SEC's LOM hearing to include former NASD director
2010-08-06 15:01 ET - Street Wire
by Mike Caswell
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The Lines brothers of Bermuda have lost their bid to prevent James Cangiano, a retired National Association of Securities Dealers official, from testifying at their civil fraud trial. In a decision handed down on July 26, 2010, New York Judge Denise Cote cleared the way for Mr. Cangiano to testify that the Lines brothers' promotion of Vancouver-based Sedona Software Solutions Inc. in 2003 had all the hallmarks of a pump-and-dump. Lawyers for the U.S. Securities and Exchange Commission plan to present him to the jury as an expert witness when the trial begins later this year.
The Lines brothers had argued against having Mr. Cangiano testify, claiming that he was simply acting as an advocate for the SEC. In a motion filed on Jan. 27, 2010, they said that all he did was review a box of documents the SEC provided, and then wrote a report opining that Sedona was a pump-and-dump. He did not perform any independent analysis, nor did he consider if the company was a legitimate business, the brothers claimed. "Cangiano should not be permitted simply to espouse the SEC's theory of the case based on his review of the SEC's cherry-picked evidence," their motion stated.
In denying the motion, the judge found that Mr. Cangiano is well qualified by years of experience. If the defence lawyers have any questions about his opinion they can challenge him during cross-examination, she said. The Lines brothers did secure one concession though, in that the SEC must give defence lawyers time to object to portions of Mr. Cangiano's report before referring to them in front of the jury.
In arguing for Mr. Cangiano to testify, the SEC said that he had 32 years of relevant experience, including working as the director of market regulation for the NASD. He had been personally involved in hundreds of regulatory actions "against perpetrators of penny stock and micro-cap fraud such as this one," stated an SEC memorandum filed on March 5, 2010. In preparing his Sedona report Mr. Cangiano examined several typical aspects of a pump-and-dump and concluded that "when one considers all the characteristics [of the Sedona promotion] taken as a whole, they conform to the profile of the typical pump-and-dump operation."
The decision on expert testimony comes just two months before the trial in the case is to begin. At that trial, the SEC will argue that the Lines brothers and others, including West Vancouver promoter Anthony Wile, manipulated Sedona to $10 with misleading news and paid touts. The Lines brothers then sold $1.5-million worth of stock, according to the SEC. (All figures are in U.S. dollars.)
SEC's complaint
The case began on Dec. 19, 2007, when the SEC filed a civil fraud complaint in the Southern District of New York. The defendants included Scott and Brian Lines and their Bermuda-based brokerage, LOM (Holdings) Ltd. Also named were Mr. Wile, who served as Sedona's president, his uncle Wayne Wew and newsletter writer Bob Chapman.
According to the complaint, the men started manipulating Sedona in January, 2003, after the Lines brothers secretly acquired control of 99 per cent of the company through nominee accounts. The SEC claimed that they had friends act as signature directors for offshore companies that held the stock. Then, with the help of Mr. Wile and Mr. Chapman, they touted a deal in which Sedona would acquire three mines in South America by taking over a private company, Renaissance Mining Corp. The SEC said the news was misleading, because it treated the Renaissance deal as done when Sedona had not actually closed it. To satisfy the agreement's terms Sedona still had to raise $6-million.
The trading portion of the promotion began on Jan. 21, 2003, with a prearranged trade between Mr. Wew and the Lines brothers, the complaint stated. Mr. Wew bought 5,000 shares at $8.25 from accounts that the Lines brothers controlled when the stock had last traded at three cents. Over the next week, the Lines brothers sold 159,300 shares at prices between $9 and $10, the SEC claimed.
At the same time, Mr. Chapman was helping fuel demand for the stock by preparing "independent" research reports on Sedona. He touted the company as "an incredible opportunity that could be the largest public offering in the United States for a mining company this year" and predicted that it would reach $62. The SEC said he failed to disclose that Mr. Wile had paid him to prepare the report, and that he had bought 370,000 shares of the company under $1.
One week after the trading began the SEC halted Sedona, citing concerns about the accuracy of its agreement to acquire Renaissance. When the stock resumed trading two weeks later, it fell to under $1.
The SEC sought orders permanently banning all of the defendants from participating in penny stock offerings, as well as appropriate civil penalties and disgorgement of profits.
Motions to dismiss
Most of the defendants in the case have responded to the allegations, denying any wrongdoing. The Lines brothers claimed that Sedona had a valid deal to acquire the gold mines, and that the SEC had scuttled that plan by halting the stock. They pointed out that the mines had been held by another public company called Greenstone Resources Ltd. that once had a $1-billion market cap.
Mr. Wile and Mr. Wew filed similar motions on Jan. 25, 2010, also asking the judge to dismiss the charges. Among other things, Mr. Wile argued that there was no evidence that he had paid any newsletter writers to promote Sedona.
The only defendant who failed to respond was Mr. Chapman. On June 18, 2010, the SEC won a default judgment against the 72-year-old newsletter writer. The judge banned him from penny stocks and invited the SEC to file a motion for appropriate civil penalties.
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