Enforcement Roundup: Ex-CCO Sues Over ‘Defamatory’ Form U5

Five Offshore Entities Charged, Assets Frozen for Penny Stock Sales

The SEC has charged five offshore entities, Cayman Islands-based Caledonian Bank Ltd. and Caledonian Securities Ltd., Belize-based Clear Water Securities Inc. and Legacy Global Markets S.A. and Panama-based Verdmont Capital S.A. with offering and selling unregistered penny stocks. In addition, it has imposed an emergency asset freeze against the five.

According to the agency, the five companies sold penny stocks in unregistered distributions from their U.S. brokerage accounts of four shell company issuers: Swingplane Ventures Inc., Goff Corp., Norstra Energy Inc. and Xumanii Inc.

Each of the distributions followed the same basic pattern. The issuers first filed bogus Forms S-1 with the SEC that supposedly registered sales of securities to public investors; however, no such sales happened. Instead, the securities supposedly sold remained in the control of the issuers and their affiliates.

In the fake offerings, the issuers pretended to sell securities to investors residing in such places as Serbia, Mexico, Ireland, Norway, Panama and Jamaica. Meanwhile, the issuers or their affiliates kept control and possession of the stock certificates.

In the scheme, restricted stock was passed off as “free trading” unrestricted stock and the share certificates issued were subsequently transferred, without restrictive legends, to the five offshore entities. The entities then deposited the shares into their U.S. brokerage accounts and sold the shares to the public.

In addition, the issuers or their affiliates directed the transfers of restricted securities to the entities, often through various offshore nominee entities intended to conceal beneficial ownership of the securities. Once the shares, controlled throughout by the issuers or their affiliates, were held in names of the five entities, the shell company issuers announced a reverse merger or business combination with a supposedly operating enterprise.

The five entities then offered and sold hundreds of millions of shares of all four issuers, all at the same time, in unregistered distributions with aggressive and extensive promotion campaigns. Each of the four stocks lost practically all market value within months of the unregistered sales. The five entities, with their actions, operated as affiliates, dealers, sales outlets and underwriters by offering and selling the penny stocks from brokerage accounts in the U.S.

In addition to other enforcement measures, the SEC is seeking the disgorgement of all proceeds obtained in the unregistered distributions and the imposition of civil penalties. The investigation is continuing.

Former Execs Agree to Return Bonuses, Stock Sale Profits in Fraud Case

Two former chief financial officers have agreed to return almost a half million dollars that they received in bonuses and the profits from stock sales while their Silicon Valley software company was committing accounting fraud.

According to the SEC, William Slater and Peter Williams III received $337,375 and $141,992, respectively, during times when Saba Software presented materially false and misleading financial statements. Although they were not personally charged with the company’s misconduct, both are still required to return the money from bonuses and stock sale profits that they got during the fraud. Saba Software overstated its pretax earnings and made material misstatements about its revenue recognition practices while Slater served as CFO from December 2008 to October 2011, and while Williams served as CFO from October 2011 to January 2012.

Both agreed to the SEC’s order without admitting or denying its findings that they were in violation of Section 304 of the Sarbanes-Oxley Act.

SEC Charges Mutual Fund Manager for Improper Asset Handling

The SEC has charged Water Island Capital LLC, the investment advisor to five alternative mutual funds, with keeping millions of dollars of the funds’ cash collateral at broker-dealer counterparties instead of at the funds’ custodial bank. The agency found the violations during an examination.

According to the SEC, Water Island Capital was responsible for the maintenance of approximately $247 million in cash collateral held by broker-dealer counterparties, which should have been was maintained with the funds’ custodial bank. The cash collateral related to the funds’ investments in certain total return and portfolio return swaps.

Instead, the firm failed to implement the funds’ directed brokerage policies and procedures, which required it to create and maintain an approved list of executing brokers for the funds as well as to monitor with documentation the funds’ compliance with the directed brokerage requirements. Water Island Capital failed to create the list, and failed to maintain documentation reflecting monitoring of the funds’ compliance pursuant to the funds’ policies and procedures.

Without admitting or denying the agency’s findings, Water Island Capital consented to a cease-and-desist order and agreed to pay a $50,000 penalty to settle the charges.