Friday, July 5, 2013

SEC Litigation Releases: Week in Review

SEC Obtains Freeze On Proceeds from Unlawful Distribution of Biozoom Securities, July 3, 2013, (Litigation Release No. 22742)

According to the complaint (PDF), eight Argentine citizens "unlawfully sold millions of shares" of Biozoom, Inc. (formerly Entertainment Art, Inc.) "in unregistered transactions" while two other Argentine citizens, Fernando Loureyro and Mariano Graciarena, also had received shares of Biozoom "but had not yet sold them." According to the SEC, from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company's total outstanding shares." Eight of the defendants -- Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman, and Mariano Pablo Ferrari -- then sold over 14 million shares in a "one-month period." They gained almost $34 million from these sales and then wired almost $17 million to overseas bank accounts. The defendants claimed they received the shares from Entertainment Art shareholders "who purchased them in private placements that began in 2007" and provided " stock purchase agreements between them and the former shareholders purportedly signed by the defendants and those shareholders." The SEC alleges that "the documents were false because the Entertainment Art investors had sold all of their stock in the company in 2009, almost four years earlier."

The SEC seeks preliminary and permanent injunctions against the defedants, as well as the return of the "allegedly ill-gotten sale proceeds, and civil penalties."

Former CFO Agrees to Settle Charges of Evading Internal Controls to Pay for Unauthorized Travel and Entertainment Expenses, July 2, 2013, (Litigation Release No. 22741)

Subramanian Krishnan, former CFO of Digi International, Inc., has agreed to settle SEC charges alleging that "he engaged in conduct which resulted in the filing of inaccurate reports and accompanying certifications in Digi’s annual quarterly reports from March 2005 through May 2010." The SEC alleges that Krishnan's conduct "resulted in corporate funds being used to pay for unauthorized travel and entertainment expenses." Furthermore, Krishnan allegedly "authorized such expenses for Digi employees, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, and wrongly certified that Digi’s internal controls were effective." To settle the charges, Krishnan has consented to a final judgment that permanently enjoins him from future violations of the Securities Act and Exchange Act, imposes a five year officer and director bar against him, orders him to pay a $60,000 civil penalty, and suspends him "from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after five years."

SEC Charges Armand R. Franquelin and Martin A. Pool with Violations of the Federal Securities Laws, July 2, 2013, (Litigation Release No. 22740)

According to the complaint (PDF), from 2006 through August 2010, Armand R. Franquelin and Martin A. Pool engaged in a Ponzi scheme and acted as unregistered broker-dealers by offering and selling more than $12 million in The Elva Group, LLC securities. The defendants allegedly encouraged investors to "convert funds held in [IRAs] into self-directed IRAs through Destiny Funding, LLC, another company owned by Franquelin and Pool, before investing those funds with Elva Group." Franquelin and Pool allegedly guaranteed "returns ranging from 10% to 240% per year." Franquelin and Pool then allegedly "misappropriated investor money for their personal use, to make 'interest' payments to earlier investors, and to pay for continuing Elva Group expenses."

The SEC has charged the defendants with violating sections of the Securities Act and Exchange Act and "seeks a permanent injunction as well as disgorgement, prejudgment interest and a civil penalty" from them. Additionally, "the complaint also seeks disgorgement and prejudgment interest from Judith Franquelin," Franquelin's wife, who was named as a relief defendant.

Pool consented to the entry of a final judgment that permanently enjoins him from future violations of the securities laws and orders him to pay over $1.3 million in disgorgement and prejudgment interest. However, "payment of disgorgement and prejudgment interest will be waived and no civil penalty will be imposed based on Pool’s current financial condition."

SEC Files Fraud Charges Against Fuqi International, Inc. and its Chairman and Former CEO and President Yu Kwai Chong, July 1, 2013, (Litigation Release No. 22739)

According to the complaint (PDF), Fuqi International, Inc. and its Chairman of the Board of Directors and former CEO and President, Yu Kwai Chong "failed to disclose cash transfers of approximately $134 million to three purportedly unknown entities." According to the SEC, Fuqi's "full board of directors was not aware of and did not approve the cash transfers, and the transactions were made without any written agreement or repayment terms." The SEC claims that "Fuqi lacked adequate internal accounting controls and incorrectly recorded the cash transfers in its books and records as increases or decreases in 'other payables' or 'prepaids' accounts." Additionally, Chong allegedly "falsely certified" that one of Fuqi's quarterly reports "contained no material misstatements or omissions even though Fuqi, at Chong's direction, had transferred $27.6 million to unknown third parties during that quarter."

Fuqi and Chong consented to a final judgment that enjoins them from future violations of the securities laws, orders them to pay $1,150,000 combined in civil penalties, and bars ") bars Chong from serving as an officer and director for five years." An order has also been entered that revokes "the registration of each class of registered securities of Fuqi for failure to make required periodic filings with the Commission."

SEC Charges Three with Insider Trading on Confidential Acquisition Negotiations Between Rohm & Haas and Dow, July 1, 2013, (Litigation Release No. 22738)

According to the complaint (PDF),  Mack D. Murrell, a former officer of The Dow Chemical Company, David A. Teekell (Murrel's long-time friend) and Charles W. Adams (Teekell's broker at Raymond James Financial Services, Inc) engaged in insider trading "that generated more than $1 million in illicit profits based on confidential information" concerning Dow's acquisition of Rohm & Haas Co. Murrell allegedly learned of the acquisition from his "then live-in girlfriend, now wife, who was the administrative assistant to Dow's Chief Financial Officer at the time." After learning this information, Murrell tipped Teekell who in turn tipped Adams. The complaint has also named Raymond James as a relief defendant.

The SEC seeks a final judgment that orders "disgorgement of ill-gotten gains together with prejudgment interest from the defendants and the relief defendant, and permanent injunctions and penalties against the defendants." Teekell has agreed to a final judgment that permanently enjoins him from future violations of the securities laws, as well as orders him to pay approximately $1.1 million in disgorgement, prejudgment interest, and a civil penalty.

SEC Charges Oil and Gas Promoter with Securities Fraud, July 1, 2013, (Litigation Release No. 22737)

According to the complaint (PDF), Bret L. Boteler conducted "a fraudulent oil and gas-related securities offering" through his now-defunct company, EnerMax, Inc. "that raised more than $17 million from...investors." Boteler allegedly "falsely portrayed EnerMax to investors as an innovative, technologically sophisticated company offering high quality oil and gas prospects" and he "misrepresented and omitted material information about the speculative and unproven nature of the prospects in which EnerMax was involved." Additionally, Boteler allegedly "misused and misappropriated investor funds." The SEC has charged Boteler with violating sections of the Securities Act and Exchange Act and seeks civil penalties, disgorgement, prejudgment interest, and permanent injunctions against him.

SEC Sues Texas Oil and Gas Promoters for Securities Fraud, July 1, 2013, (Litigation Release No. 22736)

According to the complaint (PDF), Matthew Madison, Dwight McGhee, and their company Infinity Exploration, LLC, "raised over $2 million from at least 40 investors from the fraudulent offer and sale of interests in Infinity's two oil and gas joint ventures." Infinity's offering materials allegedly misled investors "into believing that Infinity's ventures would own the leases and control drilling operations" when in fact "Infinity's ventures did not actually have direct interests in any oil and gas leases and no direct involvement in operation of any leases." Furthermore, the SEC alleges that "the defendants' offering materials falsely described Madison as experienced and successful in the oil and gas industry and failed to disclose McGhee's 2007 federal felony conviction." The SEC has charged the defendants with violating sections of the Securities Act and Exchange Act and seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties against the defendants.

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