SIFMA Compliance and Legal Society Annual Seminar Current

Transcription

SIFMA
Compliance and Legal Society Annual Seminar
Current Enforcement Issues - Outline
March 18, 2012
Miami, FL
Outline of Recent SEC Enforcement Actions
Recent Highlights Through July 31, 2011
Submitted by:
Robert S Khuzami, Director
Division of Enforcement
Prepared by:
Amy Luo,
Intern, Division of Enforcement;
Lauren Dies,
Intern, Division of Enforcement; and
Miles Greaves,
Intern, Division of Enforcement
Division of Enforcement
U.S. SEC1
Washington, D.C.
1
The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its
employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the
Commission or of the authors’ colleagues upon the staff of the Commission. Parts of this outline have been used in
other publications.
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TABLE OF CONTENTS
FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS..... 10
SEC v. Jeffery A. Lowrance, et al. ........................................................................................ 10
SEC v. Robert D. Orr, Leland G. Orr, Michael S. Lowry, Michael S. Hess, Kyle L. Garst,
and Travis W. Vrbas .............................................................................................................. 10
SEC v. Satyam Computer Services Limited d/b/a Mahindra Satyam ................................... 12
In re Lovelock & Lewes, et al. .............................................................................................. 13
SEC v. Ian J. McCarthy ......................................................................................................... 14
SEC v. Radius Capital Corporation and Robert A. DiGiorgio .............................................. 15
SEC v. DHB Industries, Inc. n/k/a Point Blank Solutions, Inc., ........................................... 15
SEC v. Provident Capital Indemnity, Ltd., et al. ................................................................... 16
SEC v. Theodore R. Maloney ............................................................................................... 17
SEC v. Joseph M. Elles ......................................................................................................... 18
SEC v. Duane Martin and Gary Trump ................................................................................. 19
SEC v. Office Depot, Inc....................................................................................................... 20
SEC v. LocatePlus Holdings Corporation ............................................................................. 21
SEC v. Citigroup Inc. ............................................................................................................ 21
SEC v. Dell Inc., et al. ........................................................................................................... 22
SEC v. Diebold, Inc. .............................................................................................................. 23
In the Matter of infoUSA Inc. ............................................................................................... 24
SEC v. Vinod Gupta; SEC v. Vasant H. Raval; SEC v. Rajnish K. Das and Stormy L. Dean
............................................................................................................................................... 25
SEC v. State Street Bank and Trust Company ...................................................................... 26
CASES INVOLVING STOCK OPTION BACKDATING ..................................................... 27
SEC v. Vitesse Semiconductor Corporation, Louis R. Tomasetta, Eugene F. Hovanec, Yatin
D. Mody, and Nicole R. Kaplan ............................................................................................ 27
SEC v. One or More Unknown Purchasers of Securities of Wimm-Bill-Dann Foods OJSC 28
SEC v. Black Box Corporation, Frederick C. Young, and Anna M. Baird ........................... 29
SEC v. SafeNet, Inc. et al. ..................................................................................................... 30
CASES INVOLVING ACCOUNTANTS AND AUDITORS ................................................. 30
In the Matter of KPMG Australia.......................................................................................... 30
SEC v. Michael R. Drogin, CPA ........................................................................................... 31
SEC v. Sujata Sachdeva and Julie Mulvaney ....................................................................... 32
In the Matter of Dan Wise ..................................................................................................... 33
SEC v. John W. Dwyer ......................................................................................................... 34
In the Matter of Ernest Young LLP....................................................................................... 35
SEC v. Michael J. Moore and Moore & Associates Chartered ............................................. 35
SEC v. Michael T. Rand ........................................................................................................ 36
SEC v. Whispering Winds Properties, LLC; LM Beagle Properties, LLC; Karlena, Inc.;
Axis International, Inc.; and Dan Wise ................................................................................. 37
CASES INVOLVING FOREIGN PAYMENTS ...................................................................... 38
SEC v. Johnson & Johnson ................................................................................................... 38
SEC v. Comverse Technology, Inc. ...................................................................................... 38
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SEC v. International Business Machines Corperation .......................................................... 39
SEC v. Tyson Foods, Inc. ...................................................................................................... 40
SEC v. Alcatel-Lucent, S.A................................................................................................... 40
SEC v. RAE Systems Inc. ..................................................................................................... 41
SEC v. Tidewater Inc. ........................................................................................................... 42
SEC v. Noble Corporation..................................................................................................... 43
SEC v. Panalpina, Inc. ........................................................................................................... 44
SEC v. Pride International, Inc. ............................................................................................. 45
SEC v. Transocean Inc. ......................................................................................................... 45
SEC v. GlobalSantaFe Corp. ................................................................................................. 46
SEC v. Universal Corp., Inc.; SEC v. Alliance One Int’l, Inc. ............................................. 47
SEC v. ENI, et al. .................................................................................................................. 48
SEC v. Bobbj J. Elkin Jr., et al. ............................................................................................. 49
OIL FOR FOOD CASES ........................................................................................................... 50
SEC v. Armor Holdings, Inc. ................................................................................................ 50
SEC v. ABB Ltd. ................................................................................................................... 51
SEC v. General Electric, et al. ............................................................................................... 52
SEC v. Daimler AG ............................................................................................................... 53
SEC v. Innospec, Inc. ............................................................................................................ 55
OTHER CASES .......................................................................................................................... 57
SEC v. Farkas, SEC v. Brown, SEC v. Kissick, SEC v. Kelly, SEC v. Allen ...................... 57
SEC v. Robert C. Butler......................................................................................................... 59
SEC v. Mike Watson Capital, LLC, Michael P. Watson and Joshua F. Escobedo ............... 59
SEC v. Spyglass Equity Systems, et al. ................................................................................. 60
SEC v. Larry Michael Parrish ............................................................................................... 61
SEC v. Gendarme Capital Corp., et al. .................................................................................. 62
SEC v. Noor Mohammed ...................................................................................................... 62
SEC v. James D. Sterling ...................................................................................................... 63
SEC v. Carol McKeown, et al. .............................................................................................. 64
SEC v. Maynard L. Jenkins ................................................................................................... 65
CASES INVOLVING BROKER-DEALERS........................................................................... 65
In the Matter of Raymond James & Associates, Inc. and Raymond James Financial Services,
Inc. ......................................................................................................................................... 65
In the Matter of Larry Feinblum............................................................................................ 66
SEC v. Joseph Catapano and Michael Piervinanzi................................................................ 67
SEC v. James J. Konaxis ....................................................................................................... 67
SEC v. CytoCore, Inc., et al. ................................................................................................. 68
SEC v. Steven L. Rattner....................................................................................................... 69
In the Matter of The Buckingham Research Group, Inc. ...................................................... 71
SEC v. Shawn A. Icely .......................................................................................................... 72
In the Matter of Pinnacle Capital Markets LLC .................................................................... 72
In the Matter of Ronald S. Bloomfield et al. ......................................................................... 73
SEC v. Goldman, Sachs & Co., et al. .................................................................................... 74
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In the Matter of Mortgages Ltd. Securities, LLC .................................................................. 75
In the Matter of ICAP Securities USA LLC, Ronald A. Purpora, Gregory F. Murphy, Peter
M. Agola, Ronald Boccio, Kevin Cunningham, Donald E. Hoffman, Jr., and Anthony Paris
............................................................................................................................................... 76
SEC v. Morgan Keegan & Company, Inc. ............................................................................ 77
SEC v. Sky Capital LLC a/k/a Granta Capital LLC, Ross Mandell, Stephen Shea, Adam
Harrington Ruckdeschel, Arn Wilson, Michael Passaro and Robert Grabowski .................. 78
CASES INVOLVING FAILURES TO SUPERVISE.............................................................. 79
In the Matter of Marc A. Ellis; In the Matter of Frederick A. Kraus; In the Matter of David
C. Levine ............................................................................................................................... 79
In the Matter of Divine Capital Markets, LLC, Danielle Hughes, and Michael Buonomo .. 80
In the Matter of TD Ameritrade, Inc. .................................................................................... 81
In the Matter of Dohan and Company CPAs, Steven H. Dohan, CPA, Nancy L. Brown,
CPA, and Erez Bahar, CA ..................................................................................................... 81
CASES INVOLVING TRANSFER AGENTS ......................................................................... 82
In the Matter of Securities Transfer Corporation and Kevin Halter, Jr. ................................ 82
In the Matter of Global Sentry Equity Transfer, Inc. ............................................................ 83
SEC v. Whitney D. Lund, Sr. and Standard Transfer & Trust Co. ....................................... 84
CASES INVOLVING MUNICIPAL BONDS .......................................................................... 84
SEC v. J.P. Morgan Securities LLC ...................................................................................... 84
SEC v. UBS Financial Services Inc. ..................................................................................... 85
SEC v. Banc of America Securities LLC .............................................................................. 86
In the Matter of State of New Jersey ..................................................................................... 87
SEC v. Harold H. Jaschke ..................................................................................................... 88
SEC v. Charles E. LeCroy, and Douglas W. MacFaddin ...................................................... 89
In the Matter of J.P. Morgan Securities Inc. ......................................................................... 90
CASES INVOLVING SELF-REGULATORY ORGANIZATIONS..................................... 90
In the Matter of Salvatore F. Sodano .................................................................................... 90
In the Matter of Boston Stock Exchange, Inc. and James B. Crofwell ................................. 91
CASES INVOLVING HEDGE FUNDS ................................................................................... 92
In the Matter of Level Global Investors, L.P. ....................................................................... 92
SEC v. John Clement & Edgefund Capital, LLC .................................................................. 92
SEC v. IU Group, Inc., Elijah Bang, and Daniel Lee ............................................................ 93
SEC v. Perry A. Gruss ........................................................................................................... 94
SEC v. Lawrence R. Goldfarb et al. ...................................................................................... 95
SEC v. Francisco Illarramendi and Michael Kenwood Capital Management, LLC ............. 95
SEC v. Stanley J. Kowalewski and SJK Investment Management, LLC ............................. 96
In the Matter of American Pegasus LDG, LLC, et al............................................................ 97
SEC v. Alero Odell Mack, Jr., et al. ...................................................................................... 98
SEC v. Southridge Capital Management LLC, Southridge Advisors LLC, and Stephen M.
Hicks ...................................................................................................................................... 98
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SEC v. Paul T. Mannion, Jr., Andrew S. Reckles, PEF Advisors LLC, and PEF Advisors
Ltd. ........................................................................................................................................ 99
CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS ................... 100
SEC v. Sam Otto Folin, Benchmark Asset Managers LLC, and Harvest Managers LLC .. 100
In the Matter of Brookside Capital, LLC ............................................................................ 101
In the Matter of Wunderlich Securities, Inc., Tracy L. Wiswall, and Gary K. Wunderlich, Jr.
............................................................................................................................................. 102
SEC v. Jupiter Group Capital Advisors, LLC, and Rick Cho ............................................ 103
In the Matter of Aristeia Capital, LLC ................................................................................ 103
In the Matter of Aletheia Research and Management, Inc., Peter J. Eichler, Jr. and Roger B.
Peikin ................................................................................................................................... 104
In the Matter of Gualario & Co., LLC ................................................................................ 105
SEC v. MAM Wealth Management, LLC, MAMW Real Estate Fund General Partner, LLC,
Alex Martinez, and Raphael R. Sanchez ............................................................................. 105
SEC v. Marlon Quan, Acorn Capital Group, LLC and Stewardship Investment Advisors,
LLC ..................................................................................................................................... 106
SEC V. Timothy J. Roth, et al. ............................................................................................ 107
SEC v. JSW Financial Inc., James S. Ward, David S. Lee, Edward G. Locker, Richard F.
Tipton and David C. Lin...................................................................................................... 108
In the Matter of SBM Investment Certificates, Inc., f/k/a 1st Atlantic Guaranty Corp., SBM
Certificate Company, Geneva Capital Partners, LLC and Eric M. Westbury, Sr. .............. 108
SEC v. William Landberg, Kevin Kramer, Steven Gould, Janis Barsuk, West End Financial
Advisors LLC, et al. ............................................................................................................ 109
SEC v. Warren D. Nadel, Warren D. Nadel & Co. and Registered Investment Advisers, LLC
............................................................................................................................................. 110
SEC v. Charles Schwab Investment Management, Charles Schwab & Co., Inc., and Schwab
Investments .......................................................................................................................... 111
SEC v. Alfred Clay Ludlum III, et al. ................................................................................. 112
SEC v. Cohmad Securities Corp., et al................................................................................ 114
SEC v. Carlo G. Chiaese, et al. ........................................................................................... 115
SEC v. ICP Asset Management, LLC, et al. ....................................................................... 116
SEC v. Kenneth Ira Starr, et al. ........................................................................................... 117
SEC v. Onyx Capital Advisors, LLC et al. ......................................................................... 118
SEC v. Gryphon Holdings, Inc. et al. .................................................................................. 119
In the Matter of Morgan Asset Management, Inc., et al. .................................................... 120
SEC v. Enrique F. Villalba, Jr. ............................................................................................ 121
In the Matter of Value Line, Inc., Value Line Securities, Inc., Jean Bernhard Buttner, and
David Henigson ................................................................................................................... 122
SEC v. Regions Bank .......................................................................................................... 123
In the Matter of Morgan Stanley & Co. Incorporated; In the Matter of William Keith
Phillips ................................................................................................................................. 124
SEC v. Stanley Chais........................................................................................................... 124
SEC v. Founding Partners Capital Management Company, William Gunlicks, Sun Capital,
Inc., Sun Capital Healthcare, Inc., Founding Partners Stable-Value Fund, LP, Founding
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Partners Stable-Value Fund II, LP, Founding Partners Global Fund, Ltd., and Founding
Partners Hybrid-Value Fund, LP ......................................................................................... 125
CASES INVOLVING INSIDER TRADING.......................................................................... 126
SEC v. Compania International Financiera S.A., et al. ....................................................... 126
SEC v. Phillip E. (Rick) Powell .......................................................................................... 126
SEC v. One or More Unknown Purchasers of Securities of Telvent GIT S.A. .................. 127
SEC v. Cheng Yi Liang, et al. ............................................................................................ 128
SEC v. Donald L. Johnson .................................................................................................. 129
SEC v. Patrick M. Carroll, et al. .......................................................................................... 130
SEC v. Joseph F. “Chip” Skowron III, et al. ....................................................................... 131
SEC v. Matthew H. Kluger and Garrett D. Bauer ............................................................... 132
SEC v. Kim Ann Deskovick and Brian S. Haig .................................................................. 133
SEC v. Todd Leslie Treadway ............................................................................................ 134
SEC v. Jeffery J. Temple and Benedict M. Pastro .............................................................. 134
SEC v. Brett A. Cohen and David V. Myers ....................................................................... 135
SEC v. One or More Unknown Purchasers of Securities of Wimm-Bill-Dann Foods OJSC
............................................................................................................................................. 136
SEC v. Arnold McClellan and Annabel McClellan ............................................................ 137
SEC v. Dr. Yves M. Benhamou .......................................................................................... 138
SEC v. Gianluca Di Nardo, et al. ........................................................................................ 139
SEC v. Marleen Jantzen and John Jantzen .......................................................................... 140
SEC v. Wyly, et al. .............................................................................................................. 140
In the Matter of David E. Zilkha ......................................................................................... 142
SEC v. Yonni Sebbag and Bonnie Jean Hoxie .................................................................... 143
SEC v. Igor Poteroba, et al. ................................................................................................. 144
SEC v. Arthur J. Cutillo, et al.............................................................................................. 145
“GALLEON” CASES............................................................................................................... 145
SEC v. Adam Smith ............................................................................................................ 145
SEC v. Michael Cardillo ..................................................................................................... 146
SEC v. Robert Feinblatt, Jeffrey Yokuty, Trivium Capital Management LLC, Sunil Bhalla,
and Shammara Hussain ....................................................................................................... 147
SEC v. Lanexa Management LLC and Thomas C. Hardin; SEC v. Franz N. Tudor .......... 148
SEC v. Galleon Management, LP, et al. .............................................................................. 148
CASES INVOLVING MARKET MANIPULATION ........................................................... 149
SEC v. Brian Gibson; SEC v. Douglas Newton and Real American Brands, Inc., n/k/a Real
American Capital Corp.; SEC v. Donald W. Klein and KCM Holdings Corp.; SEC v.
Thomas Schroepfer a/k/a Thomas Schroepfer Baetsen, Charles Fuentes, and Smokefree
Innotec, Inc. ......................................................................................................................... 149
In the Matter of Huntleigh Securities Corporation and Jeffrey S. Christanell .................... 150
In the Matter of Donald L. Koch and Koch Asset Management LLC ................................ 151
SEC v. Todd M. Ficeto, et al. .............................................................................................. 152
SEC v. Jonathan R. Curshen, et al. ...................................................................................... 153
SEC v. Gregg M.S. Berger, et al. ........................................................................................ 153
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SEC v. Alternate Energy Holdings, Inc., et al. .................................................................... 154
SEC v. Jennifer L. Dodge, Grant M. Carroll, Tamara M. Davis, and The Cornerstone TKD,
LLC ..................................................................................................................................... 154
SEC v. Javeed A. Matin and Wilshire Equity, Inc. ............................................................. 155
SEC v. BroCo Investments and Valery Maltsev ................................................................. 156
SEC v. East Delta Resources Corp., Victor Sun, David Amsel and Mayer Amsel ............ 157
SEC v. Scott R. Sand and Ingen Technologies, Inc; SEC v. Jeffrey Galpern; SEC v. Jean R.
Charbit and Tzemach David Netzer Korem; SEC v. Anthony Mellone, Alex Parsinia, Larry
Wilcox, Macada Holding, Inc. f/k/a Tri-Star Holdings, Inc., Zcom Networks, Inc., and The
UC HUB Group; SEC v. Bruce Palmer and AccessKey IP, Inc.; SEC v. John "Buckeye"
Epstein, Steven E. Humphries, Earthworks Entertainment, Inc., and The Fight Zone, Inc.
a/k/a Gold Recycle Corp. .................................................................................................... 157
In the Matter of Carlson Capital, L.P. ................................................................................. 158
In the Matter of Peter G. Grabler ........................................................................................ 159
In the Matter of Leonard J. Adams...................................................................................... 160
SEC v. Spongetech Delivery Systems, Inc., et al. ............................................................... 161
CASES INVOLVING SECURITIES OFFERINGS ............................................................. 163
SEC v. Copper King Mining Corp, Alexander Lindale, LLC., Mark D. Dotson, Wilford R.
Blum and Stephen G. Bennett ............................................................................................. 163
SEC v. Association for Betterment Through Education and Love, Inc., et al. ................... 164
SEC v. Advanced Optics Electronics, Inc., Leslie S. Robins, JDC Swan, Inc. and Jason
Claffey ................................................................................................................................. 164
SEC v. George Garcy a/k/a Jose Garcia, et al. .................................................................... 165
SEC v. mUrgent Corporation, et al. .................................................................................... 166
SEC v. Commodities Online, LLC and Commodities Online Management, LLC.............. 166
SEC v. Inofin, Inc., Michael J. Cuomo, Kevin J. Mann, Sr., Melissa George, Thomas Kevin
Keough, David Affeldt, and Nancy Keough ....................................................................... 168
SEC v. Paul Nicholson and Professional Investment Exchange, Inc. ................................ 168
SEC v. Mike Watson Capital, LLC, Michael P. Watson and Joshua F. Escobedo ............. 169
SEC v. St. Anselm Exploration Co. et al............................................................................. 170
SEC v. Timothy S. Durham, et al. ....................................................................................... 170
SEC v. Jason Bo-Alan Beckman and Oxford Private Client Group, LLC, et al. ................ 171
SEC v. Joseph A. Dawson ................................................................................................... 171
SEC v. Michael W. Perry and A. Scott Keys; SEC v. S. Blair Abernathy ......................... 172
SEC v. Petroleum Unlimited, LLC, et al. ............................................................................ 173
SEC v. Raymond P. Morris, et al. ....................................................................................... 174
SEC v. Pharma Holdings, Inc., Edward Klapp IV and Edward Klapp Jr. .......................... 174
SEC v. Robert L. Buckhannon, et al. .................................................................................. 175
SEC v. William K. Harrison, et al. ...................................................................................... 176
SEC v. Clifton K. Oram, et al.............................................................................................. 177
SEC v. Joshua Konigsberg, Louis Fischler, and MediSys Corp. ........................................ 177
SEC v. Overland Energy, Inc., et al. ................................................................................... 178
SEC v. Boston Trading and Research, LLC, Ahmet Devrim Akyil and Craig Karlis ........ 179
SEC v. Steven Brewer, et al. ............................................................................................... 180
SEC v. Elite Resources, LLC, et al. .................................................................................... 181
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SEC v. Jason K. Fifield ....................................................................................................... 181
SEC v. Imperia Invest IBC .................................................................................................. 182
SEC v. Barbra Alexander et al. ........................................................................................... 183
SEC v. Algird M. Norkus and Financial Update, Inc.......................................................... 183
SEC v. Pacific Asian Atlantic Foundation and Samuel M. Natt ......................................... 184
SEC v. Berkshire Resources, L.L.C., et al. ......................................................................... 184
CASES INVOLVING AFFINITY FRAUDS.......................................................................... 185
In the Matter of Armando Ruiz, and Maradon Holdings, LLC ........................................... 185
SEC v. Monroe L. Beachy................................................................................................... 186
SEC v. Timothy S. Durham, et al. ....................................................................................... 187
SEC v. Amit V. Patel........................................................................................................... 188
SEC V. Luis Felipe Perez .................................................................................................... 189
SEC v. Francois E. Durmaz Robert C. Pribilski, USA Retirement Management Services 190
SEC v. NewPoint Financial Services, Inc., et al. ................................................................ 191
SEC v. Shidaal Express, Inc. and Mohamud Abdi Ahmed ................................................. 192
CASES INVOLVING PONZI SCHEMES ............................................................................. 193
SEC v. John N. Irwin and Jacklin Associates, Inc. ............................................................. 193
SEC v. Eric Lipkin ............................................................................................................... 193
SEC v. Art Intellect, Inc. et al. ............................................................................................ 194
SEC v. David Ronald Allen, et al. ....................................................................................... 195
SEC v. James Clements and Zeina Smidi ........................................................................... 196
SEC v. John Scott Clark, Impact Cash, LLC and Impact Payment Systems, LLC............. 196
SEC v. Richard Dalton and Universal Consulting Resources LLC .................................... 197
SEC v. Joseph Paul Zada and Zada Enterprises, LLC ........................................................ 198
SEC v. Bruce F. Prévost, David W. Harrold, Palm Beach Capital Management LP, and Palm
Beach Capital Management LLC ........................................................................................ 198
SEC v. Robert R. Anderson and Rosand Enterprises, Inc. .................................................. 199
SEC v. Merendon Mining Inc., et al.................................................................................... 200
SEC v. Nevin K. Shapiro..................................................................................................... 201
SEC v. Scott D. Farah, Donald E. Dodge, Financial Resources Mortgage, Inc., and C L and
M, Inc. ................................................................................................................................. 202
SEC v. Daniel Bonventre .................................................................................................... 203
SEC v. Jerome O'Hara, and George Perez .......................................................................... 204
SEC v. Thomas J. Petters, Gregory M. Bell and Lancelot Investment Management LLC, et
al. ......................................................................................................................................... 204
SEC v. Cohmad Securities Corporation, Maurice J. Cohn, Marcia B. Cohn, and Robert M.
Jaffe ..................................................................................................................................... 205
SEC v. Stanford International Bank, Ltd., et al. .................................................................. 206
SEC v. Bradley L. Ruderman, Ruderman Capital Management, LLC, Ruderman Capital
Partners, LLC, and Ruderman Capital Partners A, LLC ..................................................... 206
SEC V. David G. Friehling, C.P.A and Friehling & Horowitz, CPA's, P.C. ...................... 207
SEC v. Stanford International Bank, et al. .......................................................................... 207
SEC v. Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC ................ 209
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FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS
SEC v. Jeffery A. Lowrance, et al.
Lit. Rel. No. 22040 (July 15, 2011)
http://www.sec.gov/litigation/litreleases/2011/lr22040.htm
The SEC filed fraud charges against the CEO of a purported foreign currency trading
firm, alleging he scammed hundreds of investors with false promises of high, fixed-rate returns
while secretly using their money to fund his start-up alternative newspaper.
The SEC alleges that Jeffrey A. Lowrance raised approximately $21 million from
investors in at least 26 states, including California, Oregon, Illinois and Utah by promising huge
profits from a specialized foreign currency trading program. In reality, First Capital conducted
little foreign currency trading, lost money on the little trading that it conducted, and never
engaged in any profitable business operations. Lowrance targeted investors by purporting to
share their Christian values and limited-government political views. He solicited investors
through, among other things, ads in his start-up newspaper USA Tomorrow, which he distributed
at a September 2, 2008 political rally in Minneapolis, Minnesota.
According to the SEC’s complaint, filed in federal district court in San Jose, California,
Lowrance and First Capital promised investors a “predictable monthly income,” with monthly
returns up to 7.15 percent through foreign currency trading. Some investors were told their
investment was guaranteed, and were given bogus letters of credit. First Capital also published a
spreadsheet purporting to show its multi-year history of profitable trades. In fact, the trades were
fictitious. Instead of engaging in foreign currency trading as claimed, Lowrance and First Capital
secretly diverted investor funds to pay fake returns to other, earlier investors, to pay Lowrance
(despite his failure to earn a profit for the investors), and to fund his newspaper.
The SEC alleges that Lowrance’s scheme began to unravel in June 2008 and Lowrance
and First Capital had lost all of the investors’ money by September 2008. Nevertheless,
Lowrance solicited at least an additional $1 million from at least 36 investors between June 2008
and February 2009 by continuing to tout First Capital’s fictitious high returns, the SEC alleges.
The Commission’s complaint alleges Lowrance and First Capital violated Sections
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5
and 17(a) of the Securities Act of 1933, and seeks disgorgement, penalties, and other relief.
SEC v. Robert D. Orr, Leland G. Orr, Michael S. Lowry, Michael S. Hess, Kyle L. Garst,
and Travis W. Vrbas
Lit. Rel. No. 21957 (May 4, 2011)
Accounting and Auditing Enf. Rel. No. 3276 (May 4, 2011)
The SEC charged six former senior executives of Kansas-based Brooke Corporation and
its other, publicly-traded subsidiaries, Brooke Capital Corporation, an insurance agency
franchisor, and Aleritas Capital Corporation, a lender to insurance agency franchises and other
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businesses, with conducting an extensive financial and disclosure fraud. The Complaint alleges
that in SEC filings and other public statements for year-end 2007 and the first and second
quarters of 2008, senior executives at the Brooke companies misrepresented, among other things,
the number of Brooke Capital franchisees and their financial health, the deterioration of Aleritas’
corresponding loan portfolio, and the increasingly dire liquidity and financial condition of the
Brooke companies.
