Friday, October 4, 2013

SEC Litigation Releases: Week in Review (Part I)

SEC Files Fraud Charges Against Universal Travel Group, Its Former CEO and Chair, Jiangping Jiang, and Its Former Director, Secretary and Interim CFO, Jing Xie, September 27, 2013, (Litigation Release No. 22823)

The SEC announced the filing of "fraud and related charges against Universal Travel Group, a China-based travel services company, its former CEO and Chair, Jiangping Jiang, and its former Director, Secretary and Interim CFO, Jing Xie." According to the SEC, Jiang and Xie "failed to disclose cash transfers of approximately $41 million to thirty-four unknown entities in Hong Kong and China." In effect, these "undisclosed transfers rendered false and misleading the risk factor and liquidity discussions in UTG's public disclosure." Furthermore, the defendants allegedly "falsely described UTG's business organization, fail[ed] to disclose that UTG had transferred certain subsidiaries to third parties pursuant to agreements designed to give UTG the economic benefits of ownership, and UTG materially overstated its revenues and profits in its quarterly reports in 2010."

The defendants have consented to the entry of final judgments that enjoin them from future violations of the securities laws, order them to pay $935,000 combined in civil penalties, and impose five-year officer-and-director bars against Jiang and Xie. The SEC has also entered an order that revokes the "registration of each class of registered securities of UTG for failure to make required periodic filings with the Commission."

SEC Charges Tampa-Based Adviser with Fabricating Statements and Making Unauthorized and Undisclosed Investments, September 27, 2013, (Litigation Release No. 22822)

According to the complaint (PDF), OM Investment Management LLC, its principal, Gignesh Movalia, and its director of investments, Edwin V. Gaw, "fraudulently rais[ed] money and [made] material misrepresentations and omissions relating to OM Global Investment Fund, LLC, an unregistered hedge fund." The SEC claims that the defendants, among other things, "made material misrepresentations and omissions concerning the fund's holdings and investments, the identity and duties of the fund's auditor, sub-adviser, and administrator, and failed to register the offering and sale of securities."

OM Investment Management, Movalia, and Gaw have consented to the entry of judgments that enjoin them from future violations of the securities laws. OM Investment Management and Movalia also consented to judgments that freeze their assets, prevent the destruction of documents, and require them to provide "an accounting to the Court." The SEC seeks disgorgement, prejudgment interest, and civil penalties from OM Investment Management and Movalia, "while Gaw has agreed to pay a civil penalty of $100,000." Additionally, "Movalia and Gaw consented to the entry of orders barring them from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization."

Securities and Exchange Commission v. Brian K. Velten, September 27, 2013, (Litigation Release No. 22821)

The SEC has charged Brian K. Velten "an unregistered investment adviser," with opening "accounts for his clients at [Fidelity Brokerage Services, LLC] and engag[ing] in a scheme to defraud at least three of them by misappropriating approximately $171,000 from the clients' account." Additionally, the SEC claims that Velten made "false claims about his ability to generate large profits trading stocks for the clients, and trad[ed] stocks on margin without client authorization."

The SEC has charged Velten with violating various provisions of the securities laws and seeks a permanent injunction, disgorgement, and a civil penalty.

SEC Charges Stock-Collateralized Loan Companies and Their Owner with Fraud, September 27, 2013, (Litigation Release No. 22820)

A complaint has been filed against William Dean Chapman, Jr. and his companies, Alexander Capital Markets, LLC and Alexander Financial, LLC, charging them "with operating a fraudulent stock-collateralized loan business" where they "induc[ed] borrowers to transfer ownership of millions of shares...to them as collateral for purported non-recourse loans based on false promises, including the promise to return the shares, or remit share profits in excess of accrued interest, to borrowers who repaid their loans." In reality, after June 2006 the defendants did "nothing to ensure their ability to repurchase and return shares to borrowers who elected to repay their loans, or remit share profits in excess of accrued interest to borrowers," instead using "the proceeds to pay other borrowers, for operating costs, and for their own benefit."

The SEC has charged the defendants with violating various provisions of the Exchange Act and seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

Securities and Exchange Commission v. Chan Tze Ngon and Jiang Xiangyuan, September 26, 2013, (Litigation Release No. 22819)

According to the complaint (PDF), Chan Tze Ngon, ChinaCast Education Corporation’s former CEO and chairman of the board, "illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50 percent ownership stake" and then "transferred investor funds to another entity outside ChinaCast’s control." Chan had allegedly "secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast." None of these transactions were disclosed and filed with the SEC.

Jiang Xiangyuan, "ChinaCast’s former president for operations in China, avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of [the] company’s revenue-generating colleges before it was publicly disclosed by a new management team."

Chan and Jiang have been charged with violating various provisions of the securities laws and the SEC seeks disgorgement, prejudgment interest, financial penalties, permanent injunctions, and officer-and-director bars.

