Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, December 7, 2012

SEC Charges Miami Entrepreneur with Stealing Investors' Money

The SEC charged Claudio Osorio, whom it describes as a prominent Miami-based entrepreneur, with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. Instead, Osorio allegedly stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.

The SEC alleges that Osorio, who is a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. Osorio sometimes solicited investors one-on-one at political fundraising events. To add an air of legitimacy to his company, Osorio assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. Osorio falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.

The SEC also charged InnoVida's chief financial officer Craig Toll, a certified public accountant living in Pembroke Pines, Fla., who helped Osorio create the false financial picture of InnoVida.

In a parallel action, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll.

December 7, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Florida Attorney with Issuing Fraudulent Opinions to Transfer Restricted Shares

The SEC filed charges against Guy M. Jean-Pierre, a Florida-based securities lawyer, for issuing fraudulent attorney opinion letters that resulted in more than 70 million shares of microcap stock becoming available for unrestricted trading by investors. 

An attorney opinion letter is required from a licensed and duly authorized securities lawyer in order to facilitate the transfer of restricted microcap shares on the over-the-counter markets. In April 2010, the Pink Sheets (now OTC Markets Group) banned Jean-Pierre from issuing attorney opinion letters due to “repeated missing information and inconsistencies” about the issuers and his lack of due diligence in his past letters.  According to the SEC, however, Jean-Pierre has continued writing and issuing attorney opinion letters in the name of his niece, a licensed attorney, by applying her signature without her consent. Jean-Pierre (also known as Marcelo Dominguez de Guerra) sought to evade the ban by forming a new company called Complete Legal Solutions and misrepresenting that his niece was conducting the legal work that was allegedly performed.

The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, a permanent injunction, and a bar from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.

December 7, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Massachusetts Goes After Sales of Unregistered Oil& Gas Securities in its State

Investment News reports that Massachusetts filed fraud charges against two oil and gas operations that allegedly sold unregistered securities to Massachusetts investors.  In one case, Prodigy Oil and Gas allegedly sold at least $464,000 in unregistered securities to one investor and employed a cold-caller who had previously been found guilty of fraud.  Fraud charges against Synergy Oil and two of its executives allege the sale of $35,000 in unregistered securities to two investors.  Massachusetts Secretary William Galvin has been an outspoken critic of the crowdfunding exemption contained in the JOBS Act.  Inv News, Crowdfunding takes early hit in Massachusetts

December 7, 2012 in Other Regulatory Action, State Securities Law | Permalink | Comments (0) | TrackBack (0)

Netflix and CEO Receive Wells Notices About Facebook Postings

Netflix disclosed in an 8-K filing that the company and its CEO Reed Hastings have received Wells notices from the SEC staff, indicating that it intends to recommend to the Commission that it institute a proceeding against them for violations of Regulation FD, in connection with a July posting by Hastings on his Facebook page about Netflix that members were enjoying over a billion hours per month of Netflix.  The comment was  picked up by the press and widely reported; the company did not issue a press release or file an 8-K at the time.

Hastings outlines two principal defenses to the SEC charges.  First, a posting to over 200,000 people is public.  Second, the fact of 1 billion hours of viewing in June was not "material" information, particularly since there had been an earlier blog that the company was serving "nearly" 1 billion per month.

December 7, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, December 6, 2012

FINRA Issues Guidance on Private Placement Rules

FINRA posted on its website Frequently Asked Questions About Sale of Private Placements under FINRA Rules 5122 and 5123.

December 6, 2012 in Film, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Staff Releases Report on Money Market Fund Reforms

The SEC's Division of Risk, Strategy, and Financial Innovation posted on the SEC's website Responses to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher(Download Money-market-funds-memo-2012[1]). The report addresses questions posed by the Commissioners in a September 17, 2012 memorandum.  The report addresses:

  • causes of investor redemptions of prime money market fund shares and purchases of Treasury money market fund shares during the 2008 financial crisis
  • the efficacy of the 2010 money market fund reforms
  • how money market funds would likely have performed during the events of September 2008 had the 2010 reforms been in place at the time.

