Securities Industry Commentator by Bill Singer Esq

July 1, 2019
$29.2 million operating loss for 2018 versus $73.3 million operating loss for 2017.

SEC Charges CEO of Online Entertainment Company with Defrauding Investors (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged former Function(x), Inc. Chief Executive Officer Robert F.X. Sillerman with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act  and Rule 10b-5 thereunder; and with violating the books and records and internal accounting control provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder and aiding and abetting the company's reporting violations under Section 13(a) and Rules 12b-20 and 13a-11 of the Exchange Act. Sillerman agreed to settle without admitting or denying the allegations in the complaint' and he has agreed to a permanent director-and-officer bar and a penalty of $179,000. Sillerman, who is a debtor in a Chapter 11 case, has agreed to pay the civil penalty pursuant to a Chapter 11 plan that is approved in his bankruptcy case. As set forth in part in the SEC Release:

[F]unction(x), Inc., formerly an online publishing and entertainment business, incurred significant losses during the first quarter of 2017. To raise capital and fund its operations, Function(x) completed a public securities offering in February 2017, which brought in $4.8 million from investors. The complaint alleges that Sillerman fraudulently diverted $500,000 of the offering proceeds to repay certain loans he had made to Function(x). Then, in April and May 2017, Sillerman allegedly led efforts to raise additional money for Function(x) through a private securities offering. The SEC's complaint alleges that to induce investments in this offering, Sillerman falsely claimed that two celebrities had agreed to invest in the company. The SEC further alleges that Sillerman created phony subscription documents, with forged signatures, purportedly from the two celebrities. Function(x) publicly announced that the offering had raised $10 million which would be used for working capital and corporate expansion. In reality, however, the complaint alleges that Function(x) raised only half that amount and that Sillerman diverted all of the proceeds to his personal bank accounts, as further repayment of loans he had made to Function(x). Throughout his fraudulent scheme, Sillerman also allegedly ignored Function(x)'s internal accounting controls and failed to obtain approval to use offering proceeds to repay his loans.
This is not the Broke And Broker Blog. This is not an article in that blog. This is not an article about a FINRA Arbitration. This is not an article about the appeal of that FINRA Arbitration. This is not an article about the appeal of a court's order about the arbitration. This is not a pipe.

SEC Charges Colorado Divorce Lawyer in Fraudulent Microcap Scheme (SEC Release)
In a Complaint filed an Amended Complaint in the United States District Court for the District of Colorado, the SEC charged lawyer Michael J. Woodford for his role in a fraudulent scheme to conceal attorney Diane D. Dalmy's involvement in preparing legal opinion letters concerning the sale of certain microcap securities from transfer agents and brokerage firms. As set forth in part in the SEC Release:

The initial complaint alleged that Dalmy recruited a lawyer to facilitate her scheme to circumvent the consequences of being placed on the OTC Market Group Inc.'s list of prohibited attorneys. The OTC Market Group owns and operates the largest U.S. electronic quotation and trading system for microcap securities. The SEC's amended complaint charges Woodford as the lawyer who allegedly signed the legal opinion letters drafted by Dalmy and provided them to transfer agents and brokerage firms. According to the complaint, Woodford, a divorce attorney with no previous securities law experience, signed the opinion letters without performing due diligence or conducting any legal analysis, despite representations made in the letter that he had done so. The SEC alleges that legal opinion letters are a significant factor in transfer agents' and brokerage firms' decisions to deem certain securities eligible to be freely sold on the public market without SEC registration, and that transfer agents and brokerage firms often refuse to accept legal opinion letters from attorneys subject to OTC Markets prohibitions. The SEC's amended complaint further alleges that, in 2016, Dalmy was permanently suspended from appearing and practicing before the SEC as an attorney, which prohibited her from representing clients in SEC matters, including advising clients about SEC filing obligations or content. Despite this, the SEC alleges that Dalmy continued to prepare filings for publicly traded companies and directing Woodford to sign and file them with the SEC.

The SEC's amended complaint, filed in U.S. District Court for the District of Colorado, charges Dalmy and Woodford with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks from both defendants permanent injunctions against violating these provisions, disgorgement of ill-gotten gains plus interest, penny stock bars, and seeking from Woodford civil penalties. In addition, the SEC seeks a conduct-based injunction prohibiting Dalmy from providing legal services pertaining to federal securities law exemptions from registration and requiring her to provide actual or potential clients seeking advice or representation in matters related to the federal securities laws with copies of the SEC's prior actions against her and an order pursuant to Section 21(e) of the Exchange Act requiring Dalmy to comply with the SEC's September 2016 order.
In part, SEC Commissioner Peirce muses:

The presence or absence of women on corporate boards has drawn a lot of public and private sector attention recently. This morning, I would like to talk about why all the attention on this issue gives me both concern and hope for the future. My concerns are multiple. First, much of the rhetoric on this subject overstates or misstates the research on the subject. Second, calls to dictate or encourage particular board formulations from the government improperly override private sector decisions, and involvement of the federal government represents an improper federalization of corporate governance. Third, external micromanagement of board composition adds yet another cost to the already high cost of being a public company. Fourth, "Lady on Board" signaling may send an unintended and inaccurate message-absent mandates, corporate boards will not recruit women. On the positive side, boards that make a concerted effort to be creative in looking to fill substantive gaps are likely to look in places they would not traditionally have looked. As a result, I expect that corporate boards will increasingly draw from previously underrepresented populations simply because that is where boards will find the talent and expertise they need.

