SEC CHARGES BROKERAGE FIRM WITH FAULTY UNDERWRITING REGARDING REVIEWING MATERIAL TO PREVENT FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23222 / March 27, 2015

Securities and Exchange Commission v. Macquarie Capital (USA) Inc. et al., Civil Action No. 15-CV-02304

SEC Charges New York-Based Brokerage Firm with Faulty Underwriting of Public Offering by China-Based Company

The Securities and Exchange Commission today announced charges against a New York-based brokerage firm responsible for underwriting a public offering despite obtaining a due diligence report indicating that the China-based company's offering materials contained false information.

Macquarie Capital (USA) Inc., a wholly owned subsidiary of global financial services firm Macquarie Group Limited, has agreed to settle the SEC's charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal. The SEC previously charged the Puda Coal executives behind the offering fraud at the company, which is no longer in business.

The SEC also charged former Macquarie Capital managing director Aaron Black and former investment banker William Fang for failing to exercise appropriate care in their due diligence review. Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges.

According to the SEC's complaint filed in federal court in Manhattan, Macquarie Capital was the lead underwriter on a secondary public stock offering in 2010 by Puda Coal, which traded on the New York Stock Exchange at the time and purported to own a coal company in the People’s Republic of China (PRC). In the offering documents, Puda Coal falsely told investors that it held a 90-percent ownership stake in the Chinese coal company. Macquarie Capital repeated those statements in its marketing materials for the offering despite obtaining a report from Kroll Associates showing that Puda Coal did not own any part of the coal company. According to corporate registry filings in the PRC that Kroll accessed in its due diligence review, Puda Coal's chairman had transferred ownership of the coal company to himself and then sold nearly half of his interest to the largest state-owned investment firm in the PRC. As a result, Puda Coal no longer had any ownership stake or source of revenue.

According to the SEC's complaint, Kroll provided its report to Fang, who read it but failed to act on the information revealing that Puda Coal no longer owned the coal company. Instead, Fang circulated the report to other members of the Puda Coal deal team and stated in the e-mail that "no red flags were identified." Black, who served as one of the transaction directors on the Puda Coal deal, received the report from Fang and read portions stating that Puda Coal's chairman owned 50 percent of the coal company of which Puda Coal was claiming to own 90 percent. Black likewise failed to act on the information.

The SEC alleges that Macquarie Capital made a net profit of $4.17 million as lead underwriter on the Puda Coal offering, which sold stock to investors at a price of $12 per share. When reports about Puda Coal's false claim appeared on the Internet based on the same PRC filings that Kroll Associates accessed for its report, Puda Coal's stock price plunged as low as pennies per share.

The SEC's complaint charges Macquarie Capital, Black, and Fang with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. They agreed to settle the charges and accept permanent injunctions without admitting or denying the allegations. The settlement is subject to court approval. In addition to the monetary penalties, Black has agreed to be barred from supervisory positions in the securities industry and Fang has agreed to be barred from the securities industry, both for at least five years.

MAN RECEIVES LIFETIME BAN FROM COMMODITIES INDUSTRY FOR ROLE IN COMMODITY POOL FRAUD

FROM:  COMMODITY FUTURES TRADING COMMISSION 

March 27, 2015

Federal Court in South Carolina Imposes Lifetime Ban from Commodities Industry on Robert Stanley Harrison

The CFTC Charged Harrison with Commodity Pool Fraud in 2013

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Magistrate Judge Jacquelyn D. Austin of the U.S. District Court for the District of South Carolina entered an additional Order of permanent injunction against Robert Stanley Harrison of Easley, South Carolina, permanently banning him from engaging in commodity-related activity.

In entering the Order banning Harrison from the regulated commodities industry, the Court held that “Defendant’s conduct poses a significant threat to the integrity of the markets regulated by the CFTC.”  The Order, entered on March 23, 2015, permanently bans Harrison from trading in a broad range of commodity-related markets for himself or others, managing customer accounts, and registering with the CFTC in any capacity.

The Order stems from a CFTC civil enforcement Complaint filed on February 6, 2013 (see CFTC Press Release 6513-13) and a Consent Order of permanent injunction against Harrison entered by the Court on December 19, 2014 (see CFTC Press Release 7093-14).  The December Order found that Harrison, while acting as an unregistered Commodity Pool Operator, fraudulently solicited, issued false statements, and misappropriated funds in connection with the operation of the Investors Choice Advisors commodity pool from June 2011 to February 2013.  This Order required Harrison to pay a $275,000 civil monetary penalty and resolved the case in its entirety, except for the imposition of permanent trading and registration bans.

Harrison Indicted on Criminal Charges and Sentenced to Prison

On May 14, 2013, Harrison was indicted on criminal charges arising from the same fraudulent conduct that was the subject of the CFTC’s action (see United States v. Harrison, 8:13-cr-00354-MGL (D.S.C.)).  Harrison pleaded guilty to these charges and on September 22, 2014, was sentenced to 1 year and 1 day in prison and ordered to pay restitution to victims of his fraud.

The CFTC appreciates the assistance of the Office of the U.S. Attorney for the District of South Carolina and the South Carolina Attorney General’s Office.

