FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
December 4, 2012
Defendant in SEC Action Pleads Guilty to Criminal Charges and is Barred from the Securities Industry
the Securities and Exchange Commission announced today that Arnett L. Waters of Milton, Massachusetts, a principal of a broker-dealer and investment adviser who is a defendant in a securities fraud action filed by the Commission in May 2012, has pleaded guilty to criminal charges brought by the U.S. Attorney for the District of Massachusetts and has been barred from the securities industry by the Commission. Waters' guilty plea to securities fraud and other charges occurred on November 29, 2012, and follows an earlier guilty plea by Waters in October 2012 to criminal contempt charges for violating a preliminary injunction order obtained by the Commission in its case. The Commission's Order barring Waters from the securities industry was issued on December 3, 2012.
The Commission filed an emergency enforcement action against Waters on May 1, 2012, alleging that he and two companies under his control, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, defrauded investors from at least 2009-2012 by, among other things, misappropriating investor funds and spending it on personal expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze Waters' assets and required him to provide an accounting of all his assets to the Commission. On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Court ordered him detained pending sentencing.
The Commission's Order barring Waters from the securities industry was issued on December 3, 2012, and is based on his October 2, 2012 guilty plea to criminal contempt charges. The Order bars Waters from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
The U.S. Attorney for the District of Massachusetts also charged Waters with a broader array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice. The counts of the criminal information to which Waters pleaded guilty alleged that, from at least 2007 through 2012, he used fictitious investment-related partnerships to draw in investors, misappropriate their investment money, and spend the vast majority of it on personal and business expenses and debts. Waters raised at least $839,000 from at least thirteen investors, including $500,000 from his church in March 2012. Waters also pleaded guilty to engaging in a criminal scheme to defraud clients of his rare coin business. Under this scheme, Waters defrauded coin customers out of as much as $7.8 million by selling coins at prices inflated, on average, by 600% and by inducing coin purchasers to return coins to him, on the false representation that he would sell those coins on the customers' behalf, when, in fact, he sold most or all of the coins and kept the proceeds for himself. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to allegations that he made multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. Waters is charged with obstruction of justice related to this conduct.
Waters has been detained since October 2, 2012, when the Court ordered him held pending sentencing in the criminal contempt action. He is currently scheduled to be sentenced in April 2013 in connection with the guilty pleas in the two separate criminal actions against him.
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.
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