| From: scion | 4/23/2012 2:25:33 PM | | | | | | SEC Charges Former CalPERS CEO and Friend With Falsifying Letters in $20 Million Placement Agent Fee Scheme
FOR IMMEDIATE RELEASE
2012-73
Washington, D.C., April 23, 2012 — The Securities and Exchange Commission today charged the former CEO of the California Public Employees' Retirement System (CalPERS) and his close personal friend with scheming to defraud an investment firm into paying $20 million in fees to the friend's placement agent firms.
Additional Materials
SEC Complaint
sec.gov
The SEC alleges that former CalPERS CEO Federico R. Buenrostro and his friend Alfred J.R. Villalobos fabricated documents given to New York-based private equity firm Apollo Global Management. Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures. In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms. The false letters bearing a fake CalPERS logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments.
"Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees," said John M. McCoy III, Associate Regional Director of the SEC's Los Angeles Regional Office.
According to the SEC's complaint, Apollo began requiring signed investor disclosure letters in 2007 from investors such as CalPERS before it would pay fees to a placement agent that assisted in raising funds. Villalobos's firm ARVCO Capital Research LLC (which later became ARVCO Financial Ventures LLC) agreed to this contractual provision in a placement agent agreement with Apollo related to CalPERS's investment in Apollo Fund VII. However, when ARVCO requested an investor disclosure letter from CalPERS's Investment Office to provide Apollo, it was informed that CalPERS's Legal Office had advised it not to sign a disclosure letter. ARVCO never again contacted CalPERS's Investment Office for an investor disclosure letter.
The SEC alleges that in January 2008, Villalobos instead fabricated a letter using a phony CalPERS logo. At Villalobos's request, Buenrostro then signed what appeared to be a CalPERS disclosure letter. Upon receipt of the fake disclosure letter for Apollo Fund VII, Apollo paid ARVCO about $3.5 million in placement agent fees.
The SEC's complaint further alleges that less than two weeks later, Villalobos and Buenrostro created false CalPERS disclosure letters for at least four more Apollo funds under similarly suspicious circumstances. As part of the scheme, Buenrostro signed blank sheets of fake CalPERS letterhead that Villalobos and ARVCO then used to generate additional investor disclosure letters as they needed them. Based on these false documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not have paid without the disclosure letters.
The SEC seeks an order requiring Buenrostro, Villalobos, and ARVCO to disgorge any ill-gotten gains, pay financial penalties, and be permanently enjoined from violating the antifraud provisions of the federal securities laws.
As alleged in the SEC's complaint, the defendants violated Section 17(a)(1) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder.
The SEC's investigation was conducted by Leslie A. Hakala of the Los Angeles Regional Office. The SEC's litigation will be led by David Van Havermaat.
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sec.gov |
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| From: scion | 4/23/2012 7:32:00 PM | | | | | | SEC Charges Chinese Company and Executives with Lying About Asset Values and Use of IPO Proceeds
Company’s Chairman Accused of $40 Million Theft
FOR IMMEDIATE RELEASE
2012-74
Washington, D.C., April 23, 2012 — The Securities and Exchange Commission today charged a China-based oil field services company and two senior officers involved in a scheme to intentionally mislead investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC additionally charged the company’s chairman of the board involved in a separate $40 million theft from the company.
Additional Materials
SEC Complaint
sec.gov
The SEC alleges that SinoTech Energy Limited grossly overstated the value of its primary operating assets in financial statements, specifically the lateral hydraulic drilling (LHD) units that are central to its business. The company’s IPO registration statement in November 2010 promised investors it would spend $120 million raised in the IPO to acquire LHD units, but the company’s purchase contracts and other documents otherwise show it acquired far fewer LHD units, lied about the number it acquired, and grossly overstated the value of the units. SinoTech CEO Guoqiang Xin and former CFO Boxun Zhang were responsible for the fraud.
Meanwhile, the company’s chairman Qinzeng Liu is accused of secretly siphoning at least $40 million from a SinoTech bank account in the summer of 2011. He then stood silently by as SinoTech – attempting to counter negative Internet reports that the company was potentially fraudulent – falsely assured investors that the company had that money and more in the bank. Liu later admitted his theft to SinoTech’s auditor and board of directors, but he retained his position and investors were not informed of the incident.
