FROM: U.S. SECURITIES AND EXCHANGE COMMISSSION
Attorney Virginia K. Sourlis Found Liable for Aiding and Abetting Securities Fraud by Issuing False Legal Opinion in Connection with Illegal Stock Offering
On November 20, 2012, the Federal District Court in SEC v. Greenstone Holdings, Inc., et al., 10 civ. 1302 (S.D.N.Y.), granted the SEC partial summary judgment against attorney Virginia K. Sourlis, holding Sourlis liable for aiding and abetting securities fraud by issuing a false legal opinion that certain of her co-defendants used to obtain illegally more than six million shares of unrestricted stock of Greenstone Holdings, Inc.
According to the SEC's summary judgment motion, in early 2006, Sourlis intentionally authored a materially false and misleading legal opinion, which Greenstone used to illegally issue over six million shares of stock in unregistered transactions. Among other things, Sourlis falsely described promissory notes, note holders, and communications with those holders, none of which actually existed. The SEC asserted that, contrary to Sourlis' fraudulent opinion letter, the stock issuance did not qualify for an exemption from registration under the federal securities laws.
In finding Sourlis liable for fraud, at the November 16, 2012 hearing on the SEC's summary judgment motion, the District Court stated that Sourlis' opinion "represents that Ms. Sourlis spoke to note-holders which did not exist . . . And several other facts for which there was no evidentiary support." The Court further stated that Sourlis' opinion "represented as fact matters that were contrary to fact, and to me the most egregious representation was the representation that the writer of the letter had spoken to the original note-holders which is repeated in the letter."
The Court held Sourlis liable for aiding and abetting securities fraud under Section 10(b) of the Securities Exchange Act of 1934 but denied the SEC summary judgment against Sourlis for primary liability under Section 10(b). The Court also reserved decision on the SEC's non-fraud claim that Sourlis violated Section 5 of the Securities Act of 1933. On the basis of the Court's November 20 liability holding, the SEC intends to seek from the Court against Sourlis injunctive relief, financial penalties, disgorgement, and a penny stock bar.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission today began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.
The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:
BDO China Dahua Co. Ltd
Deloitte Touche Tohmatsu Certified Public Accountants Ltd
Ernst & Young Hua Ming LLP
KPMG Huazhen (Special General Partnership)
PricewaterhouseCoopers Zhong Tian CPAs Limited
According to the SEC’s order instituting the proceedings, SEC investigators have been making efforts for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the U.S. The audit firms have refused to cooperate in the investigations.
"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."
An administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms. The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order.
The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms. Earlier this year, the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients. That proceeding is ongoing. The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited. In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.
"U.S. investors should be able to rely on the quality of audited financial statements," said Kara Brockmeyer, co-head of the SEC’s Cross Border Working Group. "Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud."
This enforcement action was coordinated by the Cross Border Working Group and involved investigative teams in SEC offices in Washington D.C., Boston, New York, Fort Worth, and Los Angeles.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 30, 2012 — The Securities and Exchange Commission today charged a Connecticut-based business executive with insider trading ahead of the sale of Patriot Capital Funding Group based on nonpublic information he learned at the helm of a firm involved in the bidding process.
The SEC alleges that I. Joseph Massoud, who founded investment advisory firm Compass Group Management, gained access to nonpublic information contained in an online "dataroom" where bidding companies could learn more about Patriot Capital’s financial condition. For access to the data, Compass Group had to enter into a confidentiality agreement that prohibited its employees from buying Patriot Capital stock. Nonetheless, Massoud purchased shares soon after Compass Group gained access to the confidential information, and he bought even more stock after he learned that Compass Group’s bid was what he described as "waaaaay off" compared to bids from other companies. Patriot Capital’s share price more than doubled after a merger was publicly announced, and Massoud realized more than $676,000 in illegal profits.
Massoud, who lives in Westport, Conn., agreed to settle the SEC’s charges by paying more than $1.4 million. He also will be barred from working in the securities industry or serving as an officer or director of a public company. The settlement is subject to court approval.
"With full knowledge of a confidentiality agreement that prohibited him from buying Patriot Capital stock, Massoud abused his access to nonpublic data for what turned out to be a short-term personal gain," said John T. Dugan, Associate Director of the SEC’s Boston Regional Office. "As a result of the SEC’s action, Massoud must pay back double what he made in the scheme and he can never work in the securities industry again."
