, George N. Stepaniuk and Elzbieta Wraga and was supervised by Sanjay Wadhwa.

SEC SEEKS TO SHUTDOWN ALLEGED FRAUDULENT PROMISSORY NOT OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Files Civil Injunctive Action Against Alleged Perpetrator and Unregistered Broker in Fraudulent Promissory Note Offering

On September 9, 2013, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Colorado against Brian G. Elrod for allegedly conducting a fraudulent offering of promissory notes for which Nova Dean Pack acted as an unregistered broker. Elrod and Pack reside in Buffalo Creek, Colorado and Highland, California, respectively.

The Complaint alleges that, from at least March 2009 through November 2009, Elrod and Pack raised approximately $2 million from 12 investors who invested in high-yield promissory notes issued by CFS Holding Company LLC (“CFS”), a Colorado company owned and managed by Elrod. According to the Complaint, Elrod told investors that their investments were secured and guaranteed and would generate annual returns ranging from 12% to 24%. According to the Complaint, Elrod further represented to investors that the proceeds from their promissory notes would be used to expand a group of financial services companies owned and managed by Elrod. The Complaint alleges that the foregoing representations, among others, were false and misleading when made, and that Elrod, rather than use investor money for legitimate business purposes, improperly used most of the investor funds to make substantial payments to himself and family members and to pay for personal expenses, to pay Pack significant commissions for referring investors, and to make interest payments back to investors. According to the Complaint, the CFS note offering was not registered with the Commission, and Pack was not an associated person of a registered broker or dealer at the time he participated in the CFS note offering.

Without admitting or denying the SEC’s allegations, Elrod and Pack agreed to settle the case against them. The settlement is pending final approval by the court. Specifically, Elrod consented to the entry of a final judgment permanently enjoining him from future violations of Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and requiring him to pay disgorgement of $1,720,491, the amount of his ill-gotten gains, plus prejudgment interest of $295,817, and a civil penalty of $1,720,491. Pack consented to the entry of a final judgment permanently enjoining him from future violations of Section 5 of the Securities Act and Section 15(a) of the Exchange Act, and ordering disgorgement of $171,500 plus prejudgment interest of $25,177, but waiving payment and not imposing a civil penalty based upon his financial condition.

SEC OBTAINED AN ASSET FREEZE RELATED TO $4 MILLION OFFERING FRAUD/PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Asset Freeze and Other Relief in $4 Million Offering Fraud

On August 8, 2013, the Securities and Exchange Commission obtained a temporary restraining order and an emergency asset freeze in a $4 million offering fraud and Ponzi scheme orchestrated by Steven B. Heinz (Heinz) and his company S.B. Heinz & Associates, Inc. (S.B. Heinz), a financial planning and insurance agency located in Provo, Utah.

The complaint alleges that since January 1, 2012, Heinz acted as an investment adviser and solicited nearly $4 million from more than fifteen former clients, family members, and friends to enable him, through his company S.B. Heinz, to execute rapid buy and sell orders of futures contracts. The complaint further alleges that investor funds are being used to falsely create the appearance of a successful investment business although S.B. Heinz has actually lost approximately $1.5 million executing Heinz’s high risk futures contract trading activities. In addition, the complaint alleges that Heinz pays “returns” to earlier investors using new investor funds, used investor funds for his own personal purposes and that S.B. Heinz used investor funds to pay business expenses, including the salary for its secretary and its office rent.

The Commission’s complaint charges Heinz and S.B. Heinz with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and civil penalties from Heinz and S.B. Heinz. The complaint also names Susan K. Heinz, Heinz’s wife, as a relief defendant and seeks disgorgement and prejudgment interest from her.

The SEC’s investigation was conducted by Jennifer Moore and Scott Frost; the litigation will be led by Thomas Melton. The SEC acknowledges the assistance of the Federal Bureau of Investigation in this matter.

SECURITIES FRAUDSTER SENTENCED TO 20 YEAR PRISON TERM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Minneapolis-Based Fraudster Patrick Joseph Kiley Sentenced to 20 Years in Priso
The Securities and Exchange Commission announced that on July 15, 2013, the Honorable Chief Judge Michael J. Davis of the United States District Court for the District of Minnesota sentenced Patrick J. Kiley to 20 years in prison and ordered him to pay $155 million in restitution.  The sentence was based on Kiley’s conviction on 15 criminal counts including mail and wire fraud, conspiracy to commit mail and wire fraud, and money laundering for his role in a $194 million foreign currency trading scheme that defrauded approximately 1,000 investors.  Kiley was charged on July 19, 2011, and a jury found him guilty on June 12, 2012.

