SEC Enforcement: Morgan Keegan Fund Directors Settle Over Botched Valuations

The SEC announced that it has charged the cosmetics company Revlon with federal securities law violations for misleading investors during a transaction to go private.

Without admitting or denying the SEC’s findings, Revlon agreed to settle the charges and pay a penalty of $850,000.

The agency’s investigation found that the company ring-fenced from its independent board members information on a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, MacAndrews and Forbes (M&F). In 2009, M&F asked Revlon to offer minority shareholders the option to exchange their common stock shares on a one-for-one basis for preferred shares with certain financial characteristics. Revlon would then provide those exchanged common shares to M&F to pay down its debt.

When Revlon’s 401(k) trustee said that the transaction could only be done with 401(k) stockholders if a third-party advisor judged that the preferred shares were at least equal to the fair market value of the common shares, the deal was threatened—since the third-party advisor found the preferred shares were worth less.

So Revlon took a number of actions to ensure that both the trustee’s insistence that the preferred shares be at least equal to common stock FMV and its determination that the shares were not in fact equal did not reach shareholders involved in the transaction. As a result, shareholders were presented with materially misleading information regarding the proposed transaction, and the board was prevented from considering whether the stock value was adequate during its deliberation on whether to approve the transaction.

Dallas Medical Insurance Company Execs Charged in Ponzi Scheme

Duncan MacDonald and Gloria Solomon, two executives at a Dallas-based medical insurance company, were charged by the SEC with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The two solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. Actually, however, GCA was a startup with zero operating history and only marginally more revenue. In 2008, according to the SEC, MacDonald set out to start an insurance company that would market medical insurance to large groups. Despite looking for months for a single investor to fund the company’s initial capital needs, he failed—but that didn’t stop him and Solomon from spending money on the business that they didn’t have. They hired employees, heavily marketed the program, and secured a sponsorship agreement with a large national membership group. MacDonald was GCA’s president and chairman, and Solomon was chief administrative officer.

When it was obvious that the search for a single investor to fund the venture was fruitless, MacDonald instead looked for smaller fish to finance the company. He pitched it to both investors and brokers as a going concern with more than 100,000 premium-paying members, and went so far as to claim that a Chinese hedge fund had bought a portion of GCA’s revenue stream from paying members. There was no real revenue stream, nor was there a Chinese hedge fund.

MacDonald and Solomon concocted both monthly enrollment numbers and a “Monthly Overage Disbursement Statement” that purported to show monthly member enrollments and cancellations. It was formatted to look like the report from a database, but it was actually a manually populated Excel spreadsheet that Solomon updated.

These phony documents were used to entice prospective investors and also to make payouts to those who had already signed on out of the funds from later investors. Of course, eventually the well ran dry; MacDonald and Solomon each took around $1 million of the $10 million in investor funds they’d acquired, and spent the remaining investor funds on various business-related expenses until GCA’s accounts were left with a negative balance.

Then they concocted a chain of excuses for the lack of additional payments to investors, while MacDonald tried to find a fresh crop of victims. He failed again.

The SEC seeks various relief for investors including disgorgement of ill-gotten gains with prejudgment interest, financial penalties and permanent injunctions. The U.S. Attorney’s Office for the Northern District of Texas has filed criminal charges against MacDonald and Solomon.

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