Securities Law Prof Blog

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

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Thursday, February 28, 2013

China-Based Company and Former CFO Settle SEC Accounting Charges

The SEC and Keyuan Petrochemical, a China-based petrochemical company, and its former chief financial officer settled charges of accounting and disclosure violations, with defendants agreeing to pay more than $1 million.  According to the SEC, Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.

The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.

Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.

February 28, 2013 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 11, 2013

Fraud Scheme Targets Foreign Investors with Lure of U.S. Citizenship

On Feb. 8 the SEC announced charges and an asset freeze against Anshoo R. Sethi, an Illinois resident,  charging him with defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through a federal visa program.   According to the SEC, Sethi created A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. Sethi duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. Investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program, which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. workers.

According to the SEC’s complaint, the EB-5 program enables foreign investors to possibly qualify for a green card if they invest $1 million (or $500,000 in a “Targeted Employment Area” with a high unemployment rate) in a project that creates or preserves at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family. Sethi and his companies used the lure of a pathway to U.S. citizenship to convince investors to wire a minimum of $500,000 apiece plus a $41,500 “administrative fee” to U.S. bank accounts. These administrative fees are separate from the investment capital that the EB-5 program requires to be deployed into a job-creating enterprise. More than $11 million in administrative fees were collected with the claim that they were fully refundable to investors if their visa applications are rejected. Sethi and his companies have instead been spending those funds.

In addition to the temporary restraining order and asset freeze granted by the court, the SEC’s complaint seeks permanent injunctions and other monetary relief.

February 11, 2013 in Film, 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)

Friday, November 16, 2012

Attorney Convicted for Obstructing SEC Investigation into Client's Ponzi Scheme

On Nov. 12, a federal district judge in California convicted David Tamman, a former partner at the law firm Nixon Peabody LLP for obstructing an SEC investigation into whether one of the law firm's former clients was running a Ponzi scheme.  Tamman was convicted on all ten counts on which he was tried: one count of conspiring to obstruct justice, five counts of altering documents, one count of being an accessory after the fact to co-defendant John Farahi’s mail and securities fraud crimes (via NewPoint Financial Services), and three counts of aiding and abetting Farahi’s false testimony before the SEC.

According to the SIGTARP press release:

The evidence at trial showed that immediately after the SEC made a surprise inspection of Farahi’s business, Tamman met with Farahi and began altering and backdating documents to make it appear that Farahi had been disclosing to investors that Farahi was himself taking the majority of investors’ funds. Those altered documents were later produced to the SEC and falsely represented by Farahi to be the actual documents that had earlier been given to investors. The evidence at trial also showed that Tamman created and backdated promissory notes and supplemental disclosure documents and lied to his partners and co-counsel about the creation and alteration of documents that the SEC was seeking.

November 16, 2012 in Film, News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, November 9, 2012

SEC Charges Executives and Auditor of Electronic Game Company will Fraud

The SEC today charged three executives of Electronic Game Card Inc. (EGMI) with repeatedly lying to investors about the operations and financial condition of the company that purported to sell credit card-size electronic games. The SEC also charged the company’s independent auditor with facilitating the scheme.

The SEC alleges that chief executive officer Lee Cole and chief financial officer Linden Boyne orchestrated a scheme in which EGMI enticed investors by claiming to have millions of dollars in annual revenue, hold millions of dollars in investments, and own an off-shore bank account worth more than $10 million. In reality, many of the company’s purported contracts were phony, the purported investments were merely in entities affiliated with Cole or Boyne, and the bank account did not exist. As a result of EGMI’s false claims, the company’s outstanding common stock was once valued as high as $150 million. EGMI is now bankrupt and its stock is worthless.

The SEC also charged the company’s outside auditor — certified public accountant Timothy Quintanilla — with repeatedly issuing clean audit opinions about EGMI based on reckless and deficient audit work. Also charged is Kevin Donovan, who later replaced Cole as CEO and ignored many red flags about the accuracy of the company’s public statements and the integrity of Cole and Boyne. He provided false information during conference calls with analysts and investors.

The SEC’s complaint seeks, among other things, a final judgment ordering Cole, Boyne, Donovan, and Quintanilla to pay financial penalties and permanently enjoining them from future violations of the securities laws; enjoining Cole, Boyne, and Donovan from serving as officers and directors of public companies and from participating in penny stock offerings; and ordering Cole, Boyne, and Quintanilla to disgorge their ill-gotten gains with prejudgment interest.

November 9, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 23, 2012

SEC Adopts Final Rule on Clearing Agency Standards

The SEC adopted yesterday new Rule 17Ad-22,which establishes minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls as well as meet the statutory requirements under the Exchange Act on an ongoing basis. (Download 34-68080[1])

October 23, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, October 19, 2012

SEC Posts Text of Proposed Rule on Requirements for Security-Based Swap Dealers

The SEC has posted on its website the release on the proposed rule regarding Capital, Margin and Segregation Requirements for Security-Based Swap Dealers and Majority Security-Based Swap Participants and Capital Requirements for Broker-Dealers.  Comments are due 60 days after publication in the Federal Register. ( Download 34-68071[1])

October 19, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 27, 2012

SEC Rethinking Quiet Period Rules

The Wall St. Journal reports that the SEC is reviewing whether to ease the restrictions on pre-IPO communications imposed on issuers and others.   This is in response to complaints that retail investors were kept in the dark about developments at Facebook prior to its IPO.  WSJ, Regulators Rethink Pre-IPO Chatter.  The WSJ also published Mary Schapiro's letter to Rep. Darrell Issa on this subject (Download Secipoletter0826[1]).

August 27, 2012 in Film, News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 13, 2012

SEC Charges Execs at Former Mortgage Company with Concealing Financial Collapse

The SEC charged Thornburg Mortgage Inc. chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett (whom the agency describes as the senior-most executives at formerly one of the nation’s largest mortgage companies) with hiding the company’s deteriorating financial condition at the onset of the financial crisis. According to the SEC, they schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008.

According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor. For example, in a February 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.”

The SEC alleges that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.

The SEC’s complaint charges Goldstone, Simmons, and Starrett with violations of the antifraud, deceit of auditors, reporting, record keeping, and internal controls provisions of the federal securities laws. The complaint seeks officer and director bars, disgorgement, and financial penalties.

March 13, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)