According to the SEC’s Complaint filed in federal court in Kansas, Brooke Capital’s
former management inflated the number of franchise locations by including failed and
abandoned locations in totals. They also concealed the nature and extent of Brooke Capital’s
financial assistance to its franchisees, which included making franchise loan payments on behalf
of struggling franchisees. Aleritas’ former management hid the company’s inability to
repurchase millions of dollars of short-term loans sold to its network of regional lenders. They
also sold or pledged the same loans as collateral to more than one lender, and improperly
diverted payments from borrowers for the company’s operating expenses. Aleritas’ former
management also concealed the rapid deterioration of the company’s loan portfolio by falsifying
loan performance reports to lenders, understating loan loss reserves, and by failing to write-down
its residual interests in securitization and credit facility assets.
The SEC’s Complaint charges the following former Brooke executives:
Robert D. Orr, founder and former chairman of the board of Brooke Corporation, former
chief executive officer and chairman of the board of Brooke Capital, and former chief
financial officer of Aleritas
Leland G. Orr, former chief executive officer, chief financial officer, and vice-chairman of
the board of Brooke Corporation, and former chief financial officer of Brooke Capital
Michael S. Lowry, former chief executive officer and member of the board of Aleritas
Michael S. Hess, former chief executive officer and member of the board of Aleritas
Kyle L. Garst, former chief executive officer, president, and member of the board of Brooke
Capital
Travis W. Vrbas, former chief financial officer of Brooke Corporation and Brooke Capital
As alleged in the Commission’s Complaint, each of the defendants violated Sections
17(a)(1) and 17(a)(3) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the
Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder, and
aided and abetted violations by Brooke Corporation, Brooke Capital, and/or Aleritas of Sections
13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13
thereunder. The Complaint also alleges that Robert Orr violated Exchange Act Section 16(a) and
Rule 16a-3 thereunder; Robert Orr, Leland Orr, Lowry, Hess, and Garst violated Exchange Act
Rule 13b2-2; Robert Orr, Leland Orr, Hess, Garst, and Vrbas violated Exchange Act Rule 13a-14
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and aided and abetted violations by Brooke Corporation and Brooke Capital of Rule 13a-1; and
Robert Orr and Hess aided and abetted violations by Aleritas of Exchange Act Rule 13a-11.
The Commission seeks permanent injunctions, civil penalties, and officers and director
bars against each defendant, and disgorgement with prejudgment interest against Robert Orr,
Leland Orr, and Lowry.
Robert Orr, Leland Orr, Lowry, Hess, and Vrbas agreed to settle the SEC’s charges
without admitting or denying the allegations in the Complaint. These settlements are subject to
approval by the Court. Each of the defendants consented to be permanently enjoined from
violating or aiding and abetting all of the provisions that the Commission alleges they violated,
and to officer and director bars. Lowry also consented to pay a $175,000 civil penalty and
disgorgement of $214,500, with prejudgment interest of $24,004.91, Hess consented to pay a
$250,000 civil penalty, and Vrbas consented to pay a $130,000 civil penalty. Robert Orr and
Leland Orr consented to pay civil penalties and disgorgement in amounts to be determined by the
Court.
SEC v. Satyam Computer Services Limited d/b/a Mahindra Satyam
Lit. Rel. No. 21915 (April 5, 2011)
Accounting and Auditing Enf. Rel. No. 3258 (April 5, 2011)
The SEC filed a settled civil action against Satyam Computer Services Limited
(“Satyam”), a foreign private issuer based in India, charging the company with fraudulently
overstating the company’s revenue, income and cash balances by more than $1 billion over five
years.
The SEC’s complaint, filed in U.S. District Court in Washington, D.C., alleges that
former senior officials at Satyam – an information technology services company based in
Hyderabad, India – used false invoices and forged bank statements to inflate the company’s cash
balances and make it appear far more profitable to investors. Although Satyam’s shares primarily
traded on the Indian markets, its American depository shares traded on the New York Stock
Exchange during the relevant period.
According to the SEC’s complaint, shortly after the fraud came to light in January 2009,
the India government seized control of the company by dissolving Satyam’s Board of Directors
and appointing new government-nominated directors; removed former top managers of the
company; and oversaw a bidding process to select a new controlling shareholder in Satyam. In
addition, Indian authorities filed criminal charges against several former officials.
In addition to the actions taken by the Indian authorities, Satyam, whose new leadership
cooperated with the SEC’s investigation, has agreed to pay a $10 million penalty to settle the
SEC’s charges, require specific training of officers and employees concerning securities laws
and accounting principles, and improve its internal audit functions. In addition, it agreed to hire
an independent consultant to evaluate the internal controls Satyam is putting in place.
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Without admitting or denying the allegations in the SEC’s complaint, Satyam agreed to a
permanent injunction against future violations of the periodic reporting provisions of Sections
10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b5, 12b-20 13a-1 and 13a-16. The settlement also requires Satyam to hire an independent
consultant and comply with certain undertakings.
In re Lovelock & Lewes, et al.
A.P. Rel. No. 34-64184 (April 5, 2011)
http://www.sec.gov/litigation/admin/2011/34-64184.pdf
The SEC sanctioned five India-based affiliates of PricewaterhouseCoopers (PwC) that
formerly served as independent auditors of Satyam Computer Services Limited for repeatedly
conducting deficient audits of the company’s financial statements and enabling a massive
accounting fraud to go undetected for several years.
The SEC found that the audit failures by the PW India affiliates – Lovelock & Lewes,
Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta,
and Price Waterhouse & Co. Calcutta – were not limited to Satyam, but rather indicative of a
much larger quality control failure throughout PW India.
The PW India affiliates agreed to settle the SEC’s charges and pay a $6 million penalty,
the largest ever by a foreign-based accounting firm in an SEC enforcement action.
In addition, the PW India affiliates agreed to refrain from accepting any new U.S.-based
clients for a period of six months, establish training programs for its officers and employees on
securities laws and accounting principles; institute new pre-opinion review controls; revise its
audit policies and procedures; and appoint an independent monitor to ensure these measures are
implemented.
The SEC’s order instituting administrative proceedings against the firms finds that PW
India staff failed to conduct procedures to confirm Satyam’s cash and cash equivalent balances
or its accounts receivables. Specifically, the order finds that PW India’s “failure to properly
execute third-party confirmation procedures resulted in the fraud at Satyam going undetected”
for years. PW India’s failures in auditing Satyam “were indicative of a quality control failure
throughout PW India” because PW India staff “routinely relinquished control of the delivery and
receipt of cash confirmations entirely to their audit clients and rarely, if ever, questioned the
integrity of the confirmation responses they received from the client by following up with the
banks.”
After the fraud at Satyam came to light, PW India replaced virtually all senior
management responsible for audit matters. The affiliates suspended its Satyam audit engagement
partners from all work and removed from client service all senior audit professionals on the
former Satyam audit team.
In addition to the $6 million penalty and previously listed reforms, the PW India affiliates
have consented to a censure, as well as the entry of a cease-and-desist order finding that they
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violated Section 10A(a) of the Exchange Act and were a cause of Satyam’s violations of
Sections 13(a) and 13(b)(2)(A) of the Exchange Act and relevant Rules thereunder.
SEC v. Ian J. McCarthy
Lit. Rel. No. 21873 (March 4, 2011)
The SEC filed an action against Ian J. McCarthy, the President and Chief Executive
Officer of Beazer Homes USA, Inc., an Atlanta, Georgia-based homebuilder, seeking to recover
bonuses and other incentive-based and equity-based compensation and stock sale profits received
while the Company was committing accounting fraud.
The Commission’s enforcement action charges McCarthy, of Atlanta, Georgia, with
violations of Section 304 of the Sarbanes-Oxley Act of 2002. Section 304 requires
reimbursement by chief executive officers and chief financial officers of certain compensation
and stock sale profits they earned while their companies were in material non-compliance with
financial reporting requirements due to misconduct, as well as profits from stock sales during
that same period. According to the SEC's complaint against McCarthy, Beazer was required to
prepare accounting restatements for the fiscal year ended September 30, 2006 and the first three
quarters of fiscal 2006 due to its fraudulent misconduct. This misconduct consisted of a
manipulation of Beazer’s land development and house cost-to-complete accounts to increase
income, and the improper recording of certain model home financing transactions as sales, again
to increase Beazer’s income. McCarthy was not charged with the underlying misconduct or
alleged to have otherwise violated the federal securities laws.
Without admitting or denying the Commission’s allegations, McCarthy agreed to
reimburse Beazer $6,479,281 in cash, 40,103 restricted stock units (or its equivalent), and 78,763
shares of restricted stock (or its equivalent). This reimbursement represents McCarthy’s entire
fiscal year 2006 incentive bonus ($5,706,949 in cash and 40,103 in restricted stock units),
$772,332 in stock sale profits, and 78,763 shares of restricted stock granted in 2006. The
settlement with McCarthy is subject to court approval.
This is the third enforcement action in the SEC's investigation into Beazer’s accounting
misconduct. In September 2008, the Commission issued an Order that instituted cease-and-desist
proceedings and found that in certain periods between 2000 and 2007, Beazer fraudulently
misstated its financial statements for the purpose of improperly managing its quarterly and
annual earnings. Specifically, the Order stated that the Company managed its earnings during the
period through the use of improper land inventory and housing accruals or reserves, and,
beginning in fiscal 2006, improperly recognized income from certain model home financing
transactions. Beazer consented to the issuance of the Order without admitting or denying any of
the findings. In July 2009, the Commission filed a civil injunctive action against Michael T.
Rand, Beazer’s former Chief Accounting Officer, for conducting the fraudulent earnings
management scheme and for misleading Beazer’s outside auditors and internal Beazer
accountants in order to conceal his wrongdoing. Litigation in that matter is ongoing.
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SEC v. Radius Capital Corporation and Robert A. DiGiorgio
Lit. Rel. No. 21867 (March 7, 2011)
http://sec.gov/litigation/litreleases/2011/lr21876.htm
The Commission filed a civil injunctive action against Robert A. DiGiorgio of Cape
Coral, Florida, and his company, Radius Capital Corporation, charging them with securities
fraud for making false and misleading statements relating to Radius’ issuance of mortgagebacked securities guaranteed by the Government National Mortgage Association (“Ginnie
Mae”).
The SEC’s Complaint, filed in the U.S. District Court for the Middle District of Florida,
alleges that from December 2005 through October 2006, Radius and DiGiorgio offered and sold
15 Ginnie-Mae guaranteed mortgage-backed securities to investors totaling approximately $23.5
million. According to the Complaint, Radius and DiGiorgio represented to Ginnie Mae, and to
investors in 15 separate prospectuses, that the residential loans underlying the securities were, or
would be, insured by the Federal Housing Administration (“FHA”) as required to receive GinnieMae’s guarantee.
The SEC alleges that Radius and DiGiorgio’s representations about the insurability of the
underlying loans were false and misleading as the vast majority, more than 100 of the 154
underlying loans, were not, and could not, be FHA insured. According to the Complaint, Radius
never even applied for FHA insurance for most of the uninsured loans and failed to submit the
up-front mortgage insurance premiums it had collected from borrowers at closing to the FHA
which were required for the loans to be insured. Even if Radius and DiGiorgio had applied for
FHA insurance and properly submitted the mortgage insurance premiums, the uninsured loans
could not have been insured because the borrowers failed to meet FHA’s debt-to-income, credit
history, employment history, and other underwriting requirements.
The SEC alleges that many of the mortgages backing Radius’ securities quickly fell into
default. In October 2006, Radius correspondingly defaulted on its pass-through payments to the
investors holding the mortgage-backed securities. As a result, Ginnie Mae was required to pay
investors the remaining principal balance on each uninsured loan that was in default, thereby
incurring several million dollars in losses. In addition, investors holding the Radius securities
lost interest income due to the unexpectedly high rate of prepayment of principal (by Ginnie
Mae) as the Radius loans fell into default.
SEC v. DHB Industries, Inc. n/k/a Point Blank Solutions, Inc.,
Lit. Rel. No. 21867 (February 28, 2011)
The SEC filed securities fraud charges against DHB Industries, Inc. n/k/a Point Blank
Solutions, Inc. (“DHB”), a major supplier of body armor to the U.S. military and law
enforcement agencies, for engaging in a massive accounting fraud that occurred at the company
between 2003 and 2005. The agency also filed separate fraud charges against DHB’s former
outside directors and audit committee members, Jerome Krantz, Cary Chasin, and Gary
Nadelman, for facilitating the company’s fraud.
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The SEC’s complaint against DHB, filed in U.S. District Court for the Southern District
of Florida, alleges that the company, through its senior executive officers, engaged in pervasive
accounting and disclosure fraud, and misappropriation of company assets that resulted in the
company filing materially false and misleading periodic reports with the SEC. The complaint
against Krantz, Chasin, and Nadelman alleges that they facilitated DHB’s fraud by willfully
ignoring numerous, significant red flags signaling widespread accounting fraud and
misappropriation at the company by senior officers.
The SEC’s complaint against Krantz, Chasin, and Nadelman alleges that from at least
2003 through 2005, they were willfully blind to numerous red flags signaling accounting fraud,
reporting violations, and misappropriation at DHB. According to the complaint, Krantz, Chasin,
and Nadelman’s willful blindness to these red flags, allowed senior management to manipulate
the company’s reported gross profit, net income, and other key figures in its earnings releases
and public filings. The company did so by, among other things, overstating inventory values,
failing to include appropriate charges for obsolete inventory, and falsifying journal entries.
The complaint against Krantz, Chasin, and Nadelman further alleges that their willful
blindness to red flags enabled DHB’s former chief executive officer, David Brooks, to divert at
least $10 million out of the company through fraudulent transactions with a related entity he
controlled. By ignoring the numerous red flags, the three outside directors also facilitated DHB’s
improper payment of millions of dollars in personal expenses for Brooks. These expenses
included such items as luxury cars, jewelry, art, real estate, extravagant vacations, and
prostitution services. As a result of this misconduct, DHB’s SEC filings and press releases
contained materially false and misleading financial and other information. Despite being
confronted with numerous, significant, and compounding red flags indicating fraud, Krantz,
Chasin, and Nadelman approved and/or signed DHB’s false and misleading filings.
DHB has agreed to settle with the SEC and agreed to a permanent injunction from future
violations. The proposed settlement took into account the remedial measures already taken by the
company in this regard. The company is currently in bankruptcy and its settlement with the SEC
is pending the approval of the bankruptcy court. Krantz, Chasin, and Nadelman have not settled
to the charges and the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary
penalties, and officer and director bars against them.
SEC v. Provident Capital Indemnity, Ltd., et al.
Lit. Rel. No. 21818 (January 19, 2011)
The Commission filed an enforcement action against Provident Capital Indemnity, Ltd.
("PCI"), its president Minor Vargas Calvo ("Vargas"), and its purported outside auditor, Jorge L.
Castillo ("Castillo") seeking to halt a massive, ongoing fraud by PCI, an offshore company
located in Costa Rica that provides financial guarantee bonds on life settlements and claims to
protect investors' interests in life insurance policies by promising to pay the death benefit if the
insured lives beyond his or her estimated life expectancy. According to the complaint, from at
least 2004 through SEC 2010, PCI issued approximately 197 bonds backstopping numerous
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bonded offerings of investments in life insurance policies with a face value of more than $670
million.
According to the complaint, the PCI bonds were a material component of numerous thirdparty life settlement offerings in the United States and abroad. Without a bond, a life settlement
investment is illiquid and open-ended because the investment's pay-out date and return are
dependent upon the date of the insured's death. PCI's bonds offered a fixed maturity date for the
investments because PCI's bond obligated PCI to pay investors (directly or indirectly through the
life settlement issuer) the face value of the underlying insurance policy by a date certain if the
insured lived past his life expectancy date.
Specifically, since at least 2003, PCI, Vargas and Castillo represented to life settlement
issuers, and in turn, the investing public, that Castillo had audited PCI's financial statements in
accordance with generally accepted accounting standards. Contrary to their representations,
however, the complaint alleges that Castillo never conducted an audit of PCI and instead issued
clean audit reports at Vargas's bidding, thereby supporting the illusion that PCI had materially
larger assets and greater financial wherewithal to support its obligations under the life settlement
bonds. According to the complaint, PCI's "audited" financial statements reflect what appears to
be a fictitious "Long Term Asset" that has comprised some 70% to 80% of PCI's total reported
assets from at least 2003 to the present.
The complaint alleges that PCI's "audited" financial statements were provided to Dun &
Bradstreet ("D&B"), which issued PCI a favorable rating of "5 A/S," based exclusively on PCI's
reported net worth. PCI then misleadingly represented in its marketing materials that D&B's
rating is a reflection of "successful customer satisfaction" and "the ability to maintain one of the
insurance industry's lowest loss ratios." According to the complaint, PCI and Vargas also have
represented that PCI was backed by a "bouquet" of reputable reinsurers that would backstop
PCI's obligations under its life settlement bonds when, in fact, PCI had no reinsurance coverage.
The United States Attorney's Office for the Eastern District of Virginia and the Fraud
Section of the Department of Justice's Criminal Division also announced simultaneously a
parallel criminal action against the defendants.
SEC v. Theodore R. Maloney
The SEC charged Theodore Robert Maloney ("Maloney"), the former chief executive
officer of MediCor, Ltd. ("MediCor"), with fraud and other misconduct for concealing the true
and precarious source of MediCor's funding from investors and the company's auditor. The
Commission simultaneously filed related settled civil actions against Donald K. McGhan,
MediCor's founder and former Chairman ("Don McGhan"), and Jimmy J. McGhan, the
company's former chief operating officer ("Jim McGhan").
The SEC complaints, filed in the Nevada District Court, allege that from 2004 through
2006, MediCor filed false and misleading annual reports, quarterly reports and proxy statements
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that falsely stated that the company was substantially funded by Don McGhan or one of his
affiliates, when in fact a significant source of MediCor's funding was money illegally transferred
from Southwest Exchange Corp. ("Southwest"). Southwest was a private company that held
deposits for taxpayers seeking to defer capital gains taxes on like-kind exchanges of property.
According to the SEC's complaint, Maloney and Don McGhan concealed the illegal transfer of
Southwest funds by creating a paper trail designed to hide the true source of MediCor's
financing; Maloney and the McGhans also concealed information regarding the true source of
MediCor's funding from MediCor's auditor. Maloney was the person primarily responsible for
preparing MediCor's misleading public filings; Maloney, Don McGhan and Jim McGhan each
signed the filings. The complaint further alleges that by the end of 2006, Don McGhan, with
Maloney's help and Jim McGhan's knowledge, had transferred over $54 million out of Southwest
for MediCor's benefit. Southwest collapsed in January 2007, owing approximately $97 million to
its clients. MediCor declared bankruptcy in June 2007.
Don McGhan and Jim McGhan each has agreed to settle to charges of violating Sections
10(b) and 14(a) of the Exchange Act and Exchange Act Rules 10b-5 and 14a-9, and with aiding
and abetting MediCor's violations of Sections 13(a) of the Exchange Act and Exchange Act
Rules 12b-20 and 13a-1. Don McGhan has agreed to consent to a permanent injunction and
officer and director bar. Jim McGhan has agreed to consent to a permanent injunction and a 5year officer and director bar.
SEC v. Joseph M. Elles
Lit. Rel. No. 21784 (December 20, 2010)
The SEC charged a former Executive Vice President of children's clothing marketer
Carter's Inc. for engaging in financial fraud and insider trading. The SEC alleges that Joseph M.
Elles's misconduct caused an understatement of Carter's expenses and a material overstatement
of its net income in several financial reporting periods.
The SEC also entered a non-prosecution agreement with Carter's under which the
Atlanta-based company will not be charged with any violations of the federal securities laws
relating to Elles's unlawful conduct. The non-prosecution agreement reflects the relatively
isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the
misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including
undertaking a thorough and comprehensive internal investigation, and Carter's extensive and
substantial remedial actions. This marks the first non-prosecution agreement entered by the SEC
since the announcement of the SEC's new cooperation initiative earlier this year.
According to the SEC's complaint filed in U.S. District Court for the Northern District of
Georgia, Elles conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice
President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of
discounts that Carter's granted to its largest wholesale customer — a large national department
store — in order to induce that customer to purchase greater quantities of Carter's clothing for
resale. Elles then concealed his misconduct by persuading the customer to defer subtracting the
discounts from payments until later financial reporting periods. He created and signed false
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documents that misrepresented to Carter's accounting personnel the timing and amount of those
discounts.
The SEC further alleges that Elles realized sizeable gains from insider trading in shares of
Carter's common stock during the fraud. Between May 2005 and SEC 2009, Elles realized a
profit before tax of approximately $4,739,862 from the exercises of options granted to him by
Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the
company's initial disclosure relating to the fraud on October 27, 2009, immediately after which
the company's common stock share price dropped 23.8 percent.
After discovering Elles's actions and conducting its own internal investigation, Carter's was
required to issue restated financial results for the affected periods.
Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and
truthfully in any further investigation conducted by the SEC staff as well as in the enforcement
action filed against Elles.
SEC v. Duane Martin and Gary Trump
Lit. Rel. No. 21733 (November 9, 2010)
Accounting and Auditing Enforcement Release No. 3212
On November 2, 2010, the District Court for the Northern District of Illinois entered a
Final Judgment against Duane Martin in a civil action brought by the United States Securities &
Exchange Commission (the Commission). Martin had been charged with a string of federal
securities law violations committed during his tenure as Chief Executive Officer of the nowdefunct Universal Food & Beverage Company. The judgment in SEC v. Duane Martin, et al., 09cv-05259 (N.D. Ill.) permanently enjoins Martin from violating Sections 5(a), 5(c), and 17(a) of
the Securities Act of 1933 (the Securities Act), and Sections 10(b) and 13(b)(5) of the Securities
Exchange Act of 1934 (the Exchange Act) and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and
from aiding and abetting Universal's violations of Sections 13(a), 13(b)(2)(A), and 13(k) of the
Exchange Act and Rules 12b-20 and 13a-1 thereunder. It also permanently bars him from
participating in any penny stock offerings and from serving as an officer or director of a public
company. The Court's Order was entered based on Martin's Consent to Final Judgment in which
he neither admitted nor denied the allegations in the Commission's Complaint.
In its Complaint, the Commission alleged that Martin violated the registration provisions
by improperly registering a Universal stock offering using Form S-8 — a registration method
that is meant to cover offerings to bona fide employees and consultants of the company — and
then surreptitiously directed the S-8 shares to stock promoters and Martin's personal creditors.
The Complaint also alleges that Martin violated the antifraud provisions for multiple material
misrepresentations and omissions to Universal's investors designed to hide the fact that Martin
(a) improperly paid himself deferred salary, (b) had misappropriated company assets to pay
himself and his creditors, (c) funneled S-8 shares to stock promoters and his creditors, and (d)
took $234,430.66 in short-term loans from Universal in violation of Section 13(k) of the
Exchange Act. To hide his self-dealing, Martin misled Universal's outside auditor and forged
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invoices to disguise payments he directed to his creditors. In so doing, Martin violated the
Exchange Act's books and records provisions and aided and abetted Universal's violations of the
Exchange Act's reporting provisions.
SEC v. Office Depot, Inc.
Lit. Rel. No. 21703 (October 21, 2010)
Accounting and Auditing Enforcement Rel. 3199 (October 21, 2010)
The Commission brought charges against Office Depot, Inc. for violating fair disclosure
regulations when selectively conveying to analysts and institutional investors that the company
would not meet analysts' earnings estimates. The SEC also charged Office Depot with unrelated
accounting violations.
Regulation FD requires that when issuers disclose material nonpublic information, they
must make broad public disclosure of that information. The SEC's alleges that as they neared the
end of Office Depot's second quarter for 2007, the company's CEO and then-CFO discussed how
to encourage analysts to revisit their analysis of the company. Office Depot then made a series of
one-on-one calls to analysts. The company did not directly state that it would not meet analysts'
expectations, but rather this message was signaled with references to recent public statements of
comparable companies about the impact of the slowing economy on their earnings. The analysts
also were reminded of Office Depot's prior cautionary public statements. Analysts promptly
lowered their estimates for the period in response to the calls. Office Depot did not regularly
initiate these types of calls to all analysts covering the company.
The SEC's complaint alleges that Office Depot's CEO, in an attempt to get analysts to
lower their estimates, proposed to the company's CFO that the company talk to the analysts and
refer them to recent public announcements by two comparable companies about their financial
results being impacted by the slowing economy. The CEO further suggested that Office Depot
point out on its calls what the company had said in prior public conference calls in April and
May 2007. The CFO then assisted Office Depot's investor relations personnel in preparing
talking points for the calls.
According to the SEC's complaint, the CEO and CFO were not present during the calls
but were aware of the analysts' declining estimates while the company made the calls. They
encouraged the calls to be completed. Office Depot continued to make the calls despite the CFO
being notified of some analysts' concerns about the lack of public disclosure among other things.
Six days after the calls began, Office Depot filed a Form 8-K announcing that its sales and
earnings would be negatively impacted due to a continued soft economy. Before that Form 8-K
was filed, Office Depot's share price had significantly dropped on increased trading volume.
Office Depot agreed to settle the SEC's charges without admitting or denying the
allegations, and will pay a $1 million penalty. Office Depot also consented to the entry of an
administrative order in a separate proceeding requiring it to cease and desist from committing or
causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B)
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of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder, and
Regulation FD.
SEC v. LocatePlus Holdings Corporation
Accounting and Auditing Enforcement Rel. 3197 (October 14, 2010)
The SEC filed a civil enforcement action in federal district court in Massachusetts
alleging that Beverly, Massachusetts-based LocatePlus Holdings Corporation ("LocatePlus")
violated the anti-fraud and the books and records provisions of the federal securities laws.
LocatePlus sells on-line access to public record databases for investigative searches. Locate Plus'
stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is
currently quoted in the Pink Sheets, operated by Pink OTC Markets, Inc.
The Commission's Complaint alleges that from 2005 through 2007, LocatePlus engaged
in securities fraud by misleading investors about its funding and revenue, in violation of, among
other provisions, Section 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5
of the Securities Exchange Act of 1934. During that time period, LocatePlus's then-CEO and
CFO abused their positions to fraudulently inflate the company's publicly-reported revenue for
fiscal years 2005 and 2006 by creating a fictitious customer called "Omni Data." LocatePlus then
improperly recognized millions of dollars in payments from Omni Data as revenue. As the
Complaint alleges, Omni Data was actually funded by approximately $2 million in cash routed
from entities secretly controlled by the former LocatePlus CEO and CFO.
