Friday, February 15, 2019

SEC Files Charges in Elaborate Microcap Stock Fraud

The Securities and Exchange Commission today announced charges against four individuals and related businesses for their roles in two microcap frauds and unlawful securities offerings.  In sum, the alleged illegal transactions resulted in proceeds of more than $25 million.

According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock.  The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally.  The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public.  The complaint alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and executed the sham transactions. 

The complaint also alleges that in November 2013, Magna Equities II, which also was wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings.  Magna Equities II and the note’s issuer, NewLead Holdings Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement.  To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead.  Kautilya “Tony” Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme. 

“As alleged in our complaint, Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “This action demonstrates the resolve of the SEC in pursuing fraudsters who use elaborate financing schemes to engage in securities fraud.”

The SEC’s investigation was conducted by Lee A. Greenwood, Philip A. Fortino, John O. Enright, Christopher Ferrante, Diego Brucculeri, and Sheldon L. Pollock of the New York office.  The SEC’s litigation will be handled by Messrs. Fortino, Greenwood, Enright, and Alexander M. Vasilescu.  The case is being supervised by Mr. Wadhwa. 



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Cognizant and Two Former Executives With FCPA Violations

Cognizant Technology Solutions Corporation has agreed to pay $25 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA), and two of the company’s former executives were charged for their roles in facilitating the payment of millions of dollars in a bribe to an Indian government official. 

The Securities and Exchange Commission’s complaint alleges that in 2014, a senior government official of the Indian state of Tamil Nadu demanded a $2 million bribe from the construction firm responsible for building Cognizant’s 2.7 million square foot campus in Chennai, India.  As alleged in the complaint, Cognizant’s President Gordon Coburn and Chief Legal Officer Steven E. Schwartz authorized the contractor to pay the bribe, and directed their subordinates to conceal the bribe by doctoring the contractor’s change orders.  The SEC also alleges that Cognizant authorized the construction firm to make two additional bribes totaling more than $1.6 million.  Cognizant allegedly used sham change order requests to conceal the payments it made to reimburse the firm.

“Bribery to further corporate goals is an illusory path to long-term success.  While always the wrong choice, it is particularly egregious when senior executives chart that course for those they lead, as our complaint alleges here.  We are committed to holding them accountable for their actions,” said Charles E. Cain, Chief of the SEC Enforcement Division’s FCPA Unit.

The SEC charged Coburn and Schwartz with violating anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws.  The SEC is seeking permanent injunctions, monetary penalties, and officer-and-director bars against Coburn and Schwartz.

The SEC’s order as to Cognizant found that the company violated Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, which are anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws.  Without admitting or denying the allegations, the company agreed to pay disgorgement and prejudgment interest of approximately $19 million and a penalty of $6 million.

The Department of Justice and the U.S. Attorney’s Office for the District of New Jersey today announced the indictment of Coburn and Schwartz on criminal charges of violating and conspiring to violate the FCPA’s anti-bribery and accounting provisions.

The SEC’s investigation was conducted by Michael K. Catoe, Paul W. Sharratt, and M. Shahriar Masud of the FCPA Unit under the supervision of Robert I. Dodge.  The litigation will be led by John Bowers.  The SEC appreciates the assistance of the Justice Department’s Fraud Section, the U.S. Attorney’s Office for the District of New Jersey, and the Federal Bureau of Investigation.



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Thursday, February 14, 2019

SEC Extends Comment Period for Rulemaking Proposal Regarding Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

The Securities and Exchange Commission today announced that it is extending for one month the comment period on the proposed rulemaking to amend rules and forms to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts that was published in the Federal Register on November 30, 2018 (Release Nos. 33-10569; 34-84508; IC-33286). 

The public comment period for the proposed rulemaking “Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts,” Release Nos. 33-10569; 34-84508; IC-33286 (Oct. 30, 2018) will now end on March 15, 2019. The scope and comment process for this release remains as stated in the original Federal Register notice of November 30, 2018.   



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Wednesday, February 13, 2019

SEC Charges Former Senior Attorney at Apple With Insider Trading

The Securities and Exchange Commission today filed insider trading charges against a former senior attorney at Apple whose duties included executing the company’s insider trading compliance efforts.    

The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.  Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided.  The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws.  As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements. 

“Levoff’s alleged exploitation of his access to Apple’s financial information was particularly egregious given his responsibility for implementing the company’s insider trading compliance policy,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement.  “The SEC is committed to pursuing insiders who breach their duties to investors.”  

The SEC’s complaint, filed in federal district court in Newark, New Jersey, charges Levoff with fraud and is seeking the return of his ill-gotten trading profits plus interest, penalties, a permanent injunction, and an officer-and-director bar.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges.

The SEC’s investigation, which is continuing, has been conducted by Pei Chung and Elizabeth Doisy.  The case has been supervised by Deborah A. Tarasevich and Ms. Chion.  The litigation will be led by Daniel Maher and Cheryl Crumpton.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Deloitte Japan Charged With Violating Auditor Independence Rules

The Securities and Exchange Commission today announced that Deloitte Touche Tohmatsu LLC (Deloitte Japan) will pay $2 million to settle charges that it issued audit reports for an audit client at a time when dozens of its employees maintained bank accounts with the client’s subsidiary.  According to the SEC’s order, the accounts had balances that exceeded depositary insurance limits in violation of the SEC audit independence rules.  Deloitte Japan’s former CEO Futomichi Amano and former reputation and risk leader and director of independence Yuji Itagaki settled related charges.

