Among recent enforcement actions by the SEC were charges against an offshore business and two individuals for a scheme to hide ownership of microcap stocks; against 34 insiders and companies for insider reporting violations; against a biotech company and former executive for fraud; and against a bank holding company for improper accounting and disclosure of past-due loans.
SEC Charges Offshore Business, Two Individuals on Stock Scheme
Belize residents Robert Bandfield and Andrew Godfrey and the offshore business they managed, IPC Corporate Services, were charged by the SEC with helping clients evade U.S. securities laws by hiding ownership of certain microcap stocks as part of a larger money laundering scheme alleged by criminal authorities.
Bandfield, Godfrey and IPC helped clients who own significant amounts of thinly traded microcap stocks avoid reporting requirements. They created associated companies through which the clients could hide their ownership and spread the shares so that none of them contained more than 5% of the stock of any particular microcap issuer.
Although the two stressed to clients the importance of keeping that ownership level below 5% for each entity, since Bandfield and IPC owned the entities that were used to hide stock ownership, that made them beneficial owners of all the clients’ shares of the microcap stocks. That meant that Bandfield and IPC were required to report their more than 5% ownership. They did no such thing.
Bandfield and IPC are charged with violations of the filing requirements, and Godfrey is charged with aiding and abetting those violations. The SEC seeks monetary relief and permanent injunctions against all three.
In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York has announced criminal charges against Bandfield and Godfrey for violations of other federal laws extending beyond the SEC’s purview.
34 Insiders, Companies Charged by SEC With Reporting Violations
The SEC has filed charges against 28 officers, directors, or major shareholders for failing to promptly report information about their holdings and transactions in company stock. Six publicly-traded companies were also charged, for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.
In an enforcement initiative that focuses on obligatory Form 4 and Schedules 13D and 13G disclosure filings, which provide other investors with information to determine whether insiders’ actions could indicate a company’s future prospects, the SEC used quantitative data sources and ranking algorithms to determine that this group of insiders repeatedly filed late, with some filings delayed not just weeks or months, but years.
Thirty-three of the 34 charged have agreed to settle the charges and pay financial penalties totaling $2.6 million. The exception is Ligang Wang, vice president of China Shen Zhou Mining & Resources, who is alleged to have failed to file, on time or at all, reports of his sales of more than 165,000 shares of company stock with a market value of more than $1 million. He will face an administrative proceeding before an administrative law judge.
The other 12 officers or directors of public companies charged were: Paul Arling, CEO and chairman of the board of directors of Universal Electronics Inc.; Paul Cronson, a director of eMagin Corporation; Bradley Forsyth, CFO and chief accounting officer of Willis Lease Finance Corporation; Stephen Gans, a director and beneficial owner of Digital Ally Inc.; Sidney Hooper, CFO and principal accounting officer of Sutron Corporation; Edgar Levin, a director of Dorman Products Inc.; Raul McQuivey, CEO, chairman of the board of directors, and a beneficial owner of Sutron Corporation; Donald Nunemaker, president of Willis Lease Finance Corporation; Thomas Nord, general counsel and senior vice president of Willis Lease Finance Corporation; Alan Schnaid, principal accounting officer and corporate controller of Starwood Hotels & Resorts Worldwide; Justin Tang, a director of ChinaCast Education Corporation; and Charles Willis IV, CEO, chairman of the board of directors, and a beneficial owner of Willis Lease Finance Corporation.
Five were beneficial owners of publicly traded companies: Stephen Adams, a beneficial owner of Solar Senior Capital Ltd. Shares; Thomas Edelman, a beneficial owner of BioFuel Energy Corporation shares; Neil Gagnon, a beneficial owner of General Finance Corporation and NTS Inc. shares; Peter Kellogg, a beneficial owner of Mercer International Inc., TRC Companies Inc., Evans & Sutherland Computer Corp., and MFC Industrial Ltd. Shares; and Gregory Shepard, a beneficial owner of Donegal Group Inc.’s Class A common stock.
The 10 investment firms named in connection with beneficial ownership were: Brown Brothers Harriman & Co.; Del Mar Asset Management LP; Lazarus Management Company LLC; P.A.W. Capital Partners LP; Ridgeback Capital Management LP; RIMA Senvest Management LLC; the Royal Bank of Scotland Group plc; Sankaty Advisors LLC; Security Capital Research & Management; and Trinad Management LLC.
The six publicly traded companies were: Jones Lang LaSalle Incorporated; KMG Chemicals Inc.; Starwood Hotel & Resorts Worldwide Inc.; Tel-Instrument Electronics Corp.; Universal Electronics Inc.; and Willis Lease Finance Corporation.
Biotech Firm, Former Exec Charged by SEC With Fraud
A Massachusetts-based biotech company and its former CEO have been charged by the SEC with defrauding investors by failing to report his sales of company stock.
According to the agency, after Gary Rabin became CEO, CFO, and chairman of Advanced Cell Technology (ACT) in 2010, he repeatedly failed to report his sales of company stock for the next few years. Subsequently, ACT’s annual reports and proxy statements during that period were inaccurate because they failed to report that Rabin was not complying with his obligation to disclose his substantial sales of ACT stock.
The SEC said that Rabin’s sales would have been viewed by a reasonable investor as significantly altering the total mix of available information about ACT, given his executive position as well as the size and frequency of his sales of the company’s stock. But Rabin didn’t report any of his 27 sales of $1.5 million worth of ACT stock from 2010 to 2012 until May of 2013.
Both Rabin and the firm agreed to settle the SEC’s charges. Rabin, who lives in Santa Monica, California, and left the company earlier this year, agreed to a $175,000 penalty. ACT agreed to pay a $375,000 penalty and retain an independent consultant to conduct a review of its Section 16(a) reporting and compliance procedures. They neither admitted nor denied the SEC’s findings.
SEC Charges Bank Holding Company With Accounting, Disclosure Fraud
The SEC charged Delaware-based Wilmington Trust Company with accounting and disclosure fraud for failing to report the true volume of its loans at least 90 days past due as they substantially increased in number during the financial crisis.
According to the agency, during the real estate market decline in 2009–2010, when its construction loans began to mature without repayment or completion of the underlying project, Wilmington Trust Company did not renew, extend, or take other appropriate action for 90 days or more on a material amount of its matured loans. Instead of disclosing these accruing loans properly, Wilmington Trust simply excluded the matured loans from its public financial reporting.
Wilmington Trust’s disclosures for Q3 and Q4 2009 only included $38.7 million for the former and $30.6 million for the latter in matured loans 90 days or more past due. In actuality, the numbers were short by $338.9 million (Q3) and $330.2 million (Q4).
Wilmington Trust also materially misreported this category of loans in Q1 and Q2 2010. Wilmington Trust also failed to accurately disclose during the second half of 2009 the amount of nonaccruing loans in its portfolio, and materially understated its loan loss provision and allowance for loan losses during this same period.
Wilmington Trust, which was acquired by M&T Bank in May 2011, has agreed to pay $18.5 million in disgorgement and prejudgment interest to settle the SEC’s charges.
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