The Complaint further alleges that, to date, LocatePlus has not made public disclosure of
the fraud or disclosed the fictitious nature of the previously-reported Omni Data revenue in any
SEC filing, restatement or other public document. The Commission is seeking an injunction
prohibiting future violations of the federal securities laws, disgorgement plus prejudgment
interest, and civil monetary penalties.
SEC v. Citigroup Inc.
Lit. Rel. No. 21605 (July 29, 2010)
The SEC charged Citigroup Inc. with misleading investors about the extent of the
company's exposure to sub-prime mortgage-related assets during 2007. The SEC alleges that,
beginning in July 2007, Citigroup made a series of statements in earnings calls and public filings
in which it represented that its investment bank had approximately $13 billion of sub-prime
exposure, and that the investment bank's sub-prime exposure declined over the course of 2007.
In fact, the $13 billion figure that Citigroup disclosed omitted two categories of sub-primebacked assets, "super senior" tranches of collateralized debt obligations (CDOs) and "liquidity
puts," through which Citigroup had approximately $43 billion of additional sub-prime exposure.
Citigroup only disclosed the extent of its holdings of the super senior tranches of CDOs and the
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liquidity puts in November 2007, after a sharp decline in their value. According to the SEC's
complaint, the misleading disclosures were made at a time of heightened investor and analyst
interest in public company exposure to sub-prime mortgages.
According to the SEC's complaint, as early as April 2007, Citigroup's senior management
began to gather information on the investment bank's sub-prime exposure for purposes of
possible public disclosure. From the outset of these efforts, internal documents describing the
investment bank's exposures included the super senior CDO tranches and the liquidity puts,
while noting that they bore little risk of default. Nevertheless, on four occasions — a July 20,
2007 earnings call; a July 27, 2007 Fixed Income investors call; an October 1, 2007 earnings preannouncement; and an October 15, 2007 earnings call — Citigroup stated that its investment
bank's sub-prime exposure was $13 billion or slightly less, and had been managed down from
$24 billion at the end of 2006. The statements made in the October 1, 2007 earnings preannouncement were included in a Form 8-K that Citigroup filed with the Commission. Citigroup
did not disclose in any of these communications that it was excluding the amount of its subprime exposure from super senior tranches of CDOs or liquidity puts.
Without admitting or denying the SEC's allegations, Citigroup Inc. consented to the entry
of a final judgment that (1) permanently restrains and enjoins it from violation of Section
17(a)(2) of the Securities Act of 1933, Section 13(a) of the Securities Exchange Act of 1934, and
Exchange Act Rules 12b-20 and 13a-11 and (2) orders it pay penalty and disgorgement of
$75,000,001. Separately, the SEC also instituted settled cease-and-desist proceedings against
Gary Crittenden, Citigroup's former chief financial officer, and Arthur Tildesley, Jr., Citigroup's
former head of Investor Relations, for their roles in causing Citigroup to make certain of the
misleading statements.
SEC v. Dell Inc., et al.
Lit. Rel. No. 21599 (July 22, 2010)
Accounting and Auditing Enf. Rel. No. 3156 (July 22, 2010)
The SEC charged Dell Inc. with failing to disclose material information to investors and
using fraudulent accounting to make it falsely appear that the company was consistently meeting
Wall Street earnings targets and reducing its operating expenses. The SEC also charged Dell
Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider
for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice
President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their
roles in the improper accounting.
The SEC alleges that Dell did not disclose to investors large exclusivity payments the
company received from Intel Corporation not to use central processing units (CPUs)
manufactured by Intel’s main rival. It was these payments rather than the company’s
management and operations that allowed Dell to meet its earnings targets. After Intel cut these
payments, Dell again misled investors by not disclosing the true reason behind the company’s
decreased profitability. The SEC’s complaint further alleges that Dell’s most senior former
accounting personnel, including Schneider, Dunning, and Jackson engaged in improper
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accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in
operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it
was consistently meeting Wall Street earnings targets and reducing its operating expenses
through the company’s management and operations. The SEC’s complaint further alleges that
reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses
as a percentage of revenue – an important financial metric that the Company itself highlighted –
for over three years. The manipulations also enabled Dell to misstate materially the trend and
amount of operating income of its EMEA segment, an important business unit that Dell also
highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.
Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell
and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to
settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s
charges.
Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of
an order that permanently restrains and enjoins it from violation of Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities
Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to
enhance its Disclosure Review Committee and disclosure processes, including the retention of an
independent consultant to recommend improvements to those processes and enhance training
regarding the disclosure requirements of the federal securities laws.
Michael Dell and Rollins consented to settle the SEC’s disclosure charges, without
admitting or denying the SEC’s allegations, to the entry of an order that permanently restrains
and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from
violating or aiding and abetting violations of other provisions of the federal securities laws.
Schneider consented to settle the disclosure and accounting fraud charges against him
without admitting or denying the SEC’s allegations, and agreed to pay a penalty, disgorgement
of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the
SEC’s improper accounting charges without admitting or denying the SEC’s allegations.
Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and
Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the
Commission’s Rules of Practice, suspending each of them from appearing or practicing before
the SEC as an accountant with the right to apply for reinstatement after five years for Schneider
and three years for Dunning and Jackson.
SEC v. Diebold, Inc.
Lit. Rel. No. 21543 (June 2, 2010)
The SEC filed fraud and other charges against Diebold, Inc. ("Diebold"), Gregory
Geswein, the company's former Chief Financial Officer, Kevin Krakora, the company's former
Controller and later CFO, and Sandra Miller, the company's former Director of Corporate
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The SEC alleges that Diebold, Geswein, Krakora, and Miller engaged in fraudulent
accounting practices to inflate the company's earnings to meet forecasts. As alleged in the
complaints, from at least 2002 through 2007, these fraudulent practices included (i) improper use
of "bill-and-hold" accounting; (ii) improper recognition of revenue on a lease agreement subject
to an undisclosed buy-back agreement; (iii) manipulating reserves and accruals; (iv) improperly
delaying and capitalizing expenses; and (v) improperly writing up the value of used inventory.
The SEC charged Diebold with violating Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules
10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the SEC's charges,
Diebold has agreed to consent to a final judgment ordering the company to pay a $25 million
civil penalty and permanently enjoining the company from future violations.
In a contested action, the SEC charged Geswein, Krakora, and Miller with violating
Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the
of the Exchange Act, and Exchange Act Rules 10b 5 and 13b2-1, and aiding and abetting
Diebold's violations of Sections 13(a), 13(b)(2)(A) and13(b)(2)(B) of the Exchange Act and
Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. In addition, the SEC charged Geswein
and Krakora with violating Exchange Act Rules 13a-14 and 13b2-2 and Section 304 of the
Sarbanes-Oxley Act of 2002. The SEC seeks against these defendants permanent injunctive
relief, disgorgement of ill-gotten gains with prejudgment interest, civil monetary penalties, and,
with respect to Geswein and Krakora, officer-and-director bars and reimbursement of bonuses
and other compensation.
In addition, the SEC filed an action against Walden O'Dell, the former Chief Executive
Officer of Diebold, seeking reimbursement for bonuses and other incentive-based and equitybased compensation pursuant Section 304 of the Sarbanes-Oxley Act of 2002. The SEC's
complaint alleges that Diebold was required to restate its annual financial statements for 2003, as
well as other reporting periods, as a result of fraud and other misconduct. The complaint further
alleges that O'Dell received from Diebold cash bonuses, shares of Diebold stock, and stock
options during the 12-month period following the issuance of Diebold's 2003 financial
statements, and that O'Dell failed to reimburse Diebold for that compensation. The complaint
does not allege that O'Dell engaged in the fraud. Without admitting or denying the SEC's
allegations, O'Dell has agreed to consent to a final judgment ordering him to reimburse $470,016
in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold
stock.
In the Matter of infoUSA Inc.
A.P. Rel. No. 34-61708 (March 15, 2010)
The SEC brought an action against Info, a Delaware corporation, which compiles and
sells business and consumer databases for sales leads, mailing lists, and direct and email
marketing. According to the SEC’s order, Info materially understated the compensation of its
former CEO and Chairman, Vinod Gupta, in the company’s 2003 through 2007 Forms 10-K,
which incorporated its proxy statements by reference. Info paid Gupta approximately $9.5
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million of unauthorized and undisclosed perquisites, which arose out of Gupta’s personal use of
company-chartered aircraft and Info’s payment of other personal expenses. The filings for fiscal
years 2003 through 2005 also understated, mischaracterized, or omitted significant related party
transactions involving various entities owned by Gupta.
The SEC’s order also finds that Info maintained a system of internal accounting controls
that permitted Gupta to obtain a significant amount of unreported compensation. Info also failed
to implement internal controls for related party transactions until December 2004 and, thereafter,
failed to enforce effectively its related party transactions policy. These internal control lapses
allowed Gupta to direct payments to himself directly or his entities and failed to provide
reasonable assurances that these transactions were accurately recorded to permit the preparation
of Info’s financial statements in conformity with generally accepted accounting principles.
Info consents to the entry of this Order Instituting Cease-and-Desist Proceedings
Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing
a Cease-and-Desist Order.
SEC v. Vinod Gupta; SEC v. Vasant H. Raval; SEC v. Rajnish K. Das and Stormy L. Dean
Lit. Rel. No. 21451 (March 15, 2010)
The SEC filed civil injunctive actions charging former senior executives and a former
director of Omaha-based infoUSA Inc., k/n/a infoGROUP Inc. ("Info") with securities fraud and
other violations of the federal securities laws. Specifically, the SEC's complaints against Vinod
Gupta, Info's former CEO and Chairman, Vasant H. Raval, former chairman of Info's audit
committee, and Rajnish K. Das and Stormy L. Dean, Info's CFOs during the relevant period,
allege that from 2003 through 2007, the Defendants caused Info to pay Gupta almost $9.5
million of unauthorized and undisclosed perquisites and to enter into $9.3 million of undisclosed
related party transactions with Gupta's entities.
The SEC's complaints allege that Gupta improperly used corporate funds for over $3
million of personal jet travel for Gupta and his family and friends to such destinations as South
Africa, Italy, and Cancun; $2.8 million of costs associated with Gupta's yacht; $1.3 million of
personal credit card expenses; and costs associated with 28 club memberships, 20 automobiles,
his homes around the country, and premiums for three personal life insurance policies. The SEC
also alleges that Gupta failed to inform Info's other board members of the material fact that he
had purchased shares of an Info acquisition target for his own benefit from which he obtained
realized and unrealized ill-gotten gains.
The SEC also alleges Raval, Info's former audit committee chairman, failed to respond
appropriately to various red flags concerning Gupta's expenses and Info's related party
transactions with Gupta's entities. Additionally, the complaint alleges that notwithstanding his
charge by Info's board in January 2005 to investigate potential improper payments to Gupta,
Raval failed to take meaningful action to further investigate Gupta's misconduct and omitted
critical facts in his report to the board concerning Gupta's expenses.
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The SEC also alleges that two of Info's former CFOs, Das and Dean, allowed Gupta to
support his lavish lifestyle by rubber-stamping hundreds of Gupta's expense reimbursement
requests.
Without admitting or denying the allegations in the SEC's complaints, Gupta and Raval
agreed to settle the matters. Gupta consented to a final judgment enjoining him from violations
of Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act")
and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 and from aiding and abetting Info's
violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1, 13a13, and 12b-20; imposing disgorgement of $4,045,000, plus prejudgment interest of $1,145,400;
imposing a $2,240,700 civil money penalty; barring him from serving as an officer or director of
a public company; and placing restrictions on Gupta's voting of his Info common stock.
Raval also consented to a final judgment enjoining him from violations of Exchange Act
Sections 10(b) and 14(a) and Rules 10b-5, 14a-3, and 14a-9, and from aiding and abetting Info's
violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20 and
13a-1; imposing a $50,000 civil money penalty; and barring him from serving as an officer or
director of a public company for five years.
The SEC's case against Das and Dean is ongoing. In a related action, Info, without
admitting or denying the SEC’s findings, consented to the issuance of an order to cease and
desist from committing or causing any violations and any future violations of Sections 13(a),
13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 14a3, and 14a-9.
SEC v. State Street Bank and Trust Company
The SEC filed a settled civil action charging State Street Bank and Trust Company
(“State Street”) with securities law violations for misleading investors during the subprime
mortgage crisis in 2007 about the extent of subprime mortgage-backed securities held in certain
funds under its management, and then selectively disclosing more complete information about
subprime investments to certain investors. Investors in the funds lost over $60 million during the
subprime market meltdown in mid-2007. State Street has already paid back over $300 million to
harmed investors, and has agreed to pay over $300 million more to settle the SEC’s action, all of
which will be returned to investors.
Without admitting or denying the allegations of the complaint, State Street consented to
the entry of a final judgment ordering it to pay a civil penalty of $50 million, disgorgement of
$7,331,020, and $1,019,161 in prejudgment interest. These amounts will be paid into a Fair
Fund and for the benefit of harmed investors, together with an additional amount of
$255,240,472 that State Street has agreed to pay to compensate harmed investors. State Street
also gets credit for having already paid over $340 million to some harmed investors through
settlements of private actions, resulting in total compensation to injured investors of
$663,191,540.
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The SEC also instituted related cease-and-desist proceedings against State Street
concerning the same conduct. In connection with these proceedings, State Street agreed to an
order requiring it to cease and desist from committing or causing any violations and any future
violations of Section 17(a)(2) and 17(a)(3) the Securities Act of 1933. For further information,
please see Securities Act Release No. 33-9107 (February 4, 2010).
CASES INVOLVING STOCK OPTION BACKDATING
SEC v. Vitesse Semiconductor Corporation, Louis R. Tomasetta, Eugene F. Hovanec, Yatin
D. Mody, and Nicole R. Kaplan
Accounting and Auditing Enf. Rel. No. 3217
The SEC filed civil fraud charges in federal district court for the Southern District of
New York against California-based integrated circuit maker Vitesse Semiconductor Corporation
and four former senior executives of Vitesse — co-founder and former Chief Executive Officer
Louis Tomasetta, former Chief Financial Officer and Executive Vice President Eugene Hovanec,
former Controller and Chief Financial Officer Yatin Mody, and former Manager and Director of
Finance Nicole Kaplan. The SEC alleges that Vitesse, through the former senior executives,
perpetrated fraudulent and deceptive schemes during 1995 to April 2006 to inflate revenue from
shipment of Vitesse's products and to backdate stock options to employees and officers by failing
to record millions of dollars of compensation expense. The SEC alleges that all four former
executives engaged in the revenue recognition fraud from 2001 to 2006 and that Tomasetta and
Hovanec orchestrated the options backdating from 1995 to 2006. The four executives left Vitesse
in 2006.
Vitesse has settled the matter by agreeing to be permanently enjoined and to pay a $3
million civil penalty. Mody and Kaplan have each agreed to a bifurcated settlement that provides
they will be permanently enjoined and ordered to pay disgorgement, and that any civil penalty
will be determined later by the district court. Mody has also agreed to be permanently barred
from serving as an officer or director of a public company. The SEC's case against Tomasetta
and Hovanec is contested.
The SEC's complaint alleges that during September 2001 through April 2006, Tomasetta,
Hovanec, Mody, and Kaplan engaged in an elaborate channel stuffing scheme in order to
improperly record revenue on product shipments. They caused Vitesse to immediately recognize
revenue and record invalid accounts receivable for product shipped at period end to its largest
distributor, even though the distributor had an unconditional right to return all of the product.
The right of return was accomplished through undisclosed side letters and oral agreements. As a
result, as alleged in the complaint, Vitesse materially inflated the revenue it reported in its
financial statements in 14 quarters from September 2001 through early 2006.
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The complaint further alleges that the defendants compounded their fraudulent revenue
recognition practices by failing to timely record credits related to the invalid accounts receivable
that were generated by the distributor's return of product. As further alleged, in order to conceal
the true age of the accounts receivable from Vitesse's external auditor, Hovanec and Kaplan then
directed that cash receipts received by Vitesse from the distributor and other customers be
misapplied to these aged invalid receivables.
As alleged in the complaint, Tomasetta and Hovanec collectively reaped millions of
dollars in illicit profits from exercising backdated options. Despite representing in Vitesse's
periodic filings made with the Commission that Vitesse did not grant in-the-money options and
complied with applicable accounting rules, Tomasetta and Hovanec intentionally manipulated
grant dates in order to award in-the-money options and failed to ensure that Vitesse properly
recorded compensation expenses for the backdated grants. As a result of the backdating, Vitesse
failed to record approximately $184 million in compensation expense, overstating its pretax
income or understating its pretax loss by as much as 45% annually for its fiscal years 1996
through 2005.
Vitesse, Mody, and Kaplan have agreed to settle this matter, without admitting or denying the
allegations in the complaint, subject to the approval of the United States District Court for the
Southern District of New York. The settlement with Vitesse takes into account the company's
cooperation in the SEC's investigation.
The SEC obtained emergency relief freezing assets and trading proceeds of certain One
of More Unknown Purchasers of the Securities of Wimm-Bill-Dann Foods OJSC (the “Unknown
Purchasers”) and prohibiting the Unknown Purchasers from obtaining the securities or the
proceeds from any sale of the securities. The Commission filed a complaint alleging that the
Unknown Purchasers engaged in illegal insider trading in the last three days before the
December 2, 2010, announcement that PepsiCo, Inc. intended to acquire a 66 percent interest in
Wimm-Bill-Dann Foods OJSC (“WBD”) for $3.8 billion, pending required government
approvals. (The $3.8 billion price for 66 percent implies a total enterprise value of $5.4 billion.)
WBD is a Russian corporation that manufactures and sells dairy and fruit juice products.
It has American Depositary Receipts (“ADRs”) that trade on the New York Stock Exchange. The
Commission’s complaint alleges that the Unknown Purchasers, through their insider trading,
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the
imposition of civil monetary penalties.
The Commission’s complaint alleges that, in an account maintained at SG Private
Banking (Suisse) SA in Geneva, Switzerland, the Unknown Purchasers placed orders to buy
107,500 ADRs on November 29, 2010; another 132,500 ADRs on November 30, 2010; and an
additional 160,000 ADRs on December 1, 2010. The Unknown Purchasers’ buys on November
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29th comprised 23 percent of the total trading volume of WBD ADRs that day; their purchases
on November 30th comprised 13 percent of that day’s total trading volume of WBD ADRs; and
their December 1st purchases comprised 21 percent of that day’s total trading volume of WBD
ADRs.
The complaint further alleges that, after the acquisition announcement, the price of WBD
ADRs rose approximately 28 percent for the day. As a result, the Unknown Purchasers are in a
position to realize total profits of approximately $2.7 million from the sale of the ADRs.
The Court's Temporary Restraining Order prohibits the transfer of the illegally purchased WBD
ADRs, or proceeds from their sale, to the Unknown Purchasers. In addition, the Order requires
the Unknown Purchasers to identify themselves, imposes an expedited discovery schedule, and
prohibits the defendants from destroying documents.
SEC v. Black Box Corporation, Frederick C. Young, and Anna M. Baird
Accounting and Auditing Enf. Rel. No. 3073 (December 4, 2009)
A.P. Rel. No. 34-61245 (December 28, 2009)
The SEC filed a civil action in the United States District Court for the Western District of
Pennsylvania against Black Box Corporation ("Black Box"), a Lawrence, PA technical services
provider, its former Chief Executive Officer Frederick C. Young, 53, of Silver Point, Tennessee,
and its former Chief Financial Officer Anna M. Baird, 52, of Bridgeville, PA, alleging violations
related to stock-options backdating. Without admitting or denying the SEC's allegations, all three
defendants agreed to settle the matter.
Black Box consented to the entry of an order permanently enjoining it from violating
Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules
12b-20, 13a-1 and 13a-13 thereunder. The settlement with Black Box takes into account the
company's cooperation during the SEC's investigation.
Young consented to the entry of an order permanently enjoining him from violating
Section 17(a) of the Securities Act of 1933, Sections 10(b),13(b)(5) and 14(a) of the Exchange
Act and Rules 10b-5, 13b2-2, 13a-14 and 14a-9 thereunder, and aiding and abetting violations of
Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and
13a-13 thereunder. Young agreed to pay a $120,000 penalty and to be barred from serving as an
officer or director of a public reporting company for five years.
Baird consented to the entry of an order permanently enjoining her from violating
Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Section 13(b)(5) of the Exchange Act,
and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Baird also consented to
disgorgement and prejudgment interest of $118,645. In addition, Baird agreed to settle a related
administrative proceeding pursuant to Rule 102(e) of the SEC's Rules of Practice by consenting,
29
without admitting or denying the SEC's findings, to the entry of an order suspending her from
appearing or practicing before the SEC as an accountant for five years.
SEC v. SafeNet, Inc. et al.
Accounting and Auditing Enf. Rel. No. 3068 (November 12, 2009)
The SEC filed a civil injunctive action against SafeNet, Inc., its former Chief Executive
Officer, Anthony Caputo, its former Chief Financial Officer, Kenneth Mueller, and three former
SafeNet accountants, Clinton Ronald Greenman, John Wilroy, and Gregory Pasko. The
complaint filed in the United States District Court for the District of Columbia alleges that,
during the period from the fourth quarter of 2000 through May 2006, SafeNet engaged in two
fraudulent schemes — one involving the backdating of options and the other earnings
management. Each scheme resulted in SafeNet materially misstating its financial results and
disseminating materially false and misleading information concerning its financial condition.
According to the complaint, Mueller and Caputo were involved in both schemes, while
Greenman, Wilroy and Pasko were involved only in the earnings management scheme. Without
admitting or denying the allegations in the complaint, except as to jurisdiction, all of the
defendants have agreed to settle the action on the terms described below.
This is the first enforcement action brought by the SEC pursuant to Regulation G.
Regulation G applies whenever a company subject to the periodic reporting requirements under
Section 13(a) or 15(d) of the Exchange Act of 1934, or a person acting on the company's behalf,
discloses publicly any material information that includes a "non-GAAP financial measure." NonGAAP financial measures, which are not calculated in conformity with Generally Accepted
Accounting Principles, often exclude non-recurring, infrequent, or unusual expenses. Regulation
G requires companies to reconcile the non-GAAP financial measure to the most directly
comparable GAAP financial measure. Regulation G also prohibits companies and their
employees from disseminating false or misleading non-GAAP financial measures or presenting
the non-GAAP financial measures in such a manner that they mislead investors or obscure the
company's GAAP results.
All defendants have agreed to settle this matter, without admitting or denying the allegations in
the complaint.
CASES INVOLVING ACCOUNTANTS AND AUDITORS
In the Matter of KPMG Australia
A.P. Rel. No. 34-63987 (February 28, 2011)
The Commission issued an Order Instituting Public Administrative and Cease-and-Desist
Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule
30
102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
Sanctions and a Cease-and Desist Order (Order) against KPMG Australia. The Order finds that
KPMG Australia and certain other KPMG member firms provided non-audit services to two
audit clients of KPMG Australia, identified in the Order as Companies A and B, both of which
had a class of securities registered with the Commission during the relevant period, in violation
of the auditor independence requirements imposed by the Commission’s rules and by U.S.
generally accepted auditing standards, or, with respect to one financial reporting period relating
to Company B, the standards of the Public Company Accounting Oversight Board. The Order
finds that the violative services were rendered during fiscal years 2001 and 2002 in the case of
Company A, and during fiscal years 2001 through 2004 in the case of Company B.
The Order finds that several distinct categories of non-audit services were rendered that
violated Rule 2-01 of Commission Regulation S-X and therefore impaired independence. First,
the Order finds that Respondent KPMG Australia and at least one other KPMG member firm
outside Australia seconded non-tax professional staff to work at each client’s premises, under the
supervision and direction of each client, doing the same types of work that each client’s own
employees or managers ordinarily would perform, in violation of the prohibition under Rule 201(c)(4)(vi) against “[a]cting, temporarily or permanently, as a director, officer, or employee of
an audit client, or performing any decision-making, supervisory, or ongoing monitoring function
for the audit client.” Second, the Order finds that Respondent KPMG Australia received trailing
commissions from an acquired subsidiary of Company B in exchange for KPMG Australia’s
earlier promotion of the subsidiary’s products prior to the subsidiary’s acquisition by Company
B. The Order finds that these services violated the prohibition under Rule 2-01(c)(3) against
direct business relationships with an audit client. Third, the Order finds that certain overseas
subsidiaries of Company B retained a legal practice associated with another KPMG member firm
to provide litigation services in violation of the prohibition under Rule 2-01 against acting as an
advocate for an audit client.
Based on the above, the Order finds that Respondent KPMG Australia engaged in
improper professional conduct pursuant to Exchange Act Section 4C and Rule 102(e)(1)(ii) of
the Commission’s Rules of Practice; (b) violated Rule 2-02(b) of Regulation S-X; and (c) caused
Company A and Company B to violate Exchange Act Section 13(a) and Rule 13a-1. As a result
of the foregoing, the Order censures KPMG Australia; orders KPMG Australia to cease and
desist from committing any violations and any future violations of Rule 2-02 of Regulation S-X,
and from causing any violations and any future violations of Exchange Act Section 13(a) and
Rule 13a-1; orders KPMG Australia to disgorge $1.982 million in audit fees and pay $760,000 in
pre-judgment interest; and orders KPMG Australia to comply with its undertaking to retain an
independent consultant.
SEC v. Michael R. Drogin, CPA
The SEC filed a settled enforcement action against Michael R. Drogin, a certified public
accountant licensed in New York and New Jersey. The Commission’s complaint charges that,
between 2005 and 2008, while he was a partner with the accounting firm Liebman Goldberg &
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Drogin, LLP in Garden City, New York, Drogin performed audit, review, and other accounting
work for three companies in violation of a Commission order issued on May 6, 2003.
The Commission’s complaint alleges that Drogin began violating the 2003 Order as early
as the fall of 2005, when he participated in auditing the financial statements of a small company
that then filed a registration statement with the Commission to become a public company. The
financial statements, and the firm’s audit report, were included in the registration statement and
subsequent amendments. Thereafter, Drogin violated the 2003 Order by participating in auditing
the 2007 financial statements of all three companies, reviewing Commission filings made by the
three companies; and advising the companies’ management regarding filing disclosures.
In addition to performing audit and review work, Drogin also violated the 2003 Order by
assisting two of the companies in responding to comments from the staff of the Commission’s
Division of Corporation Finance on the registration statements described above.
The Commission’s complaint also alleges that Drogin issued audit reports in 2008 for the
three companies without having completed the audits. The audit reports issued by Drogin falsely
stated that an audit had been performed in accordance with applicable auditing standards and
provided a reasonable basis for an unqualified report. The complaint alleges that Drogin knew
the companies would include the fraudulent audit reports in annual reports and a registration
statement filed with the Commission.