Securities and Exchange Commission v. Ronald E. Walblay, Energy Securities, Inc., and RyHolland Fielder, Inc., September 26, 2013, (Litigation Release No. 22818)

According to the complaint (PDF), Ronald Walblay defrauded investors in five oil and gas offerings through his former brokerage firm, Energy Securities Inc., and RyHolland Fielder Inc. "by misrepresenting such key facts as the amount of available reserves, the use of investor funds, and his past success in the oil and gas industry." Furthermore, Walblay allegedly offered unregistered securities through his firms "Basin Oil L.P., Basin Oil HV L.P., Great Plains Oil L.P., Permian Basin Oil L.P., and Texas Permian Oil LLLP."

The SEC has charged Energy Securities, RyHolland, and Walblay with violating sections of the Securities Act and Exchange Act and seeks financial penalties, disgorgement, prejudgment interest, and permanent injunctions.

SEC Charges Two Bank Executives for Financial Misstatements and Failure to Disclose Probable Loss on Troubled Loan, September 26, 2013, (Litigation Release No. 22817)

According to the complaint (PDF), Mercantile Bancorp's former CEO, Ted Awerkamp, and former CFO, Michael McGrath, failed to "recognize in financial statements a probable loss on one of the bank’s largest troubled loans." According to the SEC, in 2010 "Awerkamp knew that the borrower in a shared national credit loan for a large residential real estate development...was unwilling or unable to contribute the necessary funds to complete the project, which served as collateral for the loan." Additionally, he allegedly knew that "the collateral had declined significantly in value." Furthermore, "weeks before the bank’s quarterly report was filed, Awerkamp and McGrath also learned that the borrower missed a loan payment and declared bankruptcy." The bank failed to recognize this $5.28 million loan loss in its quarterly financial statements, even though it is required by U.S. accounting rules. In effect, "Mercantile...falsely stated that its main subsidiary bank had a net income of $1.8 million for first nine months of 2010 when it actually had a net loss of at least $3.48 million during that period."

The SEC has charged Mercantile, Awerkamp, and McGrath with violating various provisions of the Securities Act and Exchange Act. The defendants have consented to the entry of a final judgment that permanently enjoins them from future violations, and orders "monetary sanctions and officer-and-director bars against Awerkamp and McGrath."

Securities and Exchange Commission v. ImageXpres Corporation, et al., September 26, 2013, (Litigation Release No. 22816)

Last week the SEC filed a complaint against ImageXpres Corporation, its President and CEO, John Zankowski, and its CFO, Kevin Zankowski, alleging that the defendants engaged in "scheme to misrepresent the financial performance of ImageXpres...[t]hrough material misstatements in press releases, unaudited financial statements and other public documents." By doing so, the defendants "falsely portrayed ImageXpres as an increasingly profitable small technology company with growing sales when, in fact, it was a failing start-up venture that had little revenue and lacked the financial means to commercially produce the digital products it claimed to be selling to national retail customers."

The defendants have consented to the entry of final judgments that enjoin them from future violations of the securities laws, impose officer-and-director and penny stock bars against John Zankowski and Kevin Zankowski, and order John Zankowski and Kevin Zankowski to pay $75,000 combined in civil penalties.

SEC Charges Thought Development, Inc. and its Owner with Securities Registration Violations, September 26, 2013, (Litigation Release No. 22815)

According to the complaint (PDF), Thought Development, Inc. and its founder and chairman, Alan Amron, "directly, and through...an unaffiliated company, offered and or sold unregistered offerings of TDI to at least 90 investors located throughout the United States." The defendants have agreed to settle the charges and have agreed to "to full injunctive relief." Additionally, Amron has agreed to pay a $10,000 civil penalty.

SEC Charges Peter Kirschner, Stuart Rubens, Advanced Equity Partners and Premiere Consulting with Fraud and Registration Violations, September 26, 2013, (Litigation Release No. 22815)

According to the complaint (PDF), Peter Kirschner, his business partner, Stuart Rubens, and their companies Advanced Equity Partners, LLC, and Premiere Consulting, LCC "directly and through the services of sales agents they hired offered and or sold unregistered [Thought Development Inc] stock to approximately 200 investors." Allegedly, the defendants "lured investors by making several material misrepresentations and omissions, including failing to disclose that they retained or paid their sales agents commissions and other fees of at least 75% of the offering proceedings." TDI terminated its relationship with Kirschner and Rubens’ company Premiere after "learning about the undisclosed commissions and misrepresentations." However, "Kirschner, Rubens, and their sales agents continued soliciting investors of purported stock on behalf of their new company, Advanced Equity."

The SEC has charged Advanced Equity, Premiere, Kirschner and Rubens with violating sections of the Securities Act and Exchange Act. The defendants have agreed to settle all charges and have agreed "to full injunctive relief with disgorgement, prejudgment interest and civil penalties to be determined later by the court." Additionally, Kirschner and Rubens have agreed to penny stock bars.

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