Much of the push for women on boards comes from private actors, including investors, asset managers, and proxy advisors. Some of these private actors are calling for disclosure,[2] while others are calling for quotas.[3] One organization, 2020 Women on Boards, promotes the inclusion of more women on boards and issues a "W" award to companies whose board is at least 20 percent women.[4] Private citizens and organizations are, of course, entitled to advocate for whatever board composition they like. The half dozen shareholder proposals reviewed by the SEC's Division of Corporation Finance on this topic in recent years[5] reflect a broader trend of increased pressure on companies to achieve greater gender and ethnic diversity on their boards.[6] The New York City Comptroller's Office has launched an initiative directed at increasing board diversity, including specifically gender diversity.[7] To the extent that diversity of any kind improves a company's ability to increase corporate value-by, for example, deepening the board's understanding of its customer base or introducing new ideas that a more externally homogeneous board might have missed-it is an eminently reasonable issue for consideration by anyone interested in a company's welfare.

I do, however, question a premise seemingly underlying many of these advocacy efforts: that the presence of women, without regard to what their qualifications are, is inherently salutary. A large asset manager's "Investment Stewardship Commentary" reported "Measurable improvements," including a two-time increase in the percentage of women on boards over the past decade and explained that "the growing number of women on company boards . . . is tied to long-term performance."[8] This asset manager is not alone in linking women's mere presence on boards with improved company performance. Another manager notes that there is "compelling research connecting greater gender diversity with better performance."[9] Accordingly, this asset manager "voted against more than 600 companies that have not taken adequate steps toward adding at least one female director."[10] . . .
Former Swettwater Investments Inc. President and owner Dennis Gibb pled guilty in the United States District Court to wire fraud and falsification of records with the intent to obtsturct a matter within the SEC's jurisdiction and was sentenced to five years in prison; and he agreed to forfeit a money judgment of $3,197,401 (inclusive of $1.77 million in the Income Flood fund) and the Court ordered restitution of $4,233,616.   As set forth in part in the DOJ Release:

GIBB created Sweetwater Income Flood Limited Partnership, a private fund Gibb managed, in 2008.  As early as 2007, he began soliciting investors for the fund targeting those who wanted steady retirement income in the near future.  Between 2007 and 2018, about 25 investors put about $7.3 million into the fund.  GIBB secretly transferred more than $3.1 million from the fund for his own expenses.  To hide his theft, GIBB sent investors falsified quarterly account statements.  When the SEC began an examination of the Sweetwater Investments in May 2018, GIBB provided false records to examiners indicating the fund had been liquidated.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Paul Andrews Rinfret and general partner, Plandome Partners LLC, with violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; also, Plandome Partners LP was named as a Relief Defendant. Separately, the United States Attorney's Office for the Southern District of New York filed criminal charges against Rinfret. As set forth in part in the SEC Release:

[R]infret perpetrated amultimillion dollar offering fraud scheme by falsely telling investors that they were investing in a successful trading strategy with a proven track record of triple digit returns. In truth, the complaint alleges, Rinfret's trading strategy consistently lost money, and Rinfret used millions of dollars of investor funds for personal living expenses, extravagant vacations, lavish parties, jewelry and other luxury goods.

Rinfret, as alleged, defrauded at least five individuals out of a total of $19.3 million by selling them limited partnership interests in Plandome Partners LP, a purported investment fund operated by Rinfret and Plandome LLC. According to the complaint, Rinfret told investors that their money would be used to trade in S&P 500 futures contracts and foreign currency, and materially misrepresented the fund's current performance, historical track record, trading strategy, and assets under management. To cover up his scheme and obtain additional investments, Rinfret sent investors fabricated monthly account statements, which showed large profits from trading that either never occurred or, in fact, had resulted in substantial losses.

SEC Announces Charges in Clean Energy Services Company Fraud (SEC Release)
In a Complaint filed in the United States District Court for the District of Nevada, the SEC charged now-defunct Blue Earth Inc. former executives Johnny R. Thomas(CEO), John C. Francis (Vice President of Corporate Development and Investor Relations), Jonathan Brett Woodard (CFO), and Robert C. Potts (President/COO) with having defrauded investors by materially misrepresenting the company's scope of business operations and financial condition. Without admitting or denying the SEC's findings, former Blue Earth accounting consultant R. Gordon Jones he agreed to an order denying him the privilege of appearing or practicing before the SEC as an accountant, a cease-and-desist order and a $70,000 penalty. Without admitting or denying the SEC's findings,S. Jeffrey Jones, the engagement partner on the external audit and review of Blue Earth's financial statements agreed to an order denying him the privilege of appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after two years.  As set forth in part the SEC Release:

From at least March 2014 until at least March 2015, the defendants allegedly repeatedly misrepresented the certainty and status of Blue Earth's construction, ownership, and operation of seven combined-heat-and-power plants. According to the complaint, the defendants created the false impression that the company had secured contracts for these plants, which would purportedly transform its business from an unprofitable venture to a profitable one. Blue Earth allegedly bolstered this illusion by falsely valuing a $44 million "Construction in Progress" asset, which inflated it by over 400% and comprised approximately 51% of Blue Earth's reported total assets as of March 2014. Contrary to this image, as alleged in the complaint, Blue Earth only secured contracts for two power plants, and its prospects of performing those contracts or securing additional contracts diminished significantly by late 2014. Further, the defendants allegedly persisted in portraying Blue Earth as a business that would generate significant long-term revenue. Blue Earth filed for bankruptcy on March 21, 2016.