A Stock Pump and Dump with False Press Releases

A Stock Pump and Dump with False Press Releases

Last month the SEC initiated an enforcement action against Heart Tronics, a public company,  and six individuals including Willie Gault, a former professional football player in connection with a series of fraudulent schemes pumping the Company’s stock.  In a parallel criminal investigation the US Department of Justice and the US Postal Inspection Service announced they had arrested one of the individuals.  While I will admit the involvement of a former professional football player with a well known name caught by attention,  what I really found interesting was the criminal nature of the activities which lead to an actual arrest.  As I read the court filings I found that the public company was being accused of a lot of nasty things.  For instance the complaint alleges the following:

  1. False and Misleading Press Releases
  2. A Shrill Figuredhead co-CEO.
  3. Blind Trutsts and Nominee Entities
  4. Failure to Disclose Public Sales
  5. Fraudulent Corporate Documents
  6. False SEC filing
  7. Improperly Registered S-8 Stock

The SEC is basically alleging that the defendants basically cooked the books of the company, issued false press releases, hired an investor relations person to promote the stock, and sold stock into the market as it ran higher.  Basically a Pump and Dump.

The SEC saw fit to charge these individuals with violation of Sections or Rules 10(b), 10b-5, 12(a), 13(b)2A, 13(b)2B,  12b-20, 13a-1, 13a-11, 13a13, 13(b) 5, 13b2-1 of the Exchange Act of 1934, as well as violating Sections 5(a), 5(c), 12b-11,  13a-14,  and 17(a) of the Securities Act of 1933.  Additionally the SEC leveled Aiding and Abetting claims for violating those sections of the Securities Act and the Exchange Act against the various parties.  Not satisfied with the above mentioned violations, the SEC also claimed violation of Section 302(b) of Regulation S-T.  The SEC basically threw the book at these guys. 

In looking at the actual complaint filed in Federal Court, there are some interesting items which worth taking a closer look.

Item 4 of the factual allegations describes false statements in filings with the SEC, violations of the Sarbanes-Oxley certifications, and the Company’s books and records.  In reading the basis for the violations of the Sarbanes-Oxley certifications, it males one wonder why the SEC is not bringing claims of this nature more often.

In the Third Claim for Relief, the SEC charges four individuals with having “knowingly provided substantial assistance to the primary violations”.

In the Fourth Claim for Relief, the SEC charges one individual with “Controlling Person Liability…”  The SEC states that this individual (a) directly or indirectly controlled Heart Tronics; (b) possessed the power and ability to control Heart Tronics as to itis violation of various SEC regulations; (c) was in a meaningful sense a culpable participant in Heart Tronics violation of various SEC regulations.

In the Thirteenth Claim for Relief, the SEC charges the investor relations (IR) person with violation of section 17(b) of the Securities Act.  This is a pretty basic and easy one to understand.  The IR person failed to disclose to the public the nature and amount of consideration that he received to tout the stock of Heart Tronics.  In any manner in which someone promotes a stock they are supposed to disclose their compensation.  The SEC has taken the opinion in the past that this even includes when a person is paid to post on message boards and other forms of internet communication.  This is a really easy regulation to enforce, and it makes on wonder why the SEC has not taken a more aggressive position on Section 17(b) and used it to end more securities frauds before the public suffers greater harm.

In the fourteenth through sixteenth claims for relief, the SEC makes claims of “unjust enrichment” against the various partnerships, blind trusts, and individuals involved.

The SEC is seeking a disgorgement of all monies received, plus interest, and a permanent bar of the individuals from serving as officers or directors of public companies or any future securities offerings.

At the end of the day, the most striking about the Heart Tronics litigation was the involvement of a former professional football player, or that the Department of Justice got involved; it was how well written the SEC’s complaint was, and how well it clearly defined certain activities.  But we are left with the lingering question of why we do not see more enforcement actions of this nature.

www.coralcapital.com

If you have any questions about the above blog post, please feel free to visit our web site, www.coralcapital.com and check out we have to offer.  Feel free to contact us if you have any questions.  We can be reached at 404-816-9220 and are always willing to speak with you.

About Coral Capital Partners

Founded in 1995, Coral Capital Partners, Inc. is a consulting firm that provides services to investment banks, private equity, public and privately held companies.  Our experienced team brings a diverse set of skills that allow us to service a wide variety of needs.  Our clients have ranged from international public companies with operations on three (3) continents to smaller privately held domestic companies. The services provided has covered the spectrum of providing support services to other firms to leading and overseeing large multi-year projects.

The SEC Litigation Release can be found at:  http://www.sec.gov/litigation/litreleases/2011/lr22204.htm

A copy of the SEC’s complaint can be found at:  http://www.sec.gov/litigation/complaints/2011/comp22204.pdf

We do applaud the SEC ‘s efforts to police this type of activities.

FINRA’s Sanction of Broker/Dealers for Lack of Conducting Reasonable Due Diligence

Last month FIRNA aanounced sanctions against 8 firms and 10 individuals for selling private placements without conducting a reasonable investingation into the merits of teh companies whose private placements they were selling.  The link to the news release is:  http://www.finra.org/Newsroom/NewsReleases/2011/P125193

This is after FINRA sanctioned 2 firms and 7 individuals in April for failure to conduct reasonable investingations into the merits of the companies whose private placements were they were selling.  The link for that news releases is:  http://www.finra.org/Newsroom/NewsReleases/2011/P123441

Both of these actions are the result of the sales of private placements tied to Medical Capital Holdings, Inc.,  Provident Royalties, LLC.,  and DBSI, Inc.

