Among recent enforcement actions by the Securities and Exchange Commission were charges against the city of Allen Park, Michigan, and two former city leaders for fraudulent muni bonds; against a California company for FCPA violations; against two Canadian citizens for penny stock fraud in connection with a Tennessee coal mining company; and sanctions against 10 companies for disclosure failures.
Also, the Department of Labor filed charges against the fiduciaries of a pension plan in Wheeling, West Virginia that sustained more than $7 million in losses.
SEC Charges Michigan City Officials in Movie Studio Bond Fraud
The SEC has charged the city of Allen Park, Michigan, and two former city leaders — former mayor Gary Burtka and former city administrator Eric Waidelich — in connection with a municipal bond offering to support a movie studio project within the city.
According to the agency, offering documents provided to investors during the Detroit suburb’s sale of $31 million in general obligation bonds contained false and misleading statements about the scope and viability of the movie studio project as well as Allen Park’s overall financial condition and its ability to service the bond debt.
The SEC said that Burtka was an active champion of the project, and he was in a position to control the actions of the city and Waidelich with respect to the fraudulent bond issuances. Based on this control, the SEC charged Burtka with liability for violations committed by the city and Waidelich. This is the first time the SEC has charged a municipal official under a federal statute that provides for “control person” liability.
The city began planning the studio project in late 2008, believing it would bring much-needed economic development. The state of Michigan had just enacted legislation providing significant tax credits to film studios conducting business in Michigan.
The original plan included a $146 million facility with eight soundstages led by a Hollywood executive director, and the city initially planned to repay investors with $1.6 million in revenue from leases at the site. Allen Park issued bonds on Nov. 12, 2009, and June 16, 2010, to raise funds to help develop the site.
But by the time the bonds were issued, the plans had deteriorated into building and operating a vocational school instead of a film studio. Not that the offering documents said anything about that, however, and prospective investors were left in the dark about the change — and about the eventual collapse of the project.
Investors were also kept uninformed about the city’s financial woes, and the second set of bonds was issued although the city didn’t have a hope of repaying the debt without income from the now-nonexistent studio project. When the state of Michigan appointed an emergency manager for Allen Park in October 2010, the failed studio venture was cited as a primary reason for the city’s debt-ridden status.
The city and both officials have agreed to settle the SEC’s charges. Burtka has agreed to pay a $10,000 penalty; the city has neither admitted nor denied the charges, but took remedial actions to settle with the agency.
DOL Sues Fiduciaries Over $7 Million in Plan Losses
The Department of Labor has filed suit against the fiduciaries of the Wheeling Corrugating Co. Retirement Security Plan and the Salaried Employees’ Pension Plan of Severstal Wheeling Inc.
According to the agency, the goal is to correct fiduciary breaches by the plans’ investment manager and plan administrator, which caused the plans to sustain losses and lost earnings in excess of $7 million.
The Employee Benefits Security Administration (EBSA) found that from Nov. 3, 2008, through May 19, 2009, the plans’ assets were imprudently invested by the plans’ fiduciaries, including Severstal Wheeling Inc. Retirement Committee — specifically committee members Michael DiClemente and Dennis Halpin — and WPN Corp. and its owner, Ronald LaBow, who had been hired as the plans’ investment manager. The suit also alleges that the retirement committee and its members failed to properly oversee the plans and monitor the actions taken by WPN and LaBow.
The suit seeks to order the defendants to restore to the plans all losses, including interest or lost opportunity costs, caused by their fiduciary misconduct. While the plans have already terminated their relationship with WPN and LaBow, it also seeks to remove the retirement committee as fiduciaries for the plans and appoint an independent fiduciary with authority to manage the plans.
SEC Fines Bio Firm for Bribing Russian, Asian Officials
Bio-Rad Laboratories, a California-based clinical diagnostic and life science research company, was charged by the SEC with violations of the Foreign Corrupt Practices Act (FCPA) when its subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand in order to win business.
It will pay about $45 million in total fines to the SEC and the Justice Department.
According to the agency, Bio-Rad Laboratories lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes that were paid during a five-year period and improperly recorded in books and records as legitimate expenses like commissions, advertising and training fees. The improper payments enabled Bio-Rad to earn $35 million in illicit profits.
In Russia, Bio-Rad made excessive payments that it disguised as commissions to foreign agents with phony Moscow addresses and offshore bank accounts. The agents had no employees and no capacity to perform the purported services for Bio-Rad, and were retained primarily to influence Russia’s Ministry of Health and help the company win bids for government contracts.
Bio-Rad managers repeatedly ignored various red flags indicating that the Russian agents were likely bribing government officials, and they condoned an atmosphere of secrecy. Country managers were allowed to communicate through at least 10 different personal email addresses with aliases, and referred to the commissions with code words such as “bad debts.”
In Vietnam and Thailand, employees of the company used local intermediaries to funnel bribes to foreign officials to get business. Its Singapore subsidiary sold products at a deep discount to Vietnamese distributors, who passed through a portion of it as bribes. Bio-Rad acquired a company in Thailand and failed to uncover a preexisting bribery scheme in which Thai agents received inflated commissions that were partially used for improper payments.
The company agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC, and a $14.35 million criminal fine to the Department of Justice to settle a parallel action. In addition, the company must report its FCPA compliance efforts to the SEC for two years.