Without admitting or denying the allegations in the complaint, Drogin has consented to
the entry of a final judgment that: permanently enjoins Drogin from violating, directly or
indirectly, Section 17(a) of the Securities Act of 1933 (the “Securities Act”), Sections 10(b) and
13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20 and
13a-1 thereunder; restrains and enjoins him from violating the Commission’s 2003 Order, as
amended on January 11, 2011 (Release No. 34-63690); and orders him to pay disgorgement and
prejudgment interest of $43,612.04, and a civil penalty in the amount of $38,953.17. The
settlement is subject to the court’s approval.
SEC v. Sujata Sachdeva and Julie Mulvaney
Lit. Rel. No. 21640 (September 1, 2010)
The SEC charged two former senior accounting professionals at a Milwaukee-based
headphone manufacturer with accounting fraud, books-and-records violations, and related
misconduct arising from the embezzlement of more than $30 million from the company.
The SEC alleges that Sujata Sachdeva, who was the vice president of finance and
principal accounting officer at Koss Corporation, stole money from company accounts to make
millions of dollars in payments on her personal credit card and for other extravagant personal
purchases from luxury retailers. With the assistance of Koss senior accountant Julie Mulvaney,
Sachdeva concealed the theft on Koss’s balance sheet and income statement by overstating
assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the
fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial
32
statements and filed materially false current, quarterly, and annual reports with the SEC.
According to the SEC’s complaint, the scheme began in 2004 and lasted through
December 2009. After discovering the embezzlement, Koss amended and restated its financial
statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both
Sachdeva and Mulvaney have been terminated by the company.
The SEC’s complaint alleges that Sachdeva, a resident of Mequon, Wisc., embezzled
funds from company accounts through a variety of means, including cashier’s checks,
unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently
authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She
used them to make approximately $10 million in payments to American Express for her personal
credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva
used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M.
Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue.
According to the SEC’s complaint, Sachdeva used the embezzled funds to finance an
extravagant lifestyle, including prolific purchases of designer clothes, furs, purses, shoes, and
jewelry as well as china, statues, and household furnishings. She also used the stolen funds to
buy automobiles, pay for airline tickets and hotels during personal travel, and finance home
improvements and renovations. Meanwhile Mulvaney, who lives in Milwaukee, concealed and
facilitated the theft by preparing false journal entries to disguise Sachdeva’s misappropriation of
funds.
The SEC’s complaint charges Sachdeva with violations of the antifraud provisions of the
federal securities laws and charges both Sachdeva and Mulvaney with violations of the reporting,
books and records and internal control provisions of the federal securities laws. The SEC seeks a
permanent injunction, disgorgement of ill-gotten gains and financial penalties against Sachdeva
and Mulvaney, and an order barring Sachdeva from serving as an officer or director of a public
company.
In the Matter of Dan Wise
A.P. Rel. No. IA-2978 (January 27, 2010)
http://www.sec.gov/litigation/admin/2010/ia-2978.pdf
The SEC obtained emergency relief against a former Arizona certified public accountant
for targeting his accounting clients in a multi-million dollar real estate investment scheme. The
complaint alleges Wise solicited his tax and accounting clients, and their friends and family,
encouraging them to borrow money to invest with him. The complaint further alleges that, from
July 2001 to January 2009, Wise raised more than $67 million from approximately 125 investors
by touting his 10 to 15 years of experience in real estate investments and luring investors with
promises of lucrative annual returns ranging from 12% to 22%.
According to the SEC, Wise claimed to use investor funds to make short-term real estate
loans that would be fully collateralized and assured investors that they could obtain their
principal anytime on 24 to 48 hours notice. However, Wise apparently never funded real estate
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loans, never paid the promised returns to investors, and never honored investors’ redemption
requests.
The defendants are charged with violating the antifraud provisions of Section 17(a) of the
Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. The SEC is seeking, in addition to the emergency relief, preliminary and permanent
injunctions, disgorgement with prejudgment interest, and civil penalties.
Subsequently, the SEC instituted public administrative proceedings pursuant to Section
203(f) of the Advisers Act to determine what, if any, remedial action is appropriate against Wise.
SEC v. John W. Dwyer
Accounting and Auditing Enf. Rel. No. 3088 (December 17, 2009)
The SEC charged former chief financial officer John W. Dwyer and former controller
Theodore P. Noncek for their roles in an accounting fraud at Bally Total Fitness Holding
Corporation, which settled accounting fraud charges in 2008. Bally is a Chicago-based operator
of fitness centers. Without admitting or denying the allegations, Dwyer and Noncek agreed to
settle the SEC’s charges. The settlements are subject to Court approval.
The SEC’s complaint against Dwyer alleges, among other things, that during the relevant
time period, Dwyer violated the anti-fraud provisions, and aided and abetted Bally’s violations of
the reporting, record-keeping, and internal controls provisions, of the federal securities laws. The
SEC’s complaint against Noncek alleges that Noncek violated various provisions of the federal
securities laws. The complaints also allege that Dwyer and Noncek were responsible for Bally’s
materially false and misleading statements about its financial condition in filings with the SEC
and in other public statements. These materially false and misleading statements portrayed
Bally's financial condition (its net worth) and its performance (its income) as being materially
better than they actually were during the relevant period.
Dwyer settled the SEC case against him by consenting to permanent injunctions based on
his violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and
Exchange Act Rule 10b-5 and his aiding and abetting Bally’s violations of Sections 13(a) and
13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13,
payment of $250,000, a permanent officer-and-director bar, and a permanent bar from practice
before the SEC in a related Rule 102(e) proceeding. Noncek settled the SEC case against him by
consenting to permanent injunctions based on his violations of Section 17(a)(2) and (3) of the
Securities Act, and his aiding and abetting Bally’s violations of Sections 13(a), 13(b)(2)(A), and
13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13,
and a two-year bar from practice before the SEC in a related Rule 102(e) proceeding. (See A.P.
Rel. No. 34-61384 (January 20, 2010), http://www.sec.gov/litigation/admin/2010/34-61384.pdf.)
34
In the Matter of Ernest Young LLP
The SEC filed fraud charges against Ernest Young LLP (“E&Y”) for its actions while
serving as public auditor for Bally Total Fitness Holding Corporation (“Bally”), a Delaware
corporation, purported to be the largest, and only nationwide, commercial operator of fitness
centers.
According to the SEC’s order, E&Y served as public auditor for Bally from 2001 through
2004. In connection with Bally’s 2001-2003 financial statements, Bally engaged in fraudulent
financial accounting, including prematurely recognizing revenue and improperly deferring costs,
which overstated income and inflated stockholders’ equity. Bally also made false and misleading
disclosures regarding a $55 million special charge in its 2002 Form 10-K. On November 30,
2005, Bally filed its 2004 Form 10-K, which restated its previously reported financial statements
for 2002 and 2003, and selected financial data for 2000 and 2001 E & Y has agreed to settle the
SEC’s charges.
The SEC’s order finds that notwithstanding the fact that E&Y knew or should have
known of Bally’s fraudulent financial accounting and false and misleading disclosures, E&Y
issued unqualified audit opinions regarding Bally’s 2001-2003 financial statements, which stated
that E&Y had conducted its audits in accordance with auditing standards generally accepted in
the United States (“GAAS”) and that Bally’s financial statements were presented in conformity
with accounting principles generally accepted in the United States (“GAAP”). Contrary to the
audit opinions, E&Y’s audits of Bally’s financial statements were not performed in accordance
with GAAS and Bally’s financial statements were not in conformity with GAAP.
Without admitting or denying the SEC’s charges, E&Y has consented to a cease and
desist order. The order finds that by issuing false and misleading audit opinions, E&Y was a
cause of and aided and abetted Bally’s violations of Sections 17(a)(2) and (3) of the Securities
Act and Sections 13(a) and (b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a1, 13a11, and 13a-13. E&Y also violated Section 10A of the Exchange Act by not bringing to the
attention of Bally’s Audit Committee Bally’s false and misleading disclosures of the $55 million
special charge.
SEC v. Michael J. Moore and Moore & Associates Chartered
Lit. Rel. No. 21189A (August 27, 2009)
http://www.sec.gov/litigation/litreleases/2009/lr21189a.htm
The SEC charged Michael J. Moore ("Moore"), a Las Vegas-based CPA, and his public
accounting firm, Moore & Associates Chartered ("M&A"), with securities fraud for issuing false
audit reports that failed to comply with Public Company Accounting Oversight Board
("PCAOB") Standards and were often the product of high school graduates hired with little or no
education or experience in accounting or auditing.
35
According to the SEC's complaint, Moore and M&A issued audit reports for more than
300 clients who consist of primarily shell or developmental stage companies with public stock
quoted on the OTCBB or the Pink Sheets. The SEC alleges that Moore and M&A violated
numerous auditing standards, including a failure to hire employees with adequate technical
training and proficiency. The SEC further alleges that Moore and M&A did not adequately plan
and supervise the audits, failed to exercise due professional care, and did not obtain sufficient
competent evidence. Despite the audit failures, M&A issued and Moore signed audit reports
falsely stating that the audits were conducted in accordance with PCAOB Standards. By issuing
and signing these false audit reports, Moore and M&A violated the antifraud provisions of
Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5
thereunder and Regulation S-X Rule 2-02(b)(1).
The SEC's complaint also alleges that Moore and M&A violated Sections 10A(a)(1)
and10A(b)(1) of the Exchange Act by failing to include audit procedures designed to detect and
report likely illegal acts. The complaint further alleges that Moore and M&A improperly
modified audit documentation in violation of Regulation S-X Rule 2-06.
To settle the Commission's charges, Moore and M&A consented to the entry of a final
judgment permanently enjoining them from future violations of Sections 10(b), 10A(a)(1), and
10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder and Regulation S-X Rules 2-02(b)(1)
and 2-06 and ordering them to disgorge $179,750 plus prejudgment interest of $10,151.59.
Moore separately agreed to pay a $130,000 penalty. Moore and M&A also consented to the entry
of an administrative order that makes findings and suspends them from appearing or practicing
before the Commission as an accountant pursuant to Rule 102(e)(3) of the Commission's Rules
of Practice. (See A.P. Rel. No. 34-60792 (October 6, 2009), http://www.sec.gov/litigation/admin
/2009/34-60792.pdf.)
SEC v. Michael T. Rand
Lit. Rel. No. 21114 (July 1, 2009)
The SEC charged Michael T. Rand, the former chief accounting officer of Atlanta-based
home builder Beazer Homes, USA, Inc., for conducting a multi-year fraudulent earnings
management scheme and misleading Beazer’s outside auditors and internal Beazer accountants
to conceal his wrongdoing.
The SEC alleges that Rand fraudulently decreased Beazer’s reported net income by
recording improper accounting reserves during certain periods between 2000 and 2005 to meet
or exceed analysts’ expectations for Beazer’s diluted earnings per share (EPS) and maximize
yearly officer and senior employee bonuses. Regan began reversing these improper reserves
beginning in the first quarter of fiscal year 2006 to offset Beazer’s declining financial
performance.
The SEC further alleges that in fiscal year 2006 and the first two quarters of fiscal year
2007, Rand improperly recognized revenue from the sale and leaseback of certain model homes
on Beazer’s financial statements and used secret side agreements to hide his misconduct from
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Beazer’s outside auditors, causing Beazer to understate its income in SEC filings by around $63
million during fiscal years 2000 to 2005. Rand’s fraudulent actions caused Beazer to overstate its
income and understate its loss by a total of $47 million during fiscal 2006.
The SEC charges Rand with violating Section 17(a) of the Securities Act of 1933,
Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1,
and 13b2-2 thereunder, and, with aiding and abetting violations of Sections 13(a), 13(b)(2)(A)
and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder,
and seeks a permanent injunction, disgorgement of Rand’s ill-gotten gains plus prejudgment
interest, and a financial penalty.
SEC v. Whispering Winds Properties, LLC; LM Beagle Properties, LLC; Karlena, Inc.;
Axis International, Inc.; and Dan Wise
Lit. Rel. No. 20987 (April 6, 2009)
The SEC obtained a temporary restraining order, asset freeze, and other emergency relief
against a former Arizona certified public accountant for targeting his accounting clients in a
multi-million dollar real estate investment scheme.
The Commission’s complaint names Dan Wise, age 52, of Scottsdale, Ariz., and his four
companies Whispering Winds Properties, LLC, LM Beagle Properties, LLC, Karlena, Inc., and
Axis International, Inc. The complaint alleges Wise solicited his tax and accounting clients, and
their friends and family, encouraging them to borrow money to invest with him. The complaint
alleges that, from July 2001 to January 2009, Wise raised more than $67 million from
approximately 125 investors by touting his 10 to 15 years of experience in real estate
investments and luring investors with promises of lucrative annual returns ranging from 12% to
22%. The complaint further alleges that Wise claimed to use investor funds to make short-term
real estate loans that would be fully collateralized and assured investors that they could obtain
their principal anytime on 24 to 48 hours notice. The complaint alleges Wise never funded real
estate loans, never paid the promised returns to investors, and never honored investors’
redemption requests.
The Commission’s complaint charges the defendants with violating the antifraud
provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks, in addition to the emergency relief,
preliminary and permanent injunctions, disgorgement with prejudgment interest, and civil
penalties.
37
CASES INVOLVING FOREIGN PAYMENTS
SEC v. Johnson & Johnson
Lit. Rel. No. 21922 (April 8, 2011)
Accounting and Auditing Enf. Rel. No. 3261 (April 8, 2011)
The SEC announced a settlement with Johnson and Johnson (“J&J”) to resolve SEC
charges that the New Brunswick, NJ-based global pharmaceutical, consumer product, and
medical device company violated the Foreign Corrupt Practices Act (FCPA) by bribing public
doctors in several European countries and paying kickbacks to Iraq to illegally obtain business.
The SEC alleges that, since at least 1998, J&J’s subsidiaries paid bribes to public doctors
in Greece who selected J&J surgical implants, paid bribes to public doctors and hospital
administrators in Poland who awarded tenders to J&J, and paid bribes to public doctors in
Romania to prescribe J&J pharmaceutical products. J&J also paid kickbacks to Iraq in order to
obtain contracts under the United Nations Oil for Food Program (“Program”).
J&J has agreed to pay more than $48.6 million in disgorgement and prejudgment interest to settle
the SEC’s charges and to pay a $21.4 million fine to the U.S. Department of Justice to settle
criminal charges. A resolution of a related investigation by the United Kingdom Serious Fraud
Office is anticipated.
Without admitting or denying the SEC’s allegations, J&J has consented to the entry of a
court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and
13(b)(2)(B) of the Securities Exchange Act of 1934; ordering it to pay $38,227,826 in
disgorgement and $10,438,490 in prejudgment interest; and ordering it to comply with certain
undertakings regarding its FCPA compliance program.
SEC v. Comverse Technology, Inc.
Lit. Rel. No. 21920 (April 7, 2011)
The SEC filed a settled enforcement action against Comverse Technology, Inc., alleging
violations of the books and records and internal controls provisions of the Foreign Corrupt
Practices Act (“FCPA”). Comverse has offered to pay a total of approximately $1.6 million in
disgorgement and prejudgment interest to the SEC. In a related action, Comverse will pay a $1.2
million criminal fine to the U.S. Department of Justice.
The SEC’s complaint alleges that between 2003 and 2006, Comverse Limited, an Israeli
operating subsidiary of Comverse, made improper payments to obtain or retain business. In
particular, Comverse Limited made improper payments of approximately $536,000 to
individuals connected to OTE, a telecommunications provider based in Athens, Greece that is
partially owned by the Greek Government. These payments resulted in contracts worth
approximately $10 million in revenues and ill-gotten gain of approximately $1.2 million.
38
In order to facilitate and conceal the payments, Comverse Limited employed a third-party
agent to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to
Comverse Limited’s customers. Comverse Limited employees made payments to the agent’s
offshore entity and, after taking 15% off the top of these payments, the agent paid the remaining
85% in cash bribes, directly or indirectly, to Comverse Limited’s customers.
These payments were improperly recorded on Comverse’s books and records as “agent
commissions,” and in addition, Comverse failed to devise and maintain a system of internal
accounting controls sufficient to provide reasonable assurances that transactions at all levels of
the organization were properly recorded. For example, neither Comverse nor Comverse Limited
had a process, formal or otherwise, for conducting due diligence of sales agents or for the
independent review of agent contracts outside the sales departments.
Without admitting or denying the SEC’s allegations, Comverse has consented to a
conduct-based injunction that prohibits Comverse from having books and records that do not
accurately reflect, or from having internal controls that do not prevent or detect, any illegal
payments made to obtain or retain business. In addition, Comverse consented to pay $1,249,614
in disgorgement and $358,887 in prejudgment interest.
SEC v. International Business Machines Corperation
Lit. Rel. No. 21889 (March 18, 2011)
The SEC charged International Business Machines Corporation (“IBM”) with violating
the books and records and internal control provisions of the Foreign Corrupt Practices Act of
1977 (“FCPA”) as a result of the provision of improper cash payments, gifts, and travel and
entertainment to government officials in South Korea and China.
As alleged in the SEC’s Complaint, from 1998 to 2003, employees of IBM Korea, Inc.,
an IBM subsidiary, and LG IBM PC Co., Ltd., a joint venture in which IBM held a majority
interest, paid cash bribes and provided improper gifts and payments of travel and entertainment
expenses to various government officials in South Korea in order to secure the sale of IBM
products.
It was further alleged that, from at least 2004 to early 2009, employees of IBM (China)
Investment Company Limited and IBM Global Services (China) Co., Ltd., both wholly-owned
IBM subsidiaries, engaged in a widespread practice of providing overseas trips, entertainment,
and improper gifts to Chinese government officials.
Without admitting or denying the SEC’s allegations, IBM consented to the entry of a
final judgment that permanently enjoins the company from violating the books and records and
internal control provisions of the FCPA, codified as Sections 13(b)(2)(A) and 13(b)(2)(B) of the
Securities Exchange Act of 1934. IBM also agreed to pay disgorgement of $5,300,000,
$2,700,000 in prejudgment interest, and a $2,000,000 civil penalty.
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SEC v. Tyson Foods, Inc.
The SEC filed a settled civil action against Tyson Foods, Inc., the world’s largest meat
protein company and the second-largest food production company in the Fortune 500, charging it
with violations of the Foreign Corrupt Practices Act (FCPA).
According to the SEC’s complaint, Tyson Foods’ subsidiary, Tyson de Mexico, made
improper payments during fiscal years 2004 to 2006 to two Mexican government veterinarians
responsible for certifying its chicken products for export sales. Tyson de Mexico initially
concealed the improper payments by putting the veterinarians’ wives on its payroll while they
performed no services for the company. The wives were later removed from the payroll and
payments were then reflected in invoices submitted to Tyson de Mexico by one of the
veterinarians for “services.” Tyson de Mexico paid the veterinarians a total of $100,311. It was
not until two years after Tyson Foods’ officials first learned about the subsidiary’s illicit
payments that its counsel instructed Tyson de Mexico to cease making the payments.
The SEC alleges that in connection with these improper payments, Tyson Foods failed to
keep accurate books and records and failed to implement a system of effective internal controls
to prevent the salary payments to phantom employees and the payment of illicit invoices. The
improper payments were improperly recorded as legitimate expenses in Tyson de Mexico’s
books and records and included in Tyson de Mexico’s reported financial results for fiscal years
2004, 2005 and 2006. Tyson de Mexico’s financial results were, in turn, a component of Tyson
Foods’ consolidated financial statements filed with the SEC for those years.
Without admitting or denying the SEC’s allegations, Tyson Foods consented to the entry
of a final judgment ordering disgorgement plus pre-judgment interest of more than $1.2 million
and permanently enjoining it from violating the anti-bribery, books and records, and internal
controls provisions of the FCPA, codified as Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the
Securities Exchange Act of 1934. The proposed settlement is subject to court approval.
SEC v. Alcatel-Lucent, S.A.
The SEC filed a settled enforcement action on December 27, 2010, in the U.S. District
Court for the Southern District of Florida to resolve charges that Alcatel-Lucent, S.A. (Alcatel)
violated the anti-bribery, books and records, and internal controls provisions of the Foreign
Corrupt Practices Act (FCPA) by paying bribes to foreign government officials to obtain or
retain business in Latin America and Asia.
Alcatel, the provider of telecommunications equipment and services, has offered to pay a
total of $137.372 million in disgorgement and fines, including $45.372 million in disgorgement
to the SEC. In a related action, Alcatel will pay a $92 million criminal fine to the U.S.
Department of Justice.
40
The SEC’s complaint, filed in the Southern District of Florida, alleges that Alcatel’s
bribes went to government officials in Costa Rica, Honduras, Malaysia, and Taiwan between
December 2001 and June 2006. An Alcatel subsidiary provided at least $14.5 million to
consulting firms through sham consulting agreements for use in the bribery scheme in Costa
Rica. Various high-level government officials in Costa Rica received at least $7 million of the
$14.5 million to ensure Alcatel obtained or retained three contracts to provide telephone services
in Costa Rica.
The SEC alleges that the same Alcatel subsidiary bribed officials in the government of
Honduras to obtain or retain five telecommunications contracts. Another Alcatel subsidiary
made bribery payments to Malaysian government officials in order to procure a
telecommunications contract. An Alcatel subsidiary also made illegal payments to various
officials in the government of Taiwan to win a contract to supply railway axle counters to the
Taiwan Railway Administration.
The SEC’s complaint charges that Alcatel violated Section 30A of the Securities
Exchange Act of 1934 by making illicit payments to foreign government officials, through its
subsidiaries and agents, in order to obtain or retain business. Alcatel violated Section
13(b)(2)(B) of the Exchange Act by failing to have adequate internal controls to detect and
prevent the payments. Alcatel violated Section 13(b)(2)(A) of the Exchange Act by improperly
recording the payments in its books and records. Alcatel violated Section 13(b)(5) of the
Exchange Act when its subsidiaries knowingly failed to implement a system of internal controls
and knowingly falsified their books and records to camouflage bribes as consulting payments.
Without admitting or denying the SEC’s allegations, Alcatel has consented to a court order
permanently enjoining it from future violations of these statutory provisions; ordering the
company to pay $45.372 million in disgorgement of wrongfully obtained profits, and ordering it
to comply with certain undertakings, including an independent monitor for a three year term.
SEC v. RAE Systems Inc.
The SEC filed a settled enforcement action against RAE Systems Inc., a San Jose-based
company, alleging violations of the anti-bribery, books and records, and internal controls
provisions of the Foreign Corrupt Practices Act (“FCPA”). RAE has offered to pay
approximately $1.2 million as part of its settlement with the SEC. RAE’s proposed settlement
offer has been submitted to the Court for its consideration.
The SEC’s complaint alleges that from 2004 through 2008, RAE made illicit payments,
through two of its joint venture entities in China, of approximately $400,000, directly or
indirectly, to government officials in China to obtain or retain business from Chinese
governmental entities. These payments were made primarily by the direct sales force utilized by
RAE at its two Chinese joint-venture entities, named RAE-KLH (Beijing) Co., Limited (“RAEKLH”) and RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE-Fushun”). In all, these
41
payments resulted in contracts worth approximately $3 million in revenues and profits of
$1,147,800.
The Complaint also alleges that RAE KLH and RAE Fushun sales personnel typically made
the improper payments by obtaining cash advances from RAE KLH and RAE Fushun accounting
personnel. RAE did not impose sufficient internal controls or make any meaningful changes to
the practice of sales personnel obtaining cash advances to make the improper payments. In
addition, the expenses associated with these cash advances were improperly recorded on the
books of RAE-KLH and RAE-Fushun as “business fees” or “travel and entertainment” (T&E)
expenses. And while the payments were made exclusively in China and were conducted by
Chinese employees of RAE-KLH and RAE-Fushun, RAE failed to act on red flags of this
activity, which allowed, at least in part, the conduct to continue at RAE-KLH.
Without admitting or denying the Commission’s allegations, RAE has consented to the
entry of a court order permanently enjoining it from future violations of Sections 30A,
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; ordering it to pay $1,147,800 in
disgorgement, plus $109,212 in prejudgment interest; and ordering it to comply with certain
undertakings regarding its FCPA compliance program.
SEC v. Tidewater Inc.
The SEC charged New Orleans-based shipping company Tidewater Inc. with violating
the Foreign Corrupt Practices Act (FCPA) for paying bribes to foreign government officials in
Azerbaijan disguised as payments for legitimate services. Tidewater is also charged with
authorizing improper payments to customs officials in Nigeria that were inaccurately recorded as
legitimate expenses in the Company's books and records.
The SEC alleges that Tidewater, directly or through its subsidiaries and agents, paid
$160,000 in bribes to foreign government officials in Azerbaijan in 2001, 2003 and 2005 in order
to influence acts and decisions by Azeri tax officials to resolve local audits in favor of a
Tidewater subsidiary. The SEC further alleges that from January 2002 through SEC 2007,
Tidewater, through a subsidiary, reimbursed approximately $1.6 million to its customs broker in
Nigeria used to make improper payments to local Nigerian customs officials. These improper
payments were made in order to induce the Nigerian officials to disregard regulatory
requirements in Nigeria relating to the temporary importation of Tidewater's vessels into
Nigerian waters. Tidewater improperly recorded these payments as legitimate expenses in its
books and records.
The SEC's complaint charges that Tidewater violated Section 30A of the Securities
Exchange Act of 1934 ("Exchange Act") by making illicit payments to Azeri government
officials through its subsidiaries and agent. The complaint also charges Tidewater with violating
Section 13(b)(2)(A) of the Exchange Act for improperly recording the Azeri and Nigerian
42
payments in its books and records and Section 13(b)(2)(B) of the Exchange Act for failing to
have adequate internal controls to detect and prevent the illegal payments.
Without admitting or denying the SEC's allegations, Tidewater has consented to a court
order permanently enjoining it from future violations of these statutory provisions; and ordering
it to pay $7,223,216 in disgorgement plus prejudgment interest of $881,146, and a $217,000 civil
penalty. The Commission is not imposing an additional monetary penalty against Tidewater in
light of a criminal fine the company agreed to pay to U.S. Department of Justice in a parallel
criminal case involving substantially the same misconduct.
SEC v. Noble Corporation
The Commission settled with Noble Corporation (Noble) for violations of the Foreign
Corrupt Practices Act (FCPA). The SEC alleged that Noble, an offshore drilling contractor
headquartered in Switzerland with an office in Sugarland, Texas, made improper payments
through its custom agents to officials of the Nigeria Customs Service to obtain permits and
permit extensions necessary for operating offshore oil rigs in Nigeria. As part of the settlement,
Noble will pay $5,576,998 in disgorgement and prejudgment interest.
