Among recent enforcement actions by the SEC were a pair of cases against companies and then-executives involving accounting fraud, as well as another case against a litigation marketing company and its co-founders that the agency said was preying on retirees.
In addition, it barred and fined the principal of a registered investment advisor for securities fraud.
Company Charged With Bilking Retirees
Los Angeles-based litigation marketing company PLCMGMT LLC, also referred to as PLC or Prometheus Law, and its cofounders James Catipay and David Aldrich were charged by the SEC with defrauding retirees and other investors.
According to the agency:
Catipay, Aldrich and PLCMGMT claimed that investors’ money would be used to help gather plaintiffs for class-action and other lawsuits and that they would earn hefty investment returns from settlement proceeds.
While Catipay and Aldrich raised $11.7 million from approximately 250 investors, many of them elderly, during the past three years, just $4.3 million was actually used to locate prospective plaintiffs for lawsuits, and the company has brought in little revenue from any settlements.
Instead, Catipay and Aldrich diverted millions in investor funds to pay personal expenses. The 100–300% returns promised to investors have never materialized; in fact, PLC is obligated to pay investors at least $31.5 million.
Investors were told their funds would be used for marketing and advertising to locate plaintiffs for cases involving failed prescription drugs or medical devices. Each investor’s money would be associated with a specific potential plaintiff. PLC would refer the potential plaintiffs to a contingency-fee attorney and use proceeds of lawsuit settlements to pay investor returns.
Such a setup supposedly enabled investors, who were mostly non-attorneys, to split legal fees with the lawyer who actually litigated a particular lawsuit. That action is generally prohibited.
PLC, Catipay and Aldrich lured investors, claiming the investments were safe and “guaranteed,” but they knew perfectly well that those investments were highly speculative and risky. Only certain potential plaintiffs would qualify as actual plaintiffs, and even if a case was filed there was no guarantee they would win the lawsuit.
In addition to lying to investors, PLC, Catipay and Aldrich misused $5.6 million in investor funds, including diverting more than $1 million to pay Aldrich’s personal income taxes and another million to buy a residential condominium in the name of Aldrich’s privately held company. Aldrich and Catipay also took large salaries and admitted to SEC investigators that they have made Ponzi payments to several PLC investors.
The SEC seeks the appointment of a receiver over the company, an asset freeze and financial penalties and disgorgement plus interest, as well as other relief.
Advisor Barred, Fined by SEC for Cherry Picking Trades
The SEC has sanctioned, fined and barred Bruce Hartshorn for fraudulent trade allocations, saying in its order of settled proceedings that Hartshorn, via his firm Hartshorn & Co., was “cherry-picking” trades.
According to the agency’s order, Hartshorn disproportionately allocated profitable trades to proprietary accounts and unprofitable trades to client accounts, bringing in a sizable profit in doing so.
From approximately January 2010 through March 2011, Hartshorn purchased securities for both proprietary and client accounts through an omnibus trading account. But he waited until later in the day to allocate trades to the accounts, checking first to see whether the securities had appreciated.
He then allocated the profitable trades to proprietary accounts and the unprofitable trades to client accounts. Eighty-five percent of the block trades Hartshorn allocated solely to proprietary accounts were profitable trades. Conversely, 100% of the block trades he allocated solely to the firm’s clients were unprofitable trades. In addition, when block-purchased securities had positive first-day returns, Hartshorn allocated 68% of those securities to proprietary accounts. Conversely, when block-purchased securities had negative first-day returns, Hartshorn allocated 81% of those securities to client accounts.
As a result, during the relevant period, his proprietary accounts averaged a first-day gain of 0.26%, while client accounts averaged a first-day loss of 1.02%.
The cherry-picking strategy brought him $109,516 in ill-gotten gains.
As a result, Hartshorn has been barred from association with any investment advisor, broker, dealer, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization. He has also been prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment advisor or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment advisor, depositor, or principal underwriter.
He may reapply, but approval of any application is contingent on a number of factors, including payment of disgorgement, any arbitration award and any restitution order.
He has also been ordered to pay disgorgement of $109,516, prejudgment interest of $5,036.23, and a civil penalty of $75,000, to the SEC.
Without admitting or denying the SEC’s findings, Hartshorn consented to the sanctions.
Logitech Settles With SEC for $7.5 Million
Technology manufacturer Logitech International agreed to pay a $7.5 million penalty for fraudulently inflating its fiscal year 2011 financial results to meet earnings guidance, and for committing other accounting-related violations during a five-year period.
In addition, the agency said that the firm’s then-controller, Michael Doktorczyk, and then-director of accounting, Sherralyn Bolles, agreed to pay penalties of $50,000 and $25,000, respectively, for violations related to Logitech’s warranty accrual accounting and failure to amortize intangibles from an earlier acquisition.
However, the SEC charged then-Chief Financial Officer Erik Bardman and then-acting controller Jennifer Wolf with deliberately minimizing the writedown of millions of dollars of excess component parts for a product for which Logitech had excess inventory in FY11. For Logitech’s financial statements, the two executives falsely assumed the company would build all of the components into finished products, despite knowing that wasn’t going to happen.
Former CEO Gerald Quindlen, who was not accused of misconduct, has returned $194,487 in incentive-based compensation and stock sale profits received during the period of accounting violations.
Neither the company nor its former executives admitted or denied the SEC’s charges.
Execs Overstated Revenues, Assets: SEC
In the second accounting fraud case, three then-executives at battery manufacturer Ener1 agreed to settle with the SEC and pay penalties for having materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.
Former CEO and Chairman Charles Gassenheimer, former Chief Financial Officer Jeffrey Seidel and former Chief Accounting Officer Robert Kamischke agreed to pay penalties of $100,000, $50,000 and $30,000, respectively, after the SEC found that the financial misstatements came from management’s failure to impair investments and receivables related to an electric car manufacturer that was one of its largest customers.
The SEC also found that Robert Hesselgesser, the engagement partner for PricewaterhouseCoopers LLP’s audit of Ener1’s 2010 financial statements, violated professional auditing standards by failing to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.
Hesselgesser has agreed to be suspended for two years from appearing and practicing before the SEC.
Neither the company nor the executives have admitted or denied the SEC’s charges.
— Check out Ex-NFL Player Willie Gault Slapped With Securities Fraud on ThinkAdvisor.