 Commissioner Aguilar, in turn, released a Statement on Money Market Funds as to Recent Developments, in which he cited both the release of the Study and "the serious consideration by the SEC staff and FSOC of the potential migration of money fund assets to opaque, unregulated funds" as welcome developments.

December 6, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Wells Fargo Banker with Insider Trading

The SEC charged John W. Femenia, an investment banker at Wells Fargo Securities, and nine others with involvement in an insider trading ring that garnered more than $11 million in illicit profits trading on confidential information about impending mergers.

The SEC alleges that Femenia misused his position at Wells Fargo to obtain material, nonpublic information about four separate merger transactions involving firm clients. According to the SEC, upon learning inside information about an impending deal, Femenia would typically call his longtime friend Shawn C. Hegedus, who worked as a registered broker. Femenia and Hegedus illegally tipped other friends who in turn tipped more friends or family members in a ring that spread across five states.  

According to the SEC’s complaint, the illegal trading occurred from July 2010 to July 2012 and involved the following transactions:

The acquisition of ATC Technology Corporation by GENCO Distribution Systems (publicly announced July 19, 2010)
The acquisition of Smurfit-Stone Container Corp. by Rock-Tenn Company (publicly announced Jan. 23, 2011)
The acquisition of K-Sea Transportation Partners by Kirby Corporation (publicly announced March 13, 2011)
The acquisition of The Shaw Group by Chicago Bridge & Iron Co. (publicly announced July 30, 2012)

The court entered a temporary restraining order freezing the assets of the defendants and relief defendants. The court order also provides for expedited discovery and prohibits the defendants and relief defendants from destroying evidence.

December 6, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Gears Up for Internet Fraud In Wake of JOBS Act Crowdfunding

According to the NASAA, "crowdfunding’s presence on the Internet has risen sharply in recent months in anticipation of rules to allow small businesses and entrepreneurs to raise investments online."  NASAA Sees Sharp Spike in Crowdfunding Presence on the Internet

An analysis of Internet domain names by state and Canadian securities regulators found nearly 8,800 domains with “crowdfunding” in their name as of November 30, 2012, up from less than 900 at the beginning of the year. Of these websites, about 2,000 contained content, more than 3,700 had no content and more than 3,000 appeared to be “parked” and serving as placeholders to reserve a domain name for later use or sale. Of the domains with “crowdfunding” in their name, about 6,800 have appeared since April, 2012 when the JOBS Act was signed into law.

The release goes on to say

Anticipating an increase in online fraud stemming in part from passage of the JOBS Act, NASAA created a task force on Internet fraud investigations shortly after the enactment of the JOBS Act to monitor crowdfunding and other Internet offerings. The group is currently coordinating multi-jurisdictional efforts to scan various online offering platforms for fraud, and, where authorized, will coordinate investigations into online or crowdfunded capital formation fraud.

December 6, 2012 in Books, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC & FINRA Offer Suggestions on Year-End Investment Considerations

The SEC's Office of Investor Education and Advocacy and FINRA issued an Investor Alert to provide individual investors with a few suggestions for year-end investment planning, including

  • Review your asset allocation
  • consider rebalancing
  • tax considerations
  • check out your investment professiona
  • locate your financial records.