The Commission's complaint, filed in federal court, alleges that from January 2003
through May 2007, Noble authorized payments by its Nigerian subsidiary to its customs agent,
believing that the agent would give portions of the payments to Nigerian government officials to
induce them to grant temporary importation permits (TIPs) and TIP extensions for Noble's
drilling rigs. Although Noble was required to move its rigs out of Nigeria when TIPs and any
extensions had expired, it did not do so in order to avoid the costs of moving the rigs, the
potential loss of profits, and the break in performance of rigs under contract. Noble used the
customs agents to submit false documents to Nigerian Customs Service showing export and reimport of its drilling rigs when in fact the rigs never moved. Noble paid its customs agents to
present these false documents to the Nigeria Customs Service (NCS) and, through the customs
agents, made improper payments to officials of the NCS to process the false documents and issue
new TIPS. Noble obtained eight TIPs with false documentation.
The Commission's complaint further alleges that Noble improperly recorded in its books
and records the payments that its customs agent passed on to Nigerian government officials.
Noble also failed to maintain internal controls to detect and prevent these payments.
In the Commission's settlement, Noble has agreed, without admitting or denying the
allegations of the complaint, to the entry of a Court order enjoining it from violating the antibribery, books and records, and internal controls provisions of the federal securities laws. The
order also requires that Noble disgorge ill-gotten gains of $4,294,933 and pay prejudgment
interest of $1,282,065. The settlement takes into consideration Noble's self-reporting and its
substantial cooperation during the investigation, as well as its remediation efforts following its
extensive internal review.
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SEC v. Panalpina, Inc.
The SEC charged the U.S. subsidiary of Panalpina World Transport (Holding) Ltd.
(PWT), a global freight forwarding and logistics services provider based in Basel, Switzerland,
with violating the Foreign Corrupt Practices Act (FCPA) by bribing foreign officials around the
world on behalf of its customers.
The SEC's complaint, filed in federal district court, alleges that from 2002 through 2007
Panalpina, Inc. (Panalpina), in concert with other PWT subsidiaries and affiliates (Panalpina
Group), bribed government officials in countries including Nigeria, Angola, Brazil, Russia, and
Kazakhstan. The bribes were paid by Panalpina to obtain preferential customs, duties, and import
treatment for its customers in connection with international freight shipments. Although PWT,
Panalpina, and the Panalpina Group are not issuers for purposes of the FCPA, many of their
customers are. By paying bribes on behalf of issuers, Panalpina both violated and aided and
abetted violations of the FCPA.
To settle the SEC's charges, Panalpina will pay $11,329,369. PWT and Panalpina will
pay an additional $70,560,000 to resolve related criminal proceedings.
The complaint alleges that although the bribery schemes varied, most shared several
similarities. The customers often used Panalpina or other Panalpina Group companies to ship
goods internationally or sought Panalpina's assistance in obtaining customs or logistics services
in the country to which goods were shipped. For various reasons—including delayed departures,
insufficient or incorrect documentation, the nature of the goods being shipped and imported, or
the refusal of local government officials to provide services without unofficial payments—
Panalpina's customers sometimes faced delays in importing goods. In other cases, Panalpina's
customers sought to avoid local customs duties or inspection requirements or otherwise sought to
import goods in circumvention of local law. In order to secure the importation of goods under
these circumstances, Panalpina's customers often authorized Panalpina and other Panalpina
Group companies to bribe foreign officials.
The complaint further alleges that Panalpina Group companies invoiced Panalpina's
customers for the bribes. The invoices, which contained both legitimate and illegitimate charges,
concealed the bribes by inaccurately referring to them as "local processing," "special
intervention," "special handing," and other seemingly legitimate fees.
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SEC v. Pride International, Inc.
The SEC charged one of the world’s largest offshore drilling companies with violating
the Foreign Corrupt Practices Act (FCPA) by paying approximately $2 million to foreign
officials in eight countries.
The SEC’s complaint, filed in federal district court, alleges that from 2001 through 2006
Pride International, Inc. and its subsidiaries bribed government officials in Venezuela, India,
Mexico, Kazakhstan, Nigeria, Saudi Arabia, the Republic of the Congo, and Libya. The bribery
schemes allowed Pride and its subsidiaries to extend drilling contracts, obtain the release of
drilling rigs and other equipment from customs officials, reduce customs duties, extend the
temporary importation status of drilling rigs, lower various tax assessments, and obtain other
improper benefits.
To settle the SEC’s charges, Pride will pay disgorgement of $19,341,870 plus prejudgment interest of $4,187,848. The company will pay an additional $32,625,000 to resolve
related criminal proceedings.
According to the SEC’s complaint, from 2003 through 2005, Pride’s former Venezuela
country manager authorized bribes totaling approximately $384,000 to an official of Venezuela’s
state-owned oil company to secure extensions of three drilling contracts. In addition, the country
manager authorized a bribe of approximately $30,000 to an employee of Venezuela’s stateowned oil company to secure the payment of receivables.
The SEC’s complaint also alleges that from 2001 through 2006 numerous improper
payments made by Pride subsidiaries operating in Mexico, Kazakhstan, Nigeria, Saudi Arabia,
the Republic of the Congo, and Libya were not correctly recorded in those subsidiaries’ books
and records. As a result, the complaint alleges that Pride failed to make and keep accurate books
and records and failed to devise and maintain appropriate internal controls.
Without admitting or denying the SEC’s allegations, Pride consented to the entry of a
final judgment ordering disgorgement plus pre-judgment interest and permanently enjoining it
from violating the anti-bribery, books and records, and internal controls provisions of the FCPA,
codified as Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934.
The proposed settlement is subject to court approval.
SEC v. Transocean Inc.
Accounting and Auditing Enf. Rel. No. 3202
The SEC filed a settled enforcement action in the U.S. District Court for the District of
Columbia charging Transocean Inc. (“Transocean”), an international provider of offshore drilling
45
services and equipment to oil companies throughout the world, with violations of the antibribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act
(“FCPA”). Transocean has agreed to pay disgorgement, interest, and a civil penalty totaling
$7,265,080 to settle the charges.
The SEC’s complaint alleges that from at least 2002 through 2007, Transocean made
illicit payments through its customs agents to Nigerian government officials to extend the
temporary importation status of its drilling rigs, to obtain false paperwork associated with its
drilling rigs, and obtain inward clearance authorizations for its rigs and a bond registration. In
addition, Transocean made illicit payments through Panalpina World Transport Holding Ltd.’s
Pancourier express courier service to Nigerian government officials to expedite the import of
various goods, equipment and materials into Nigeria. In most instances, customs duties for these
items were not paid by either Panalpina or Transocean. Transocean also made illicit payments
through Panalpina to Nigerian government officials to expedite the delivery of medicine and
other materials into Nigeria. Transocean’s total gains from the conduct were approximately
$5,981,693.
From approximately 2002 to 2006, Transocean also made illicit payments totaling
$207,170 to a second customs agent for what were described on invoices as “customs
intervention” charges related to six rigs. Transocean’s employees believed that the invoiced
“intervention” charges were likely illicit payments to customs officials. From 2002 to 2007,
Transocean also made illicit payments to Nigerian customs officials through Panalpina, a freight
forwarding company headquartered in Switzerland, and Panalpina’s express door to door courier
service, Pancourier, to import goods and materials into Nigeria without paying applicable duties
to Nigerian customs officials. Pancourier invoiced Transocean for “local processing charges”
related to the shipments, and the invoice amounts were typically 25% to 40% of the actual duties
owed.
The total customs duties that Transocean avoided through its use of Pancourier were
approximately $1,480,419. Transocean also used Panalpina to make illicit payments to Nigerian
government officials to expedite the delivery of medicine and other goods totaling $32,741.
Without admitting or denying the Commission’s allegations, Transocean has consented to
the entry of a court order permanently enjoining it from future violations of Sections 30A,
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and ordering it to pay $5,981,693 in
disgorgement, plus prejudgment interest of $1,283,387.
SEC v. GlobalSantaFe Corp.
The SEC charged GlobalSantaFe Corp. (GSF) (c/k/a Transocean Worldwide Inc.) with
bribery and other violations of the Foreign Corrupt Practices Act (FCPA).
46
According to the SEC’s complaint, filed in federal district court in Washington, D.C.,
from approximately January 2002 through July 2007, GSF made illegal payments to officials of
the Nigerian Customs Service (NCS), through companies acting as customs brokers for GSF. In
November 2007, GSF, an oil and gas drilling services company, merged with a subsidiary of
Transocean Inc. In December 2008, the listed company became Transocean Ltd. GSF will pay a
total of approximately $5.9 million dollars to settle the SEC’s charges.
The SEC complaint alleges that instead of moving its oil drilling rigs out of Nigerian
waters as required by Nigerian law when GSF’s permit to temporarily import the rigs into
Nigeria had expired, GSF, through its customs brokers, made illegal payments to NCS officials
to secure documentation reflecting that the rigs had moved out of Nigerian waters, when in fact,
the rigs had not moved at all.
Without admitting or denying the SEC’s allegations, GSF has consented to the entry of a
court order permanently enjoining it from violating the anti-bribery and record keeping and
internal controls provisions in Section 30A and Sections 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act. GSF also consented to the entry of a court order requiring GSF to pay
disgorgement of $2,694,405, prejudgment interest of $1,063,760, and a civil penalty of $2.1
million. The proposed settlement is subject to court approval.
SEC v. Universal Corp., Inc.; SEC v. Alliance One Int’l, Inc.
Lit. Rel. No. 21618 (August 6, 2010)
Accounting and Auditing Enf. Rel. No. 3170 (August 6, 2010)
The SEC charged two major tobacco companies, Universal Corporation, Inc. and
Alliance One International, Inc., with violating, among other things, the anti-bribery provisions
of the Foreign Corrupt Practices Act of 1977 ("FCPA") for their involvement in a multi-million
dollar bribery scheme with government officials in Thailand to obtain nearly $30 million in sales
contracts to supply tobacco. The SEC also charged Alliance One with paying bribes in
Kyrgyzstan and making improper payments in China, Greece, and Indonesia and Universal with
making improper payments in Malawi and Mozambique. Moreover, the SEC's complaints
alleged Universal and Alliance One engaged in books and records and internal control violations.
Universal
According to the SEC's complaint, between 2000 and 2004, Universal, in coordination
with two of its competitors, Dimon, Inc. ("Dimon") and Standard Commercial Corporation
("Standard"), paid approximately $800,000 to bribe officials of the government-owned Thailand
Tobacco Monopoly ("TTM") in exchange for securing approximately $11.5 million in sales
contracts for its subsidiaries in Brazil and Europe. From 2004 through 2007, Universal also made
a series of payments in excess of $165,000 to government officials in Mozambique through
corporate subsidiaries in Belgium and Africa. Universal made these payments, among other
things, to secure an exclusive right to purchase tobacco from regional growers and to procure
legislation beneficial to the company's business. Between 2002 and 2003, Universal subsidiaries
paid a total of $850,000 to high-ranking Malawian government officials. Universal did not
accurately record these payments in its books and records.
47
Alliance One
From 2000 to 2004, in a coordinated bribery scheme with Universal, Dimon and Standard
paid bribes of more than $1.2 million to government officials of the TTM in order to obtain more
than $18.3 million in sales contracts. (In May 2005, Dimon and Standard merged to form
Alliance One). Dimon characterized the payment of bribes to TTM officials as commissions paid
to Dimon's agent in Thailand. Similarly, Standard personnel authorized improper payments to
TTM officials and failed to record those payments accurately in Standard's books and records.
The SEC's complaint also alleges that, from 1996 through 2004, Dimon International Kyrgyzstan
("DIK"), a wholly-owned subsidiary of Dimon, paid more than $3 million in bribes to
Kyrgyzstan government officials to purchase Kyrgyz tobacco for resale to Dimon's customers.
Most of these payments were delivered in bags filled with $100 bills to a high-ranking
government official. DIK also made improper payments to Kyrgyzstan tax officials.
Additionally, Dimon made improper payments to tax officials in Greece and Indonesia. Standard
also made an improper payment to a political candidate and provided gifts, travel, and
entertainment expenses to foreign government officials in the Asian Region, including China and
Thailand. Dimon and Standard failed to record these payments accurately in the companies'
books and records.
Without admitting or denying the SEC's allegations, defendants Universal and Alliance
One consented to the entry of final judgments permanently enjoining each of them from violating
the anti-bribery, books and records, and internal control provisions of the FCPA, codified as
Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Universal
and Alliance One are ordered to pay disgorgement of $4,581,276.51 and $10,000,000,
respectively, and each is ordered to retain an independent monitor for three years.
SEC v. ENI, et al.
Lit. Rel. No. 21588 (July 7, 2010)
The SEC charged Italian company ENI, S.p.A. and its former Dutch subsidiary
Snamprogetti Netherlands B.V. with multiple violations of the Foreign Corrupt Practices Act
(FCPA) in a bribery scheme that included deliveries of cash-filled briefcases and vehicles to
Nigerian government officials to win construction contracts.
According to the SEC's complaint, senior executives at Snamprogetti and the other joint
venture companies authorized the hiring of two agents, a U.K. solicitor and a Japanese trading
company, through which more than $180 million in bribes were funneled to Nigerian
government officials to obtain several contracts to build liquefied natural gas (LNG) facilities on
Bonny Island, Nigeria. The Nigerian government exercised majority control over the company
that awarded the contracts — Nigeria LNG Ltd. After Nigeria LNG awarded the joint venture
companies a $2.2 billion LNG-related construction contract in December 1995, the companies
sent a total of $60 million to the U.K. agent's Swiss bank account over the next 52 months. The
U.K. agent transferred the money to accounts owned or controlled by high-ranking Nigerian
government officials.
48
The SEC alleges that following a change in Nigerian government in 1999, representatives
from the joint venture companies traveled to Nigeria to meet a high-ranking government official
to continue the scheme. The official confirmed that the U.K. agent was the correct intermediary,
and also appointed his own representative to negotiate the bribe amount. A senior officer from
Snamprogetti and others from the joint venture met with the Nigerian official's representative in
London and negotiated an amount of $32.5 million to be delivered through the U.K. agent. Days
after the London meeting, Nigeria LNG awarded a contract to the joint venture companies for
$1.2 billion. In 2002 and 2003, the U.K. agent used a subcontractor on the Nigeria LNG project
to transfer millions of dollars to a Nigerian government official for the benefit of a Nigerian
political party. The subcontractor personally hand-delivered U.S. cash in briefcases to the
Nigerian official in a hotel room in Abuja, Nigeria. The subcontractor also delivered the bribes to
the Nigerian official in local Nigerian currency, the Naira. In these instances, because the Naira
was too bulky to deliver by hand, the subcontractor loaded the cash into vehicles that were
delivered to the Nigerian official.
The SEC also alleges that ENI failed to ensure that its former subsidiary, Snamprogetti,
complied with ENI's internal controls concerning the use of agents, and that the books and
records of both companies were falsified as a result of the bribery scheme. After ENI became a
U.S. issuer in 1995, it became subject to the FCPA, including the requirement to create and
maintain adequate internal controls.
Without admitting or denying the SEC's allegations, Snamprogetti has consented to the
entry of a court order permanently enjoining it from violating the anti-bribery and recordkeeping
and internal controls provisions in Sections 30A and 13(b)(5) of the Securities Exchange Act of
1934 and Rule 13b2-1, and ENI has consented to the entry of a court order permanently
enjoining it from violating the recordkeeping and internal controls provisions in Sections
13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Snamprogetti and ENI also consented to the
entry of court orders that require them, jointly and severally, to pay $125 million in
disgorgement. The proposed settlements are subject to court approval.
SEC v. Bobbj J. Elkin Jr., et al.
Lit. Rel. No. 21509 (April 29, 2010)
The SEC filed a civil injunctive action charging four former employees of Dimon, Inc.,
now Alliance One International, Inc., with violating, among other things, the anti-bribery
provisions of the Foreign Corrupt Practices Act of 1977 ("FCPA"). All four defendants agreed to
settle the SEC's charges against them.
According to the SEC's complaint, during the period 1996 through 2004, Dimon's
subsidiary in Kyrgyzstan paid more than $3 million in bribes to various Kyrgyzstan government
officials to purchase Kyrgyz tobacco for resale to Dimon's largest customers. The SECs
complaint alleges that defendant Bobby J. Elkin, Jr., a former country manager for Kyrgyzstan,
authorized, directed, and made these bribes in Kyrgyzstan through a bank account held under his
name called the Special Account. The complaint further alleges that defendant Baxter J. Myers, a
former Regional Financial Director, authorized all fund transfers from a Dimon subsidiary's bank
49
account to the Special Account and that defendant Thomas G. Reynolds, a former Corporate
Controller, formalized the accounting methodology used to record the payments made from the
Special Account for purposes of Dimon's internal reporting.
In addition, the SEC's complaint alleges that, from 2000 to 2003, Dimon paid bribes of
approximately $542,590 to government officials of the Thailand Tobacco Monopoly in exchange
for obtaining approximately $9.4 million in sales contracts. Defendant Tommy L. Williams, a
former Senior Vice President of Sales, directed the sales of tobacco from Brazil and Malawi to
the Thailand Tobacco Monopoly through Dimon's agent in Thailand. He authorized the payment
of bribes to government officials of the Thailand Tobacco Monopoly. These bribes were
characterized as commissions paid to Dimon's agent in Thailand.
Without admitting or denying the allegations in the SEC's complaint, defendants Elkin,
Myers, Reynolds, and Williams consented to the entry of final judgments permanently enjoining
each of them from violating the anti-bribery provisions of the FCPA, codified as Section 30A of
the Securities Exchange Act of 1934 ("Exchange Act"), and aiding and abetting violations of
Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Defendants Myers and Reynolds also
agreed to pay civil monetary penalties of $40,000 each.
OIL FOR FOOD CASES
SEC v. Armor Holdings, Inc.
Litigation Release No. 22037 (July 13, 2011)
The SEC filed a settled civil enforcement action against Armor Holdings, Inc. (“Armor
Holdings”), alleging violations of the anti-bribery, books and records, and internal controls
provisions of the Foreign Corrupt Practices Act (“FCPA”). Armor Holdings, a manufacturer of
military and law enforcement safety equipment based in Jacksonville, Florida, agreed to pay a
total of $5,690,744 in disgorgement, prejudgment interest, and civil penalties in order to resolve
the Commission’s charges. In a related matter, Armor Holdings will pay a $10,290,000 fine to
the U.S. Department of Justice (“DOJ”).
According to the Commission’s complaint, from 2001 to 2006, certain agents of Armor
Holdings participated in a bribery scheme to help a U.K. subsidiary of Armor Holdings, Armor
Products International, Ltd. (“API”), obtain contracts for the supply of body armor to be used in
United Nations (“U.N.”) peacekeeping missions. These agents of Armor Holdings caused API to
enter into a sham consulting agreement with a third-party intermediary for purportedly legitimate
services in connection with the sale of goods to the U.N.
By late 2006, API had made at least ninety-two payments to the intermediary, totaling
approximately $222,750. Agents of Armor Holdings caused API to wire payments to the
intermediary with the understanding that part of these payments would be offered to a U.N.
official who could help steer business to API. From the 2001 and 2003 U.N. contracts, together
50
with the extension granted in 2006, Armor Holdings derived gross revenues of approximately
$7,121,237, and net profits of approximately $1,552,306.
Without admitting or denying the allegations in the Commission’s complaint, Armor
Holdings has consented to a court order permanently enjoining it from violating Sections 30A,
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; ordering it to pay disgorgement of
$1,552,306, together with prejudgment interest of $458,438; imposing on it a civil penalty of
$3,680,000; and ordering it to comply with certain undertakings regarding its FCPA compliance
program. The proposed settlement is subject to court approval.
SEC v. ABB Ltd.
Lit Rel. No. 21673 (September 29, 2010)
Accounting and Auditing Enf. Rel. No. 3191 (September 29, 2010)
The SEC charged ABB Ltd with violations of the Foreign Corrupt Practices Act (FCPA)
for using subsidiaries to pay bribes to Mexican officials to obtain business with governmentowned power companies, and to pay kickbacks to Iraq to obtain contracts under the U.N. Oil for
Food Program. The SEC alleges that ABB's subsidiaries made at least $2.7 million in illicit
payments in these schemes to obtain contracts that generated more than $100 million in revenues
for ABB, a Swiss corporation that provides power and automation products and services
worldwide.
The SEC's complaint alleges that from 1999 to 2004, ABB Network Management (ABB
NM) — a business unit within ABB's U.S. subsidiary — bribed officials in Mexico to obtain and
retain business with two government owned electric utilities, Comision Federal de Electricidad
(CFE) and Luz y Fuerza del Centro (LyFZ). The bribes were funneled through ABB NM's agent
and two other companies in Mexico. The SEC alleges that ABB failed to conduct due diligence
on these payments and entities and improperly recorded the bribes on its books as payments for
commissions and services on projects in Mexico. Illicit payments included checks and wire
transfers to relatives of CFE officials, cash bribes to CFE officials, and a Mediterranean cruise
vacation for CFE officials and their wives. As a result of this bribery scheme, ABB NM was
awarded contracts with CFE and LyFZ that generated more than $90 million in revenues and $13
million in profits for ABB.
The SEC alleges that from approximately 2000 to 2004, ABB participated in the U.N. Oil
for Food Program through six subsidiaries that developed various schemes to pay secret
kickbacks to the former regime in Iraq to obtain contracts under the program. ABB's Jordanian
subsidiary acted as a conduit for other ABB subsidiaries by making the kickback payments on
their behalf. Some of the kickbacks were made in the form of bank guarantees and cash
payments. ABB improperly recorded these kickbacks on its books as legitimate payments for
after sales services, consultation costs, and commissions. Oil for Food contracts obtained as a
result of the kickback schemes generated $13.5 million in revenues and $3.8 million in profits
for ABB.
Without admitting or denying the allegations in the SEC's complaint, ABB consented to
the entry of a final judgment that permanently enjoins the company from future violations of
51
Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, orders the
company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a
$16,510,000 penalty. The order also requires the company to comply with certain undertakings
regarding its FCPA compliance program.
SEC v. General Electric, et al.
Lit. Rel. No. 21602 (July 27, 2010)
The SEC filed Foreign Corrupt Practices Act books and records and internal controls
charges against General Electric Company ("GE") and two GE subsidiaries — Ionics, Inc.
(currently GE Ionics, Inc.) and Amersham plc (currently GE Healthcare Ltd.). The SEC alleges
that two GE subsidiaries — along with two other subsidiaries of public companies that have
since been acquired by GE — made $3.6 million in illegal kickback payments in the form of
cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the
Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.
From approximately 2000 to 2003, two GE subsidiaries, Marquette-Hellige
("Marquette") and OEC-Medical Systems (Europa) AG ("OEC-Medical"), made approximately
$2.04 million in kickback payments in the form of computer equipment, medical supplies, and
services to the Iraqi Health Ministry. Two other current GE subsidiaries, Ionics Italba S.r.L.
("Ionics Italba"), and Nycomed Imaging AS ("Nycomed"), made approximately $1.55 million in
cash kickback payments under the Program prior to GE's acquisition of their parent companies.
Marquette manufactures and sells cardiology monitoring equipment and has been a GE
subsidiary since 1998. Marquette entered into three Program contracts in which it either paid or
agreed to pay illegal kickbacks in the form of computer equipment, medical supplies, and
services after declining to make the payments in cash. The contracts were for the supply of
disposable electrodes, transducers, and fetal monitors to the Iraqi Health Ministry.
OEC-Medical manufactures and sells medical equipment. In 2000, OEC-Medical entered
into a Program contract to provide C-Arms (C-shaped armatures used to support X ray
equipment) to the Iraqi Ministry of Health. OEC made an in-kind kickback payment worth
approximately $870,000 on the contract and earned a wrongful profit of $2.1 million. The OECMedical contract was negotiated by the same third party agent that handled the Marquette
contracts. As was done with the Marquette contracts, the Iraqi agent agreed to make the payment
on behalf of OEC-Medical in the form of computer equipment, medical supplies, and services,
rather than cash. In order to conceal from UN inspectors the fact that the agent's commission had
been increased to cover an illegal kickback, OEC-Medical and the agent entered into a fictitious
"services provider agreement," purporting to identify services the agent would perform to justify
his increased commission.
Between 2000 and 2002, Nycomed entered into nine contracts involving the payment of
cash ASSF kickbacks. The contracts were all direct agreements between Nycomed and the Iraqi
Ministry of Health for the provision of Omnipaque and Omniscan. Omnipaque is an injectible
52
contrast agent used in conjunction with X-rays; and Omniscan is a contrast agent used in
conjunction with magnetic resonance imaging (MRI). Nycomed paid approximately $750,000 in
kickbacks on the nine contracts and earned approximately $5 million in wrongful profits. The
contracts were negotiated by Nycomed's Jordanian agent. The kickback payments were explicitly
authorized by Nycomed's salesman in Cyprus. The Nycomed salesman increased the agent's
commission from 17.5% to 27.5% of the contract price, and artificially increased the UN
contract prices by 10%, all to cover the cost of the kickbacks.
Ionics Italba manufactures and sells water purification equipment. Between 2000 and
2002, Ionics Italba paid $795,000 in kickbacks and earned $2.3 million in wrongful profits on
five Program contracts to sell water treatment equipment to the Iraqi Oil Ministry. In the first of
these contracts, the illegal kickback payment was concealed under a fictitious line item for
"modification and adaptation at site of obsolete spare parts." When UN inspectors requested
additional detail about the line item, officials at Ionics Italba passed the inquiry along to the Iraqi
Oil Ministry. The Ministry's proposed response, which described services neither party intended
to be performed, was incorporated nearly verbatim in a letter that Ionics Italba provided to the
UN. Four of the five contracts were negotiated with side letters documenting the commitment of
Ionics Italba to make cash kickback payments. The side letters were concealed from UN
inspectors in violation of a Program requirement to provide all contract documentation for
inspection and UN approval. On the majority of the Ionics Italba contracts, invoices provided by
the sales agent included fictitious activities to justify the agent's inflated commission.
GE; Ionics, Inc.; and Amersham plc failed to maintain adequate systems of internal
controls to detect and prevent the payments; and the defendants' accounting for these transactions
failed properly to record the nature of the payments. GE; Ionics, Inc.; and Amersham plc,
without admitting or denying the allegations in the Commission's complaint, consented to the
entry of a final judgment permanently enjoining them from future violations of Sections
13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering GE to disgorge
$18,397,949 in wrongful profits, pay $4,080,665 in pre-judgment interest, and pay a civil penalty
of $1,000,000.