Under the SEC’s rules, accountants are not considered to be independent if they maintain bank accounts with an audit client with balances greater than FDIC or similar depositary insurance limits.  According to the SEC’s order, Deloitte Japan knew but failed to adequately disclose that Amano maintained bank account balances with the audit client’s subsidiary bank that compromised his independence.  A subsequent investigation by the firm revealed that 88 other Deloitte Japan employees had financial relationships with the audit client that compromised their independence as well.  The SEC’s order also found that Deloitte Japan’s system of quality controls did not provide reasonable assurances that the firm and its auditors were independent from audit clients.  For example, the SEC’s order found that Deloitte Japan failed to adequately staff and supervise its Office of Independence and caused certain independence violations by making deposits to partners’ bank accounts that exceeded the deposit insurance limits.

“Auditor independence is critical to the integrity of the financial reporting process,” said Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement.  “The auditor independence rules addressing bank account balances that exceed deposit insurance limits are clear, and audit firms must devote adequate resources to ensuring the independence of the firm and its personnel.”

The SEC’s order finds that Deloitte Japan violated the auditor independence provisions of the federal securities laws and that Amano and Itagaki caused those violations.  The order also finds that Deloitte Japan, Amano, and Itagaki caused the audit client to violate its reporting obligations, and that all respondents engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice by virtue of their violations of the auditor independence requirements.

Deloitte Japan, Amano, and Itagaki consented to the SEC’s order without admitting or denying the findings and were ordered to cease-and-desist from future violations.  Deloitte Japan agreed to pay $2 million in monetary sanctions and be censured.  Amano and Itagaki agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Amano and Itagaki to apply for reinstatement after two years and one year, respectively.  In determining to accept Deloitte Japan’s offer of settlement, the SEC considered remedial acts promptly undertaken by Deloitte Japan and cooperation afforded the SEC staff.

The SEC’s investigation was conducted by James Bresnicky and Sarah Lamoree, and supervised by J. Lee Buck II and Ms. Hodgman.



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Thursday, February 07, 2019

SEC Charges Founder of Online Gaming Company Defrauding Investors

The Securities and Exchange Commission today charged Robert Alexander with fraudulently raising approximately $9 million from more than 50 individuals by selling investments in Kizzang LLC, a purported online gaming business.

According to the SEC's complaint, among other misrepresentations, Alexander told investors that they would make a minimum of 10 times their investment, Alexander had personally invested millions of dollars in Kizzang, Alexander had made a $50 million charitable donation, and that he had led the creation of a prominent video game. Rather than using investor funds for Kizzang's business, Alexander stole at least $1.3 million, including spending more than $450,000 on gambling sprees. Alexander also used investor funds to finance his daily living and other personal expenses, including credit card bills, shopping and entertainment, and expenses for his daughter, including culinary school tuition and luxury car payments.

"As alleged in our complaint, Alexander promoted Kizzang as an opportunity for investors to profit from the early success of a technology start-up," said Carolyn Welshhans, Associate Director in the SEC's Division of Enforcement. "In reality, Alexander brazenly converted investor proceeds for his personal use, sometimes within days of receiving investor funds."

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, charges Alexander and Kizzang with violating the anti-fraud provisions of the Securities Act and Exchange Act and seeks permanent injunctions, civil monetary penalties, and disgorgement of ill-gotten monetary gains plus interest.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Alexander.

The SEC's investigation was conducted by Cecilia B. Connor and Andrew Elliott, and supervised by Ms. Welshhans and Amy L. Friedman, with assistance from Janet Yang. The SEC's litigation will be handled by Martin Healey. The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney's Office for the Southern District of New York.



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Monday, February 04, 2019

Elizabeth McFadden Named Deputy General Counsel

The Securities and Exchange Commission today announced that Elizabeth McFadden has been named Deputy General Counsel for General Law and Management of the agency.

The Deputy General Counsel for General Law and Management provides daily oversight into representation of the Commission, its members and employees in litigation and advises the Commission and Divisions and Offices within the Commission with respect to general law responsibilities, personnel management and budget. The Deputy General Counsel for General Law and Management also serves as Managing Executive for the Office of the General Counsel.

Ms. McFadden comes to the SEC after over 15 years at the U.S. Department of Education. Since 2011, she has served as Deputy General Counsel at the department, where she advised the agency's senior leadership on complex legal issues, including the interpretation of Federal statutes and regulations, litigation strategy, agency policy, operations and procedures. At the Department of Education she focused on procurement, labor and employment law, FOIA and interagency agreements, among other areas. Prior to joining the Department of Education in 2003, Ms. McFadden practiced law at Dow Lohnes, first as an associate in 1991 and beginning in 2000 as a partner, where she represented private and public corporations on a wide range of legal matters including regulatory compliance, business transactions, rulemaking and litigation.

"We are excited to have Elizabeth join us at the Commission," said General Counsel Robert Stebbins. "I am confident that given her extensive experience and legal expertise, the Commission and its employees will greatly benefit from her legal counsel."

"I am grateful for the opportunity to join the dedicated team at the Commission," said Ms. McFadden. "I look forward to working with them toward advancing the SEC's mission for American investors and markets."

Ms. McFadden earned a J.D. from the University of Virginia School of Law and a B.A.summa cum laude from Trinity Washington University in Political Science.



SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.