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SEC Imposes Pennystock Bar And Spells It Out
Written: January 2, 2013

A financial industry veteran for over 40 years with some 38 years experience in China, Peter Siris was also a New York Daily News financial and economic columnist for 12 years ending in 2011. Since 1998, Siris has been:

  • a managing member of Guerrilla Capital Management, L.L.C., which has been the investment manager to Guerrilla Partners, LP, a domestic fund, since it was formed in 1998 and to Hua-Mei 21st Century Partners, L.P., a China fund that focused on the Chinese microcap market, including reverse-merged companies, since it commenced operations in 2007; and
  • the managing member of Hua-Mei 21st Century Partners, L.L.C., a consulting firm, since it was founded in 2006.

Neither Siris, nor either of the entities, nor Guerrilla Advisors, L.L.C., the general partner of both funds, are registered investment advisers.  Virtually all of his Siris’ family’s money is in Guerrilla Partners, LP, and Hua-Mei 21st Century Partners, L.P., (the "Funds'), and, as such, there was some alignment of Siris’ and his outside investors’ interests.

In the Matter of Peter Siris (Securities and Exchange Commission, Initial Decision,Initial Decision Release No. 477/Administrative Proceeding File No. 3-15057, December 31, 2012), we have the case of Siris who was charged with misconduct from 2007 through 2010 while associated with an unregistered investment advisor and, subsequently, enjoined on September 18, 2012, from violating the antifraud and registration provisions of the federal securities laws. Also, Siris was ordered to pay a $464,011.93 civil penalty; and to disgorge $592,942.39 in ill-gotten gains plus prejudgment interest of $70,488.83 jointly and severally with co-defendants the Funds. The underlying misconduct involved the pennystock China Yingxia International, Inc.; and the Funds (which had purchased the issuer's restricted shares and warrants in a private placement offering). 

Facing Bars

The SEC's Division of Enforcement sought collateral and penny stock bars of Siris, who argued that the proposed bars were unnecessary to protect the public and would even lead to harm. In addition to offering not to
  • participate in offerings,
  • accept consulting assignments, and 
  • purchase penny stocks,

Siris noted that 18 months earlier he had taken corrective action by discontinuing  investing in PIPEs and registered direct offerings. Further, he noted that as of two years ago, he discontinued all consulting services of Hua-Mei 21st Century Partners, L.L.C.; he established compliance protocols, appointed a chief compliance officer, and set up safeguards, including maintaining a restricted list; and he established an email back-up system to ensure the maintenance of records of all communications

It appears that a prime motivating factor in Siris’s decision to contest the imposition of bars is his desire to  wind down the Funds in an orderly fashion  -- for example, he reduced the Funds’ assets from approximately $101 million as of January 1, 2012, to approximately $70 million, of which nearly $46 million is cash, as of September 30, 2012.

Telegraphing The Message

Ominously for Siris, the Adminstrative Law Judge ("ALJ") noted that:

Siris also seeks to diminish his culpability in the events at issue in SEC v. Siris.
. . .
Siris acknowledged that he was not permitted to contest the factual allegations of the Commission’s complaint and agreed not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis...

To the extent that things could go downhill from here, they do.

Pointedly characterizing Siris' conduct as "egregious and recurrent," the ALJ acknowledges that he has been remorseful but with the filip that "he also blames others." Not exactly a ringing endorsement.  In sustaining the imposition of bars, the ALJ sums it up as follows:

[R]espondent’s previous occupation, if he were allowed to continue it in the future, would present opportunities for future violations. The violations are recent. The degree of harm to investors and the marketplace is indicated in the $464,011.93 civil penalty that Siris was ordered to pay and the $592,942.39 in disgorgement that he and co-defendants were ordered to pay. Further, as the Commission has often emphasized, the public interest determination extends beyond consideration of the particular investors affected by a respondent’s conduct – Siris and the outside investors in the Funds – to the public-at-large, the welfare of investors as a class, and standards of conduct in the securities business generally. See Christopher A. Lowry, Advisers Act Release No. 2052 (Aug. 30, 2002), 55 S.E.C. 1133, 1145, aff’d, 340 F.3d 501 (8th Cir. 2003); Arthur Lipper Corp., Exchange Act Release No. 11773 (Oct. 24, 1975), 46 S.E.C. 78, 100. Thus, Siris’ desire to participate personally in winding down the Funds cannot weigh against imposition of bars. Bars are also necessary for the purpose of deterrence. Arthur Lipper Corp., 46 S.E.C. at 100.

Siris argues that his conduct was not as bad as that of respondents in various follow-on cases cited by the Division. He does not, however, cite any follow-on case in which a respondent had been enjoined against violations of the antifraud provisions and received no sanction or a sanction less than a bar. None exists. From 1995 to the present there have been over thirty follow-on proceedings based on antifraud injunctions in which the Commission issued opinions. All of the respondents were barred 3 – thirty-one unqualified bars and three bars with the right to reapply after five years.4

Consequently, Siris is barred from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock. The impact of such a bar means that he is barred from acting as a promoter, finder, consultant, or agent; or otherwise engaging in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

 
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