According to the SEC’s complaint filed in federal court in Connecticut, Patriot Capital initiated a nonpublic bidding process in 2009 to entertain proposals for strategic investments and the possible sale of the company. In May 2009, Massoud directed Compass Group to execute a confidentiality agreement with Patriot Capital so it could participate in that process. After Compass Group was provided access to the online dataroom as part of the bidding process, a Compass Group analyst accessed the dataroom and provided various reports containing material, nonpublic information to Massoud.
The SEC alleges that Massoud also learned nonpublic information about the value of bids received by Patriot Capital from other parties involved in the bidding process. On July 7, 2009, Massoud e-mailed others working on the Patriot Capital transaction at Compass Group and indicated that he had just talked with Patriot Capital’s CEO. He wrote that Compass Group was "waaaaay off" on its bid to acquire Patriot Capital, which according to the CEO had received several acquisition bids that were much higher than Compass Group’s offer. Massoud also learned from the CEO that Compass Group would have to increase its bid to match those higher proposals if it wanted to be considered.
According to the SEC’s complaint, Massoud bought 322,216 shares of Patriot Capital stock in transactions spread across 15 different trading days from May to July. Massoud purchased more than half of those shares after July 7 when Patriot Capital’s CEO confidentially told him about other higher bids to acquire Patriot Capital. On Aug. 3, 2009, Patriot Capital publicly announced a merger with Prospect Capital Corporation. On August 25, after Patriot Capital had been acquired and its stock price had increased significantly, Massoud sold all of his Patriot Capital stock.
The SEC alleges that Massoud violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 and that his profits constitute ill-gotten gains. Massoud agreed to pay disgorgement of $676,013, prejudgment interest of $80,785, and a penalty of $676,013. He agreed to be enjoined from violating Section 10(b) and Rule 10b-5 in the future, and he will be barred from serving as a public company officer or director and from being associated with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or national recognized statistical rating organization. He also will be barred from participating in any penny stock offering.
F
ROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today announced that, on November 29, 2012, the Commission filed fraud and other related charges against China North East Petroleum Holdings (CNEP); its CEO, President and former Chairman of the Board of Directors, Wang Hongjun (Wang); its founder, former director and Wang's mother, Ju Guizhi (Ju); and its Vice President of Corporate Finance and Secretary, Jiang Chao. The Commission also named Wang's wife, Sun Jishuang (Sun), and Jiang Chao's father, Jiang Mingfu, as Relief Defendants to recover company monies that they improperly received.
The Commission alleges that CNEP, Wang, Ju and Jiang Chao diverted offering proceeds to the personal accounts of corporate insiders and their immediate family members, and also engaged in fraudulent conduct in connection with at least 176 undisclosed transactions between the company and its insiders or their immediate family members, otherwise known as related-party transactions.
The Commission alleges that, in connection with its two public stock offerings in late 2009, CNEP falsely stated to investors in a registration statement and other public filings signed by Wang that the offering proceeds would be used to fund future business expansion and for general working capital purposes. Instead, consistent with a pre-existing pattern of engaging in undisclosed, related-party transactions, Jiang Chao then diverted over $900,000 of offering proceeds to his father, Jiang Mingfu, and at the direction of Ju, diverted at least $6 million dollars to her and Sun, who is her daughter-in-law and Wang's wife.
The Commission further alleges that during 2009, CNEP, Wang and Ju engaged in at least 176 undisclosed, related-party transactions. This fraudulent conduct involved approximately $28 million in transactions from CNEP to Wang or Ju; approximately $11 million purportedly loaned to CNEP or paid to third parties on behalf of CNEP by Wang or Ju; and $20 million of unusual post-year-end adjustments that purported to eliminate the remaining debts owed by Wang and Ju to CNEP. Together, these transactions totaled approximately $59 million of related-party activity during 2009. Neither the magnitude nor the volume of these related-party transactions has been fully disclosed to the investing public.
The Commission alleges that CNEP, Wang, Ju and Jiang Chao violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges violations of reporting, recordkeeping and internal controls provisions of the securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Securities Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 13b2-1. The Commission is seeking: (i) permanent injunctive relief to prevent future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from each Defendant; (ii) officer and director bars against Wang, Ju and Jiang Chao; and (iii) disgorgement from the Relief Defendants, Sun and Jiang Mingfu, of improperly received funds.