“SinoTech’s brief life as a public company in the U.S. markets has been rife with falsehoods,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “Investors deserve the utmost honesty and transparency from companies and their officers when they tap public markets in the United States.”
According to the SEC’s complaint filed in U.S. District Court for the Western District of Louisiana (Lake Charles Division), SinoTech’s public filings certified by both Xin and Zhang represented that the company had purchased 16 LHD units worth $94 million. In fact, the company only acquired 11 such units worth less than $17 million. SinoTech continually misled investors about the value of its equipment in press releases and SEC filings between December 2010 and November 2011. Xin went so far as to try (unsuccessfully) to convince SinoTech’s LHD unit supplier to issue public statements verifying the company’s false valuations to investors. The supplier refused.
The SEC’s complaint alleges that Liu’s admitted theft of $40 million in company funds occurred sometime between June 30 and August 17. Liu withdrew the money from SinoTech’s primary bank account at the Agricultural Bank of China. SinoTech did not record Liu’s withdrawal in the company’s books and records, and it retained Liu as its chairman despite his confession.
The SEC alleges that the theft remained hidden when SinoTech attempted to rebut an Internet report alleging fraud in August 2011. In an effort to persuade investors that SinoTech was legitimate, the company issued a press release stating that SinoTech’s bank balances totaled more than $93 million and included $54 million on deposit at the Agricultural Bank of China. Liu knew this claim was false due to his earlier theft from that account. .
The SEC’s complaint seeks permanent injunctive relief and financial penalties against all defendants as well as disgorgement of ill-gotten gains by SinoTech and Liu. The SEC also requests bars against each of the individual defendants from serving as officers or directors of U.S. public companies.
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sec.gov |
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| From: StockDung | 4/23/2012 7:37:50 PM | | | | | | SEC OBTAINS $4.8 MILLION JUDGMENT AGAINST MARCO GLISSON, WHO WAS CHARGED WITH MAKING A MARKET IN DEREGISTERED SECURITIES OF CMKM DIAMONDS, INC
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 22340 / April 23, 2012 Securities and Exchange Commission v. Marco Glisson, Civil Action No. 2:09-cv-00104 SEC OBTAINS $4.8 MILLION JUDGMENT AGAINST MARCO GLISSON, WHO WAS CHARGED WITH MAKING A MARKET IN DEREGISTERED SECURITIES OF CMKM DIAMONDS, INC. The Securities and Exchange Commission ("Commission") announced that a judgment was entered on April 11, 2012 in its civil injunctive action against Marco Glisson, filed in the United States District Court of Nevada. Without admitting or denying the allegations in the complaint, Glisson consented to entry of a permanent injunction against violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and the broker dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934. Glisson was ordered to pay $2,765,650.65 in disgorgement, which represented profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest in the amount of $670,574.79. In addition, Glisson was ordered to pay a civil penalty in the amount of $1,400,000, and was permanently barred from participating in the offering of penny stock.
The Commission’s complaint alleged that from December 2005 through April 2007, Glisson acted as an unregistered broker or dealer and illegally sold deregistered securities of CMKM Diamonds, Inc. CMKM's registration with the Commission was revoked and the stock delisted on October 28, 2005. According to the complaint, Glisson, a retired auto worker and part-time restaurant worker who used the name “Deli Dog” or “Deli” in Internet chat rooms, identified potential buyers and sellers by frequenting CMKM related internet chat rooms and through referrals from past buyers and sellers. Glisson then negotiated the terms of the transaction and consummated it by exchanging money for the pertinent CMKM stock certificate. Through these practices, Glisson made a market in deregistered CMKM securities at a time when legitimate broker-dealers refused to execute such purchases or sales because of the Commission's deregistration of CMKM.
