Friday, August 3, 2012

SEC Litigation Releases: Week in Review

SEC Settles Litigation with Former Veritas Software Corporation Chief Financial Officer,  August 2, 2012, (Litigation Release No. 22432).

On July 20, 2012, a final judgment was entered against Kenneth E. Lonchar in the case SEC v. Mark Leslie, Kenneth E. Lonchar, Paul A. Sallaberry, Michael M. Cully, and Douglas S. Newton. Lonchar, the former Chief Financial Officer of Veritas Software Corporation, had been charged with inflating Veritas' reported revenues "by approximately $20 million in connection with a software sale to America Online, Inc." Also, Lonchar was charged with using improper accounting practices to "'smooth' artificially Veritas' financial results." Lonchar has agreed to pay $400,000 in disgorgement, prejudgment interest, and penalties. He has also been suspended from appearing or practicing before the Commission as an accountant, but can request reinstatement in five years.

Shane A. Mullholand and Dissemination Services LLC Enjoined and Barred from Penny Stock Offerings,  August 2, 2012, (Litigation Release No. 22431).

 On July 30, 2012, the court enjoined Shane A. Mullholand and Dissemination Services LLC from violating sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. Mullholand and Dissemination have also been ordered to pay over $4.8 million in disgorgement and prejudgment interest and $240,000 in civil penalties. Mullholand and Dissemination were charged with "acting as underwriters engaged in a scheme to evade the securities registration requirements" because they offered and sold securities for six companies "when no registration statements were filed or in effect to provide information to public investors." 
 
SEC Charges Multiple Individuals and Entities in the U.S. for Widespread Misconduct in Connection with Chinese Reverse Merger Company,  July 30, 2012, (Litigation Release No. 22430).

In an investigation into China Yingxia International, Inc., the SEC has filed complaints against various entities and individuals. According to the complaint against Peter Siris et al. (opens to PDF), Peter Siris along with his associated entities, Guerrilla Capital Management, LLC and Hua Mei 21st Century, LLC were involved in "insider trading, trading in violation of Rule 105 of Regulation M, fraudulent representations in a securities purchase agreement, misstatements to investors in pooled investment vehicles, acting as an unregistered securities broker, and unregistered sales of securities." Siris, "a well-known fund manager and active investor in Chinese companies," invested $1.5 million in China Yingxia through tow New York-based hedge funds he managed. Siris, along with his consulting firm, Hua Mei, acted as advisers to China Yingxia. Hua Mei allegedly received cash and shares which "were improperly sold without any registration statement in effect." Additionally, in February and March 2009, Siris sold over 1.1 million shares based on non-public information regarding China Yingxia's Ceo's illegal activity. Siris not only allegedly made more than $172,000 in ill-gotten gains, but he also "omitted material information and made material misrepresentations to investors in his funds concerning his role with China Yingxia." Siris allegedly engaged in insider trading, selling short the securities of two Chinese companies. Further, Siris claimed "in one securities purchase agreement that he had not traded the issuer's securities," when in fact he had "sold short the issuer's stock."Siris gained almost $289,000 from this illegal activity. Siris and his entities have agreed to pay over $660,000 in disgorgement and prejudgment interest and Siris agreed to pay a civial penalty of about $464,000. Siris, Guerrilla Capital, and Hua Mei have been enjoined from violating provistions of the Securities Act, Exchange Act, and Advisers Act. 

In the complaint against Alan Sheinwald et al. (opens to PDF) Ren Hu, former chief financial officer of China Yingxia, was charged by the SEC for "fraudulent representations in Sarbanes-Oxley certifications, lying to auditors, failure to implement internal accounting controls, and aiding and abetting China Yingxia's failure to implement internal controls." Alan Sheinwald, along with his investor relations firm, Alliance Advisors, LLC, was charged with acting as unregistered securities brokers. Other individuals connected to China Yingxia have been charged as well. Peter Dong Zhou has been charged with "insider trading, unregistered sales of securities, and aiding and abetting unregistered broker activity." Steve Mazur has been charged with acting as an unregistered securities broker. Finally, James Fuld, Jr. has been charged for unregistered sales of securities. Cease-and-desist orders have been issued against Zhou and Mazur, as well as a cease-and-desist order against Fuld. Zhou has agreed to pay over $73,000 in disgorgement, prejudgment interest and penalties. Zhou has also agreed to a "collateral bar, penny stock bar, and investment company bar, with the right to apply for reentry after three years." Mazur has agreed to pay over $177,000 in disgorgement, prejudgment interest, and penalties. Mazur has agreed to "a collateral bar, penny stock bar, and investment company bar, with right to apply for reentry after two years." Fuld has agreed to pay over $216,000 in disgorgement and prejudgment interest. 


SEC Charges Ohio Oil and Gas Concern with Offering Fraud,  July 30, 2012, (Litigation Release No. 22429).