SEC Charges Two Canadians in Penny Stock Fraud Case
Bruce Strebinger and Brent Howard Chapman, both Canadian citizens, were charged by the SEC for conducting an international microcap fraud scheme by stockpiling shares in a coal mining company and funding a multimillion-dollar promotional campaign to hype the stock while simultaneously dumping their shares and routing the proceeds through offshore accounts.
According to the agency, Strebinger facilitated a reverse merger between shell company Americas Energy Company-AECo and a private startup company in Knoxville, Tennessee. Strebinger and Chapman each acquired substantial positions of more than 5% of the common stock without publicly disclosing their beneficial ownership stake as required under the federal securities laws.
Then the pair orchestrated an aggressive campaign to promote Americas Energy stock to prospective investors through emails and direct mailings of stock promotion reports that contained false and misleading statements.
As new investors were drawn into the scheme and Americas Energy’s share price was significantly increasing, Strebinger and Chapman were secretly selling their shares through an intricate web of offshore corporations, foreign accounts and financial institutions located in Canada, Nevis, Panama, Switzerland, and the Turks and Caicos Islands. The pair made more than $17 million through their elaborate scheme.
The SEC seeks permanent injunctions, disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, penny stock bars, an accounting, and the repatriation of any stock sales proceeds transferred to any offshore sites.
In addition, the SEC has named Strebinger’s wife as a relief defendant in its complaint for the purposes of seeking disgorgement of ill-gotten gains from the scheme that may be located in her accounts. Muskateer Investments, a Nevis-based entity beneficially owned by Strebinger, also is listed as a relief defendant along with a company beneficially owned by Strebinger’s wife called Furla Blue SpA and a company beneficially owned by Chapman called Lance Investments S.A.
The SEC’s investigation is continuing.
SEC Fines 10 Companies for Disclosure Failures
The SEC announced that it has sanctioned 10 companies that failed to make required disclosures about financing deals and other unregistered sales that diluted their stock.
According to the agency, each of the 10 companies that were the target of enforcement actions failed to make the required 8-K disclosure for a stock dilution scenario — either when shares of common stock are sold in transactions that are not registered with the SEC and constitute at least five percent of total stock held by their stockholders, or when they’ve entered into a financing agreement not made in the ordinary course of business.
Three of the companies also failed to use accurate numbers when they finally did report the dilution of their common stock in quarterly or annual reports. While none of the companies either admitted or denied the SEC’s charges, they all agreed to settle, and the agency assessed a total of $350,000 in penalties. The companies, their various disclosure failures and penalties are as follows:
APT MotoVox Group Inc., formerly known as Frozen Food Gift Group Inc., failed to file Form 8-Ks disclosing three unregistered sales of equity securities. The Kansas City-based company agreed to pay a penalty of $25,000.
CoroWare Inc. failed to file a Form 8-K disclosing an unregistered sale of equity securities, and failed to file a Form 8-K disclosing a financing agreement. The Bellevue, Washington-based company agreed to pay a penalty of $25,000.
ERF Wireless Inc. failed to file Form 8-Ks disclosing three unregistered sales of equity securities, failed to file a Form 8-K disclosing a financing agreement, and incorrectly reported the number of shares outstanding in its Form 10-K for the 2013 fiscal year. The League City, Texas-based company agreed to pay a penalty of $50,000.
Green Automotive Co. failed to file Form 8-Ks disclosing three unregistered sales of equity securities, failed to file a Form 8-K disclosing a financing agreement, and incorrectly reported the number of shares outstanding in its Form 10-K for the 2013 fiscal year. The Riverside, California-based company agreed to pay a penalty of $50,000.
MineralRite Corp. failed to file Form 8-Ks disclosing two unregistered sales of equity securities, and failed to file a Form 8-K disclosing a financing agreement. The Lindon, Utah-based company agreed to pay a penalty of $25,000.
Mondial Ventures Inc. failed to file Form 8-Ks disclosing four unregistered sales of equity securities, and incorrectly reported the number of shares outstanding in its Form 10-Q for the quarter ended Sept. 20, 2013. The Scottsdale, Arizona-based company agreed to pay a penalty of $50,000.
Monster Arts Inc. failed to file Form 8-Ks disclosing three unregistered sales of equity securities, and failed to file a Form 8-K disclosing a financing agreement. The San Clemente, California-based company agreed to pay a penalty of $25,000.
Red Giant Entertainment Inc. failed to file a Form 8-K disclosing an unregistered sale of equity securities, and failed to file a Form 8-K disclosing a financing agreement. The Clermont, Florida-based company agreed to pay a penalty of $25,000.
Seaniemac International Ltd. failed to file a Form 8-K disclosing an unregistered sale of equity securities, failed to file a Form 8-K disclosing financing agreements, and failed to make required annual and quarterly filings on Forms 10-K and 10-Q. The Huntington, New York-based company agreed to pay a penalty of $50,000.
Worthington Energy Inc. failed to file Form 8-Ks disclosing three unregistered sales of equity securities, and failed to file a Form 8-K disclosing a financing agreement. The Corte Madera, California-based company agreed to pay a penalty of $25,000.
— Check out Why NASAA Is Leading the Charge Against Elder Fraud on ThinkAdvisor.