See Litigation Release No. 20855/January 15, 2009, for information on the filing of the original action and a link to the Commission’s Complaint.
http://www.sec.gov/litigation/litreleases/2012/lr22340.htm
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| To: Bear Down who wrote (114638) | 4/24/2012 8:22:42 AM | | From: StockDung | | | | How can DUMBK he a total fraud? They have a clock, yes a countdown clock. 40 days or less
============================================================================
CEO Michael Franklin has announced Domark’s wholly-owned Solawerks subsidiary expects the revolutionary “Solapad” ever-charging solar and battery system for all versions of the Apple (NASDAQ: AAPL) iPad to be in the hands of US consumers in 40 days or less. Mr. Franklin has directed that the Solawerks website be programmed to include a prominent countdown clock that begins ticking down the days and hours for the hot new product to hit US shores. The clock is scheduled to begin a 40-day countdown, beginning at 9:00 Eastern Time on Monday April 23rd.
The countdown clock as well as other Company business may be seen at: http://www.solawerks.com.investors.html
----------------------------------------------------------------------------------------------------
DOMK: Countdown Begins For Hottest AAPL iPad Accessory of 2012 to Hit US Consumers
2012-04-23 08:45 ET - News Release
Company Website: http://www.solawerks.com
LONGWOOD, Fla. -- (Business Wire)
Domark International Inc. (OTCBB: DOMK) told the public today to get ready to unplug their Apple iPads forever.
The new Solapad solar iPad sleeve is expected to hit US consumers in less than 40 days. White version shown. (Photo: Business Wire)
CEO Michael Franklin has announced Domark’s wholly-owned Solawerks subsidiary expects the revolutionary “Solapad” ever-charging solar and battery system for all versions of the Apple (NASDAQ: AAPL) iPad to be in the hands of US consumers in 40 days or less. Mr. Franklin has directed that the Solawerks website be programmed to include a prominent countdown clock that begins ticking down the days and hours for the hot new product to hit US shores. The clock is scheduled to begin a 40-day countdown, beginning at 9:00 Eastern Time on Monday April 23rd.
The countdown clock as well as other Company business may be seen at: http://www.solawerks.com.investors.html
Mr. Franklin leaves today for China to directly oversee production of the Solapad. The Company has already disclosed that packaging, warranties and manuals for the new Solapad have already been approved.
Solawerks has also previously announced two other ever-charging products, the “Solafire” for the Amazon (NASDAQ: AMZN) Kindle Fire and the “Solacase” for all versions of the Apple iPhone. Similar to the Solapad, both the Solafire and Solacase contain a large, high-efficiency solar panel on their back, plus an additional internal battery to keep the associated unit charged at all times.
The Solacase fits all iPhone versions, including the new iPhone 4 and iPhone 4S. The Solacase can now be purchased directly on the Company’s website at www.solawerks.com/products.html
About Solawerks:
Solawerks, Inc. is a newly formed subsidiary, wholly owned by Domark International Inc. Solawerks’ current focus is to develop and distribute the Solapad: a combined cover and charging system for Apple’s iPad, the Solafire: a combined cover and charging system for Amazon’s Kindle Fire and the Solacase: a combined cover and charging system for all versions of Apple’s iPhone. Solawerks competes in a market that also includes Texas Instruments (NASDAQ: TXN) and 3M (NYSE: MMM).
Solawerks’ website can be seen at www.solawerks.com
Domark International, Inc.’s corporate website may be seen at: www.domarkintl.com
Forward-Looking Statements. Certain of the above statements contained in this press release contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results, events and circumstances (including future performance, results and trends) could differ materially from those set forth in such statements due to various factors, risks and uncertainties, including but not limited to, risks associated with the company's future growth and operating results, the uncertainty of market acceptance of the company's business plan, competitive factors and general economic conditions. Domark International, Inc. has no duty and undertakes no obligation to update such statements.
Photos/Multimedia Gallery Available: http://www.businesswire.com/cgi-bin/mmg.cgi?eid=50248029&lang=en
Contacts:
Media Contact:
Domark International, Inc.
Michael Franklin, (321) 250-4996
Source: Domark International Inc. |
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| From: scion | 4/24/2012 8:54:00 AM | | | | | | Plaintiff must identify trade secrets during discovery, judge rules
4/23/2012
newsandinsight.thomsonreuters.com
NEW YORK, April 23 (Reuters) - Plaintiffs who claim their trade secrets have been misappropriated must identify what those secrets are during discovery, a New York state judge has ruled.