Kiley is one of the defendants in a pending civil injunctive action filed by the Commission on November 23, 2009 in the United States District Court for the District of Minnesota.  The Commission’s action against Kiley arose out of the same facts that are the subject of the criminal case against him.

The Commission’s complaint alleges that from at least July 2006 through at least July 2009, Kiley and co-defendant Trevor G. Cook of Minneapolis, Minnesota, raised at least $190 million (later determined to be $194 million) from 1,000 investors through the unregistered offer and sale of investments in a purported foreign currency trading venture.  According to the Commission’s complaint, Cook and Kiley pooled investors’ funds in bank and trading accounts in the names of entities they controlled.  The Commission’s complaint alleges that the foreign currency trading they conducted resulted in millions of dollars in losses, and they misused approximately one half of the investor funds to make Ponzi-like payments to earlier investors and pay for, among other things, Cook's gambling losses and the purchase of the historic Van Dusen Mansion in Minneapolis.

The Commission’s complaint charges Cook and Kiley with violating Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  On November 23, 2009, the Court entered a preliminary injunction order against Cook and Kiley and froze all of their assets.  On March 7, 2011, the Commission also filed a civil complaint in the U.S. District Court in Minneapolis against Jason Bo-Alan Beckman and his registered investment advisory firm Oxford Private Client Group, LLC, for their roles in this scheme.  On August 27, 2010, the Court entered an order of permanent injunction against Cook.  The Court also appointed a receiver to marshal and preserve all of the Defendants’ assets.

CHINA-BASED CEO AND COMPANY CHARGED WITH FRAUD IN CROSS-BORDER WORKING GROUP CASE

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 
SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million.

According to the SEC’s complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

According to the SEC’s complaint, China MediaExpress’ external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company’s audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress’ banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm’s team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress’ bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress’ reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to “assist with the investigation.”  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances.

The SEC’s complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media’s violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

SEC COMMISSIONER AGUILAR MAKES REMARKS AT OPEN MEETING

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Limiting — But Not Eliminating — Bad Actors from Certain Offerings
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Open Meeting
Washington, D.C.
July 10, 2013

Today, after too lengthy a delay, the Commission implements the Dodd-Frank mandate to disqualify felons and certain other bad actors from participating in unregistered offerings under Rule 506 of Regulation D.1 Limiting felons and bad actors from participating in Rule 506 offerings is simply the right thing to do, and I support the amendments to Rule 506.

However, the Bad Actor Rule before us today is by no means perfect. The most glaring weakness is that the Bad Actor Rule will only apply to those that are disqualified in the future. In other words, a Bad Actor will only be disqualified if the event that triggers disqualification occurs after the effective date of the rule. Given that the effective date is in the future — that is, 60 days after publication in the Federal Register — what does this mean? It means that everyone who triggers the bad actor definition prior to sometime in September 20132 is free to participate in Rule 506 offerings on a going forward basis.

I do not believe that Congress intended to limit bad actor disqualification to such a great extent. Moreover, it is particularly disappointing that the Commission allowed this rule to languish for more than two years, while all too many “bad actors” received court orders or other sanctions that could have — but, now, will not — disqualify them from taking advantage of Rule 506 for years to come.

In addition, the adopting release makes a number of changes to the proposal that will limit the reach of the Bad Actor Rule. For example, the proposal applied the disqualification triggers to any officer of the issuer or any officer of a person paid to solicit investors; in contrast, the final rule covers only executive officers of such entities and officers who participate in the offering. Similarly, the proposal applied the triggers to any beneficial owner of 10% or more of any class of the issuer’s securities; in contrast, the final rule covers only beneficial owners of securities representing 20% or more of the issuer’s total voting power. I also believe that the look-back period for court injunctions, Commission cease-and-desist orders, and other disqualification orders should have been ten years, rather than five.

