On October 24, 2016, James M. Merrill, of Ashland, Massachusetts, the former president of TelexFree, Inc. and TelexFree, LLC, pled guilty to criminal charges related to his operating a pyramid scheme through TelexFree. On May 9, 2014, Merrill and another defendant, Carlos N. Wanzeler, who is a fugitive located in Brazil, were charged in a federal criminal complaint, charging them with conspiracy to commit wire fraud. The criminal charges against Merrill arose out of the same fraudulent conduct alleged by the SEC in a civil securities fraud action filed in April 2014. Read More
The Securities and Exchange Commission (“SEC”) says it doesn’t like over-the-counter shell companies, and would like to see them gone from the marketplace. To that end, its Enforcement Division cooked up an initiative it called Operation Shell-Expel. It began with a bang on May 14, 2012, when the agency coupled an announcement of Shell-Expel with the suspension of trading in the stock of 379 dormant penny companies. It was, the SEC said, the largest such action in agency history. What danger did these sorry companies present?
The existence of empty shell companies can be a financial boon to stock manipulators who will pay as much as $750,000 to assume control of the company in order to pump and dump the stock for illegal proceeds to the detriment of investors. But with this trading suspension’s obligation to provide updated financial information, these shell companies have been rendered essentially worthless and useless to scam artists.
The shells were “rendered essentially worthless” because the suspension meant they’d be delisted to the Grey Market, the graveyard of bad pennies, in which market makers are forbidden to publish quotes.
Critics of rampant abuse in the OTC market cheered the SEC on, hoping Operation Shell-Expel signaled a new, and far less tolerant, attitude toward dormant shells that were often serially pumped and dumped. The following June, the agency suspended trading in another 61 issuers, and in February 2014, it followed up by suspending another 255 shells. The hammer came down on 128 more in March 2015. There’s been no similar action in 2016. At the time of the 2015 suspensions, Enforcement director Andrew J. Ceresney remarked, “We are getting increasingly aggressive and adept at ridding the microcap marketplace of dormant shells within a year of the companies becoming inactive.” Read More
On October 27, 2016 the Securities and Exchange Commission (“SEC”) charged a Los-Angeles based investment advisory firm and its owner, Marc Broidy with fraudulently overbilling clients and stealing assets from their trusts to pay such personal expenses as his home mortgage, overseas trips, and leases on two Mercedes-Benz vehicles.
The SEC’s complaint alleges that Broidy and his firm Broidy Wealth Advisors obtained more than $1.4 million in ill-gotten gains since February 2011. Broidy allegedly billed clients approximately $643,000 in excess fees And covered it up by altering the amount of management fees recorded on forms issued by brokerage firms before sending the forms to his clients. The SEC further alleges that he fraudulently obtained additional funds to pay his personal expenses by misappropriating approximately $865,000 in assets from clients’ trusts for which he was trustee. Read More
Texas company Southlake Resources Group, LLC and its president Cody Winters have agreed to pay over $5.4 million to settle charges by the Securities and Exchange Commission (“SEC”) that they orchestrated an oil-and-gas fraud. The SEC also charged the president and a company vice president with acting as unregistered brokers in the transactions underlying the fraud.
According to the SEC’s complaint, filed on October 24, 2016, in the U.S. District Court for the Northern District of Texas, Southlake and its founder and president, Winters, raised approximately $5.2 million from more than 70 investors in 12 fraudulent oil-and-gas joint ventures. Winters and Southlake employed sales agents, including vice president Nicholas Hamilton, to offer and sell joint-venture interests to investors in 26 states from approximately June 2010 through September 2014. Read More
The Securities and Exchange Commission (“SEC”) announced a global settlement along with the U.S. Department of Justice and Brazilian authorities that requires aircraft manufacturer Embraer S.A. to pay more than $205 million to resolve alleged violations of the Foreign Corrupt Practices Act (FCPA).
The SEC’s complaint alleges that Embraer made more than $83 million in profits as a result of bribe payments from its U.S.-based subsidiary through third-party agents to foreign government officials in the Dominican Republic, Saudi Arabia, and Mozambique. Embraer allegedly created false books and records to conceal the illicit payments, and also engaged in an alleged accounting scheme in India. Read More
On October 21, 2016 the Securities and Exchange Commission (“SEC”) charged a James Cope, a Tennessee lawyer who served on the executive committee of the board of directors of Nashville-based Pinnacle Financial Partners with insider trading based on nonpublic information he learned about an impending merger.