SEC v. Daimler AG
Press Rel. No. 2010-51 (April 1, 2010)
http://www.sec.gov/news/press/2010/2010-51.htm
The SEC alleges that, from at least 1998 through 2008, Daimler AG ("Daimler" or the
"Company"), and certain of its subsidiaries and affiliates, violated the anti-bribery, books and
records and internal controls provisions of the Foreign Corrupt Practices Act (the "FCPA") by
making illicit payments, directly or indirectly, to foreign government officials in order to secure
and maintain business worldwide.
During this time period, Daimler paid bribes to government officials to further
government sales in Asia, Africa, Eastern Europe and the Middle East. In connection with at
least 51 transactions, Daimler violated the anti-bribery provision of the FCPA by paying tens of
millions of dollars in corrupt payments to foreign government officials to secure business in
Russia, China, Vietnam, Nigeria, Hungary, Latvia, Croatia and Bosnia. These corrupt payments
53
were made through the use of U.S. mails or the means or instrumentality of U.S. interstate
commerce.
Daimler also violated the FCPA's books and records and internal controls provisions in
connection with the 51 transactions and at least an additional 154 transactions, in which it made
improper payments totaling at least $56 million to secure business in 22 countries, including,
among others, Russia, China, Nigeria, Vietnam, Egypt, Greece, Hungary, North Korea, and
Indonesia. Through these tainted sales transactions, which involved at least 6,300 commercial
vehicles and 500 passenger cars, Daimler earned $1.9 billion in revenue and at least $91.4
million in illegal profits.
Nineteen of these transactions, which occurred between approximately 2001 through
2003, involved direct and indirect sales of motor vehicles and spare parts under the United
Nations Oil for Food Program. Those transactions included $6,048,948 in bribes in the form of
under-the-table "after sales service fees." Daimler offered to pay kickbacks of more .than $1
million under six direct contracts with Iraqi ministries; made one payment of $7,134 under a
direct contract; and knowingly acquiesced in the payment of another $5 million in kickbacks by
its contract partners in connection with twelve indirect Oil for Food contracts.
A number of Daimler's former senior executives, who operated in a decentralized
corporate structure, permitted or were directly involved in the Company's bribery practices,
including the head of its overseas sales department, who reported directly to the Company's most
senior officers. The Company's internal audit, legal, and finance and accounting departments,
which should have provided checks on the activities of the sales force, instead played important
roles in the subversion of internal controls and obfuscation of corporate records.
The improper payments were made possible in part as a result of the falsification of
corporate records and a lax system of internal controls.
In this environment, Daimler developed several organized procedures and mechanisms
through which improper payments could be made. Daimler's books and records contained over
200 ledger accounts, known internally as "interne Fremdkonten," or, "internal third party
accounts," which reflected credit balances controlled by Daimler subsidiaries or outside third
parties. Certain Daimler employees used numerous such accounts to make or facilitate improper
payments to foreign government officials. Bribes were also made through the use of “corporate
cash desks" (where sales executives would obtain cash in amounts as high as 400,000 Deutsche
Marks for making improper payments), deceptive pricing and commission arrangements, phony
sales intermediaries, rogue business partners and misuse of inter-company and debtor accounts.
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SEC v. Innospec, Inc.
Lit. Rel. No. 21454 (March 18, 2010)
The SEC filed a settled enforcement action charging Innospec, Inc. (“Innospec”), a
specialty chemical company incorporated in Delaware with principal offices in the United States
and the United Kingdom, with violations of the anti-bribery, books and records, and internal
controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Innospec has offered to pay
$40.2 million as part of a global settlement with the Commission, the Department of Justice,
Fraud Section (“DOJ”), the United Kingdom’s Serious Fraud Office (“SFO”), and the U.S.
Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). This case is the first
corruption-related settlement coordinated between the Commission, DOJ, and the SFO.
The SEC’s complaint alleges that, from 2000 to 2007, Innospec routinely paid bribes to
sell Tetra Ethyl Lead (“TEL”), a fuel additive that boosts the octane value of gasoline, to state
owned refineries and oil companies in Iraq and Indonesia. TEL was a significant source of
revenue for Innospec; however, TEL sales were declining due to the passage of clean air
legislation in the U.S. and abroad. Innospec also paid kickbacks to Iraq to obtain contracts under
the United Nations Oil for Food Program (the “Program”). Innospec’s former management did
nothing to stop the bribery, and in fact authorized and encouraged it. In addition, Innospec’s
internal controls failed to detect the illicit conduct, which continued for nearly a decade. In all,
Innospec made illicit payments of approximately $6,347,588 and promised an additional
$2,870,377 in illicit payments to Iraqi ministries, Iraqi government officials, and Indonesian
government officials in exchange for contracts worth approximately $176,717,341 in revenues
and profits of $60,071,613.
From 2000 through 2003, Innospec obtained five Program contracts for the sale of TEL
to the Iraqi Ministry of Oil and its component oil refineries (“MoO”) and paid kickbacks
equaling 10% of the contract value on three of the contracts and offered kickbacks on the
remaining two contracts. Innospec increased its agent’s commission as a means to funnel the
payments to Iraq. Innospec artificially inflated its prices in the Program contracts and did not
notify the UN of the kickback scheme. When the Program ended shortly before Innospec paid
the promised kickbacks on two of the contracts, Innospec kept the promised payments as part of
its profit.
After the Program was terminated in late 2003, Innospec continued to use its agent in Iraq
to pay bribes to Iraqi officials to secure additional TEL sales. From at least 2004 through 2007,
Innospec made payments totaling approximately $1,610,327 and promised an additional
$884,480 to MoO officials so as to garner good will with Iraqi authorities, obtain additional
orders under a Long Term Purchase Agreement that was executed in October 2004 (the “2004
LTPA”) and ensure the execution of a second LTPA in January 2008 (the “2008 LTPA”). In an
October 2005 e-mail to Innospec, Innospec’s agent informed a Business Director and an
Executive that prior to opening a letter of credit for a shipment of TEL, Iraqi officials were
demanding a 2% kickback. The e-mail further stated that: “We are sharing most of our profits
55
with Iraqi officials. Otherwise, our business will stop and we will lose the market. We have to
change our strategy and do more compensation to get the rewards.” The Business Director
authorized the over $195,000 bribe, and in an e-mail discussing the wording of the invoice, the
Business Director stated that “the fewer words the better!”
Innospec also paid lavish travel and entertainment expenses for MoO officials, including
paying for a seven day honeymoon, supplying mobile phone cards and cameras, and paying
thousands in cash for “pocket money” to officials. Innospec also paid bribes to ensure the failure
of a 2006 field test of MMT, a fuel product manufactured by a competitor of Innospec. Finally,
Innospec promised additional bribes of approximately $850,000 in connection with the 2008
LTPA, which was thwarted due to the U.S. governments’ investigation of the Iraq bribery.
Innospec also had several schemes to pay bribes to Indonesian government officials from
at least 2000 through 2005 to win contracts with state owned oil and gas companies.
Approximately $2,883,507 in bribes was funneled through an Indonesian agent. One scheme
involved bribes paid annually to a senior official at BP Migas; another involved “special
commissions” paid to a Swiss account; and one involved a “one off payment” of $300,000.
Innospec paid bribes to officials to support efforts to maintain TEL sales in Indonesia at a time
when Indonesia was planning to go unleaded. In one instance, an official indicated that he would
assist Innospec in obtaining TEL sales but that he wanted more than just “cents” in return.
Innospec violated Section 30A of the Securities Exchange Act of 1934 by engaging in
bribery of government officials in Iraq during the post-Oil for Food period and government
officials in Indonesia. Innospec violated Section 13(b)(2)(B) of the Exchange Act by failing to
maintain internal controls to detect and prevent bribery of officials in Iraq and Indonesia as well
as the illicit Oil for Food Program kickbacks. Finally, Innospec violated Section 13(b)(2)(A) of
the Exchange Act by improperly recording all of the illicit payments in its books.
Without admitting or denying the SEC’s allegations, Innospec has consented to the entry
of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A),
and 13(b)(2)(B) of the Exchange Act; ordering it to pay $60,071,613 in disgorgement, provided
that the SEC waive all but $11,200,000 of disgorgement and permitting payment in four
installments based upon Innospec’s sworn Statement of Financial Condition; and ordering it to
comply with certain undertakings regarding its FCPA compliance program, including an
independent monitor for a period of three years. Based on its financial condition, Innospec
offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7
million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning
allegations of violations of the Cuban Assets Control Regulations.
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OTHER CASES
SEC v. Farkas, SEC v. Brown, SEC v. Kissick, SEC v. Kelly, SEC v. Allen
Lit. Rel. No. 22002 (June 16, 2011)
Lit. Rel. No. 22007 (June 21, 2011)
The SEC charged Lee B. Farkas, the former chairman and majority owner of Taylor,
Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository
mortgage lender, with orchestrating a large-scale securities fraud scheme and attempting to scam
the U.S. Treasury's Troubled Asset Relief Program (TARP).
The SEC charged Desiree E. Brown, TBW’s former treasurer, with aiding and abetting
Farkas’ securities fraud and TARP related schemes.
The SEC charged Catherine L. Kissick, a former vice president at Colonial Bank and the
head of its mortgage warehouse lending division (MWLD) with being an active participant in
Farkas’ securities fraud scheme.
The SEC charged Teresa A. Kelly, a former operations supervisor at Colonial Bank’s
MWLD with being an active participant in Farkas and Kissick’s securities fraud scheme.
In the comprehensive scheme, the SEC alleged that Farkas, Kissick, Brown and Kelly
(collectively, Defendants) conspired together to sell more than $1.5 billion worth of fabricated or
impaired mortgage loans and securities from TBW to Colonial Bank. The complaint alleges that
those loans and securities were falsely reported to the investing public as high-quality, liquid
assets. Farkas and Brown were also responsible for a bogus equity investment that caused
Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP
funds. When Colonial Bank's parent company — The Colonial BancGroup, Inc. — issued a
press release announcing it had obtained preliminary approval to receive $550 million in TARP
funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its
largest one-day price increase since 1983.
According to the SEC's complaints, Defendants executed the fraudulent scheme from
SEC 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala,
Florida — filed for bankruptcy. TBW was the largest customer of Colonial Bank's MWLD.
Because TBW generally did not have sufficient capital to internally fund the mortgage loans it
originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to
fund such mortgage loans.
The SEC's complaint against Farkas charges him with violations of the antifraud,
reporting, books and records and internal controls provisions of the federal securities laws,
including Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the
Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and aiding and
abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the
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Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is
seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest,
and financial penalties against Farkas. The SEC also seeks an officer-and-director bar against
Farkas as well as an equitable order prohibiting him from serving in a senior management or
control position at any mortgage-related company or other financial institution and from holding
any position involving financial reporting or disclosure at a public company.
The SEC’s complaint against Kissick charges her with violations of the antifraud,
reporting, books and records and internal controls provisions of the federal securities laws.
Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a
judgment permanently enjoining her from violation of Section 17(a) of the Securities Act,
Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2
thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
Kissick also consented to an order barring her from acting as an officer or director of any public
company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act.
Kissick also consented to an order prohibiting her from serving in a senior management or
control position at any mortgage-related company or other financial institution or from holding
any position involving financial reporting or disclosure at a public company.
The SEC's complaint against Brown charges her with violations of the antifraud,
Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment
permanently enjoining her from violation of Rule 13b2-1 of the Exchange Act and from aiding
and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the
Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
The SEC’s complaint against Kelly charges her with violations of the antifraud,
Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment
permanently enjoining her from violation of Sections 10(b) and 13(b)(5) of the Exchange Act
and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections
10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1,
13a-11 and 13a-13 thereunder.
On June 17, 2011 the Securities and Exchange Commission charged Paul R. Allen, the
former chief-executive officer at Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was
once the nation's largest non-depository mortgage lender, with aiding-and-abetting the efforts of
TBW’s former chairman, Lee B. Farkas, to defraud the U.S. Treasury's Troubled Asset Relief
Program (TARP).
According to the SEC's complaint, filed in U.S. District Court for the Eastern District of
Virginia, Farkas, with the substantial assistance of Allen, was responsible for a bogus equity
investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite
necessary to qualify for TARP funds. When Colonial Bank's parent company — The Colonial
BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to
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receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two
hours of trading, representing its largest one-day price increase since 1983.
The SEC's complaint against Allen charges him with aiding and abetting violations of the
antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act). Without admitting
or denying the SEC's allegations, Allen consented to the entry of a judgment permanently
enjoining him from violation of Section 10(b) of the Exchange Act and Rules 10b-5 thereunder.
The preliminary judgment, under which the SEC's requests for financial penalties against Allen
remain pending, was entered by the Honorable Leonie M. Brinkema on June 17, 2011.
SEC v. Robert C. Butler
Lit. Rel. No. 21959 (May 5, 2011)
The SEC obtained an emergency asset freeze and court order to halt an ongoing securities
fraud being orchestrated by Robert C. Butler.
The SEC alleges that from January 2009 to March 2011, Butler raised approximately
$3.3 million from at least 17 investors who were mostly senior citizens living in or around Indio,
Calif. He operated out of his home and dazzled investors with his multiple computer screens and
a purported proprietary trading program that he claimed to use in his day trading business. Butler
promised exorbitant returns to investors through investments in his hedge fund, but instead stole
$1.6 million and lost the other half of investor funds in his securities trading.
The SEC’s complaint alleges that Butler sent falsified account statements to investors in
order to conceal his fraud, and grossly inflated the hedge fund balances. According to one
statement, the fund balance was $8.9 million compared to the true balance of merely $22. The
SEC further alleges that Butler lied that he was a graduate of MIT and he concealed from
investors his Chapter 7 bankruptcy filing in 1998. Despite investor requests, Butler has failed to
return their money and instead continues to solicit new funds and lull existing investors into
believing that repayments are forthcoming.
The SEC’s complaint charges Butler with violating the antifraud provisions, Section
17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act
of 1940 and Rule 206(4)-8 thereunder, of the federal securities laws. In addition to the
emergency relief, the complaint seeks preliminary and permanent injunctions, disgorgement,
prejudgment interest, and financial penalties.
SEC v. Mike Watson Capital, LLC, Michael P. Watson and Joshua F. Escobedo
Lit. Rel. No. 21898 (March 24, 2011)
The SEC filed a civil action in the United States District Court for the District of Utah
against Mike Watson Capital, LLC, a company based in Provo, Utah, Michael P. Watson, a
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resident of Mapleton, Utah, and Joshua F. Escobedo, a resident of Spanish Fork, Utah, alleging
that each of the Defendants violated the antifraud and securities offering registration provisions,
and that Watson and Escobedo violated the broker-dealer registration provisions of the federal
securities laws.
In its Complaint, the Commission alleges that from October 2004 through February 2009,
Defendants raised more than $27.5 million from more than 120 investors through Mike Watson
Capital’s issuance of promissory notes. According to the Complaint, Watson and Escobedo told
investors that returns were generated by real estate investments, and backed by substantial equity
and cash flow produced by company properties. In reality, the properties never generated
sufficient income to cover investment interest or redemptions, and therefore investor returns
were paid primarily from new investors’ funds.
Mike Watson Capital, Watson, and Escobedo agreed to settle the SEC’s charges without
admitting or denying the allegations in the Complaint. This settlement is subject to approval by
the court. Mike Watson Capital agreed to be permanently enjoined from violations of Sections
5(a), 5(c) and 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the
Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and imposing
jointly and severally with Watson, disgorgement of $16,383,037.83 and prejudgment interest of
$1,953,610.99, and imposing a civil penalty of $130,000. Watson agreed to be permanently
enjoined from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b)
and 15(a) of the Exchange Act and Rule 10b-5 thereunder, imposing jointly and severally with
Mike Watson Capital, disgorgement of $16,383,037.83 and prejudgment interest of
$1,953,610.99, and imposing a civil penalty of $130,000. Escobedo agreed to be permanently
enjoined from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b)
and 15(a) of the Exchange Act and Rule 10b-5 thereunder, imposing but waiving disgorgement
of $153,822.98 and prejudgment interest of $16,786.56, and not imposing a civil penalty based
upon his Sworn Statement of Financial Condition.
SEC v. Spyglass Equity Systems, et al.
Lit. Rel. No. 21892 (March 22, 2011)
The SEC charged three firms and four individuals involved in a boiler room scheme
operating out of Los Angeles that defrauded investors who they persuaded to buy purportedly
profitable trading systems.
The SEC alleges that representatives of Spyglass Equity Systems Inc. cold-called
investors and made false and misleading statements to help raise more than $2.15 million from
nearly 200 investors nationwide for two related investment companies – Flatiron Capital Partners
LLC (FCP) and Flatiron Systems LLC (FS). However, only a little more than half of that money
was actually used for the advertised trading purposes, and much of the trading that did occur
failed to use the purported trading systems. FCP and FS wound up losing about $1 million in
investor funds. The managing member of the two firms – David E. Howard II – misused almost
$500,000 of investor money for unauthorized business expenses as well as personal expenses
including travel, entertainment, and gifts for his girlfriend.
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The SEC's complaint charges Spyglass, Sjoblom, Carter, Elliott, FS, FCP and Howard
with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder;
FS, FCP and Howard with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of
1933; Spyglass, Sjoblom, Carter and Elliott with violation of Section 15(a) of the Exchange Act;
FS and FCP of violations of Section 7(a) of the Investment Company Act of 1940; Howard with
violations of Section 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule
206(4)-8 thereunder; and Spyglass, Carter, Sjoblom and Elliott with aiding abetting Howard’s
violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC seeks
permanent injunctions, disgorgement plus prejudgment and post-judgment interest, and financial
penalties.
SEC v. Larry Michael Parrish
Lit. Rel. No. 21881 (March 9, 2011)
The SEC filed an injunctive action against Larry Michael Parrish alleging that from about
November 2005 through October 2009, Parrish raised approximately $9.2 million from 70
investors in 3 states. Parrish, and his company, IV Capital, solicited investors for his “Trading
Program” and promised returns of at least 60% per year. The Commission alleges that investors
received monthly payments which Parrish told them were profits from successful trading.
However, the majority of funds that came into IV Capital bank accounts were from new
investors, not from any actual profit-generating activity. The complaint alleges that Parrish, who
had no other employment or legitimate source of income, funded his personal life at the expense
of investors, misappropriating at least $780,000 for his personal benefit.
According to the complaint, Parrish told investors in the Trading Program that their
money would be held safely in an escrow account, and that the IV Capital traders would use the
value of that account, but not the actual funds, to obtain leveraged funds to purchase and sell
bank notes. According to Parrish, the trading was profitable enough that he was able to guarantee
returns of five percent per month – or 60% per year – to investors. Parrish claimed that he had
successfully run the Trading Program since 1996, generated profits every single month of that
time, and that he had $22 million under management.
Parrish is a recidivist who was a named defendant in a previous SEC action. In April
2005 the SEC brought an action against Parrish for his involvement in a Prime Bank Scheme,
SEC v. Larry Michael Parrish, et al., 05 Civ. 1031 (D. Md., filed April 14, 2005). Parrish was
subsequently enjoined from violating securities laws and he also consented to the entry of an
administrative order barring him from associating with any broker-dealer with a right to reapply
for association after five years. 2007 SEC LEXIS 1031. When asked by investors, Parrish denied
he was the same Michael Parrish.
In the current action, the SEC's complaint alleges that Parrish violated Sections 5(a), 5(c),
and 17(a) of the Securities Act of 1933, Sections 10(b), 15(a), and 15(b)(6)(B)(i) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206 (1), (2), and (4) of
the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
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SEC v. Gendarme Capital Corp., et al.
The SEC charged Gendarme Capital Corporation (“Gendarme”) and its two executives
with engaging in an illegal stock distribution scheme. The SEC alleges that Gendarme
repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a
long-term investment and then dumped the shares into the market, essentially effecting public
stock distributions without complying with the disclosure requirements of the federal securities
laws. Through its two principals – CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian
Lamphere of Lawrenceville, Vt. – Gendarme sold more than 15 billion shares of at least a dozen
companies, netting illicit profits of more than $1.6 million.
According to the SEC’s complaint, filed in federal district court in Sacramento,
Gendarme began entering into agreements with penny stock issuers in early 2008. The
agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the
market price. The SEC alleges that, in an effort to avoid the registration and disclosure
obligations of the federal securities laws, Gendarme falsely represented to issuers that it was
purchasing shares for “investment purposes only.” Contrary to those representations, Gendarme
quickly dumped most of these shares on the public markets, profiting by more than $1.6 million
from its unregistered stock distributions.
The SEC also alleges that Gendarme’s outside attorney — Cassandra Armento of
Greenwich, N.Y. — violated the securities laws by issuing more than 50 false legal opinion
letters in support of Gendarme’s activities. Armento repeatedly informed stock transfer agents
that Gendarme was not an “underwriter” and thus had no intent to sell the stock. Thus, shares
could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento
made no inquiry into whether Gendarme intended to resell the stock, and was aware of
information showing that it was likely that Gendarme was dumping the stock into the market.
In its federal court action, the SEC alleges Gendarme, Rahimi, Lamphere, and Armento
violated Sections 5(a) and (c) of the Securities Act of 1933. Against Gendarme, Rahimi, and
Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties,
and an order barring them from participating in an offering of penny stock. The SEC seeks
injunctive relief and monetary penalties against Armento.
SEC v. Noor Mohammed
The SEC charged a Deer Park, New York man with orchestrating and conducting an
illegal scheme that defrauded two broker-dealers out of more than $600,000, and netted the
trader, alone or with others, over $223,000 in illicit profits.
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The SEC alleges that Noor Mohammed, acting alone or in conjunction with others,
conducted a fraudulent "free-riding" scheme by: (1) using false information to establish margin
accounts at the broker-dealers; (ii) funding those accounts with checks that Mohammed knew
were not backed by sufficient funds; (iii) executing over 100 trades in the accounts; and (iv)
either profiting from the winning trades or abandoning the accounts without paying for the losing
trades.
According to the SEC's Complaint filed in the U.S. District Court for the Eastern District
of New York, from approximately April through October 2007, Mohammed, alone or with
others, obtained and used the names and identities of several Bangladeshi immigrants to establish
at least eight different brokerage accounts in which the illegal trading occurred. Mohammed
fabricated and submitted false information to the broker-dealers on new account applications,
misrepresenting, for example, the account holder's income, assets, employment, and investment
experience. In total, Mohammed, alone or with others, fraudulently presented to the brokerdealers checks with a total face value of approximately $1.05 million, pretending to fund the
brokerage accounts but knowing that the checks were not backed by sufficient funds.
Mohammed solicited and obtained some of these checks from Bangladeshi immigrants he had
recruited. Mohammed also, directly or indirectly, pretended to fund the brokerage accounts with
checks drawn against bank accounts that he owned or controlled.
The Complaint further alleges that Mohammed, alone or with others, then purchased and
sold hundreds of short term options in the accounts before the checks used to fund the accounts
bounced. When the trades resulted in losses, which occurred on all but one occasion, Mohammed
abandoned the brokerage accounts, leaving the broker-dealers holding the loss. On the one
occasion when the trades generated a net profit, Mohammed directed the funding of the
securities account with a second check backed by sufficient funds and proceeded to reap the
profits from the successful trades.
The SEC charged Mohammed with violations of Section 17(a) of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
Commission seeks to enjoin Mohammed from future violations of these provisions,
disgorgement of Mohammed's ill-gotten gains plus prejudgment interest, and a monetary penalty.
SEC v. James D. Sterling
The Commission filed a civil injunctive action against James D. Sterling, of New York,
NY, for conducting a fraudulent scheme involving 51 public offerings of banks that were
converting from mutual to stock ownership. The SEC’s complaint alleges that, from January
2003 until October 2008, Sterling defrauded these banks and their depositors by secretly using
his daughter as a nominee to acquire stock in conversion offerings in violation of the offering
terms and applicable banking regulations. Over the course of the fraudulent scheme, Sterling
reaped $1,502,193 in ill-gotten gains.
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When banks convert from mutual to stock ownership, depositors receive priority rights to
purchase shares in the offering ahead of other interested investors. To ensure that only
depositors benefit from these priority rights, banking regulations and offering terms prohibit
depositors from transferring their purchase rights or shares obtained in the offering. The SEC’s
complaint alleges that Sterling, to evade these restrictions, opened numerous savings accounts at
mutual banks for himself, and in his daughter’s name, in the hope that some would convert to
stock ownership. When banks converted, Sterling executed his daughter’s signature on stock
order forms certifying that she was purchasing stock solely for her own account and was not
transferring her purchase rights or the underlying stock to anyone else. The SEC’s complaint
alleges that Sterling funded his daughter’s purported stock purchases, controlled the depositing
and sales of the shares issued to her, and transferred all of her purported stock sale proceeds to
himself. Because most of the 51 offerings at issue were oversubscribed, Sterling’s scheme
harmed legitimate bank depositors by limiting the amount of stock available to them.
Sterling, without admitting or denying the allegations in the complaint, has consented to
the entry of a final judgment permanently enjoining him from violating the abovementioned
provisions, ordering him to pay $2,084,494 in disgorgement and prejudgment interest, and
imposing a civil monetary penalty of $150,000.
SEC v. Carol McKeown, et al.
Lit. Rel. No. 21580 (June 29, 2010)
The SEC obtained an emergency asset freeze against a Canadian couple who fraudulently
touted penny stocks through their website, Facebook and Twitter. The SEC also charged two
companies the couple control and obtained an asset freeze against them.
According to the SEC's complaint, the defendants profited by selling penny stocks at or
around the same time that they were touting them on www.pennystockchaser.com. The website
invites investors to sign up for daily stock alerts through email, text messages, Facebook and
Twitter.
The SEC alleges that since at least April 2009, Carol McKeown and Daniel F. Ryan, a
couple residing in Montreal, Canada, have touted U.S. microcap companies. According to the
SEC's complaint, McKeown and Ryan received millions of shares of touted companies through
their two corporations, defendants Downshire Capital Inc., and Meadow Vista Financial Corp.,
as compensation for their touting. McKeown and Ryan sold the shares on the open market while
PennyStockChaser simultaneously predicted massive price increases for the issuers, a practice
known as "scalping."
The SEC's complaint also alleges McKeown, Ryan and one of their corporations failed to
disclose the full amount of the compensation they received for touting stocks on
PennyStockChaser. The SEC alleges that McKeown, Ryan and their corporations have realized
at least $2.4 million in sales proceeds from their scalping scheme.
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The SEC's complaint charges McKeown, Ryan, Downshire Capital Inc. and Meadow
Vista Financial Corp. with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of
the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The SEC's complaint also
charges McKeown, Ryan and Meadow Vista Financial Corp. with violating Section 17(b) of the
Securities Act of 1933. In addition to the emergency relief already granted by the U.S. District
Court, the Commission also seeks a preliminary injunction and permanent injunction, along with
disgorgement of ill-gotten gains plus prejudgment interest and the imposition of a financial
penalty, penny stock bars against the individuals and the repatriation of assets to the United
States.