However, notwithstanding the significant narrowing of the disqualification, it is important to take steps to limit the potential abuse of Rule 506. That is particularly true as a result of the Commission’s concurrent adoption of a deficient regime allowing general solicitation in Rule 506 offerings.3 Rule 506 is the most widely used exemption for offerings under Regulation D. Companies and investment funds raise almost as much money each year using Rule 506 as they do in registered public offerings. But, as is well known, investors in Rule 506 offerings have substantially fewer protections than investors in public offerings. Accordingly, it makes sense to limit the ability of individuals and entities with a record of fraud or dishonesty, or who have disregarded regulatory requirements, to take advantage of the Rule 506 exemption.

As adopted, the Bad Actor Rule will help protect investors in a number of ways:

First, the rule requires companies and investment managers to exercise due diligence in Rule 506 offerings to ensure that executive officers and other key offering participants are not disqualified under the rule. I expect for issuers utilizing Rule 506 to develop effective vetting procedures to keep the bad apples from harming investors.

Second, the Bad Actor Rule provides the Commission with an additional enforcement tool to protect investors from fraudsters and other recidivists who seek to use Rule 506. Disqualifying bad actors from using Rule 506 should also strengthen the hand of state securities regulators, since offerings that comply with Rule 506 are exempt from the registration and qualification requirements of state securities laws.4

My support for the Bad Actor Rule is tempered by my belief that it should be stronger. Nonetheless, I appreciate the efforts of the staff on this rule.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, §926. Pub. L. No. 111-203, § 926, 124 Stat. 1376, 1851 (July 21, 2010) (codified at 15 U.S.C. 77d note).

2 The rule is effective 60 days after publication in the Federal Register. Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-[XXXX] (July 10, 2013).

3 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Facilitating General Solicitation at the Expense of Investors,” Statement at SEC Open Meeting (July 10, 2013).

4 See, Securities Act of 1933, §18.

TRADER IN THAILAND HAS ASSETS FROZEN BY SEC FOR INSIDER TRADING IN SMITHFIELD FOODS

FROM: U.S. SECURTIES AND EXCHANGE COMMISSION
06/06/2013 10:45 AM EDT
SEC Freezes Assets of Thailand-Based Trader for Insider Trading Ahead of Smithfield Foods Acquisition Announcement

Washington, D.C., June 6, 2013 — The Securities and Exchange Commission today announced an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.

The SEC alleges that Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers LLC. Rungruangnavarat allegedly made these purchases based on material, nonpublic information about the potential acquisition, and among his possible sources is a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield. After profiting from his timely and aggressive trading, Rungruangnavarat sought to withdraw more than $3 million from his account on June 3.

"The speed in which we were able to bring this emergency action exemplifies the talent, tenacity, and commitment that the SEC staff brings to bear every day to keep our markets fair and investors safe," said Andrew Ceresney, Co-Director of the SEC's Division of Enforcement.

Merri Jo Gillette, Director of the SEC's Chicago Regional Office, added, "As alleged in our complaint, not only did the defendant trade out of the money Smithfield call options, he further pumped up his profits by purchasing single-stock futures, thereby reaping a total unrealized return on his investment of 3,400 percent in the span of eight days. We will act quickly and decisively to uncover and take action against insider trading no matter where the trader resides or what types of securities are used to profit from nonpublic information."

According to the SEC's complaint filed under seal yesterday in U.S. District Court for the Northern District of Illinois, Smithfield publicly announced on May 29 that Shuanghui agreed to acquire the company for $4.7 billion, which would represent the largest-ever acquisition of a U.S. company by a Chinese buyer. Smithfield, which is headquartered in Smithfield, Va., is the world's largest pork producer and processor. Following the announcement, Smithfield stock opened nearly 25 percent higher than the previous day's closing price.

The SEC obtained the emergency court order late yesterday on an ex parte basis. The order freezes the proceeds of Rungruangnavarat's securities purchases, grants expedited discovery, and prohibits Rungruangnavarat from destroying evidence.

The SEC's complaint alleges that Rungruangnavarat violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction.

The SEC's expedited investigation, which is continuing, was conducted jointly by staff in the Enforcement Division's Market Abuse Unit and the Chicago Regional Office, including Kathryn A. Pyszka, Frank D. Goldman, R. Kevin Barrett, Benjamin J. Hanauer and Steven C. Seeger. The Market Abuse Unit is headed by Chief Daniel M. Hawke, and the Chicago office leadership in this matter are Regional Director Merri Jo Gillette and Associate Regional Director Timothy Warren. The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA).