Year-End Investment Considerations for Individual Investors

December 6, 2012 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 5, 2012

Big Lots CEO Steps Down as SEC Looks into Stock Sales

Yesterday Big Lots Inc. announced that its CEO Steven Fishman intends to retire to spend time with his family.  Today the Wall St. Journal headline is that the SEC is conducting an inquiry into Fishman's $10 million sale of Big Lots stock in advance of the company's release of bad news in March 2012.  The WSJ cited Fishman's sale in its recent article that highlighted executives' trading in their companies' stock under Rule 10b5-1 plans.  WSJ, Big Lots Chief Probed by SEC

December 5, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Rep. McHenry Charges Schapiro Delayed JOBS Implementation Because of Concern over Legacy

There has been quite a lot of heat in the last few days about whether SEC Chairman Schapiro delayed implementation of Section 201 of the JOBS Act, which requires the SEC to remove the ban on general solicitation for certain issuers, in order to preserve her pro-investor legacy.  (see WSJ, WSJ UPDATE: SEC Chief Schapiro Delayed Rule Over Legacy Concerns).  The SEC has posted on its website the letter from Rep. Patrick McHenry, Chairman of the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, which occasioned the firestorm.

Rep. McHenry objects to the Commission's August 29, 2012 adoption of a proposal to implement Section 201 instead of an interim final rule because "the delay in implementation of Section 201 is a significant obstacle to capital formation and economic recovery."  The letter sets forth various emails that, Rep. McHenry charges, "imply that [Schapiro] personally intervened to delay implementation of the law in an effort to appease special interest groups and out of concern for your legacy as Chairman."  Rep. McHenry charges that "one late communication from a well-placed lobbyist effectively stalled the implementation of Section 201" -- i.e., Barbara Roper, of the Consumer Federation of America, who in an email communicated "strong objections" to the draft interim final rule.

December 4, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Roundtable on Decimalization

The SEC's staff will host a roundtable on Feb. 5, 2013 to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets. Information on the agenda and participants will be issued shortly.

The JOBS Act directed the Commission to conduct a study of the effects of decimalization on initial public offerings (IPOs) and on small and middle-capitalization companies. In its Report to Congress on Decimalization, the SEC staff recommended that the Commission solicit the views of investors, companies, market professionals, academics, and other interested parties on decimalization generally, its effects on IPOs and on trading and liquidity for small and mid-cap companies, and what, if any, changes should be considered. The roundtable will provide a forum to discuss these issues and explore specific recommendations on structuring pilot programs to gather additional data and analysis on these issues.

December 4, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, December 3, 2012

SEC Brings Proceedings Against Chinese Affiliates of Big 4 Accounting Firms

The SEC began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.  Foreign public accounting firms are required to provide the SEC upon request with audit work papers involving any company trading on U.S. markets.  The firms are:

BDO China Dahua Co. Ltd
Deloitte Touche Tohmatsu Certified Public Accountants Ltd
Ernst & Young Hua Ming LLP
KPMG Huazhen (Special General Partnership)
PricewaterhouseCoopers Zhong Tian CPAs Limited


December 3, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, December 2, 2012

Donelson & Yust on Litigation Risk and Nevada Corporate Law

Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law, by Dain C. Donelson, University of Texas at Austin - McCombs School of Business, and Christopher G. Yust, University of Texas at Austin - McCombs School of Business, was recently posted on SSRN.  Here is the abstract:

In 2001, Nevada significantly limited the personal legal liability of corporate officers and directors. We use this exogenous shock to examine the impact of officer and director litigation risk on agency costs. Specifically, we examine changes in firm value, operating performance and CEO compensation. We find that this change adversely affected firm value, especially for firms with the highest expected agency costs. In addition, we find an adverse impact on operating performance and lower CEO pay-for-performance sensitivity for Nevada firms subsequent to the change. Our findings emphasize that officer and director litigation risk is a powerful and effective governance mechanism.

December 2, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Releases its 2012 Financial Report

The SEC's 2012 Agency Financial Report is now posted on its website.

December 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges China North East Petroleum Holdings with Diverting Offering Proceeds & Fraud

The SEC filed fraud and other related charges against China North East Petroleum Holdings (CNEP); its CEO, President and former Chairman of the Board of Directors, Wang Hongjun (Wang); its founder, former director and Wang's mother, Ju Guizhi (Ju); and its Vice President of Corporate Finance and Secretary, Jiang Chao. The Commission also named Wang's wife, Sun Jishuang (Sun), and Jiang Chao's father, Jiang Mingfu, as Relief Defendants to recover company monies that they improperly received.

