Motion to Amend Charges Granted

Consumers Financial Corp., Exchange Act Rel. 61561, February 22, 2010

After these proceedings were instituted under Exchange Act § 12(j) based on delinquent mandatory filings the company claimed that it had less than 200 shareholders by filing a Form 15. The Division of Enforcement sought to amend the proceedings to bring them under § 12(g) after the ALJ noted that the filing of t he Form 15 deprived the Commission of jurisdiction under §12(j). The Commission granted the motion.

Delinquent Issuer's Registration Revoked - Commission Waits More Than A Year

Nature's Sunshine Products, Inc., Exchange Act Rel. 59268, January 21, 2009

Time since appeal filed – 1 year, 1 month, 22 days.
Time since last brief – 1 month, 16 days
Pages – 16
Footnotes – 50

Summary

The ALJ revoked Nature's Sunshine Exchange Act registration in late 2007 for failing to file any annual reports since 2004 and by failing to file quarterly reports since mid-2005. The Commission upheld the revocation.

After the company's auditors resigned, it continually promised to cure the delinquency. It finally filed a limited number of the required annual and quarterly reports in October 2008.

Discussion

Since the Commission has held periodic filings to be mandatory – why when the violations are recurring over a long period did the Commission here delay taking action? The Commission explained its revocation by citing the fact that the company is still not in compliance despite numerous promises. The Commission emphasized that a delinquent company's registration will be revoked even if the company has substantial ongoing business operations. Revocation is not reserved for shells. The Commission clearly was offended that the company attempted to file the delinquent filings on the eve of oral argument two weeks ago. It found those filings to be deficient. The defense argument that this was a corporate death penalty was rejected. The Commission noted that the company could file a new registration statement at any time so long as it contained the required audited financial statements.

Comment

This one is weird. After the ALJ revoked the company's registration in 2007, the Commission apparently stayed its hand only to then revoke the registration. Perhaps the Commission was giving the company time to become current. Why it should do so is never explained. But is it reasonable to hold trading markets hostage for more than a year after the company has been delinquent for a sustained period, proceedings have been brought and an ALJ has revoked the company's registration? What standards does the Commission use to determine how much time is enough time to wait for a company to attempt to become current in its filings? Every argument that the Commission trots out to justify the revocation was equally persuasive a year ago. At the very least, if the Commission is going to delay ruling on ALJ decisions in these 12(j) proceedings, it owes issuers and investors an explanation of the factors it will use to delay a final decision. Arbitrary delay with no standards is an not appropriate.

Order Amended To Correct Factual Error

Birman Managed Care, Inc., Exchange Act Rel. 59074, December 10, 2008

Summary

The proceedings were brought against Birman and Alcar Chemicals Group its purported successor under Exchange Act Section 12(j) to revoke their registrations for delinquent filings. The ALJ revoked their registrations by default. Birman then moved to set aside the default and the ALJ granted the motion. Birman and the Division of Enforcement then jointly moved to amend the Order Instituting Proceedings to remove all references to Alcar because Alcar was not in fact a successor to the Birman that is the subject of the proceeding. This is because there were two separate Birman's with the same name, both of which were incorporated in Delaware and Alcar was a successor to the second Birman. Since the purpose of the motion is to correct a factual error in the OIP it was granted.

Delinquent Filing Proceedings Dismissed After Issuer Deregisters

World Associates, Inc., Exchange Act Rel. 59034, December 1, 2008

The Commission brought proceedings under Exchange Act Section 12(j) against World Associates due to delinquent periodic Exchange Act filings. Shortly after that the company filed to voluntarily deregister its securities claiming that it had less than 500 shareholders and total assets of less than $10 million in its last three fiscal years. Since the deregistration became automatically effective the Division of Enforcement moved to dismiss the case. Since revocation or suspension of registration is the only statutory remedy no purpose would be served by continuing the case and the Division's motion was granted.

12(j) Proceeding Dismissed After Company Voluntarily Withdraws Registration

Telcoblue, Inc., Exchange Act Rel. 58061 (June 30, 2008)

Summary

Before these proceedings to de-register the company's stock were brought the company filed to withdraw the registration of its securities because it had less than 300 shareholders.  Such withdrawals become automatically effective in ninety days.  As a result the Division of Enforcement moved to dismiss the proceedings.  That motion was granted because the only remedy available in a 12(j) proceeding - revocation or suspension of registration had already occurred.  

Comment

One supposes that the proceedings were brought to encourage the company not to withdrawits withdrawal of registration before it became effective.

