SEC Sues Austin Real Estate Developer for Conducting Fraudulent Securities Offering
On Dec. 22, 2009, the Commission filed suit in the United States District Court for the Western District of Texas against Austin businessman Kurt B. Barton, Triton Financial, LLC (Triton), and Triton Acquisition, LP, d/b/a Triton Insurance, LP (Triton Insurance). The Commission alleges that from July 2008 through December 2009, the Defendants raised $8.4 million from approximately 90 investors in a fraudulent offering of "investor units" in Triton Insurance. The Commission further alleges that Barton, Triton and Triton Insurance: (i) misrepresented to investors how the offering proceeds would be used and (ii) misrepresented Triton Insurance's business operations.
Without admitting or denying the Commission's allegations, Barton, Triton and Triton Insurance have consented to permanent injunctions against future violations of the anti-fraud provisions. The Defendants have also consented to an order appointing a receiver and an order freezing their assets, prohibiting the destruction of documents, and requiring that they provide an accounting. [SEC v. Triton Financial, LLC, et al., Civil Action No. A09CA924 JN, United States District Court for the Western District of Texas (Austin Division)] (LR-21346)
Securities and Exchange Commission Obtains Emergency Asset Freeze of Profits Against Belgian Residents Based on Insider Purchasers of Call Options for Chattem, Inc. Prior to Acquisition Announcement
On Dec. 22, 2009, the Honorable Charles A. Pannell, Jr., U.S. District Judge for the Northern District of Georgia, entered a Temporary Restraining Order freezing assets of Nicolas Patrick Benoit Condroyer and Gilles Robert Roger, both of whom are citizens of France and reside in Brussels, Belgium. The Commission's complaint alleges that Condroyer and Roger engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws. In addition to freezing approximately $4.2 million in assets, the Court's order: (i) provides for expedited discovery, and (ii) prohibits the defendants from destroying evidence.
On Dec. 21, 2009, Chattem, Inc., a company based in Chattanooga, Tennessee, announced that it had entered into a definitive agreement to be acquired by Sanofi-Aventis, a health care company located in France. Chattem manufactures and markets an array of the over-the-counter healthcare products and its shares are traded on the New York Stock Exchange. Under the acquisition agreement, Sanofi agreed to pay $1.9 billion for 100% of Chattem's outstanding shares, at a share price of $93.50 per share. According to the complaint, the acquisition share price represents a 32.6% premium above the closing price of $69.98 on the prior trading day, Friday, December 18th.
The Commission further alleges that between December 7 and On Dec. 18, 2009, Condroyer, while in possession of material, nonpublic information regarding this acquisition, purchased over 1,900 "out-of-the-money" call option contracts for Chattem stock in a newly-opened account at an options brokerage firm in the United States. Substantially all of those contracts were set to expire on Jan. 15, 2010, within weeks of the purchase date. The Commission similarly alleges that that on December 17 and On Dec. 18, 2009, Roger, while in possession of material, nonpublic information regarding this acquisition, purchased 940 "out-of-the-money" call option contracts for Chattem in an account at an options brokerage firm in the United States. According to the complaint, Roger had only opened this account on Dec. 14, 2009. All of the call option contracts purchased by Roger were set to expire on Jan. 15, 2010, within weeks of the purchase date, according to the complaint. The complaint further alleges that, on Dec. 21, 2009, after the acquisition was announced, Condroyer and Roger sold all of their call option contracts, generating illicit profits of approximately $2.8 million for Condroyer and $1.4 million for Roger. Since the accounts were opened, the complaint alleges that there have been no transactions in either account other than the purchase and sale of Chattem call options.
The Commission alleges that Condroyer and Roger violated of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties. [SEC v. Nicolas Patrick Benoit Condroyer and Gilles Robert Roger, Civil Action No. 1:09-cv-3600 (N.D. GA)] (LR-21347)
Commission Sues Houston Residents In Connection with $5.5 Million Oil-and-Gas Fraud
On Dec. 22, 2009, the Commission filed a civil action against Gregory S. Shindler, Bradley M. James, Rockwell Energy of Texas, LLC (RET), and Rockwell Energy Management, LLC (REM), alleging that they violated the antifraud and registration provisions of the federal securities laws. According to the complaint, from March 2008 through February 2009, Shindler, through funds using variations of the name "Rockwell Energy," created and managed two unregistered and fraudulent oil-and-gas offerings. James co-created the second Rockwell Energy fund and co-managed it for a period of several months. Together, defendants raised $5.5 million from 139 investors based upon a multitude of misrepresentations.
