Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—N.D. Ill.: Energy company finds a lump of coal from the SEC in its stocking, (Dec 23, 2015)

By Matthew Garza, J.D.

The SEC sued Illinois-based Southern Cross Resources Group and two of its officers in federal district court in Chicago after accusing the asset-based trading company of misrepresenting its coal mining assets to investors. The SEC said the company’s CEO and president falsely claimed in private offering documents to have hundreds of millions of dollars of coal mining assets and nickel wire inventory, and also lied about their personal investments in the company and its status as a listed stock on the London Stock Exchange. The $5 million scam ran between 2012 and 2014 and victimized nearly 100 investors in 12 states. Without admitting or denying the charges, the defendants consented to an entry of judgment of violations of Securities Act Section 5(a), 5(c), and 17(a), as well as Exchange Act Section 10(b) (SEC v. Southern Cross Resources Group, December 21, 2015).

Former traders. The CEO and president of Southern Cross, former futures and commodities traders, began in April 2012 to raise funds through private placement memoranda by claiming that the company had over $310 million of audited assets. In fact, the SEC alleged, neither the assets nor the company had been audited. For instance, $84 million of coal mining assets described in the documents did not exist. At no point were the offerings registered with the SEC.

The two officers also claimed to have personally contributed over $26 million in unencumbered assets into the company, including nickel wire and 22 million tons of coal reserves at two Kentucky coal mines. But the owner of those reserves never transferred any interest in the coal mines to Southern Cross, said the SEC, and Southern Cross never paid the owner for the rights to mine the property.

Rescission offer. In March 2014, the company allegedly gave 54 investors the opportunity to back out of their investment, while advising that it had decided not to commit resources to the exploitation of its coal assets due to the deteriorating price of coal. But they still falsely claimed to possess rights to “significant coal reserves” and permits to mine those reserves, the SEC alleged.

The company also lied about its nickel wire assets, according to the allegations. The company’s private placement memorandum claimed that the CEO had contributed 2.6 million meters of nickel wire valued at over $226 million, but he had not paid anything for the wire. The suit alleged that an overseas business associate gave him the wire on consignment and requested he try to sell it in the U.S. A later amendment to the stock transfer agreement recorded a more modest $4 million value for 100,000 meters of wire. In actuality, the company had tried and failed to sell any wire since 2009.

The two officers were also accused of overstating their personal investments in Southern Cross. Both claimed to have made substantial cash contributions, but in fact contributed nothing, according to the SEC. Other promotional material overstated the pair’s past trading success and personal wealth. They also claimed that the stock was publicly traded on the London Stock Exchange, but the company had never applied for admission to the exchange.

The case is No. 15-cv-11506.

Companies: Southern Cross Resources Group, Inc

LitigationEnforcement: Enforcement FraudManipulation SecuritiesOfferings