Federal Appeals Court Sustains Bar in SEC v. Siris

3. Siris and his firm Hua Mei acted as paid consultants to numerous Chinese companies in which his funds invested, including China Yingxia International, Inc. ("China Yingxia" or the "Company"), a purported nutritional foods company and one of the many Chinese companies in recent years that have gained access to the U.S. capital markets via reverse merger. Hua Mei received both cash and shares - including shares received through a person directly or indirectly controlled by the issuer, in a transaction that operated as an end-run around registration provisions of the federal securities laws, and which Siris sold for illicit proceeds of approximately $24,600 - for performing due diligence on China Yingxia; raising over $2 million for an $8.7 million China Yingxia "PIPE" transaction, in which Siris acted as an unregistered broker and received payment of $107,500 in transaction-based compensation; and reviewing and advising on Commission filings, press releases, and hiring decisions, among other things.

4. During the time Siris worked and had a relationship of trust and confidence with China Yingxia, he received and traded on material, non-public information concerning the Company. Specifically, on or around February 19, 2009, Siris learned of problems at China Yingxia directly from the Company's chief executive officer, including that she had engaged in companies, Hua Mei, for repeated violations of the federal securities laws. Defendants Siris, Guerrilla Capital, and/or Hua Mei - who are significant investors and consultants in the Chinese reverse merger investment space - engaged in wide-ranging misconduct from 2007 to 2010, including improper sales of unregistered illegal fundraising activities in China, and that a Company factory had shut down. In response, Siris began selling hundreds of thousands of shares of China Yingxia stock prior to any public disclosure by China Yingxia concerning these issues that threatened to, and indeed later did, shutter the Company. Siris learned additional material, non-public information during the late afternoon of March 3, 2009, when he received a draft press release and notice that China Yingxia planned to publicly disclose the problems. Siris increased his orders to sell over the next couple of days before China Yingxia issued its press release publicly disclosing the problems on March 6, 2009. In all, Siris, through his funds, sold 1,143,660 China Yingxia shares in a matter of weeks, for ill-gotten gains (profits and/or losses avoided) of approximately $172,000.

5. China Yingxia's stock price plummeted on the first trading day after it issued the press release of March 6, 2009. The Company's directors resigned that same day and, within roughly a month, the chief financial officer also resigned, effectively ending China Yingxia's operations. Reports indicate that Chinese officials have sentenced the Company's CEO to death for illegal fundraising activities, similar to a Ponzi scheme, involving Chinese citizens. . .

3. The Commission's complaint alleged that, from at least 2007 until 2010, Siris violated numerous federal securities laws in connection with his dealings with Chinese reverse merger companies. It alleged that, relating to China Yingxia, a company with which Siris maintained a consulting relationship, Siris engaged in illegal insider trading in its securities shortly before the company collapsed; acted as an unregistered securities broker by raising over $2 million for China Yingxia in exchange for transaction-based compensation; sold unregistered securities of China Yingxia that one of his firms received through an end-run around registration provisions of the federal securities laws; and made material misrepresentations and omissions to investors in his funds concerning his dealings with China Yingxia. Specifically, Siris wrote to his investors after the company collapsed and placed blame on others he claimed were responsible for the company's Commission filings and key hiring decisions, among other things, and against whom he wanted to initiate legal action. Siris omitted from disclosure, however, his significant role in those very same tasks, depriving his investors of information concerning his role with the failed company. The complaint further alleged that in advance of ten confidential securities offerings, after agreeing to go "over-the-wall," Siris engaged in repeated insider trading in breach of his duty to keep certain information confidential and not trade on such information; committed fraud in a securities purchase agreement by falsely representing that his funds had not engaged in any trading after being contacted about a deal, when in fact his funds had effected short sales in that issuer's securities; and violated Rule 105 of Regulation M by participating in two offerings of equity securities after directing short sales in those issuers' securities.