The Commission alleges that CNEP, Wang, Ju and Jiang Chao diverted offering proceeds to the personal accounts of corporate insiders and their immediate family members, and also engaged in fraudulent conduct in connection with at least 176 undisclosed transactions between the company and its insiders or their immediate family members, otherwise known as related-party transactions.

The Commission alleges that, in connection with its two public stock offerings in late 2009, CNEP falsely stated to investors in a registration statement and other public filings signed by Wang that the offering proceeds would be used to fund future business expansion and for general working capital purposes. Instead, consistent with a pre-existing pattern of engaging in undisclosed, related-party transactions, Jiang Chao then diverted over $900,000 of offering proceeds to his father, Jiang Mingfu, and at the direction of Ju, diverted at least $6 million dollars to her and Sun, who is her daughter-in-law and Wang's wife.

The Commission further alleges that during 2009, CNEP, Wang and Ju engaged in at least 176 undisclosed, related-party transactions. This fraudulent conduct involved approximately $28 million in transactions from CNEP to Wang or Ju; approximately $11 million purportedly loaned to CNEP or paid to third parties on behalf of CNEP by Wang or Ju; and $20 million of unusual post-year-end adjustments that purported to eliminate the remaining debts owed by Wang and Ju to CNEP. Together, these transactions totaled approximately $59 million of related-party activity during 2009. Neither the magnitude nor the volume of these related-party transactions has been fully disclosed to the investing public.

The Commission is seeking: (i) permanent injunctive relief to prevent future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from each Defendant; (ii) officer and director bars against Wang, Ju and Jiang Chao; and (iii) disgorgement from the Relief Defendants, Sun and Jiang Mingfu, of improperly received funds.

December 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Brazilian Banker Settles SEC Charges of Insider Trading in Burger King Stock

The SEC announced insider trading charges against a Brazilian ex-banker for his role in a scheme to illegally trade Burger King securities. The SEC alleges that Igor Cornelsen and his firm through which he made trades - Bainbridge Group - reaped illicit profits of more than $1.68 million by trading Burger King options based on confidential information ahead of the company's September 2010 announcement that it was being acquired by a New York private equity firm. He sought inside information from his broker Waldyr Da Silva Prado Neto by sending him e-mails with such masked references as, "Is the sandwich deal going to happen?" Prado was stealing the inside information from another Wells Fargo brokerage customer involved in the Burger King deal.

Cornelsen and Bainbridge Group agreed to pay more than $5.1 million to settle the SEC's charges. The settlement is subject to court approval. The litigation continues against Prado, whose assets have been frozen by the court.


December 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Connecticut Executive Settles Charges He Traded on Confidential Information Learned in Bidding Process

The SEC charged  I. Joseph Massoud, a Connecticut-based business executive, with insider trading ahead of the sale of Patriot Capital Funding Group based on nonpublic information he learned at the helm of a firm involved in the bidding process.  The SEC alleges that Massoud, who founded investment advisory firm Compass Group Management, gained access to nonpublic information contained in an online “dataroom” where bidding companies could learn more about Patriot Capital’s financial condition. For access to the data, Compass Group had to enter into a confidentiality agreement that prohibited its employees from buying Patriot Capital stock. Nonetheless, Massoud purchased shares soon after Compass Group gained access to the confidential information, and he bought even more stock after he learned that Compass Group’s bid was what he described as “waaaaay off” compared to bids from other companies. Patriot Capital’s share price more than doubled after a merger was publicly announced, and Massoud realized more than $676,000 in illegal profits.

Massoud, who lives in Westport, Conn., agreed to settle the SEC’s charges by paying more than $1.4 million. He also will be barred from working in the securities industry or serving as an officer or director of a public company. The settlement is subject to court approval.


December 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)