According to the complaint (opens to PDF), Michael A. Bodanza, former chief financial officer and founding member of Preferred Holdings Co., LLC, was involved with the unregistered offering and sale of securities. Preferred Financial Holdings Co., LLC was formed in 2006 to "engage in oil and gas exploration, drilling, and leasing through operating subsidiaries." From June 2007 to August 2010, Bodanza and Preferred Holdings allegedly raised almost $6.8 million from investors through the "unregistered sale of Preferred Holdings promissory notes." Bodanza allegedly failed to disclose to investors the financial problems that Preferred Holdings experienced from 2007 through 2010. During this time frame, the company experienced combined net losses of more than $6 million. Bodanza also allegedly failed to tell investors crucial information including: Preferred Holdings "removed one of its founding members and its chief operating officer," suing him for causing the company to incur damages between $3 million and $4 million; the only operating drilling rig held by the company's subsidiary "suffered an irreparable breakdown in August 2008"; the company was involved with an insurance dispute to recover $1 million as a result of this breakdown; the company's drilling subsidiary "incurred $260,000 in drilling expenses above its original cost estimates"; and the company's subsidiary failed to acquire property in Tennessee that would have been used to drill and sell gas. Bodanza agreed to judgment permanently enjoining him from violating sections of the Securities Act and the Exchange Act and an order to pay "disgorgement of $359,656 and prejudgment interest of $50,551." However, based on Bodanza's financial condition, all but $154,000 of the disgorgement and prejudgment interest have been waived. Preferred Holdings has agreed to a judgment permanently enjoining it from violating sections of the Securities Act and Exchange Act, and has agreed to pay over $4.7 million in disgorgement and prejudgment interest, "jointly and severally with the Relief Defendants." Preferred Holdings subsidiaries, Preferred Drilling Co., LLC, Preferred Financial Investment Co., LLC, Preferred Financial Leasing Co., LLC, and Preferred Well Management Co., LLC have been charged as Relief Defendants "based on their receipt or benefit from the funds raised through the unregistered, fraudulent offering." Each of the Relief Defendants has agreed to pay over $4.7 million in disgorgement and prejudgment interest, "jointly and severally with Preferred Holdings."


SEC Freezes Assets of Insider Traders in Nexen Acquisition,  July 30, 2012, (Litigation Release No. 22428).

On July 27, 2012, the SEC obtained an emergency court order to freeze the assets of the Hong Kong-based firm, Well Advantage Limited, and other unknown traders using trading accounts in Hong Kong and Singapore "to reap more than $13 million in illegal profits by trading in advance of this week's public announcement that China-based CNOOC Ltd. agreed to acquire Canada-based Nexen Inc." Zhang Zhi Rong controls Well Advantage as well as "another company that has a 'strategic cooperation agreement' with CNOOC." The SEC's emergency order came within 24 hours after Well Advantage placed an order to liquidate its entire position in Nexen. Well Advantage purchased more than 830,000 shares in Nexen on July 19, whose stock rose nearly 52 percent on July 23 after the announcement of its acquisition went public. Well Advantage and the unknown traders made over $13 million in illegal profit. The frozen assets of the traders are valued at more than $38 million.

Securities and Exchange Commission v. Emanuel L. Sarris, Sr. and Sarris Financial Group, Inc.,  July 30, 2012, (Litigation Release No. 22427).

The SEC has charged Emanuel L. Sarris, Sr. and his firm, Sarris Financial Group, Inc. with facilitating a Ponzi scheme where over 70 individuals invested $30 million in private funds which were "purportedly traded in foreign currencies, called 'Kenzie Funds.'" In actuality, these funds "were a massive Ponzi scheme that defrauded at least 400 investors out of more than $105 million."  Sarris and Sarris Financial allegedly failed to disclose to investors that they were hired by one of the companies that managed the Kenzie Funds to induce investments. When selling these funds, Sarris and Sarris Financial allegedly made false claims about the funds' "safety, performance, and legitimacy" and even "proposed that the Kenzie entities use existing or new investor money to pay redemptions to departing investors."

Securities and Exchange Commission v. LocatePlus Holdings Corporation, Jon Latorella and James Fields,  July 30, 2012, (Litigation Release No. 22426).

LocatePlus Holdings Corporation, a company that sold on-line access to public record databases for investigative searches, has agreed to settle charges that "it engaged in securities fraud from 2005 through 2007 by misleading investors about its funding and revenue." On October 14, 2010, the SEC filed a civil enforcement action against LocatePlus "alleging that [it] violated the anti-fraud and books and records provisions of the federal securities laws." Jon Latorella, former LocatePlus chief executive officer, and James Fields, former LocatePlus chief financial officer, were both charged with conspiracy to commit securities fraud "for their roles in a scheme to fraudulently inflate revenue at LocatePlus." On June 14, 2012, Latorella was sentenced to 60 months' imprisonment. The criminal case is still pending against Fields. LocatePlus has agreed to an order barring the trade of its securities in the public market. The proposed judgment against LocatePlus, "which is subject to court approval, will not impose monetary relief against LocatePlus in light of its bankruptcy and financial condition."


Judgments Entered Against Defendants for Disturbing Unregistered Shares of Universal Express Inc.,  July 27, 2012, (Litigation Release No. 22425).

On July 26, 2012 an amended judgment was entered against Michael J. Xirinachs and Emerald Asset Advisors LLC, enjoining them from future violations of provisions of the Securities Act and ordered them to jointly and severally pay over $7.6 million in disgorgement, prejudgment interest, and civil penalties. Xirinachs has been ordered separately to pay over $2.5 million in disgorgement, prejudgment interest, and civil penalties. Xirinachs and Emerald Asset have also been barred from "participating in penny stock offerings for three years, but [are] allowed to purchase penny stocks during that period." Xirinachs and Emerald Asset were engaged in "unregistered distribution of billions of shares of Universal Express Inc. (USXP) between February 2006 and June 2007."



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