FROM: U.S. DEPARTMENT OF JUSTICE
Friday, November 30, 2012
Former Director of Accounting and Outside Auditor of American Mortgage Specialists Inc. Plead Guilty to Roles in Fraud Against BNC National Bank
The former director of accounting and the former outside auditor of Arizona-based residential mortgage loan originator American Mortgage Specialists Inc. (AMS) pleaded guilty in Arizona to conspiracy to defraud BNC National Bank and obstruction of justice, respectively, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney Timothy Q. Purdon of the District of North Dakota; Christy Romero, Special Inspector General for the Troubled Asset Relief Program (SIGTARP); and Steve A. Linick, Inspector General of the Federal Housing Finance Agency Office of Inspector General (FHFA-OIG) announced today.
Lauretta Horton, 45, and David Kaufman, 69, both residents of Arizona, pleaded guilty yesterday before U.S. District Judge Daniel L. Hovland of the District of North Dakota, who took the pleas in Arizona federal court. Horton and Kaufman were charged in separate criminal informations unsealed on Oct. 2, 2012, for their roles in the fraud scheme against BNC.
"While the nation was reeling from a financial downturn, Lauetta Horton conspired with AMS executives to deceive BNC Bank about AMS’s true financial stability, and AMS auditor David Kaufman lied to federal investigators to impede their investigation," said Assistant Attorney General Breuer. "Horton and Kaufman’s guilty pleas reflect our continued vigilance in investigating and punishing criminal conduct relating to the financial crisis."
"Banks in North Dakota were not immune from illegal conduct related to the mortgage crisis that impacted banks all across the country," said U.S. Attorney Purdon. "These guilty pleas are the result of close collaboration with our federal investigative partners and the Justice Department’s Criminal Division and should send the message that the Department of Justice is committed to prosecuting cases such as these wherever they might arise."
"As the controller and director of accounting of mortgage originator AMS, Horton sent to TARP-recipient BNC National Bank false financial statements she had prepared so that BNC would continue to fund AMS," said Special Inspector General Romero. "In a cover-up and an attempt to impede the federal grand jury investigation, AMS’s external auditor Kaufman lied to SIGTARP agents about his telling an AMS executive that he had changed the financial statements so that BNC would not discover the truth. Kaufman is the third person convicted of lying to SIGTARP agents, which shows that SIGTARP will aggressively pursue those who fail to tell the truth and impede our investigations."
"This is a significant case because it holds accountable an individual who participated in a scheme to defraud a member bank of the Federal Home Loan Bank System, and another individual who lied to federal investigators," said Inspector General Linick. "This case is a reminder that there are consequences for giving investigators false information and manipulating numbers."
AMS was in the business of originating residential real estate mortgage loans to borrowers and then selling the loans to institutional investors. In 2006, AMS entered into a loan participation agreement with BNC whereby BNC provided funding for the loans issued by AMS. According to court documents, Horton, the director of accounting at AMS, conspired from February 2009 to April 2010 to defraud BNC by making false representations regarding the financial well-being of AMS in order for AMS to continue to obtain funding from BNC. Specifically, Horton admitted to inflating asset items and altering financial information in the AMS balance sheet provided to BNC to falsely reflect that AMS had substantial liquid assets when, in fact, it did not.
According to court documents, Kaufman, a certified public accountant and the outside auditor of AMS’ annual financial statements, lied to federal agents during the criminal investigation and obstructed the grand jury investigation. Specifically, Kaufman admitted denying to agents that he had a conversation with an AMS executive in which Kaufman explained to the AMS executive that Kaufman had combined two expenses on AMS’s financial statements in order to conceal the true nature and extent of AMS’s financial condition from BNC.
Although BNC’s holding company had received approximately $20 million under the TARP and had injected approximately $17 million of the TARP funds into BNC, BNC incurred losses exceeding the millions received from TARP. BNC then did not make its required TARP dividends to the Department of Treasury for nearly two years.
At sentencing, scheduled for May 6, 2013, Kaufman and Horton face a maximum penalty of 10 years and five years in prison, respectively.
The investigation was conducted by agents assigned to the Offices of the Inspector General of SIGTARP and of FHFA. The case is being prosecuted by Trial Attorney Robert A. Zink and Senior Litigation Counsel Jack B. Patrick of the Criminal Division’s Fraud Section and by Assistant U.S. Attorney Clare Hochhalter of the District of North Dakota, with the assistance of Trial Attorney Jeannette Gunderson of the Criminal Division’s Asset Forfeiture and Money Laundering Section.
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