SEC COMMISSIONER AGULAR DISCUSSES RULES TO PREVENT IDENTITY THEFT

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Promulgating Rules to Prevent Identity Theft

by
Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission
SEC Open Meeting
Washington, D.C.
April 10, 2013

In today’s world, the expansion of information technology and the proliferation of electronic communication and social media have resulted in a dramatic increase in identity theft. The Federal Trade Commission ("FTC") estimated that as many as nine million Americans have their identities stolen each year. It is not clear how many more cases go unreported. Additionally, identity theft has topped the FTC’s National Consumer Complaints List for the
13th consecutive year.

Today, to help address this growing problem, the Commission considers rules and guidelines to adopt Regulation S-ID to require those entities covered by the rules to establish programs to detect, prevent, and mitigate identity theft. This action is a direct result of Section 1088 of the Dodd-Frank Act that directed the U.S. Securities and Exchange Commission ("SEC") and the U.S. Commodity Futures Trading Commission to adopt joint rules requiring entities that are subject to the Commissions’ respective enforcement authorities to address identity theft.

This requirement is an expansion of a requirement initially put in place in 2003 that required several federal agencies, albeit not the SEC, to issue joint rules and regulations regarding the detection, prevention, and mitigation of identity theft. These rules were enacted in 2007. Even though, the Commission was not one of the included agencies, many of its regulated entities are likely to have already been subject to similar rules previously enacted by those other agencies, as a result of activities that cause these entities to qualify as "financial institutions" or "creditors." Thus, for those entities, they should already have identity theft prevention programs in place.

There is one group of entities, however, that may not have existing identity theft red flag programs and will need to pay particular attention to the rules being adopted today. This group consists of investment advisers registered under the Investment Adviser Act — particularly the private fund and hedge fund advisers that are recent registrants with the SEC. Today’s release offers a number of examples and illustrations that may assist those entities in understanding, whether they qualify, and, if they do, what their responsibilities are under Regulation S-ID.

I am pleased to support the staff’s recommendation to adopt Regulation S-1D and I want to thank the staff for its efforts.

Thank you.

INVESTMENT ADVISER AND FIRM CHARGED BY SEC WITH DEFRAUDING INVESTORS FOR PERSONAL GAIN

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C., Nov. 9, 2012 — The Securities and Exchange Commission today charged a Miami-based investment adviser for defrauding his clients by concealing trading losses and diverting investor funds for personal use.

The SEC alleges that Anand Sekaran and his firm Wasson Capital Advisors Ltd. fabricated documents showing illusory profits after his trading strategy became unprofitable in 2008 and produced substantial losses for clients. Sekaran also misused client funds to pay various personal and business expenses, and he collected fees in excess of what he was due under the arrangements he had with clients.

Sekaran and Wasson agreed to resolve the SEC’s charges as well as a parallel criminal action announced today by the U.S. Attorney’s Office for the Southern District of New York.

"An investment adviser’s fiduciary duty applies equally in good times and bad," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "Sekaran breached that duty when he concealed trading losses and misled clients rather than simply admitting that his investment strategy was unsuccessful."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Sekaran provided investors with a spreadsheet inaccurately showing that Wasson was profitable. He inflated account balances on some clients’ account statements, using the letterhead of a defunct British Virgin Islands trust company for one client and the letterhead of a New Zealand firm for another client. He misappropriated investor money for personal mortgage and maintenance payments, restaurant and travel expenses, entertainment and event tickets, employee salaries and health insurance, and rent and office expenses.

In settling the SEC’s charges, Sekaran and Wasson consented to a final judgment imposing permanent injunctions from future violations of the anti-fraud provisions of the federal securities laws. Sekaran separately consented to an SEC order barring him from the securities industry and penny stock industry. Sekaran is required to pay $2.3 million to satisfy restitution and forfeiture orders in the criminal matter.

The SEC’s investigation was conducted by Salvatore Massa and Anthony Kelly of the Asset Management Unit and Tonya Tullis of the Miami Regional Office. Omar Santos conducted a related SEC examination. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the U.S. Postal Inspection Service for their assistance in this matter