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September 25, 2014 at 11:28 AM
Among recent enforcement actions by the SEC were charges for microcap fraud against a so-called health food company and its CEO; against two Florida-based attorneys for their part in an offering fraud; against a Silicon Valley-based software firm and two former executives for accounting fraud; sanctions against a Scottsdale, Arizona-based software company for inadequate internal accounting controls over its financial reporting; and suspensions in trading for nine penny stocks in its fight against microcap fraud.
“Health Food” Company, CEO Fined by SEC
The SEC filed charges against a Florida-based penny stock company, Heathrow Natural Food & Beverage Inc., and its CEO Michael Pagnano with defrauding investors after it put out phony press releases proclaiming large sales and fantastic revenue projections.
Meanwhile, the purported health food company had never actually manufactured any of the products it was supposed to have sold, nor did it have any of the distribution agreements with major retail chains that it claimed.
At the time, Pagano was busy prompting the illegal, unregistered distribution of billions of shares of company stock to several people or entities, including himself. He profited by more than $150,000 by selling 877 million of his shares into the market, capitalizing on the phony press releases that boosted public demand for Heathrow stock.
Pagano also is charged with insider trading because he sold his shares while in possession of material nonpublic information about the falsehood of the press releases.
The SEC separately charged New Jersey-based transfer agent Registrar and Transfer Co. (R&T) and its CEO Thomas Montrone with violating the registration provisions of the federal securities laws and failing to supervise firm employees who enabled Heathrow’s unregistered distribution of billions of purportedly unrestricted shares of its stock.
An SEC examination revealed that R&T repeatedly failed to detect and address blatant red flags in connection with more than 54 share issuance requests from Pagnano, including the fact that none of them were accompanied by legal opinions pertaining to the shares to be issued.
In every instance, the shareholder for whom the issuance was requested was not the shareholder covered by the attached opinion letter. R&T issued more than a billion shares to Pagnano directly in spite of the firm’s own written policy against honoring requests by company officers to issue unrestricted shares to themselves. R&T even made special accommodations so the firm could keep track of Heathrow’s unusually large and frequent issuance requests, which totaled 5.6 billion shares in 27 months.
Without admitting or denying the findings, R&T agreed to settle the charges and pay disgorgement of $24,265.86 plus prejudgment interest of $3,401.78 and a penalty of $100,000, and Montrone agreed to pay a $25,000 penalty.
Two Attorneys Charged in Offering Fraud
The SEC has charged Jonathan Flom and James Schmidt II, Florida-based attorneys, for their parts in an offering fraud conducted by Cecil Franklin Speight and his firm International Stock Transfer Inc., already charged in the case in July.
Flom and Schmidt were designated to receive wire transfers from investors solicited by cold callers using boiler-room tactics to convince them their investments would yield high rates of return.
Cold callers told investors to wire their money to either Schmidt or Flom in order to purchase purported securities that included fake foreign bond certificates and stock certificates for a publicly traded microcap company with no connection to IST.
Wiring the money to a licensed attorney made the “investment opportunity” look safe, and kept investors from finding out what happened to their money after it went to Flom and Schmidt. The attorneys kept 2% of the money they received from investors, and sent the rest of it on to Speight, who promptly used it for personal expenses or to make Ponzi-like payments. Speight never made any of the investments he’d promised to investors. According to the agency, Schmidt and Flom knowingly participated with Speight in the sale of fraudulent securities. Flom received e-mails from Speight that explicitly discussed the misappropriation of investor funds. Schmidt collaborated with Speight on answers to numerous investors who complained about nonexistent coupon payments they were promised, as well as about the counterfeit appearance of the stock certificates they got and the fact that they couldn’t contact the cold callers who solicited them.
Flom and Schmidt enabled Speight and IST to steal more than $3.3 million from at least 70 investors. Approximately $2.7 million of scheme proceeds flowed through Schmidt’s account and more than $580,000 passed through an account controlled by Flom.
Flom and Schmidt were arrested in parallel criminal actions brought by the U.S. Attorney’s Office for the Eastern District of New York.
Software Company, Former Execs Charged With Fraudulent Accounting
A fraudulent accounting scheme has gotten Silicon Valley-based Saba Software and two of its former executives, vice presidents Patrick Farrell and Sajeev Menon, charged with a fraudulent accounting scheme that falsified time sheets to hit quarterly financial targets. The agency also ordered a “clawback” of $2.5 million from CEO Babak “Bobby” Yazdani, even though he was not charged in the scheme.
According to the agency, Farrell and Menon cooked up the scheme, in which U.S.-based managers directed consultants in India to either falsely record time that they had not yet worked, or purposely fail to record hours worked during certain pay periods to conceal budget overruns from management and finance divisions.