The SEC alleges that Cope obtained more than $56,000 in ill-gotten gains by purchasing securities in Pinnacle’s acquisition target, Avenue Financial Holdings, prior to the banks’ joint public announcement later that month. According to the SEC’s complaint, Cope learned confidential details about the planned merger during a board executive committee meeting on January 5, 2016, and proceeded to place his first order to purchase Avenue Financial stock while that executive committee meeting was still in progress. Read More
A federal grand jury in the Northern District of Indiana has indicted Christopher Salis, Douglas Miller, and Edward Miller on charges relating to insider trading, money laundering, and structuring currency transactions. The 17-count indictment also charges Douglas Miller with false statements and Edward Miller with obstruction of justice and witness harassment. All three defendants were charged earlier this year in a parallel SEC matter.
According to the indictment, returned October 19, 2016, Salis was employed as a global vice president at SAP America in August 2014 when he obtained material, nonpublic information related to SAP’s intent to acquire Concur Technologies. The indictment alleges that Salis tipped his close friend, Douglas Miller, who in turn, tipped his brother, Edward Miller, and others. The Miller brothers and others allegedly purchased short-term, risky Concur call options, yielding illegal profits exceeding $500,000 after the acquisition was announced publicly on September 18, 2014. In an effort to avoid scrutiny and to evade currency transaction reporting requirements, the Miller brothers allegedly used cash, money orders, and checks to transfer some of these profits to Salis. Read More
On November 2, 2016, the Securities and Exchange Commission (“SEC”) Division of Corporation Finance released two new compliance and disclosure interpretations (“C&DIs”) addressing eligibility to use Form S-3 registration statements and submission of annual reports to the SEC.
Form S-3 Eligibility
New Question 116.25 of the Securities Act Forms C&DIs clarifies that securities registered for resale on Form S-3 registration statements in reliance on Form S-3 Instruction I.B.3 should be counted against the issuer’s available capacity under Instruction I.B.6 of the form.
Instruction I.B.6 allows an issuer with less than a $75 million public float to use a Form S-3 registration statement for a primary offering such as an Initial Public Offering (“IPO) so long as the issuer sells no more than one-third of its public float within a 12-month period. Read More
On October 17, 2016 the Securities and Exchange Commission (“SEC”) charged Lime Energy Co., an energy services provider and four of its executives for their roles in an accounting fraud in which the company recognized revenue earlier than allowed in order to meet internal targets.
Lime Energy areed to pay $1 million to settle the charges, and its four now-former executives also agreed to settlements.
The SEC’s complaint alleges that Lime Energy improperly recognized $20 million in revenue from at least 2010 to 2012. Two then-executives in the company’s utilities division — vice president of operations Joaquin Alberto Dos Santos Almeida and director of operations Karan Raina — developed procedures to enable the company to recognize revenue on newly signed contracts based on documentation received before year-end 2010. But when documentation did not arrive in time, they allegedly went ahead and booked the revenue anyway.
According to the SEC’s complaint, Almeida and Raina became even more aggressive in 2011 and 2012 as they further recognized revenue earlier than allowed by accounting principles as they faced increasing pressure to produce results. They eventually went so far as to direct internal accountants to book revenue on jobs that didn’t exist. The SEC further alleges that Lime Energy’s then-corporate controller Julianne Chandler accepted new accounting entries to book millions of dollars in additional 2011 revenue well after the year-end close. And in February 2012 when Lime Energy still needed $500,000 to meet its 2011 revenue target, the company’s then-executive vice president James Smith suddenly sent Chandler new entries that provided the company with even more additional revenue to improperly recognize. Read More
On October 26, 2016, the Securities & Exchange Commission (the “SEC”) adopted amendments to Rule 147 of the Securities Act of 1933, as amended (“Securities Act”) to modernize the exemptions for intrastate securities offerings. According to the SEC, the amendments are intended to assist smaller companies with their capital raising efforts. Amended Rule 147 and new Rule 147A will become effective 150 days after publication in the Federal Register. The Rule 147 amendments expand the existing Rule 147 safe harbor under Section 3(a)(11) of the Securities Act and create Rule 147A under the Securities Act, a new intrastate offering exemption.
In October of last year, the SEC announced proposed amendments to Rule 147. As amended Rule 147 is substantially the same as the proposed rule amendments except that the existing Rule 147 safe harbor under Section 3(a)(11) is identical to the new exemption created by Rule 147A except that issuers relying on the Rule 147 safe harbor:
- May not offer securities to out-of-state residents, and
- Must be incorporated or organized in the state in which the offering is conducted.