SEC
Legal

Florida Professors Nabbed in Naked Shorting Scheme

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Two college professors were caught using a complicated scheme to naked short over 20 stocks using call and put options from 2010 to 2012. The Securities and Exchange Commission levied fines of over $670,000 against the duo, after discovering the fraud while monitoring unusual trading in one of the companies whose options they traded. The scheme shows how delivery rules for shorting stocks leave gaps in option brokers’ ability to monitor trade settlement. Milen Kostov, assistant professor of engineering at Florida University in Tallahassee, came up with the trading strategy, which involved purchasing and writing two pairs of options for the same underlying stock to generate over $400,000 in profits. Around $800 million worth of call options were sold and at least $1.2 billion of common stock was purchased off an initial investment of only $100,000.

Legal

SEC Places U.S. Investment in China EGCs at Crossroads

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The recent ruling banning Chinese affiliates of the Big Four accounting firms from auditing companies listed on U.S. exchanges exposed a faulty agreement between the two countries and returned a longstanding conundrum to the forefront: Can officials concoct an oversight regime of Chinese issuers that satisfies both countries and reassures U.S. regulators and investors? The answer at this point: as much chance as the Jamaican Olympic bobsled team winning gold in Sochi. On January 23, Securities and Exchange Commission Administrative Law Judge Cameron Elliot ordered a six-month suspension of the Chinese units of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst & Young after the accountants failed to provide audit work papers of some Chinese issuers to U.S. regulators, who have been investigating the companies for fraud. The accounting firms claimed that to do so would have violated secrecy laws in China and wanted officials with the two countries to resolve the problem. The ruling fouled investor sentiment on Chinese companies over delisting fears.

Legal
Joe Meuse

China Reverse Merger Banker Meuse Banned by the SEC

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A leading banker in China reverse merger deals was banned from the penny stock business for five years by the Securities and Exchange Commission. On January 8, the U.S. District Court for the Southern District of New York ordered Belmont Partners CEO Joseph Meuse to pay fines and penalties of $224,500. The SEC barred Virginia-based Belmont and Meuse from committing fraud in relation to a securities offering again but Meuse did not admit or deny guilt.
Joe Meuse
In December 2011 the government regulator alleged that the company and Joseph Meuse used fabricated and backdated documents to convince a transfer agent and an attorney writing an opinion letter to issue free-trading shares of Alternative Green Technologies (AGTI). The SEC also charged AGTI, its CEO Mitchell Segal, a business partner named Howard Borg and stock promoters for their roles in the scheme that resulted in unknowing investors purchasing fraudulently issued AGTI shares. “Shell packagers who buy and sell public companies for use by fraudsters have no rightful place in our markets,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office in 2011 after the SEC fraud suit was filed.

SEC
Legal

Secondary Market Key to Success of New Reg A+ Offerings

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The development of a reasonably liquid secondary market for trading securities issued under the newly reformed Regulation A exemption proposed by the Securities and Exchange Commission is critical to the future growth and success of the offering structure for raising emerging growth capital, say both its proponents and critics. Without one, many cap markets pros say the new Tier II “A+” offerings will offer few advantages over the standard S-1 registered offerings while incurring most of the costs, and continue to be the neglected stepchild of the public offerings market. But with a secondary market to facilitate investor exits, Reg A+ boosters see a Goldilocks-like equity offering structure that could become the go-to channel to bridge young private emerging growth companies, some of them financed via publicly marketed private offerings, into the public markets. The SEC published a draft of the reformed Reg A rules in late December as an amendment to the Securities Act labeled Section 3(b)(2).  The proposal splits Reg A offerings into Tier I and Tier II types.