In particular, the complaint alleges that Shindler and James, both of Texas, made material misrepresentations and omitted material facts concerning the profitability of the funds, the nature and extent of the investments that the funds had made or intended to make, and the use of investor proceeds. Among other misrepresentations, the offering materials claimed that the funds had existing and prospective investments in oil-and-gas properties, and that investors would immediately start earning and receiving returns of 1.5% per month from production revenue.
In reality, according to the complaint, the first fund owned no oil-and-gas properties when it began accepting investors, and the second fund has never acquired any producing oil-and-gas properties. Moreover, even though the oil-and-gas properties that the funds have invested in never generated sufficient production revenue to cover distribution payments to investors at the 1.5% monthly rate, Shindler made the monthly income distributions at the targeted rate for a number of months. To do so, he relied in part on "investment" income other than production revenue, including payments from sham transactions designed specifically to artificially create the promised returns. The complaint alleges that Shindler also converted some investor funds to personal and other improper uses, and some of the "returns" he paid investors were made from the principal payments of other investors (i.e., Ponzi payments).
The complaint alleges that, as a result of their misconduct, Shindler, James, RET, and REM violated Sections 5(a), 5(c), and 17(a) of Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 thereunder. The Commission also charges salesmen W. Todd Smith, Stuart E. Rawitt, and Brian W. Walsh, with violating Sections 5(a) and 5(c) of the Securities Act, and Section 15(a) of the Exchange Act, based on their roles in selling unregistered Rockwell securities and selling securities without a license. The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against all defendants. [SEC v. Rockwell Energy of Texas, LLC, Rockwell Energy Management, LLC, Gregory S. Shindler, Bradley M. James, W. Todd Smith, Stuart E. Rawitt, and Brian W. Walsh, Civil Action No. 4:09-cv-4080 (U.S.D.C./S.D. Tex., Houston Division)] (LR-21348)
Court Enters Final Judgment by Consent Against Defendant Clifford A. Lewis
The Securities and Exchange Commission announced today that on Dec. 22, 2009, the United States District Court for the District of Arizona entered a final judgment by consent against Clifford A. Lewis of Huntsville, Alabama, a defendant in a fraud action filed by the Commission in August 2008. The Commission alleges in its complaint that Lewis and others participated in a scheme to manipulate the price and trading volume of Alliance Transcription Services, Inc. (formerly Strategy X, Inc.) stock and to issue and sell Alliance's common stock in an unregistered distribution. In the consent judgment, the Court permanently enjoined Lewis from violating the antifraud provisions of the federal securities laws and imposed officer and director and penny stock bars against him.
The Commission filed its action against Lewis, the former president and chief executive officer of Alliance, and six other defendants on Aug. 8, 2008. The Commission's complaint alleges that Lewis and others participated in a scheme in which, among other things, Alliance issued press releases that made false and misleading claims about its contracts and revenues and published them on its website and through business newswire services.
Without admitting or denying the allegations in the Commission's complaint, Lewis consented to a final judgment entered by the Court. The final judgment enjoins Lewis from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, prohibits him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act, and permanently bars him from participating in any penny stock offering. The judgment does not impose a civil monetary penalty based on Lewis's financial condition.
The Commission previously obtained a default judgment against Alliance and settled its action against Arizona attorney William D. O'Neal. The action remains pending against the remaining four defendants, Raymond C. Dabney of Vancouver, British Columbia, Richard A. Dabney of Torrance, California, Charles J. Smith of Reno, Nevada, and Philip M. Young of Scottsdale, Arizona.