SEC v. Maynard L. Jenkins
Lit. Rel. No. 21149A (July 23, 2009)
http://www.sec.gov/litigation/litreleases/2009/lr21149a.htm
The SEC charges Maynard L. Jenkins with violations of Section 304 of the SarbanesOxley Act of 2002. It is the first action seeking reimbursement under Section 304 from an
individual who is not alleged to have otherwise violated the securities laws. Section 304 deprives
corporate executives of money that they earned while their companies were misleading investors.
According to the SEC's complaint, Jenkins made $2,091,020 in bonuses and $2,018,893
in company stock sales that should have been reimbursed to CSK pursuant to Section 304. The
complaint alleges that CSK was required to prepare an accounting restatement due to its
fraudulent conduct. While Jenkins served as CEO, CSK filed two such restatements related to its
overstated vendor allowances. The complaint further alleges that, in violation of Section 304,
Jenkins failed to reimburse CSK for bonuses, or other incentive-based or equity-based
compensation, and profits from the sale of CSK stock he received during the 12-month periods
following the filing of each of CSK's fraudulent financial statements. The SEC's complaint does
not allege that Jenkins engaged in the fraudulent conduct.
CASES INVOLVING BROKER-DEALERS
In the Matter of Raymond James & Associates, Inc. and Raymond James Financial
Services, Inc.
A.P. Rel. No. 33-9228 (June 29, 2011)
The SEC charged Raymond James & Associates Inc. and Raymond James Financial
Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to
customers.
Raymond James agreed to settle the SEC’s charges and provide its customers the
opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS
market in February 2008.
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According to the SEC’s administrative order, some registered representatives and
financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to
money market funds and other cash-like investments. In fact, ARS were very different types of
investments. Among other things, representatives at Raymond James did not provide customers
with adequate and complete disclosures regarding the complexity and risks of ARS, including
their dependence on successful auctions for liquidity.
The SEC’s order against Raymond James finds that the firm willfully violated Section
17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to
cease and desist from future violations, and reserved the right to seek a financial penalty against
the firm.
Without admitting or denying the SEC’s allegations, Raymond James consented to the
SEC’s order and agreed to several remedial actions.
In the Matter of Larry Feinblum
A.P. Rel. No. 34-64573 (May 31, 2011)
The Commission issued an Order Instituting Administrative and Cease-and-Desist
Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934
(Exchange Act), and Section 203(f) of the Investment Advisers Act of 1940, Making Findings,
and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Larry Feinblum
(Feinblum).
The Order finds that Respondent Feinblum and Jennifer Kim (Kim), two traders then
associated with Morgan Stanley & Co., Inc. (MS & Co. or the firm), engaged in fraudulent
conduct that had the effect of concealing from risk managers the extent of the risk associated
with their proprietary trading and that ultimately contributed to millions of dollars of losses in
their trading books. The Order finds that from at least October through December 2009,
Respondent and Kim executed numerous trades in certain securities that they traded for MS &
Co. that created net risk positions substantially in excess of limits that could be exceeded only
with supervisory approval. The Order further finds that to conceal from the firm that their trading
exceeded internal net risk position limitations, Respondent (an Executive Director and Kim’s
supervisor) and Kim entered in MS & Co.’s risk management system swap orders -- on at least
thirty-two occasions -- that they had no intention of executing and that they promptly canceled
after entering the orders in the system. The Order also finds that Respondent and Kim entered
these orders for the sole purpose of temporarily and artificially reducing the net risk exposure in
the securities, as recorded in certain of the firm’s risk management systems, in order to pursue a
strategy that sought to profit from price differences between U.S. and foreign markets. The Order
finds that Respondent and Kim cancelled the swap orders after they knew that the risk
management systems had captured false and misleading information about their net risk exposure
and continued to execute their arbitrage trading strategy at positions beyond MS and Co.’s net
risk limits. As a result of Respondent’s and Kim’s misconduct, MS & Co. unwound the
unauthorized trading positions, ultimately sustaining a loss of approximately $24.47 million.
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Based on the above, the Order orders Feinblum to cease and desist from committing or causing
any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder. The Order also bars Feinblum from association with any broker, dealer, investment
adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized
statistical rating organization for a period of two (2) years, and requires Feinblum to pay a
$150,000 civil penalty.
SEC v. Joseph Catapano and Michael Piervinanzi
Lit. Rel. No. 21902 (March 28, 2011)
The Commission filed a civil injunctive action against Joseph Catapano ("Catapano") and
Michael Piervinanzi ("Piervinanzi"), alleging that they engaged in a fraudulent broker bribery
scheme designed to manipulate the market for the common stock of Euro Solar Parks, Inc.
("Euro Solar").
The complaint, filed on SEC 25, 2011 in federal court in Brooklyn, New York, alleges
that beginning in at least February 2011, Catapano and Piervinanzi engaged in an undisclosed
kickback arrangement with an individual ("Individual A") who claimed to represent a group of
registered representatives with trading discretion over the accounts of wealthy customers.
Catapano and Piervinanzi promised to pay a 30% kickback to Individual A and the registered
representatives he purported to represent in exchange for the purchase of up to $3 million of
Euro Solar stock through the customers' accounts.
The complaint further alleges that from February 16-18, 2011, Catapano instructed
Individual A to purchase approximately 130,000 shares of Euro Solar stock for a total of
approximately $31,000 through matched trades using detailed instructions concerning the size,
price and timing of the purchase orders. Thereafter, Catapano paid Individual A a bribe of
$8,800.
The complaint charges Catapano and Piervinanzi with violating Section 17(a) of the
Securities Act of 1933 and Sections 9(a)(1) and 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5. The Commission seeks permanent injunctive relief from the Defendants,
disgorgement of ill-gotten gains, if any, plus pre-judgment interest, and civil penalties from
Catapano and Piervinanzi, and a judgment prohibiting Piervinanzi from participating in any
offering of penny stock.
SEC v. James J. Konaxis
Lit. Rel. No. 21897 (March 23, 2011)
The Commission filed a civil injunctive action in Massachusetts federal court against
James J. Konaxis, of Beverly, Massachusetts, formerly a registered representative of
Massachusetts-based broker-dealer Sentinel Securities, Inc. The Commission charged that
Konaxis defrauded a former customer who was left widowed by the September 11, 2001 terrorist
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attacks. Konaxis’s customer made her investments with funds she obtained through the
September 11th Victim Compensation Fund.
According to the Commission’s complaint, Konaxis excessively traded his customer’s
funds while knowingly or recklessly disregarding her interests. The Commission alleges that
Konaxis earned approximately $550,000 over approximately two years in commissions on his
customer’s accounts. During this period, the Commission alleges that the value of his customer’s
accounts decreased from approximately $3.7 million to approximately $1.6 million, much of
which was due to Konaxis’s investments and the resulting commissions paid to Konaxis.
Konaxis has consented to a partial judgment pursuant to which he will be enjoined from
future violations of the antifraud provisions of the Securities Act and Exchange Act, and barred
from participating in any offering of penny stock. The SEC also seeks disgorgement of ill-gotten
gains plus pre-judgment interest, and the imposition of a civil monetary penalty against Konaxis,
and Konaxis has agreed to leave these issues to the discretion of the court. The Commission will
also institute separate administrative proceedings against Konaxis in which he has consented to
be barred from association with any broker, dealer, investment adviser, municipal securities
dealer, or transfer agent.
SEC v. CytoCore, Inc., et al.
The SEC filed a civil injunctive action against CytoCore, Inc. (“CytoCore”), Daniel J.
Burns (“Burns”), the former Chairman of CytoCore’s Board of Directors, and Robert F.
McCullough, Jr. (“McCullough”), CytoCore’s Chief Executive Officer and Chief Financial
Officer, alleging that they engaged in violative conduct relating to trading in CytoCore stock and
Burns’ compensation.
According to the complaint, from 2003 to 2008, Burns employed fraudulent schemes to
profit from CytoCore stock transactions and received hundreds of thousands of dollars in
improper compensation and benefits from CytoCore as an unregistered broker. In February 2008,
Burns allegedly caused CytoCore to issue a press release touting Burns’ investment in CytoCore
stock, and then secretly sold shares immediately following the announcement. According to the
complaint, Burns’ secret selling also constituted insider trading because Burns was in possession
of material, nonpublic information about an ongoing CytoCore private stock offering.
The complaint further alleges that, from 2003 to 2008, Burns improperly received
transaction-based compensation as an unregistered broker soliciting investors in CytoCore stock.
CytoCore and McCullough allegedly aided and abetted Burns by engaging him to act as a broker
for the Company. The complaint also alleges that Burns submitted false claims for commissions
purportedly earned by a friend for soliciting CytoCore investors, and his friend, in turn, remitted
those commission payments to Burns. Burns also allegedly submitted to CytoCore false claims
for expense reimbursements relating to his investor solicitations.
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The complaint further alleges that Burns and McCullough violated insider reporting
requirements. Burns allegedly publicly disclosed only his purchases, never his sales, of CytoCore
stock, and he arranged for the secret sale of CytoCore stock through a friend to further conceal
his selling. McCullough allegedly failed to report more than 100 CytoCore stock transactions,
and both Burns and McCullough allegedly misreported their stock holdings in disclosure forms
and in CytoCore’s proxy statements.
The Commission’s complaint alleges that Burns violated Section 17(a) of the Securities
Act of 1933 (“Securities Act”), Sections 10(b), 14(a), 15(a), and 16(a) of the Securities Exchange
Act of 1934 (“Exchange Act”), and Rules 10b-5, 14a-9, and 16a-3 thereunder. The complaint
also alleges that CytoCore and McCullough violated Section 14(a) of the Exchange Act and Rule
14a-9 thereunder, and aided and abetted Burns’ violations of Section 15(a) of the Exchange Act.
Finally, the complaint alleges that McCullough violated Section 16(a) of the Exchange Act and
Rule 16a-3 thereunder.
The Commission is seeking permanent injunctions, disgorgement of ill-gotten gains,
including prejudgment interest, civil penalties, and a bar from serving as an officer or director of
any public company against Burns. CytoCore and McCullough settled the charges against them
without admitting or denying the allegations of the complaint. CytoCore has consented to
injunctive relief and certain undertakings, and McCullough has consented to injunctive relief and
a $100,000 civil penalty. As part of the settlement, McCullough has also consented to a twelvemonth suspension from association with a broker-dealer or investment adviser.
SEC v. Steven L. Rattner
The SEC charged former Quadrangle Group principal Steven Rattner with participating
in a widespread kickback scheme to obtain investments from New York’s largest pension fund.
The SEC alleges that Rattner secured investments for Quadrangle from the New York
State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a
low-budget film produced by the Retirement Fund’s chief investment officer and his brothers.
Rattner then caused Quadrangle to retain Henry Morris – the top political advisor and chief
fundraiser for former New York State Comptroller Alan Hevesi – as a “placement agent” and
pay him more than $1 million in sham fees even though Rattner was already dealing directly
with then-New York State Deputy Comptroller David Loglisci and did not need an introduction
to the Retirement Fund.
The SEC alleges that after receiving pressure from Morris, Rattner also arranged a
$50,000 contribution to Hevesi’s re-election campaign. Just a month later, Loglisci increased the
Retirement Fund’s investment with Quadrangle from $100 million to $150 million. As a result
of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a
Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates,
Rattner’s personal share of these fees totals approximately $3 million.
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Rattner agreed to settle the SEC’s charges by paying $6.2 million and consenting to a
two-year bar from associating with any investment adviser or broker-dealer.
The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme
that extracted kickbacks from investment management firms seeking to manage the assets of the
Retirement Fund. The SEC charged Quadrangle earlier this year.
According to the SEC’s complaint against Rattner filed in U.S. District Court for the
Southern District of New York, Morris informed Rattner in the fall of 2003 that Loglisci’s
brother was involved in producing a film called “Chooch.” Morris suggested that Rattner help
Loglisci’s brother with the theatrical distribution of the film. Rattner met with Loglisci’s brother
and agreed to assist him, but Rattner’s efforts did not lead to a distribution deal. Approximately
one year later, Loglisci’s brother contacted Rattner about DVD distribution of “Chooch.” Within
days of speaking to Loglisci’s brother, Rattner contacted Loglisci about investing in a new
Quadrangle private equity fund being marketed by the firm. Rattner told Loglisci that he had
arranged a meeting between Loglisci’s brother and a Quadrangle affiliate – GT Brands – to
discuss a possible DVD distribution deal.
The SEC alleges that after Loglisci’s brother met with GT Brands and telephoned Rattner
to complain about the treatment he had received from GT Brands, Rattner warned a GT Brands
executive to treat Loglisci’s brother “carefully” because Quadrangle was trying to obtain an
investment through Loglisci. After GT Brands made clear to Rattner that it was not interested in
distributing the film, Rattner instructed the GT Brands executive to “dance along” with
Loglisci’s brother. According to an e-mail, Rattner telephoned Morris to inquire whether “GT
needs to distribute [the Chooch] video” in order to secure an investment from the Retirement
Fund. Morris offered to “nose around” to determine how important the DVD distribution deal
was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute
the DVD at a discount from its standard fee. Rattner approved the proposed terms of the
distribution deal.
The SEC’s complaint alleges that in late October 2004, after Rattner and others from
Quadrangle had already met with Loglisci and the Retirement Fund’s private equity consultant
and received encouraging feedback from both of them, Morris met with Rattner and offered his
placement agent services to Quadrangle. Morris warned Rattner that Quadrangle’s negotiations
with the Retirement Fund could always fall apart. Although Quadrangle was already working
with a placement agent, Quadrangle agreed to pay Morris as well.
According to the SEC’s complaint, soon after Quadrangle retained Morris as a placement
agent and Rattner had advised Morris that GT Brands was moving forward with the deal to
distribute the Chooch DVD, Loglisci personally informed Rattner that the Retirement Fund
would be making a $100 million investment in the Quadrangle fund.
The SEC alleges that Morris later contacted Rattner and pressed him for a financial
contribution to Hevesi’s re-election campaign. Although Rattner purportedly had a personal
policy that he would not make political contributions to politicians who have influence over
public pension funds, Rattner agreed to find someone else to make the contribution. After
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speaking with Morris, Rattner asked a friend and the friend’s wife to each contribute $25,000 to
Hevesi’s campaign. The day after these contributions were communicated to Hevesi’s campaign
staff, Hevesi telephoned Rattner and left him a message thanking him for the contribution. In
late May 2006, Rattner’s friend transmitted the promised campaign contributions to Rattner, who
forwarded the two checks to Hevesi’s campaign. Approximately one month later, Loglisci
committed the Retirement Fund to an additional $50 million investment in the Quadrangle fund.
In the Matter of The Buckingham Research Group, Inc.
A.P. Rel. No. 34-63323 (November 17, 2010)
The SEC charged two affiliated New York-based firms and their former chief compliance
officer with failing to have adequate policies and procedures to prevent misuse of nonpublic
information.
One of the firms - investment adviser Buckingham Capital Management Inc. (BCM) also is charged with supplementing and altering its records prior to turning them over to SEC
examination staff, which prevented the exam staff from discovering BCM's failure to follow its
compliance procedures.
In administrative proceedings against BCM and its broker-dealer parent company, The
Buckingham Research Group Inc. (BRG), the SEC found that the firms failed to establish,
maintain, and enforce written policies and procedures reasonably designed to prevent misuse of
material, nonpublic information, including forthcoming BRG research reports. The former chief
compliance officer for both firms, Lloyd Karp, was charged with aiding and abetting and causing
the failures.
The firms and Karp agreed to settle the SEC's cases against them. In its order instituting
administrative proceedings, the SEC found that when BCM began preparing for an SEC
examination in 2006, the firm discovered that it was missing pre-approval forms for more than
100 employee trades. Instead of producing the incomplete employee trading records to the SEC
exam staff, BCM created new forms to replace the missing ones. BCM then produced the
existing records along with the newly-created forms to the SEC examination staff without telling
the staff what it had done. BCM also replaced incomplete compliance logs with newly-created
completed logs and turned the completed logs over to SEC staff without disclosing what had
been done. These compliance documents were particularly important because they were intended
to address deficiencies identified in an earlier SEC exam of the firm.
The Commission found that whenever there was a material research event, BRG's written
policy required research analysts to complete a certification form attesting that they had
maintained confidentiality of the material research information. However, in practice, BRG
required an analyst to complete a certification form only where a BCM portfolio had traded in
the same direction as the research. Moreover, in some instances, analyst certifications were
lacking, incomplete, or dated long after the research event had occurred.
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Without admitting or denying the SEC's findings, BRG agreed to pay a $50,000 penalty,
BCM agreed to pay a $75,000 penalty, and Karp agreed to pay a $35,000 penalty. They also
consented to an order that censures all of the respondents; requires BRG to cease and desist from
committing or causing any violations or future violations of Section 15(f) of the Securities
Exchange Act of 1934; requires BCM to cease and desist from committing or causing any
violations and any future violations of Sections 204(a), 204A and 206(4) of the Investment
Advisers Act of 1940 and Rule 206(4)-7 thereunder; and requires Karp to cease and desist from
causing any violations and any future violations of Section 15(f) of the Exchange Act and
Sections 204A and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The order also
requires that both firms engage an independent consultant to review and make recommendations
regarding their compliance policies and procedures.
SEC v. Shawn A. Icely
The SEC filed a civil injunctive action against Shawn A. Icely alleging violations of the
antifraud provisions of the federal securities laws in connection with his misappropriation of
hundreds of thousands of dollars from customers of American Portfolios Financial Services, Inc.
while he was employed there as a registered representative.
The Commission's complaint alleges that, from no later than November 2008 through
December 2009, Icely fraudulently diverted approximately $625,000 from American Portfolios
customer accounts to his company, Icely, Inc. According to the complaint, Icely diverted the
money by using wire transfer forms or IRA distribution forms that were forged. The complaint
further alleges that to facilitate and otherwise conceal his fraud, Icely told customers that their
money was transferred to bank accounts in their name or that the money was being transferred to
new accounts at another brokerage firm. The complaint alleges that Icely defrauded at least 11
customers, many of whom had long-standing business and personal relationships with Icely.
The Commission's complaint charges Icely with violating Section 17(a) of the Securities
Act of 1993, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)
thereunder. The complaint seeks a permanent injunction prohibiting future violations of the
securities laws, disgorgement of all ill-gotten gains, and a civil money penalty against Icely.
In the Matter of Pinnacle Capital Markets LLC
A.P. Rel. No. 34-62811 (September 1, 2010)
The SEC charged Pinnacle Capital Markets LLC with failing to comply with an antimoney laundering (AML) rule that requires broker-dealers to identify and verify the identities of
its customers and document its procedures for doing so. The SEC also charged Pinnacle's
managing director Michael A. Paciorek with causing Pinnacle's violations.
Pinnacle is a broker-dealer based in Raleigh, N.C., with more than 99 percent of its
customers residing outside the United States. Pinnacle's business primarily involves order
processing with direct market access (DMA) software for foreign institutions comprised mostly
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of banks and brokerage firms and foreign individuals. The SEC found that Pinnacle established,
documented and maintained a customer identification program (CIP) that specified it would
identify and verify the identities of all of its customers. However, during a six-year period,
Pinnacle failed to follow the identification and verification procedures set forth in its CIP.
According to the SEC's order against Pinnacle, many of the firm's foreign entity
customers hold omnibus accounts at Pinnacle through which the entities carry sub-accounts for
their own corporate or retail customers. Pinnacle treats the sub-account holders of the foreign
entity omnibus accounts in the same manner as it does its regular account holders. The vast
majority of Pinnacle's regular account holders, as well as the omnibus sub-account holders, use
DMA software to enter securities trades directly and instantly through their own computers. As a
result, these account holders have direct, unfiltered control over how securities transactions are
effected in the accounts. The foreign entity holding the omnibus account does not intermediate
these trades. The DMA software allows the omnibus sub-account holders to route their securities
transactions directly to the relevant market centers without intermediation.
The SEC's order finds that Pinnacle willfully violated Section 17(a) of the Securities
Exchange Act of 1934 and Rule 17a-8 thereunder, which require a broker-dealer to comply with
the reporting, recordkeeping and record retention requirements in regulations implemented under
the BSA, including the requirements in the CIP rule applicable to broker-dealers. The CIP rule
generally requires a broker-dealer to establish, document, and maintain procedures for
identifying customers and verifying their identities.
Pinnacle and Paciorek agreed to settle the SEC's enforcement action without admitting or
denying the allegations, and Pinnacle will pay $25,000 in financial penalties. As part of an action
taken by the Financial Industry Regulatory Authority (FINRA) in February 2010, Pinnacle also
has agreed to certain undertakings, including extensive AML training for its employees, as well
as the hiring of an independent consultant to review its AML compliance program.
In the Matter of Ronald S. Bloomfield et al.
A.P. Rel. No. 33-9121 (April 27, 2010)
According to the SEC’s order, from April 2005 through mid-2007 (the “Relevant
Period”), customers of Leeb Brokerage Services, Inc., a defunct brokerage firm that had been
registered with the SEC, routinely delivered into their accounts large blocks of privately obtained
shares of penny stocks, which Leeb then sold to the public on their behalf, without any
registration statements being in effect.
The selling of privately obtained shares to the public, without registration statements in
effect, included instances in which Leeb’s customers started selling their stock within weeks of
its receipt; in which promotional activity was occurring during the sales; and in which the
number of shares being sold represented a significant percentage of an issuer’s outstanding share
balance.
Despite such obvious red flags indicating that their customers were violating Section 5 of
the Securities Act by engaging in illegal distributions of securities through their accounts at
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Leeb, Ronald S. Bloomfield, a former registered representative and supervisor of an Office of
Supervisory Jurisdiction for Leeb, John Earl Martin, Sr., a former registered representative at
Leeb, and Victor Labi, a former registered representative at Leeb, failed to conduct a reasonable
inquiry regarding the securities delivered into Leeb customer accounts.
Leeb supervisors Robert Gorgia and Eugene Spencer Miller failed reasonably to
supervise Bloomfield, Martin and Labi to address whether they conducted a reasonable inquiry
into the circumstances of their customers’ penny stock sales. Indeed, Gorgia and Miller’s failure
to monitor adequately the registered representatives’ handling of customer penny stock trading
left intact a revenue stream that in 2006 amounted to almost half of the firm’s commission
income.
In addition to allowing customers to sell large blocks of penny stock to the public without
sufficiently investigating whether they were facilitating illegal underwriting, the Respondents
failed to address whether Leeb fulfilled its obligations, under the Bank Secrecy Act, to file
Suspicious Activity Reports concerning their customers’ conduct.
The Respondents’ violations of the securities laws and rules exposed the public to repeated risk
of unlawful distributions of penny stocks.
Consequently, the SEC deems it necessary and appropriate in the public interest to
institute public administrative and cease-and-desist proceedings.
SEC v. Goldman, Sachs & Co., et al.
Lit. Rel. No. 21489 (April 16, 2010)
Lit. Rel. No. 21592 (July 15, 2010)
The SEC filed securities fraud charges against Goldman, Sachs & Co. ("GS&Co") and a
GS&Co employee, Fabrice Tourre ("Tourre"), for making material misstatements and omissions
in connection with a synthetic collateralized debt obligation ("CDO") GS&Co structured and
marketed to investors. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of
subprime residential mortgage-backed securities ("RMBS") and was structured and marketed in
early 2007 when the United States housing market and the securities referencing it were
beginning to show signs of distress.
According to the SEC’s complaint, the marketing materials for ABACUS 2007-AC1
represented that the reference portfolio of RMBS underlying the CDO was selected by ACA
Management LLC ("ACA"), a third party with expertise in analyzing credit risk in RMBS.
According to the SEC’s complaint, undisclosed in the marketing materials and unbeknownst to
investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly
adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio
selection process. After participating in the selection of the reference portfolio, Paulson
effectively shorted the RMBS portfolio it helped select by entering into credit default swaps
("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital
structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS
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that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's
adverse economic interest or its role in the portfolio selection process in the term sheet, flip
book, offering memorandum or other marketing materials.
The SEC alleges that Tourre was principally responsible for ABACUS 2007-AC1.
According to the SEC's complaint, Tourre devised the transaction, prepared the marketing
materials and communicated directly with investors. Tourre is alleged to have known of
Paulson's undisclosed short interest and its role in the collateral selection process. He is also
alleged to have misled ACA into believing that Paulson invested approximately $200 million in
the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson's interests in
the collateral section process were aligned with ACA's when in reality Paulson's interests were
sharply conflicting. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15
million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the
RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% was on negative
watch. By January 29, 2008, 99% of the portfolio had allegedly been downgraded. Investors in
the liabilities of ABACUS 2007-AC1 are alleged to have lost over $1 billion. Paulson's opposite
CDS positions yielded a profit of approximately $1 billion.
The SEC's complaint charges GS&Co and Tourre with violations of Section 17(a) of the
Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act
Rule 10b-5. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest and
civil penalties from both defendants.
Subsequently, on July 15, 2010, GS&Co will pay $550 million and reform its business
practices to settle SEC charges that Goldman misled investors in a subprime mortgage product
just as the U.S. housing market was starting to collapse.
In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also
acknowledged that its marketing materials for the subprime product contained incomplete
information.
In the Matter of Mortgages Ltd. Securities, LLC
A.P. Rel. No. 34-6137 (January 19, 2010)
The SEC filed an order instituting administrative proceedings against Mortgage Ltd.
Services, LLC (MLS), a registered broker-dealer and affiliate of Mortgages Ltd (MLtd), an
Arizona-based private lender that, through MLS, raised more than $741 million from
approximately 2,700 investors nationwide from February 2004 to June 2008.
The SEC’s order finds that MLS made oral and written misrepresentations to investors
concerning the safety and liquidity of the investment and risks associated with the investment.
MLS led investors to believe that the loans MLtd. had underwritten were safer than they actually
were, and investors were unaware that MLtd. was taking on larger and riskier loans. MLS
misrepresented how the declining market conditions that worsened throughout 2007 impacted
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the safety of the investment, and how MLtd. and its principal had increasingly resorted to selling
their personal assets to prop up MLtd.
Without admitting or denying the SEC’s findings MLS consented to its revocation as a
broker or dealer and a disgorgement penalty of $6,973,785 and prejudgment interest of
$331,048.