The decision, issued Friday by Manhattan Supreme Court Justice Shirley Werner Kornreich, requires computer software maker MSCI to identify "with reasonable peculiarity" the trade secrets it alleged former employee Philip Jacob and his new employer, Axioma, misappropriated.
"Only by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense," Kornreich wrote.
MSCI asserted that Jacob and Axioma misappropriated the source code for risk management software it sells to investment institutions, such as hedge funds and investment banks.
In a previous ruling in November, the judge permitted MSCI to identify solely which portions of its source code were not trade secrets. But Axioma and Jacob's lawyers argued that it was unfair to expect defendants to deduce what trade secrets were at issue, given that the code likely included tens of millions of lines.
MSCI argued in a letter to the judge that Axioma was seeking to delay discovery in order to avoid having to submit its own source code for inspection.
It also said that it already had identified its trade secrets with sufficient particularity by listing the components that are not trade secrets.
Kornreich, however, sided with the defense.
"Plaintiffs who have brought this action, bear the burden of proving their allegations," the judge wrote. "Merely providing defendants with plaintiffs' 'reference library' to establish what portions of their source code are in the public domain shifts the burden to defendants to clarify plaintiffs' claim."
Lance Gotko, Jacob's lawyer, said the ruling appears to be the first of its kind in New York state court.
He compared the plaintiffs' position to reporting a theft to police and then asking to be allowed to walk around the suspect's apartment and identify what was taken.
"It would have been an almost insurmountable and expensive burden for the defense to figure out and almost guess what they thought plaintiffs' trade secrets were," said David Kasakove, Axioma's lawyer.
Lawyers for MSCI did not respond to calls for comment Monday.
The case is MSCI et al. vs. Jacob et al., New York State Supreme Court, New York County, No. 651451/2011.
For MSCI: Todd Soloway, Lisa Buckley and Mona Simonian of Pryor Cashman
For Jacob: Lance Gotko of Friedman Kaplan Seiler & Adelman
For Axioma: David Kasakove of Bryan Cave
(Reporting by Joseph Ax)
Follow us on Twitter: @ReutersLegal
newsandinsight.thomsonreuters.com |
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| To: StockDung who wrote (114655) | 4/24/2012 11:49:55 AM | | From: Bear Down | | | | did you notice all their ads on CNBC.com? they have google targeted ads on several high traffice sites. The latest ads have a link to their new website. The link says solarwerks.com, however since they don't own that you are directed to "solawerks.com"
Considering that these same products were pushed in a scam a year ago by GSLO, I can't imagine how they still need 40 days to have them delivered. The SEC is asleep and I sent them a very detailed report severl millions shares ago.....They are allowing franklin to fleece the poor and stupid penny buyers. Soon those buying will be crying and wishing Franklin was with both Sam and Tim Cook.
Was there a pr today? why all the volume? must be the cnbc.com google targeted ad campaign working. the facebook ad campaign was responsible for their first surge in volume. if something this blatent and easy to dissect can attract buyers through those advertising mediums, don't be surprised to see a surge in penny stock ads on facebook and thru google targeting. Seems the sucker crowd is out in full force today and they will all probably be willing to hold the stock for the remainder of the countdown clock.
sell franklin, sell |
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| From: scion | 4/24/2012 2:41:12 PM | | | | | | Egan-Jones Ratings Co. and Sean Egan Charged with Making Material Misrepresentations to SEC
FOR IMMEDIATE RELEASE
2012-75
Washington, D.C., April 24, 2012 — The Securities and Exchange Commission today announced charges against Egan-Jones Ratings Company (EJR) and its owner and president Sean Egan for material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities. EJR and Egan also are charged with material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.
Additional Materials
SEC Order
sec.gov
The Commission issued an order instituting proceedings in which the SEC’s Division of Enforcement alleges that EJR — a credit rating agency based in Haverford, Pa. — submitted an application to register as an NRSRO for issuers of asset-backed and government securities in July 2008. EJR had previously registered with the SEC in 2007 as an NRSRO for financial institutions, insurance companies, and corporate issuers.