Exchange Act Revocation Upheld - Cure The Delinquency While The Appeal Is Pending

Impax Laboratories, Inc., Exchange Act Release 57864 (May 23, 2008)

Time Since Appeal Filed - 1 year

Times Since Last Brief - 9 months, 17 days

Pages - 17

Footnotes - 35

Summary

This case has some valuable lessons for companies facing revocation due to delinquent filings. If the company is seriously delinquent, has had a significant amount of time to become current, is still delinquent at the time of the decision, and has not been able to credibly state when it will become current - revocation is likely to be a foregone conclusion.

Impax appealed the ALJ's initial decision revoking the company's Exchange Act registration under Exchange Act Section 12(j) for failing to file periodic reports for any period after September 30, 2004.  The company admitted this.  The company claimed it was unable to devise an appropriate revenue recognition policy in connection with a profit sharing arrangement with an Israeli company.  Impax was to develop and manufacture generic drugs that the Israeli company would market.  The Israeli company was to loan money to Impax and purchase a specified amount of its stock.

In February 2005 the company and its auditors Deloitte started discussions about how to account for revenue related to the arrangement.  In March 2005 Deloitte advised the company it could not determine appropriate revenue recognition policies and advised the company to consult the Commission's staff for guidance.  Commission policy requires that companies seeking such guidance have their auditors confirm the accuracy of the submission made to the staff and reach a conclusion on the accounting issue.  In this instance, Deloitte advised management that the submission to the Commission staff was not complete and should not be submitted to the Commission staff because Deloitte had not reached a conclusion on proper accounting treatment.  The company made the submission anyway.  

In June 2005 Commission staff advised the company of specific factual and analytical issues that must be addressed by the company before it could provide a meaningful response and suggested the company make a second submission addressing those issues.  Also in June 2005 the company filed a Form 8-K announcing that it had identified material weaknesses in its internal accounting controls and NASDAQ notified the company that its listing was in jeopardy due to its delinquency in filing with the SEC.

In November 2005 the company made a second submission to the SEC staff, still without a conclusion from Deloitte.  In January 2006 Commission staff told the company that eight of the issues it had previously requested the company address were still unanswered.  The staff suggested that a third submission be made.  Over the next thirteen months the company, Deloitte, and an accounting consultant labored to prepare a third submission to the SEC staff.  

By November 2005 Deloitte notified the company it would resign as auditors after completion of the 2004 year-end audit. In February 2006 the company made a third submission to the Commission staff which included a claim that Deloitte concurred in the proposed accounting treatment. In March 2006 the Commission notified the company it would seek to revoke its registration unless it filed its delinquent periodic reports.  

At trial an expert for the company claimed that the stock traded in an efficient market despite the lack of periodic reports.  The company also claimed at the hearing that it would file all its delinquent reports within eight to twelve weeks after receiving clearance from the Commission staff who were still reviewing its third submission.  Unfortunately for the company, Deloitte testified that it could not estimate how long it would need to complete the 2004 audit.  The company's current auditors said they could not finish the 2005 and 2006 audits until Deloitte concluded its work.

In July 2007, while the appeal was pending, the Commission's accounting staff advised the company that all open accounting questions had been satisfactorily resolved.  Usually Commission staff responds to accounting submissions in less than three weeks.  As of the date of the opinion, Impax had filed none of the delinquent reports.

Despite Impax's efforts to solve its accounting problems, the Commission sustained the ALJ's order revoking the company's registration.  It noted that "[e]ven if the failure were unintentional, it has deprived the investing public of current and accurate information with respect to [its] operations and financial condition for a period of more than three years."  These were serious violations. Here, the company had been delinquent in filing a total of four annual reports and ten quarterly reports (including those that occurred after the enforcement case was instituted). 

Comment

The Commission here seems to have resolved some of the ambiguities in its earlier revocation decisions by announcing what amounts to a per se revocation rule when the company is still delinquent by the time of the decision, has been delinquent for a long time, and cannot credibly predict a date when it will become current in its delinquent filings.  

Also, when a company is delinquent over a long period, the Commission puts the burden of making a "strongly compelling showing" of other factors that will justify a sanction less than revocation.  This per se rule was adopted even though the company made significant efforts to solve its accounting problems.  

The Commission discounted the company's undeniable significant efforts to solve its problems because it made no filings even though the Commission staff had agreed with it on an accounting treatment in late July 2007.  Undoubtably this continued delinquency for almost ten months weighed heavily in the Commission's ultimate decision.  This rendered the company's assurances against future violations not credible.  Also significant was the company's inability to identify when it would actually be able to become current.

As to the company's argument that revocation would have a drastic impact on the company, the Commission noted that it could always reregister once it had completed its audits and was able to comply with registration requirements.

Wise defense counsel will focus their efforts in these cases on producing strong and credible evidence of when delinquencies will be cured and will cure while an appeal of an ALJ's revocation order is pending. Failure to cure while an appeal is pending is likely to prove fatal.