CFTC Division of Enforcement staff members responsible for this action are Amanda Burks, Daniel Jordan, Michael Loconte, Erica Bodin, and Rick Glaser.

DAY-TRADER CHARGED FOR ROLE IN MANIPULATION STOCK PRICES TO OBTAIN NASDAQ LISTING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23224 / March 27, 2015

Securities and Exchange Commission v. Michael J. Ling, Civil Action No. 15-cv-02179

SEC Charges Day-Trader with Manipulating Stock Prices in Order to Obtain NASDAQ Listing for Company

The Securities and Exchange Commission today announced charges against a New Jersey-based day-trader who allegedly manipulated the securities of a microcap company in order to drive-up and maintain the company's stock price above the minimum price required for listing on a national exchange. According to the SEC, apart from helping the company get listed on the exchange, the day-trader also profited from his scheme by more than $650,000.

The SEC alleges that Michael J. Ling repeatedly engaged in marking-the-close trades and entered into matched trades in shares of Cyberdefender Corp., a now-defunct computer software company, in order to maintain the price of the microcap company at or above $4.00 per share over the period September 2009 through June 2010. Maintaining a closing bid price at $4.00 per share or higher for 90 consecutive trading days prior to application was a prerequisite for listing on the Nasdaq Capital Market. Marking-the-close is the practice of attempting to influence the closing price of a stock by executing orders at or near the close of the market. A matched trade occurs when an order for the purchase (or sale) of a security is entered with the knowledge that a substantially similar order for the sale (or purchase) of the security has been or will be entered.

According to the SEC's complaint filed in the U.S. District Court for the District of New Jersey, over a period of 144 trading days, Ling traded in Cyberdefender Corp. stock on 127 days, and on 54 of those 127 days, Ling traded in the final fifteen minutes of the trading day. Further, Ling was the last trade of the day, and thus set the closing price, on 48 days. Ling also engaged in 23 matched trades that were coordinated with an acquaintance.

The Commission alleges that Ling profited from his scheme by more than $650,000, mainly by exercising warrants he received at bargain prices. After the manipulation concluded, Cyberdefender's share price slowly fell, leaving unsuspecting shareholders who purchased at elevated prices with a loss.

The SEC's complaint alleges that Ling violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder.

The Commission's investigation has been conducted by William Finkel, and Thomas P. Smith, Jr. of the New York Regional Office, with assistance from Joseph Darragh of the Commission's Microcap Fraud Task Force. The litigation will be led by David Stoelting. The case is being supervised by Sanjay Wadhwa.

SEC.gov | International Cooperation in a New Data-Driven World

SEC.gov | International Cooperation in a New Data-Driven World

Grading the Commission’s Record on Capital Formation: A , D, or Incomplete?

Grading the Commission’s Record on Capital Formation: A , D, or Incomplete?

SEC CHARGES SEVERAL INDIVIDUALS AND COMPANIES WITH FAILING TO REGISTER AS A BROKER-DEALER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

03/26/2015 11:05 AM EDT

The Securities and Exchange Commission today charged nearly two dozen companies and individuals who regularly bought and sold securities on behalf of a suburban Chicago-based trading firm without registering with the SEC as a broker-dealer as required under the federal securities laws.

The broker-dealer registration provisions of the securities laws ensure the protection of customers by requiring firms to undergo periodic inspections by the SEC and maintain books and records for their securities transactions.  An SEC investigation found that Global Fixed Income LLC, which was primarily in the business of purchasing investment grade corporate bonds, entered into agreements with third parties that acted as unregistered broker-dealers on its behalf and bought billions of dollars’ worth of newly issued bonds causing Global Fixed Income’s allocation in the bond offerings to increase.  Because the offerings were often oversubscribed, Global Fixed Income was generally able to sell or “flip” the bonds within a few days for a small profit compared to the dollar value of the trade, and it split profits with the third-party participants.

Global Fixed Income and its owner Charles Perlitz Kempf, who arranged the deals, agreed to settle the SEC’s charges along with 21 third-party participants.  They must collectively pay nearly $5 million in disgorgement of profits plus approximately $1 million in penalties.

“Global Fixed Income essentially hired firms to act as brokers on its behalf and purchase billions of dollars of newly issued bonds to increase profitability in the bond market, yet none of the firms or their employees were registered to legally act as brokers,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s orders instituting settled administrative proceedings, the misconduct occurred from July 2009 to June 2012.  The order finds that Global Fixed Income and Kempf caused violations of Section 15(a)(1) of the Securities Exchange Act of 1934, and Kempf willfully aided and abetted violations of Section 15(a)(1).  The third-party participants committed violations of Section 15(a)(1) and include companies and 12 individuals.

Global Fixed Income, Kempf, and the third-party participants consented to the orders without admitting or denying the findings.  In addition to the disgorgement amounts set forth in the orders, Global Fixed Income agreed to pay a $500,000 penalty, each corporate participant agreed to pay a $50,000 penalty, and each individual participant agreed to pay a $5,000 penalty.  The SEC’s order suspends Kempf from associating with a registered entity or participating in a penny stock offering for 12 months.

The SEC’s investigation was conducted by David Rosen and supervised by Finola H. Manvelian of the Los Angeles Regional Office.