The SEC’s Division of Enforcement alleges that in its 2008 application, EJR falsely stated that as of the date of the application it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR further falsely stated in its 2008 application that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995. In fact, at the time of its July 2008 application, EJR had not issued — that is, made available on the Internet or through another readily accessible means — any ABS or government issuer ratings, and therefore did not meet the requirements for registration as an NRSRO in these categories. EJR continued to make material misrepresentations regarding its experience rating asset-backed and government securities in subsequent annual certifications furnished to the SEC.
The SEC’s Division of Enforcement also alleges that EJR made other misstatements and omissions in submissions to the SEC by providing inaccurate certifications from clients, failing to disclose that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR did not know if subscribers were long or short a particular security.
The SEC’s Division of Enforcement further alleges that EJR violated other provisions of Commission rules governing NRSROs. EJR failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, and allowed two analysts to participate in determining credit ratings for issuers whose securities they owned. EJR also failed to make and retain certain required records, including a detailed record of its procedures and methodologies to determine credit ratings and e-mails regarding its determination of credit ratings.
The SEC’s Division of Enforcement alleges that Egan provided inaccurate information that was included in EJR’s applications and annual certifications. He signed the submissions and certified that the information provided in them was “accurate in all significant respects,” when he knew that it was not. Egan also failed to ensure EJR’s compliance with the recordkeeping requirements and conflict-of-interest provisions.
The SEC’s Division of Enforcement alleges that, by the conduct described above, EJR willfully violated Exchange Act Sections 15E(a)(1), 15E(b)(2), 15E(h)(1) and 17(a), and Rules 17g-1(a), 17g-1(b), 17g-1(f), 17g-1(a)(2), 17g-2(a)(6), 17g-2(b)(2), 17g-2(b)(7), and 17g-5(c)(2). The Division of Enforcement further alleges that by the conduct described above, Egan willfully made, or caused EJR to make, material misstatements in its Form NRSRO, and caused or willfully aided, abetted, counseled, commanded, induced or procured EJR’s violations of Sections 15E and 17(a) of the Exchange Act and Rules 17g-1, 17g-2, and 17g-5.
The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation will be led by James Kidney.
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sec.gov |
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| From: Glenn Petersen | 4/24/2012 6:23:28 PM | | | | | | | Fraud Heightens Jeopardy of Investing in Chinese Companies
By STEVEN M. DAVIDOFF
DealBook
New York Times
April 24, 2012, 5:40 pm
You might think that if you bought shares of a Chinese company that was listed on an American stock market, you would actually own a piece of that company.
Unfortunately, it is not that simple. The recent cases of the ChinaCast Education Corporation and the Sino-Forest Corporation show that in many instances, foreign investors in Chinese companies might have bought shares that don’t really represent much. It’s a problem that has the potential to extend to even the soundest Chinese company listed in the United States.
The ChinaCast case is not the most egregious, but it is certainly the most scandalous. In March, its chief executive, Ron Chan, was ousted in a battle for shareholder control of the company. An American investor succeeded not only in replacing Mr. Chan, but also in obtaining control of the ChinaCast board.
Yet that turned out to be only the beginning of the battle.
Last week, ChinaCast disclosed that it could not find its company seals, or authorized signatures, for its Chinese subsidiary. Seals are necessary for ChinaCast’s Chinese subsidiary to undertake any business in China. Without them, ChinaCast can’t sign contracts or even pay employees. In other words, China appears to have “Lord of the Rings” corporate governance — one seal to rule them all.
Mr. Chan was believed to have possession of them but now claims to know nothing.
Two of the universities owned by ChinaCast appear to have been transferred to ChinaCast’s former chief investment officer and president of its Chinese operations. And last week, according to the board, about a dozen people broke into the company’s Shanghai office and stole a number of documents and computers.
ChinaCast has a revolt on its hands that it is finding difficult to quell.
One reason that ChinaCast is having a problem is that shareholders did not actually buy an interest in its operations. Instead, to avoid Chinese restrictions on foreign investment, ChinaCast’s shareholders invested in a United States company that has contractual arrangements with a Chinese company. But the Chinese company remains in the ownership of Chinese citizens.