Phlo Corp., et. al., Exchange Act Rel. 55562 (March 30, 2007)

Transfer agent, Issuer reporting violations

Time between appeal and decision – 12 months, 16 days
Time between last brief and decision – 9 months, 25 days
Pages – 28

Comment

Perhaps the most significant ruling in this case is the imposition of a cease and desist order against the company whose transfer agent registration was revoked and officer who was barred from transfer agent association because the cease and desist orders would serve the remedial purpose of encouraging [them] "to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission." In justifying this sanction the Commission stated, "[w]e find that the record as a whole, especially the evidence with regard to the seriousness, recentness, and recurrent nature of the violations, the harm to the marketplace and the regulatory scheme, and the very high degree of scienter, establishes a sufficient risk that Respondents would commit future violations to warrant imposition of cease-and-desist orders. Based on all of these factors, we find cease-and-desist orders against Respondents to be in the public interest."

Also significant is the fact that the Commission increased the penalty against one respondent from $50,000 to $100,000. That respondent was responsible for the transfer agent violations and failed to cooperate with an SEC staff examination.

Finally, the Commission overturned the ALJ's sanction of revoking the issuer's registration because despite the egregious past violations, the company has devoted "significant resources to satisfying its reporting obligations," has become current with its periodic filings, and retained a consultant to improve its internal accounting functions. It did impose a cease and desist order against future filing violations. It is therefore clear that the Commission is reluctant to revoke the registration of a delinquent issuer that has become current and has taken other steps to make repeat violations less likely and will in the future be subject to a cease and desist order.

Key points

• The Commission considered as evidence a statement in a responpondent's Wells submission that she contradicted in her oral trial testimony.
• "'The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership . . . , are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.' Failure to comply jeopardizes the efficacy of the Congressionally-mandated national system for the prompt and accurate clearance and settlement of transactions in securities." (footnotes omitted).
  A transfer agent is required to keep records demonstrating that it has complied with the turn-around rule.
• "A willful violation of the securities laws means merely 'that the person charged with the duty knows what he is doing.' Wonsover v. SEC, 205 F.3d 408, 414 (2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor 'also be aware that he is violating one of the Rules or Acts.' Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965))
• The aiding and abetting scienter requirement can be satisfied with proof of actual knowledge or reckless disregard.
• Incomplete response by transfer agent to staff request for documents and to conduct physical examination for 2 ½ months violates the obligation to make required records available for inspection by the SEC staff.
• The person who delayed the transfer agent's response and submitted an incomplete response to the staff document request was an aider and abetter of the violations and a cause.
• There is no scienter requirement to establish a violation of the periodic reporting requirements of Exchange Act Section 13.
• Corporate officer who "engaged in acts and omissions that he knew or should have known would result in [the company's] reporting violations was a cause of those violations.
• The fact that the ALJ denied respondents request for a postponement of the hearing did not establish that the ALJ was biased against respondents and should have withdrawn from the proceeding.
• Revocation of transfer agent registration was appropriate as the failure to transfer items occurred for a three month period that the Commission characterized as egregious, recurrent, and prolonged.
• The fact that the company no longer acts as a transfer agent is irrelevant in considering sanctions as there is an opportunity for future violations because it could in the future resume that role.
• Despite revocation of the transfer agent's registration and a bar from association with a transfer agent for an individual, a cease and desist order was in the public interest in order to "serve the remedial purpose of encouraging [them] to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission."
• A $25,000 penalty was imposed for each month respondent aided and abetted transfer agent violations and another $25,000 for failure to comply with staff inspection requests.
• Because the company only had revenues of $1,544 and was in financial difficulty, and had a going concern qualification of its financial statements, the penalty of $100,000 against the company imposed by the ALJ was overturned as not in the public interest.
• Because the proceedings against one respondent were instituted only under Sections 12(j) and 21C of the Exchange Act, no penalty was appropriate and the penalty imposed by the ALJ against that respondent was also overturned.

Summary

Phlo Corp. manufactured beverages and acted as its own transfer agent (and was so registered with the Commission) for its publicly traded securities. James Hovis was executive vice presidenet of the company and Anne Hovis was the company's general counsel. The initial decision found that Phlo willfully violated transfer agent turnaround requirements and failed to make documents available for inspection by SEC staff. It also found that A. Hovis aided and abetted and caused the transfer violations and failure to provide records for examination. The ALJ also found that Phlo failed to timely file periodic reports with the SEC from March 2003 through November 2005 and that J. Hovis aided and abetted and caused those violations. The ALJ ordered civil penalties of $100,000 against Phlo, $25,000 against J. Hovis and $50,000 against A. Hovis, revoked Phlo's transfer agent registration, barred A. Hovis from associating with any transfer agent and imposed cease and desist orders on all respondents.

