SEC wins $2.04-million (U.S.) order against Pierce
2009-06-09 14:16 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
by Mike Caswell
The U.S. Securities and Exchange Commission has secured an order requiring Vancouver promoter Brent Pierce to disgorge $2.04-million that he made by selling shares of Lexington Resources Inc., a now-defunct pink sheets oil and gas company. (All figures are in U.S. dollars.) The order, contained in a decision handed down Friday by Administrative Law Judge Carol Foelak, comes 10 months after the SEC filed an administrative case alleging that Mr. Pierce and his associates made $13-million dumping Lexington as the stock rose to $7.50. It claimed that he co-ordinated an e-mail spam campaign and newsletters, while selling the company through an offshore bank.
The SEC convened a three-day hearing in Seattle on Feb. 2, 2009, to hear arguments in the case. Although Mr. Pierce was represented by his lawyer, Christopher Wells, he did not personally testify. He said that he was concerned he could be arrested if federal prosecutors discovered he was at the Seattle courthouse because they are investigating him for another company, CellCyte Genetics Corp.
Judge Foelak's decision
The judge, in a decision dated June 5, 2009, stated that Mr. Pierce's failure to appear in person was unexpected, and that she was entitled to draw an adverse inference from it. The SEC had called Mr. Pierce as a witness, and the hearing had been scheduled for February because Mr. Pierce had indicated he would not be available to testify in December. "Pierce's failure to give assurances against future violations or to recognize the wrongful nature of his conduct is underscored by his failure to appear in person and give testimony on these or any other topics," her decision reads. Instead of having in-person testimony, the judge treated his earlier depositions, which were taken in Vancouver, as testimony.
In finding against Mr. Pierce, the judge described his conduct as "egregious and recurrent." She said he sold unregistered shares of Lexington and took active steps to evade the reporting requirements of the U.S. Securities Act. In addition to the disgorgement order, the judge entered an order preventing future violations of the U.S. Securities Act.
One of the SEC's allegations was that Mr. Pierce was a behind-the-scenes control person at Lexington during the pump-and-dump. The judge agreed, noting that he held over 10 per cent of the company's shares and had considerable sway over the company's chief executive officer, Grant Atkins. The men met in the early 1990s, when Mr. Pierce hired Mr. Atkins to write a business plan for a company. They have since worked together at 10 companies, the judge said. During the Lexington promotion, Mr. Atkins consulted with Mr. Pierce repeatedly about the company. They spoke multiple times every week during 2003 and 2004, the judge found. In addition, Mr. Pierce directly controlled Lexington's consultants.
The judge also agreed with the SEC's allegation that Mr. Pierce executed several share transactions to avoid having a 10-per-cent ownership interest in Lexington, which would have triggered reporting requirements. In one of these transactions, Mr. Pierce assigned shares to Newport Capital Corp., a private Belize company. "Pierce testified that he transferred 350,000 shares to Newport to satisfy some of his debt to Newport; Atkins testified that the transfer was to enable Pierce to avoid having a ten percent beneficial ownership in Lexington," the judge stated.
Mr. Pierce claimed he did not own Newport, but the judge disagreed. She found that he was the beneficial owner, president and director of the company. She said he received a salary of $800,000 from Newport in 2005.
The judge said that Mr. Pierce used Hypo Bank of Liechtenstein as a conduit to sell his shares during the alleged pump-and-dump. As of April 30, 2004, he held 446,683 shares there, which he had sold by September, 2004, for gross proceeds of $2,113,362, the judge found. His total cost for the shares was $70,000, leaving him with a profit of $2,043,362. (On May 28, 2008, the B.C. Securities Commission issued a cease trade order against Hypo Bank, stating that it was a conduit for suspicious trading. The bank had refused to disclose the identities of clients who had sold $165-million worth of stock in several pink sheets and OTC Bulletin Board companies, citing privacy laws in Liechtenstein.)
Judge Foelak also noted that the BCSC banned Mr. Pierce for 15 years in 1993 after he improperly received money from Bu-Max Gold Corp., a former Vancouver Stock Exchange listing. The company raised $210,000 (Canadian) in May, 1989, for exploration. It paid $100,000 (Canadian) of that money to a private company controlled by Mr. Pierce for purposes which did not benefit Bu-Max.
The judge declined a late request by the SEC to increase the disgorgement by $7-million. After the hearing, the regulator said it had discovered new evidence indicating that Mr. Pierce had received an additional $7-million in ill-gotten gains by selling shares through two companies, Jenirob Company Ltd. and Newport Capital. Based on this evidence, the SEC asked her to raise the disgorgement, but the judge refused. She said she could not order disgorgement for any shares that those companies may have sold, because the SEC made no mention of either company in its initial order instituting proceedings.
The order from Judge Foelak is an initial decision, which means that Mr. Pierce has 30 days to appeal her findings or file a motion for reconsideration. After that, the decision becomes binding.
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