Siris has been in the in the financial industry for over forty years, with over thirty-eight

years of experience in China. Answer at 8-9. For twelve years, until 2011, Siris wrote a column for the New York Daily News covering financial and economic news. Answer at 5. His record was unblemished until SEC v. Siris. Answer at 2. Siris lives frugally. Answer at Aff. at 3. Virtually all of his family's money is in Guerrilla Partners, LP, and Hua-Mei 21st Century Partners, L.P., (the Funds) so that his interests and the outside investors' interests are aligned. Answer at Aff. at 4. Siris has acknowledged and learned from his mistakes. Answer at 1, Answer at Aff. at 1-2, 23.Siris has taken corrective action: as of eighteen months ago, he discontinued investing in PIPEs and registered direct offerings; 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. Answer at Aff. at 2-3; Opposition at 1-2. Siris wants the opportunity to wind down the Funds in an orderly fashion; 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. Answer at Aff. at 2.

SIDE BAR: For an extensive listing of Siris's NY Daily News columns pertaining to China, READ

Siris's conduct was egregious and recurrent and amply justifies his being barred from the industry. He was enjoined based on alleged conduct that included numerous instances of insider

trading over the course of almost two years and that resulted in ill-gotten gains of over half-a-million

dollars. In addition to recurrent insider trading, the Complaint further alleged that Siris

committed securities fraud through material misrepresentations in connection with a securities

purchase agreement and misrepresentations and omissions to investors in his funds.35

We have

repeatedly held that "'conduct that violates the antifraud provisions of the securities laws is

especially serious and subject to the severest of sanctions under the securities laws.'"36

Siris's conduct involved scienter. The multiple, repeated instances of insider trading alleged in the Complaint support the conclusion that Siris acted intentionally, or at a minimum,

with severe recklessness.

37

This is particularly true given Siris's long experience in the industry

and admitted knowledge that he could not trade while in possession of material, non-public

information. Moreover, in addition to fraud-based claims, the Complaint alleged deceptive

conduct in connection with a violation of Section 5 of the Securities Act. The sale of China

Yingxia stock that forms the basis of the Section 5 charge was facilitated by Siris's making a

knowingly false representation that the stock he received was for services rendered to the

shareholder and not the company.

38

According to the Complaint, despite knowing of its falsity,

Siris made this representation to evade the registration requirements of Section 5 so he could

freely trade China Yingxia stock.39

Giving "considerable weight to the injunctive allegations" of

the Complaint,40 we find based on our review of the entire record that Siris's conduct involved

scienter, which supports a bar.41

Siris insists that he has taken "corrective efforts" to avoid future misconduct, such as ceasing to participate in offerings, eliminating consulting services, establishing trading compliance protocols, appointing a chief compliance officer, maintaining a restricted list, and

establishing an e-mail backup system.42

While we acknowledge the steps Siris has taken, we

find that such voluntary measures do not ensure, as he suggests, that "there is no realistic

prospect for future violations." 43 And accepting the sincerity of Siris's assurances against future

misconduct does not mean that "there can be no risk of future misconduct warranting a bar."44

As we have held "such assurances are not an absolute guarantee against misconduct in the

future"; we weigh them against the other Steadman factors in assessing the public interest.

45.

. . .

We also find that Siris has not meaningfully recognized the wrongful nature of his

conduct. Although Siris insists that he has "acknowledged his conduct" and "accepted

responsibility for it," he continues to maintain, as discussed more fully below, that his conduct

did not in fact amount to violations of the securities laws as alleged in the Complaint. Denying

that there is a factual basis for most of the securities law violations in the Complaint (something

Siris agreed not to do) does not amount to a meaningful recognition of his misconduct.48

Indeed, although Siris agreed that he would not contest the factual allegations of the Complaint in this proceeding, he has failed to abide by this agreement and has repeatedly disputed the Complaint's factual allegations.

49

The flagrant manner in which Siris has violated

the terms of his consent also gives us pause about relying upon his assurances against future

misconduct, even accepting them as sincere. Weighing the relevant factors, we conclude that,

"notwithstanding the sincerity of his present assurances that he will not commit such misconduct

again, the risk that he would not be able to fulfill his commitment is sufficiently great that

permanent associational bars are required to protect the public interest."

• Siris
• SEC
• SDNY
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• Bar
• Injunction
• Bill Singer
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