The initial decision was upheld in all respects, except that the penalty for A. Hovis was increased to $100,000 and no penalties were imposed against the company and J. Hovis.

Exchange Act rules require that registered transfer agents turn around 90 percent of routine items within three business days. Reports sent to Phlo by its Depository Trust Corp. showed that for three months in 2003 Phlo failed to meet the three day turnaround rule for fifty-four items. Phlo did not offer evidence that it had met the three day requirement and there was no evidence the items were non-routine. A. Hovis also was notified by DTC staff of the failure to turn around items. A. Hovis also explicitely refused to transfer items to Cede & Co.(DTC's nominee). She claimed that DTC had no legal right to insist that securities be registered in the name of Cede. The SEC staff told A. Hovis Phlo was required to transfer to Cede if instructed to do so by DTC despite her claim that this was facilitating naked short selling in Phlo stock. During a heated conversation with SEC staff A. Hovis refused to provide a legal basis for her position. When the hearing in this matter began in September 2005, a number of the transfers had still not been completed. Indeed, at the time of the oral argument on appeal, some of the transfers were still pending.

SEC staff pursuant to the Commission's inspection authority requrested various documents from Phlo in late October 2003. The documents were never provided and at one point the staff visited the registered location of the transfer agent, which was locked. Despite a request from the SEC staff, A. Hovis never contacted the staff to arrange a date for an inspection of that registered location. Finally, in mid-January 2004, A. Hovis provided some, but not all of the requested documents. The remaining documents have never been produced.

Because the Division of Enforcement met its initial burden of showing turn around violations by proof that all fifty-four items received by Phlo in June through August 2003 were still outstanding in early September 2003, the burden then shifted to Phlo to refute that evidence. Further, Phlo failed to respond to a request for documents that sought the required logs which document a transfer agent's compliance with the turn around rule.

A. Hovis aided and abetted the transfer agent violations and Phlo's failure to provide requested documents to the SEC staff. A. Hovis was a cause of the violations as well.

Between March 2003 and November 2005 Phlo failed to timely file three annual reports and eight quarterly reports with the SEC (the delinquencies ranged from three days to twenty months). Six of the eleven filings were more than a year late. During this time the company had four auditors.

J. Hovis admitted he was responsible for overall management of the company. He signed the company's annual and quarterly reports. He was found to be a cause of Phlo's reporting violations.

It was appropriate under the Steadman factors to revoke Philo's transfer agent registration and bar A. Hovis from associating with a transfer agent. It is appropriate to impose cease and desist orders against Phlo and A. Hovis for transfer agent violations despite the revocation and bar to "serve the remedial purpose of encouraging [them] to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission."

America's Sports Voice, Inc., Exchange Act Rel. 55511 (March 22, 2007)

Issuer reporting violations

Time between appeal and decision - 7 months, 6 days.
Time between last brief and decision - 4 months, 30 days.
Pages - 10

Comment

This is a routine matter revoking the registration of a company that had repeatedly failed to comply with the periodic reporting requirements since 2001. The Company had not filed any annual or quarterly reports since June 2001. The Commission affirmed the ALJ's initial decision revoking the registration of the company.

Remarkably, the Commission denied the Division of Enforcement motion for summary affirmance without explanation, merely citing Richard Kern, Exchange Act Release 51115 (February 1, 2005)(observing that "summary affirmance is rare, given that generally we have an interest in articulating our views on important matters of public interest.").

The Commission failed to articulate what in this opinion involved any "views on important matters of public interest" that justified denial of the motion. This was not the first case of its kind and would seem particularly appropriate for summary disposition.

Key Points

• No scienter is required to establish a violation of the reporting provisions of Exchange Act Section 13(a).
• In determining sanctions against an issuer the Commission considers: the seriousness of the violations, whether the violations are isolated or recurring; the degree of culpability; the issuers efforts to cure the violations; and the credibility of any assurances, if any, concerning future compliance.
• Compliance with reporting requirements is mandatory and may not be subject to conditions from the registrant.
• Harm to existing investors from a revocation must be weighed against harm to potential future investors and both existing and potential investors are harmed by continuing lack of current and reliable financial information about the company.

Summary

There isn't much to say here. The company had not made any periodic filings since June 2001. The Commission suspended trading in the stock for 10 days in June 2006.

Revocation was appropriate because the company's violations were "numerous and extended over a lengthy period."

Particularly important is the fact that although current management took control of the company before June 2004, the company is 29 months delinquent in filing a Form 10-KSB for that year. The company has also made no filings despite the June 2006 trading suspension and the later institution of this proceeding.