The problem with this structure, known as a variable interest entity, is that it may be illegal under Chinese law and has been criticized by Chinese regulators. Even if it is legal, if the Chinese owners decide to go rogue, the United States-listed entity must sue and obtain a judgment from a Chinese court to enforce these dubious contracts. Good luck with that. Such a litigation can take a long time to resolve, if ever.
In ChinaCast’s case, it can’t do anything until it has control of the corporate seals, but under Chinese law it needs them to sue to recover them. In the meantime, the operators of the Chinese subsidiary can take full advantage of the situation.
Unfortunately, ChinaCast is not the only Chinese company with dubious claims to its assets.
Sino-Forest, listed on the Toronto Stock Exchange, is the most prominent Chinese company to experience this problem. Last summer, Sino-Forest was accused by Muddy Waters Research of fraudulent accounting with respect to timber lands. At the time of the report, SinoForest had a $4 billion market capitalization.
A subsequent report by an independent committee of directors denied that there was a practice of fraud at the company, but also acknowledged that much of Sino-Forest’s property was held through a variable interest entity, or otherwise under contractual rights without an actual title.
Sino-Forest has filed for bankruptcy in Canada. Its assets far exceed its liabilities, but shareholders are likely to end up with nothing, in part because Sino-Forest’s rights to its assets are tenuous at best.
The variable interest entity structure may be the root of the problem when foreign investors own shares in Chinese companies, but it is only part of it. The norms for business are different in China, and enforcing legal contracts or rights is sometimes impossible. Legal title to assets is often not formalized, and even when it is, Chinese executives can use the lack of rule of law to take advantage of foreign shareholders.
Other disputes show that ownership of assets in China can be fleeting.
Yahoo got into a tussle with Jack Ma, the chairman and chief executive of the Alibaba Group, in which Yahoo has a substantial interest, when he transferred Alibaba’s online payment platform, Alipay, to a private company controlled by him. Mr. Ma and Yahoo eventually resolved their disputes, but the transfer was a warning sign that Mr. Ma was willing to take all steps to ensure that the only buyers for Yahoo’s Chinese assets were Mr. Ma and his co-investors.
In the case of Nasdaq-listed GigaMedia, a Singapore-based online gaming company, it wasn’t the variable interest entity structure that did the company in. Instead, the head of its Chinese business simply made off with the seals for GigaMedia’s Chinese company and transferred ownership of the assets. GigaMedia appears to have given up on getting the business back.
And it’s not just a few bad apples. At least 105 Chinese companies listed in the United States have been delisted, are under investigation or have financial problems, according to The Pittsburgh Tribune-Review.
Even when there is no suggestion of fraud, the wide use of the variable interest entity structure by Chinese companies listed on United States stock markets should trouble investors.
The structure is used by a number of prominent Chinese Internet companies including Ren-Ren, Baidu.com and Sohu.com. In most cases, the actual Chinese assets are held by the company’s executives. Ren-Ren’s Chinese assets, for example, are 99 percent owned by Ren-Ren’s founder and his wife. This puts these executives in prime position to fend off any challenges by foreign shareholders.
Investors seem to heed the warning signs only half-heartedly. The recent Chinese initial public offering of VIPshop and the pending I.P.O. of AdChina both use the variable interest entity structure. AdChina disclosed that if the parties controlling its Chinese operations “fail to perform their obligations under their agreements with us, we may have to rely on legal remedies” under People’s Republic of China law “which may not be effective.”
VIPshop’s I.P.O. had top-tier underwriters, including Goldman Sachs. But don’t depend on the underwriters to stick around to make sure that American shareholders can enforce their rights. After an I.P.O., the underwriters tend to disappear.
This is not just a problem of a questionable legal structure, but Wall Street’s apparent willingness to ignore the fact that investors in the United States have tenuous claims when they buy shares in Chinese companies. And underwriters and Chinese issuers have taken advantage of the hunger for Chinese stocks.
The Securities and Exchange Commission and Washington seem to be almost as absent. The S.E.C. just brought charges against one Chinese issuer, SinoTech Energy, claiming it overstated its assets. The regulator has issued a warning about investing in Chinese companies listed on American stock exchanges, but the conduct in the ChinaCast case appears to be outright fraud. The agency simply has not followed up aggressively in most of these cases, most likely because it is overwhelmed with other tasks. The United States government has also not pressed China to vigorously and quickly enforce its own laws to help American shareholders.