For further information, please see Litigation Release Numbers 20791 (Oct. 24, 2008) [default judgment against Alliance]; 20676 (Aug. 8, 2008) [civil injunctive action filed and judgment by consent against William D. O'Neal]; and 19870 (Oct. 16, 2006) [subpoena enforcement action filed]; and Exchange Act Release Number 56610 (Oct. 4, 2007) [order suspending trading in Alliance securities]. [SEC v. Alliance Transcription Services, Inc., et al., CV-08-01464-PHX-NVW (District of Arizona] (LR-21349)
SEC Charges Former President of World Health Alternatives, Inc. and Three Others for Conducting Financial Fraud
The Commission announced that, on Dec. 23, 2009, it filed a civil action in the United States District Court for the Western District of Pennsylvania against Richard E. McDonald of Leechburg, Pennsylvania, former President, CEO and Chairman of World Health Alternatives, Inc. (World Health), a now defunct medical staffing company previously located in Pittsburgh, Pennsylvania. The Commission's complaint alleges that McDonald was the principal architect of a wide-ranging financial fraud at World Health by which McDonald misappropriated approximately $6.4 million for his personal benefit. Also named as defendants are Deanna Seruga of Pittsburgh, the company's former controller and a CPA, Marc D. Roup, of Murrysville, Pennsylvania and Miami, Florida, a former CEO of World Health, and Joseph I. Emas, of Surfside, Florida, World Health's former outside securities counsel. The complaint charges the defendants with violations of the antifraud and other provisions of the federal securities laws. Without admitting or denying the Commission's allegations, all four defendants have agreed to settle the matter. The settlements are pending final approval by the court.
The complaint alleges that, from at least May 2003 through August 2005, McDonald, along with Seruga and Roup, engaged in a wide array of fraudulent and improper conduct. A key aspect of the fraud involved the manipulation of World Health's accounting entries. McDonald and Seruga repeatedly falsified accounting entries in World Health's financial books and records, understating expenses and liabilities. This made the Company appear more financially sound, and masked McDonald's misappropriation of funds. During the relevant period, every annual and quarterly report that World Health filed with the Commission contained false financial statements.
The complaint further alleges that McDonald caused World Health to make misrepresentations and omissions in documents publicly filed with the Commission concerning, among other things, the Company's financial performance, the registration of millions of shares of World Health stock, certain material financial transactions, the number of shares authorized and outstanding, and the Company's business plan. McDonald signed and certified these filings, knowing they contained misstatements.
The complaint further alleges that, during his tenure as CEO, Roup also signed and certified false public filings, and did so with no basis to assess the veracity of the information contained therein. McDonald and Roup also failed to properly publicly report their personal sales of World Health stock to the Commission.
As alleged in the complaint, McDonald also improperly attempted to issue and register for immediate sale millions of shares of World Health stock by misusing a Form S-8 registration statement. In addition, McDonald also caused World Health to file with the Commission two false post-effective amendments drafted by Emas, World Health's outside securities counsel.
McDonald has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b), 13(b)(5) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The order will also bar McDonald from serving as an officer or director of a public reporting company. The order finds McDonald liable for disgorgement of approximately $6.4 million plus prejudgment interest. Based on sworn financial statements and other documents and information submitted to the Commission, payment of disgorgement and prejudgment interest will be waived and civil penalties not imposed.
Roup has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b) and 16(a) of the Exchange Act, and Rules 10b-5 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The order will also bar Roup from serving as an officer or director of a public reporting company. Roup will also be ordered to pay disgorgement and prejudgment interest of $5,324,187, and a $120,000 civil penalty. Roup consented to transfer his assets to a court-appointed receiver to satisfy payment of these amounts.
Seruga has consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and13b2-2 thereunder, and aiding and abetting violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. The order finds Seruga liable for disgorgement of $383,662 plus prejudgment interest. Based on sworn financial statements and other documents and information submitted to the Commission, payment of disgorgement and prejudgment interest will be waived and civil penalties not imposed. In addition, Seruga agreed to settle a related administrative proceeding by consenting to the entry of an order suspending her from appearing or practicing before the Commission as an accountant.
Emas has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) of the Securities Act. Emas will also be ordered to pay disgorgement and prejudgment interest of $163,083, and a $15,000 civil penalty. In addition, Emas agreed to settle a related administrative proceeding by consenting to the entry of an order suspending him from appearing or practicing before the Commission as an attorney for two years. [SEC v. Richard E. McDonald, et al., Case No. 09-CV-01685 (W.D. Pa.)] (LR-21350; AAE Rel. 3089)
STANDARDS SETTING BOARDS
2010 PCAOB Budget and Accounting Support Fee
The Commission issued an order approving the budget and annual accounting support fee of the Public Company Accounting Oversight Board under Section 109 of the Sarbanes-Oxley Act of 2002. (Rels. 33-9099; 34-61212)
Immediate Effectiveness of Proposed Rule ChangeA proposed rule change (SR-NYSE-2009-127) filed by New York Stock Exchange extending the pilot program that offers liquidity takers a reduced transaction fee structure for certain bond trades executed on the NYSE Bonds system and retiring the liquidity provider credit pilot program has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 21. (Rel. 34-61201)
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