FINRA has made it very clear that it expects broker/dealers that engage in placing private placments that it expects them to either conduct or obtain a due diligence review under the guidelines of FINRA Regulatory Notice 10-22, and that it intends to come down very hard on those firms that fail to do so.  In most cases the firms that fails to obtain a due diligence review under the FINRA 10-22 guidelines are being ordered to pay restitution equal to the amount of the investor losses,  plus fines for the failure to obtain the due diligence review.  These penalties can easily put a smaller firm out of business.

We think that it is important, that broker/dealers understand the importance and significance of the FINRA 10-22 Due Diligence requirements.  It is only a matter of time that plaintiff’s attorneys start to go after the failure to conduct a FINRA 10-22 review in order to win damages awards against broker/dealers for client losses.  Obtaining a due diligence review from an independent third-party firm is a smart way for broker/dealers to protect themselves from plaintiff’s lawyers and help avoid FINRA regulatory actions.

www.coralcapital.com

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs.  Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms.

Coral Capital Partners, Inc.  provides services to Investment Banks,  Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations.  This has included international public companies with operations on three (3) continents to smaller privately held domestic companies.

Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand.  Please feel free to contact our offices to see how we may be of assistance.

 

Sun River Energy Pitches Investors on $39M to Fund Drilling Budget for 2012

Coral Capital Partners was mentioned in the article below, which was originally published on November 28th, 2011 in the PIPE’s Report.

Sun River Energy Pitches Investors on $39M to Fund Drilling Budget for 2012

By Dan Lonkevich
November 28, 2011 12:24 PM PST

Oil and gas producer Sun River Energy has recently been trying to raise $39 million to fund its drilling budget for 2012.

An investor presentation obtained by The PIPEs Report shows that Dallas-based Sun River was recently planning to raise $14 million by issuing 7 million units, each consisting of a common share and a warrant to purchase a common share. The units were to be priced at $2 each, and the warrants were to have an exercise price of $3. In a second, $25 million private placement, Sun River was to issue preferred stock that would pay an 8% dividend and convert, for a term of two years, into common shares at $5.25 each.

The investor presentation was dated Oct. 31.

Shares of Sun River rose 10 cents to $2.25 at 12.19 p.m. New York time in over-the-counter trading. They’ve traded between $1.89 and $5.17 over the past 52 weeks.

Representatives of the company couldn’t immediately be reached for comment by The PIPEs Report.

Sun River said in the presentation that it planned to use $9 million of the proceeds for exploratory test drilling in Colfax County, N.M., where the company has 171,000 acres of land rights. Sun River also planned to spend $2.5 million to lease an additional 100,000 acres in Colfax County. The company also planned to spend $13.9 million for development drilling in Texas, where it has more than 9,600 acres.

Sun River said its first identified development prospect in the Raton Basin of Colfax County may hold 80 million to 100 million barrels of oil. Overall, Sun River claims proved, developed, producing reserves of 4.9 billion cubic feet of natural gas equivalent and proved undeveloped reserves of 8.7 billion cubic feet of gas equivalent.

The company also has mineral rights to 154,000 acres of land in Colfax County, which it claims contains gold and silver. Sun River also has 178,000 acres with mineral rights to coal and 40,400 acres of timber rights.

The company said it plans seismic studies on previous prospects and to complete three test wells under its 2011-to-2012 development plan.

Sun River said it has a $50 million operational budget for 2011 and 2012, of which $25 million would come from the preferred stock placement and the rest from the unit placement and subsequent placements.

The company previously raised $11.1 million from two private placements. It raised $10 million from a convertible preferred stock PIPE in installments from December 2010 until January 2011. Investors included Centaur Value FundSherbrook PartnersNext View PartnersSeaside 88Warburg Opportunity Trading FundBrio CapitalMicro PIPE Fund,Fairfield Investments, and Bank of Guttenberg.

Sun River also raised $1.1 million from a private placement of common stock to LPC Investment, a Castle Rock, Colo.-based hedge fund, in 2007.

In the meantime, Sun River is embroiled in litigation with multiple investors, contractors and other holders of its restricted stock over its refusal to lift the restrictive legends that would permit the sales of the shares.

Sun River filed a suit to take back restricted stock issued to Mirador Consulting, a Boca Raton, Fla.-based firm that introduced the energy company to potential investors and investment bankers.

Similarly, Sun River filed suits to take back stock from Nova Leasing, a Casper, Wyo.-based oil and gas producer that sold assets to Sun River, and Coral Capital Partners, an Atlanta-based investment consulting company whose president researched and wrote reports on Sun River’s properties.

Each of these cases is pending, but Sun River lost on a similar lawsuit filed against LPC Investment.

 UPDATE:

Coral Capital Partners was awarded a judgment in its favor against Sun River Energy, Inc. following a trial on October 23rd, 2013.  Please see our blog entry “Coral Capital Partners Victorious in Sun Energy Litigation” for a further explanation of the trial, and how Sun River dropped all of its claims prior to trial. It should also be noted that the District Court Judge ruled in our favor in the dispute over the proposed settlement, and our decision to not enter into what was a clearly one-sided agreement.

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs.  Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms.  Coral Capital Partners, Inc.  provides services to Investment Banks,  Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations.  This has included international public companies with operations on three (3) continents to smaller privately held domestic companies.  Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand.  Please feel free to contact our offices to see how we may be of assistance.