Here lies the ultimate lesson. An investment in Chinese companies is really an investment in the people who run these companies. While some, if not most, of these executives are well intentioned, there seems be a lot of suspicious activity out there. Even more so, when those executives are threatened, they can use the weak legal structures and rule of law to maintain control of their companies. And heaven forbid they should steal the seals.
For American investors, it may be that the risks are worth the potential gains in investing in China, but don’t say you haven’t been warned.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
http://dealbook.nytimes.com/2012/04/24/fraud-heightens-jeopardy-of-investing-in-chinese-companies/?smid=tw-nytimesdealbook&seid=auto | |
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| From: scion | 4/24/2012 7:12:34 PM | | | | | | H&R Block Subsidiary Agrees to Pay $28.2 Million to Settle SEC Charges Related to Subprime Mortgage Investments
FOR IMMEDIATE RELEASE
2012-76
Washington, D.C., April 24, 2012 — The Securities and Exchange Commission today charged H&R Block subsidiary Option One Mortgage Corporation with misleading investors in several offerings of subprime residential mortgage-backed securities (RMBS) by failing to disclose that its financial condition was significantly deteriorating.
Additional Materials
SEC Complaint
sec.gov
Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges.
The SEC alleges that Option One promised investors in more than $4 billion worth of RMBS offerings that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. But Option One did not tell investors about its deteriorating financial condition and that it could not meet its repurchase obligations on its own.
“Option One’s financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The company nonetheless concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages in its RMBS portfolios.”
Kenneth Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “We will take action against those who fail to disclose or downplay important facts that make an investment riskier, even if those risks do not materialize. We remain committed to uncovering misconduct involving complex financial instruments including RMBS.”
According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Option One was one of the nation’s largest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. Option One originated subprime loans and sold them in the secondary market through RMBS securitizations or whole loan pool sales.
According to the SEC’s complaint, Option One was generally profitable prior to its 2007 fiscal year. However, when the subprime mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenues and significant losses, and faced hundreds of millions of dollars in margin calls from its creditors. At the time Option One offered and sold the RMBS, it needed H&R Block, through a subsidiary, to provide it with financing under a line of credit in order to meet its margin calls and repurchase obligations. But Block was under no obligation to provide that funding. Option One did not disclose this information to investors. The SEC further alleges that Block never guaranteed Option One’s loan repurchase obligations and that Option One’s mounting losses threatened Block’s credit rating at a time when Block was negotiating a sale of Option One.
Without admitting or denying the SEC’s allegations, Option One consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,250,558, prejudgment interest of $3,982,027, and a penalty of $10 million. The proposed settlement is subject to court approval.
The SEC has now charged 102 individuals and entities in financial crisis-related enforcement actions, including 55 CEOs, CFOs, and other senior corporate officers. These enforcement actions have resulted in more than $1.98 billion in penalties, disgorgement, and other monetary relief for investors.
The SEC also is a co-chair of the Residential Mortgage-Backed Securities Working Group formed under the Financial Fraud Enforcement Task Force in January 2012. The Working Group is marshaling parallel efforts on the state and federal levels to collaborate on current and future investigations, pooling resources and streamlining processes to investigate in a comprehensive way those responsible for misconduct in the RMBS market. In addition to the SEC, other co-chairs of the Working Group include representatives from the Civil and Criminal Divisions of the U.S. Department of Justice, the Attorney General of the State of New York, and the United States Attorney’s Office.
The SEC’s investigation of Option One was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio and the Chicago Regional Office. The investigative attorneys were Daniel Ryan, Michael Wells, Anne McKinley, and Robert Burson along with litigation counsel Jonathan Polish and John Birkenheier in the Chicago Regional Office.
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| From: scion | 4/24/2012 8:23:50 PM | | | | | | ACA Financial gets go-ahead for Abacus fraud case v. Goldman
4/24/2012
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Goldman Sachs' chicancery in advance of the mortgage meltdown has once again convinced a judge to permit one of the bank's (alleged) dupes to proceed with a fraud case. And this time, the ruling specifically holds that Goldman's actions were egregious enough to overcome the high bar for sophisticated investors.
The bond insurer ACA Financial Guaranty and its lawyers at Kasowitz, Benson, Torres & Friedman certainly had some help from the Securities and Exchange Commission and the Senate Permanent Subcommittee on Investigations. ACA was nominally the portfolio selection agent on Goldman's notorious Abacus collateralized debt obligation, the designed-to-fail instrument for which hedge fund honcho John Paulson picked a reference portfolio of ailing mortgage-backed securities so he'd reap huge profits on his short position. Before ACA ever filed its fraud complaint in New York State Supreme Court in 2010, Goldman had agreed to pay $550 million to resolve the SEC's Abacus claims and the Senate had featured Abacus prominently in its enormous tome on the economy's collapse.
Those preceding investigations gave ACA more of the gritty details of Goldman's campaign to mislead investors than you normally see in a complaint. Thanks to the SEC case against former Goldman vice-president Fabrice Tourre, for instance, ACA could point to a February 2007 meeting in which Goldman, Paulson, and ACA representatives discussed the mortgage-backed securities that would go into the CDO's reference portfolio. Tourre sent an email to a colleague calling the meeting "surreal," because (according to ACA's complaint) Paulson was pretending good faith in proposing notes that he and Goldman knew were doomed.
Like U.S. District Judge Victor Marrero, who last month permitted the hedge fund Dodona to proceed with fraud claims for its investment in Goldman's Hudson CDOs, Justice Barbara Kapnick was swayed by allegations that the bank deliberately set out to mislead ACA, which insured the Abacus CDO. Kapnick's 41-page opinion recounts that ACA specifically asked Goldman at least twice about Paulson's position on the CDO. Goldman repeatedly informed the insurer, according to Kapnick, that Paulson was the equity investor with a long position that aligned his interests with ACA's. Of course, that wasn't true: Through credit default swaps, Paulson was banking on the inevitable failure of the CDO.
That allegedly active deception, according to Kapnick, overcomes Goldman's argument that if ACA really wanted to know Paulson's position it could simply have asked him. "By undertaking to characterize Paulson's economic interest in the transaction, Goldman Sachs assumed a duty to disclose Paulson's true economic interest in Abacus, especially once it was put on notice that ACA was acting on the erroneous belief, based on Goldman Sachs's affirmative misrepresentations, that Paulson had pre-committed to take a long position," the judge wrote.
In other words, Kapnick held, even though ACA is a sophisticated player, Goldman is on the hook for concealing information ACA couldn't have obtained by other means.
To reach that conclusion, Kapnick rejected arguments by Goldman's Sullivan & Cromwell lawyers that have succeeded in two recent appellate rulings involving sophisticated investors -- one of them a 2nd Circuit Court of Appeals dismissal of another Goldman CDO case. The judge in ACA's suit specifically addressed last month's stern warning to sophisticated investors from a New York state appeals court in HSH Nordbank v. UBS. In that case, Kapnick said, UBS legitimately disclaimed responsibility for the riskiness of the investment. Here, she said, the issue was more blatant deception.
ACA's complaint "certainly contains a 'rational basis' to infer that Goldman Sachs intentionally mislead ACA its silence in the face of ACA's manifest detrimental reliance on its mistaken belief that Paulson was on the same side of the transaction as it was," she wrote. Kapnick refused to dismiss ACA's fraudulent inducement and fraudulent concealment claims, although she did toss an unjust enrichment allegation.
ACA counsel Marc Kasowitz sent me an email statement: "ACA is pleased with Justice Kapnick's decision, which makes clear that Goldman Sachs and others that fraudulently promote investments even to sophisticated investors can and should be held liable. This is especially so where, as here, there is active concealment of the material facts. Thus the decision appropriately confirms that New York law does not immunize fraudulent conduct directed at investors, including sophisticated ones."
A Goldman spokesman declined to comment.
(Reporting by Alison Frankel)
Follow us on Twitter: @AlisonFrankel, @ReutersLegal
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