In the Matter of ICAP Securities USA LLC, Ronald A. Purpora, Gregory F. Murphy,
Peter M. Agola, Ronald Boccio, Kevin Cunningham, Donald E. Hoffman, Jr., and Anthony
Paris
The SEC charged a U.S. subsidiary of the world's largest inter-dealer broker, U.K.-based
ICAP plc, with fraud for engaging in deceptive broking activity and making material
misrepresentations to customers concerning its trading activities.
As an inter-dealer broker, ICAP Securities USA LLC (ICAP) matches buyers and sellers
in over-the-counter markets for various securities, such as U.S. Treasuries and mortgage-backed
securities, by posting trade information on computer screens accessed by its customers who
make trading decisions based in part on such information. Inter-dealer brokers with greater trade
activity on their screens often are better positioned to attract customer orders and than those
whose screens reflect little or no trading activity.
The SEC's enforcement action finds that ICAP, through its brokers on its U.S. Treasuries
(UST) desks, displayed fictitious flash trades also known as "bird" trades on ICAP's screens and
disseminated false trade information into the marketplace in order to attract customer attention to
its screens and encourage actual trading by these customers. ICAP's customers believed the
displayed fake trades to be real and relied on the phony information to make trading decisions.
ICAP agreed to settle the SEC's charges by, among other things, paying $25 million in
disgorgement and penalties. The SEC additionally charged five ICAP brokers for aiding and
abetting the firm's fraudulent conduct and two senior executives for failing reasonably to
supervise the brokers. The individuals have each agreed to pay penalties to settle the SEC's
charges.
The SEC's order finds that ICAP willfully violated Section 17(a)(2) and 17(a)(3) of the
Securities Act of 1933, and Section 15C of the Securities Exchange Act of 1934 and 17 CFR
Parts 404 and 405. The order also finds that each of the five brokers willfully aided and abetted
and caused ICAP's violations of Section 17(a)(2) and 17(a)(3) of the Securities Act, and that
Purpora and Murphy failed reasonably to supervise the brokers.
Without admitting or denying the SEC's findings, ICAP has agreed to a censure, to cease
and desist from committing or causing any violations of Section 17(a)(2) and 17(a)(3) of the
Securities Act, Section 15C of the Exchange Act and 17 CFR Parts 404 and 405, and to pay $1
million in disgorgement and $24 million in penalties. ICAP also has agreed to retain an
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independent consultant to, among other things, review ICAP's current controls and compliance
mechanisms; its trading activities on all desks to ensure that the violations described in the order
are not occurring elsewhere at ICAP; and ICAP's books and records pertaining to trading
records. Based on its review, the independent consultant will recommend any additional policies
and procedures which are reasonably designed to ensure that ICAP complies with applicable
provisions of the federal securities laws.
Without admitting or denying the SEC's findings, each of the brokers has agreed to cease
and desist from committing or causing any violations of Section 17(a)(2) and 17(a)(3) of the
Securities Act; to be suspended from association with any broker or dealer for a period of three
months; and, with the exception of Hoffman, to pay a $100,000 penalty. Hoffman, who retired
from ICAP nearly four years ago, has agreed to pay a $50,000 penalty.
Finally, without admitting or denying the SEC's findings, Purpora and Murphy have each
agreed to be suspended from association in a supervisory capacity with any broker or dealer for a
period of three months and pay a penalty of $100,000.
SEC v. Morgan Keegan & Company, Inc.
Lit. Rel. No. 21143 (July 21, 2009)
The Commission filed a complaint in the U.S. District Court for the Northern District of
Georgia against Morgan Keegan & Company, Inc. (“Morgan Keegan”), a Tennessee-based
broker-dealer, for misleading investors regarding the liquidity risks associated with auction rate
securities (“ARS”) that the firm underwrote, marketed, or sold.
The Commission’s complaint alleges that Morgan Keegan misrepresented to customers
that ARS were safe, highly liquid investments that were comparable to money-market funds.
According to the complaint, in 2007 and early 2008, Morgan Keegan was aware that the ARS
market was deteriorating. Specifically, the complaint alleges that investor concerns about the
creditworthiness of ARS insurers, auction failures in certain segments of the ARS market,
increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and
higher than normal ARS inventories at Morgan Keegan collectively indicated that the risk of
auction failures had materially increased. The SEC alleges that Morgan Keegan sold
approximately $925 million of ARS to its customers between November 1, 2007, and SEC 20,
2008, but failed to inform its customers about liquidity risks for ARS, even after the firm decided
to stop supporting the ARS market in February 2008.
The Commission’s complaint alleges that Morgan Keegan violated the antifraud
provisions of the federal securities laws, Sections 17(a) of the Securities Act of 1933 and
Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
complaint also seeks (i) permanent injunctions against Morgan Keegan for future violations; (ii)
disgorgement of ill-gotten gains with prejudgment interest; (iii) imposition of civil penalties; and
(iv) an order requiring Morgan Keegan to repurchase ARS sold to its customers.
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SEC v. Sky Capital LLC a/k/a Granta Capital LLC, Ross Mandell, Stephen Shea, Adam
Harrington Ruckdeschel, Arn Wilson, Michael Passaro and Robert Grabowski
Lit. Rel. No. 21120 (July 8, 2009)
The SEC charged a New York based broker-dealer Sky Capital LLC a/k/a Granta Capital
LLC for using fraudulent boiler room tactics to raise more than $61 million from investors in two
related companies–Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (the Sky
Entities). The SEC also charged Sky Capital’s founder, former President and CEO, Ross
Mandell, the firm’s former COO, Stephen Shea, and four registered representatives, Adam
Harrington Ruckdeschel, Arn Wilson, Michael Passaro, and Robert Grabowski, for orchestrating
and participating in the fraudulent scheme designed to fraudulently induce numerous individuals
to invest in the Sky Entities.
The SEC’s complaint alleges that Mandell directed Sky Capital brokers to make material
misrepresentations to induce their Sky Capital customers to purchase stock in the Sky Entities.
Mandell also personally made material misrepresentations to his customers. Further, the
defendants implemented a “no-net sales” policy, which essentially prevented investors from
selling their Sky Entities’ stock that were otherwise publicly traded on the Alternative
Investment Market of the London Stock Exchange. The trading in the Sky Entities shares was
suspended, rendering the investments worthless. The complaint further alleges that Sky Capital
raised over $61 million from U.S. and U.K. investors, and Mandell used the investor funds for
various personal expenses.
The SEC’s complaint charges each of the defendants with violations of Section 17(a) of
the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange
Act”) and Rule 10b-5 thereunder. The complaint, also, in the alternative, charges Shea with
aiding and abetting the other defendants’ violations of Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder. Additionally, it charges Sky Capital with violating Section 15(c) of the
Exchange Act, and Mandell with aiding and abetting Sky Capital’s violation of Section 15(c) of
the Exchange Act. The complaint seeks a final judgment permanently enjoining the defendants
from future violations of the above provisions of the federal securities laws, ordering them to
disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay civil penalties.
The complaint also seeks to permanently prohibit Mandell from acting as an officer or director of
any registered public company.
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CASES INVOLVING FAILURES TO SUPERVISE
In the Matter of Marc A. Ellis; In the Matter of Frederick A. Kraus; In the Matter of David
C. Levine
A.P. Rel. No. 34-64220 (April 7, 2011)
A.P. Rel. No. 34-64221 (April 7, 2011)
A.P. Rel. No. 34-64222 (April 7, 2011)
The SEC charged three former brokerage executives for failing to protect confidential
information about their customers.
The SEC’s investigation found that while Tampa-based GunnAllen Financial Inc. was
winding down its business operations last year, former president Frederick O. Kraus and former
national sales manager David C. Levine violated customer privacy rules by improperly
transferring customer records to another firm. The SEC also found that former chief compliance
officer Mark A. Ellis failed to ensure that the firm’s policies and procedures were reasonably
designed to safeguard confidential customer information.
Kraus, Levine, and Ellis each agreed to settle the SEC’s charges against them. This is the
first time that the SEC has assessed financial penalties against individuals charged solely with
violations of Regulation S-P, an SEC rule that requires financial firms to protect confidential
customer information from unauthorized release to unaffiliated third parties.
According to the SEC’s orders instituting administrative proceedings, Kraus authorized
Levine to take information from more than 16,000 GunnAllen accounts to his new employer as
the firm wound down operations in April 2010. Levine downloaded customer names and
addresses, account numbers, and asset values to a portable thumb drive, and provided the records
to his new employer after resigning from GunnAllen. The SEC found that the record transfer
violated Regulation S-P because account holders were only informed about it after the fact. The
cases against Kraus and Levine mark the first time that the SEC has charged individuals with
Regulation S-P violations arising when a departing representative takes customer information to
a new employer without providing sufficient notice and opt-out procedures.
According to the SEC’s order against Ellis, GunnAllen’s policies and procedures to
protect customer information were vague and did little more than recite a provision of Regulation
S-P known as the Safeguard Rule. There were several serious security breaches at GunnAllen
from July 2005 to February 2009, including the theft of three laptop computers belonging to
GunnAllen’s registered representatives and the unlawful access of its e-mail system by a
terminated employee using stolen password credentials. Despite the security breaches, Ellis
failed to revise or supplement GunnAllen’s policies and procedures for safeguarding customer
information.
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The SEC’s orders found that Kraus, Levine, and Ellis willfully aided and abetted and
caused GunnAllen’s violations of Rule 30(a) of Regulation S-P under the Securities Exchange
Act of 1934, and that Kraus and Levine willfully aided and abetted the firm’s violations of Rules
7(a) and 10(a) of the same regulation.
Without admitting or denying the SEC’s findings, Kraus, Levine, and Ellis each
consented to the entry of an SEC order that censures them and requires them to cease and desist
from committing or causing any violations or future violations of the provisions charged. Kraus
and Levine have been ordered to pay penalties of $20,000 each, and Ellis has been ordered to
pay a $15,000 penalty.
In the Matter of Divine Capital Markets, LLC, Danielle Hughes, and Michael Buonomo
http://sec.gov/litigation/admin/2011/34-63980.pdf
The Commission instituted public administrative and cease-and-desist proceedings
against Divine Capital Markets, LLC, Danielle Bionda Hughes, and Michael Buonomo.
Between 2006 and 2007, Buonomo violated Section 5 of the Securities Act for selling over 9.8
billion shares of Advanced Optics Electronics Inc. (ADOT) without an effective registration
statement and without a valid registration exemption.
During the relevant time period, Buonomo was a registered representative at Divine
Capital Markets, and Huges was Buonomo’s supervisor. From the inception of the account,
Hughes ignored red flags that the ADOT sales constituted an unregistered distribution. In
September 2006, Hughes hired a new Chief Compliance Officer who alerted her on several
occasions to the large number of ADOT shares flowing through the JDC Swan account. Hughes
took no steps to prevent the sales or to ensure that the sales were either registered or exempt from
registration. From approximately June 3, 2006 through September 6, 2006, Hughes was
responsible for developing and maintaining the firm's supervisory policies and procedures.
Throughout the February 27, 2006 through July 2007 period, Divine's supervisory
policies were inadequate to provide guidance to supervisors regarding the appropriate inquiry to
determine whether the public sale of shares acquired directly or indirectly from an issuer was
prohibited by Section 5 of the Securities Act. For example, the policies did not address
unregistered distributions through statutory underwriters. The supervisory procedures also failed
to address situations in which certificates without restrictive legends were acquired by a
customer from an issuer with a view to distribution. If Hughes and Divine had developed
reasonable policies and procedures requiring appropriate due diligence in situations in which a
customer sold large blocks of illiquid stock in a little-known company and prohibited re-sales of
such shares, the firm likely would have prevented and detected Buonomo's violations of Section
5.
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In the Matter of TD Ameritrade, Inc.
The SEC charged TD Ameritrade Inc. for failing to reasonably supervise its registered
representatives, some of whom misled customers when selling shares of the Reserve Yield Plus
Fund, a mutual fund that "broke the buck" in September 2008.
According to the SEC's order, TD Ameritrade's representatives offered and sold the fund
through the firm's various sales channels prior to September 16, 2008. The order finds that a
number of the representatives violated the securities laws when they mischaracterized the fund as
a money market fund, as safe as cash, or as an investment with guaranteed liquidity. They also
failed to disclose the nature or risks of the fund when offering the investment to customers. TD
Ameritrade failed to prevent the misconduct by its representatives because it did not establish
adequate supervisory policies and procedures or a system to implement them with respect to the
offers and sales of the fund.
To settle the SEC's charges, TD Ameritrade has agreed to distribute approximately $10
million to eligible customers who continue to hold shares of the fund.
The SEC's administrative order finds that the Reserve Yield Plus Fund sought to provide
higher returns than a money market fund while seeking to maintain a net asset value (NAV) of
$1.00. The fund's NAV fell to 97 cents on September 16, 2008, after the Reserve wrote down the
fund's investments in commercial paper issued by Lehman Brothers Holdings Inc.
The SEC's order finds that thousands of TD Ameritrade's customers continue to hold a
majority of the fund's shares. They have received approximately 95 percent of their original
principal investments in the fund following distribution of most of the fund's liquidated assets to
all of its shareholders.
Without admitting or denying the SEC's allegations, TD Ameritrade consented to the
SEC's order, which censures the firm. As part of the order, TD Ameritrade also agrees to
distribute $0.012 per share of the fund to eligible customers who hold such shares within 30 days
of the order's issuance; provide notice of the terms of the SEC's order to all eligible customers;
and display information concerning the terms of the order on the firm's website.
In the Matter of Dohan and Company CPAs, Steven H. Dohan, CPA, Nancy L. Brown,
CPA, and Erez Bahar, CA
A.P. Rel. No. 34-63740 (Jan 20, 2011)
The Commission charged Dohan + Company CPAs, Steven H. Dohan, and Nancy L.
Brown with violations of Section 4C of the Securities Exchange Act of 1934 and Rule
102(e)(1)(ii) of the Commission’s Rules of Practice. On January 20, 2011, Defendants submitted
settlement offers which the Commission has agreed to accept.
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The Commission charged defendants with improper professional conduct during their
audit of International Commercial Television, Inc.'s 2007 financial statements. During fiscal year
2007, ICTV improperly recognized revenue and incorrectly recorded product returns, resulting in
a material overstatement of revenue and net income. Respondents' audit of ICTV's 2007 financial
statements failed to comply with numerous Public Company Accounting Oversight Board
("PCAOB") auditing standards. These included failing to demonstrate the required level of
proficiency, failing to exercise due care and professional skepticism, failing to obtain sufficient
evidential matter, failing to plan the audit, and failing to supervise the audit staff. As a result,
Dohan and Brown and others caused Respondent Dohan + Co. to issue an unqualified audit
report for ICTV's 2007 Form 10-K/SB that incorrectly stated that the audit had been conducted
in accordance with the PCAOB's auditing standards and that ICTV's financial statements were
fairly reported in conformity with Generally Accepted Accounting Principles ("GAAP").
Defendants’ conduct constituted improper professional conduct within the meaning of Rule
102(e)(1)(ii) and (iv) and Section 4C of the Exchange Act.
CASES INVOLVING TRANSFER AGENTS
In the Matter of Securities Transfer Corporation and Kevin Halter, Jr.
A.P. Rel. No. 34-64030 (March 3, 2011)
Proceedings, Pursuant to Sections 17A and 21C of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions and a Cease-and Desist Order against Securities
Transfer Corporation and Kevin Halter, Jr. Securities Transfer Corporation (STC) is a transfer
agent registered with the Commission, located in Frisco, Texas, and Kevin Halter, Jr. (Halter, Jr.)
is the President of STC.
The Order finds that between August 2007 and November 2008, STC’s bookkeeper,
Kevin B. Halter (Halter), Halter, Jr.’s father, misappropriated approximately $2.7 million from
ten issuer accounts. The transfers were identified during a routine examination of STC by
Commission staff and resulted in Halter’s termination. Halter repaid the misappropriated funds
to STC and the issuers were made whole.
In the Order against STC and Halter, Jr., the Commission finds that STC and Halter, Jr.
failed reasonably to supervise Halter and that STC also violated Section 17A of the Securities
Exchange Act of 1934 (Exchange Act) by failing to have necessary controls over funds entrusted
to STC.
STC and Halter, Jr. settled the cease-and-desist proceedings by consenting to the entry of
the Order, which requires that they cease and desist from committing or causing any violations
and any future violations of the foregoing provisions of the securities laws, censures STC and
requires the company to pay a $10,000 civil money penalty. The Order also requires STC to
retain an independent consultant and suspends Halter, Jr. from association in a supervisory
capacity with any transfer agent, broker, dealer, investment adviser, municipal securities dealer,
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municipal advisor or nationally recognized statistical ratings organization for a period of three
months.
In the Matter of Global Sentry Equity Transfer, Inc.
The Commission instituted administrative proceedings against Global Sentry Equity
Transfer, Inc. on February 14, 2011. During 2008, Global Sentry was the transfer agent of
record for, among other entities, Infinity Medical Group, Inc., Cannon Exploration Inc., and
China Jiangsu Golden Horse Steel Ball Inc. In at least 2008, Infinity, Cannon, and China Jiangsu
issued a total of approximately 3.5 million purportedly unrestricted shares to Wheeler. Global
Sentry, acting in its capacity as transfer agent, issued stock certificates in Wheeler's name, which
Wheeler's brokerage firm credited to Wheeler's account and from which Wheeler subsequently
sold the shares. Specifically, Global Sentry failed to comply with the Exchange Act and related
rule provisions as follows:
•
Global Sentry was required to maintain cancelled stock certificates. Global Sentry
admitted that it is "not in possession of any documentation concerning Wheeler . .
. ." Global Sentry failed to maintain cancelled stock certificates relating to the sale
of Infinity, Cannon, and China Jiangsu shares issued to Wheeler as required under
Rule 17Ad-6.
•
To the extent that Global Sentry failed to maintain documents as required under
17Ad-6(c), Global Sentry was required to maintain cancelled Infinity, Cannon,
and China Jiangsu stock certificates that it issued to Wheeler for not less than six
years. Global Sentry admitted that it is "not in possession of any documentation
concerning Wheeler . . . ." Global Sentry failed to maintain cancelled stock
certificates relating to the sale of Infinity, Cannon, and China Jiangsu shares
issued to Wheeler as required under Rule 17Ad-7.
•
Global Sentry admitted that it is "not in possession of any documentation
concerning Wheeler . . . ." Global Sentry failed to maintain accurate "master
securityholder files" as required under Rule 17Ad-10.
•
Global Sentry failed to maintain records as required under Rule 17Ad-19, in
particular the stock certificates relating to [*8] the transfer of Infinity, Cannon,
and China Jiangsu shares issued to Wheeler.
•
Global Sentry has failed to make timely filings for the years ended December 31,
2008, and December 31, 2009, as required.
As a result of the conduct described above, Global Sentry willfully violated Sections
17(a)(1) and 17A(d)(1) of the Exchange Act and Rules 17Ad-6, 17Ad-7, 17Ad-10, 17Ad-19, and
17Ac2-2 thereunder.
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SEC v. Whitney D. Lund, Sr. and Standard Transfer & Trust Co.
The SEC filed a civil injunctive action in the U.S. District Court for the District of Utah
against Whitney D. Lund, Sr. and Standard Transfer & Trust, a registered transfer agent. In its
complaint, the SEC charges Lund with abusing the gate-keeping responsibility he had as
president of Standard Transfer & Trust by improperly distributing restricted stock certificates of
Mosaic Nutraceuticals Corp. after fraudulently issuing the certificates without the proper
restrictive legends. He did this as part of a scheme to profit from the sale of Mosaic shares he
owned and controlled, and, as a result of his actions, market participants were misled into
treating these restricted securities as free trading. To cover his scheme and reap more than
$700,000 in illicit profits, according to the complaint, Lund falsified transfer agent records and
obtained a materially false and misleading attorney opinion letter that was backdated at Lund’s
direction in an effort to make his distribution of Mosaic stock appear legitimate. In addition,
according to the complaint, Lund testified falsely during the SEC’s investigation, claiming that
he relied on this opinion letter when he made the distribution. The complaint further charges the
entity with violating multiple regulations governing the conduct of transfer agents and Lund with
aiding and abetting those violations.
The complaint alleges that Lund violated Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 (Exchange Act), and Sections 17(a), 5(a), and 5(c) of Securities Act of
1933 (Marchurities Act). The Complaint also alleges that Standard Transfer & Trust violated
Sections 17(a)(3), 17A(c)(2) and 17A(d)(1) of the Exchange Act and Rules 17Ac2-1, 17Ac2-2,
17Ad-2, 17Ad-3, 17Ad-6, 17Ad-10, 17Ad-12, 17Ad-13, 17Ad-17, 17Ad-19 and 17f-1
thereunder and that, through his actions, Lund aided and abetted these violations. The complaint
requests that the court permanently enjoin the defendants from future violations of the federal
securities laws, order the defendants to pay financial penalties, and order Lund to disgorge illgotten gains, plus prejudgment interest. The complaint also asks the court to bar Lund from
participating in an offering of penny stock.
CASES INVOLVING MUNICIPAL BONDS
SEC v. J.P. Morgan Securities LLC
Lit. Rel. No. 22031 (July 7, 2011)
The SEC charged J.P. Morgan Securities LLC (JPMS) with fraudulently rigging at least
93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in illgotten gains.
To settle the SEC’s fraud charges, JPMS agreed to pay approximately $51.2 million that
will be returned to the affected municipalities or conduit borrowers. JPMS and its affiliates also
agreed to pay $177 million to settle parallel charges brought by other federal and state
authorities.
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Typically, when investors purchase municipal securities, the municipalities temporarily
invest the proceeds of the sales in municipal reinvestment products until the money is used for
the intended purposes. Under relevant Internal Revenue Service (IRS) regulations, the proceeds
of tax-exempt municipal securities generally must be invested at fair market value. The most
common way of establishing fair market value is through a competitive bidding process in which
bidding agents search for the appropriate investment vehicle for a municipality.
The SEC alleges that from 1997 through 2005, JPMS’s fraudulent practices,
misrepresentations and omissions undermined the competitive bidding process, affected the
prices that municipalities paid for reinvestment products, and deprived certain municipalities of a
conclusive presumption that the reinvestment instruments had been purchased at fair market
value. JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in
municipal securities because the supposed competitive bidding process that establishes the fair
market value of the investment was corrupted. The employees involved in the alleged
misconduct are no longer with the company.
According to the SEC’s complaint filed in U.S. District Court for the District of New
Jersey, JPMS, acting as the agent for its affiliated commercial bank, JPMorgan Chase Bank,
N.A., at times won bids because it obtained information from the bidding agents about
competing bids, a practice known as “last looks.” In other instances, it won bids set up in
advance for JPMS to win (set-ups) because the bidding agent deliberately obtained non-winning
bids from other providers, and it facilitated bids rigged for others to win by deliberately
submitting non-winning bids.
Without admitting or denying the allegations in the SEC’s complaint, JPMS has
consented to the entry of a final judgment enjoining it from future violations of Section
15(c)(1)(A) of the Securities Exchange Act of 1934 and has agreed to pay a penalty of $32.5
million and disgorgement of $11,065,969 with prejudgment interest of $7,620,380. The
settlement is subject to court approval.
SEC v. UBS Financial Services Inc.
Lit. Rel. No. 21956 (May 4, 2011)
The SEC charged UBS Financial Services Inc. (UBS) with fraudulently rigging at least
100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in
ill-gotten gains.
To settle the SEC’s charges, UBS has agreed to pay $47.2 million that will be returned to
the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle
parallel charges brought by other federal and state authorities.
When investors purchase municipal securities, the municipalities generally temporarily
invest the proceeds of the sales in reinvestment products before the money is used for the
intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal
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securities must generally be invested at fair market value. The most common way of establishing
fair market value is through a competitive bidding process in which bidding agents search for the
appropriate investment vehicle for a municipality.
The SEC alleges that during 2000 to 2004, UBS’s fraudulent practices and
misrepresentations undermined the competitive bidding process and affected the prices that
municipalities paid for the reinvestment products being bid on by the provider of the products. Its
fraudulent conduct at the time also jeopardized the tax-exempt status of billions of dollars in
municipal securities because the supposed competitive bidding process that establishes the fair
market value of the investment was corrupted. The business unit involved in this misconduct
closed in 2008 and its employees are no longer with the company.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey,
UBS played various roles in these tainted transactions. UBS illicitly won bids as a provider of
reinvestment products, and also rigged bids for the benefit of other providers while acting as a
bidding agent on behalf of municipalities. UBS at times additionally facilitated the payment of
improper undisclosed amounts to other bidding agents. In each instance, UBS made fraudulent
misrepresentations or omissions, thereby deceiving municipalities and their agents. As bidding
agent UBS steered business through a variety of mechanisms to favored bidders acting as
providers of reinvestment products. In some cases, UBS gave a favored provider information on
competing bids in a practice known as “last looks.” In other instances, UBS deliberately obtained
off-market ”courtesy” bids or arranged “set-ups” by obtaining purposefully non-competitive bids
from others so that the favored provider would win the business. UBS also transmitted improper,
undisclosed payments to favored bidding agents through interest rate swaps. In addition, UBS
was favored to win bids with last looks and set-ups as a provider of reinvestment products.
SEC v. Banc of America Securities LLC
The SEC charged Banc of America Securities, LLC (BAS) with securities fraud for its
part in an effort to rig bids in connection with the investment of proceeds of municipal securities.
To settle the SEC's charges, BAS has agreed to pay more than $36 million in
disgorgement and interest. In addition, BAS and its affiliates have agreed to pay another $101
million to other federal and state authorities for its conduct.
When investors purchase municipal securities, the municipalities generally invest the
proceeds temporarily in reinvestment products before the money is used for the intended
purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must
generally be invested at fair market value. The most common way of establishing fair market
value is through a competitive bidding process, whereby bidding agents search for the
appropriate investment vehicle for a municipality.
In its Order, the SEC found that the bidding process was not competitive because it was
tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used
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to establish the fair market value of the reinvestment instruments. As a result, these improper
bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt
status of the underlying municipal securities, the principal amounts of which totaled billions of
dollars.
According to the Commission's Order, certain bidding agents steered business from
municipalities to BAS through a variety of mechanisms. In some cases, the agents gave BAS
information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids
or purposefully non-winning bids so that BAS could win the transaction (set-ups). As a result,
BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment
contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).
In return, BAS steered business to those bidding agents and submitted courtesy and
purposefully non-winning bids upon request. In addition, those bidding agents were at times
rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The
Commission also found that former officers of BAS participated in, and condoned, these
improper bidding practices.
Without admitting or denying the SEC's findings, BAS consented to the entry of a
Commission Order which censures BAS, requires it to cease-and-desist from committing or
causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of
1934, and to pay disgorgement plus prejudgment interest totaling $36,096,442 directly to the
affected entities.
In the Matter of State of New Jersey
A.P. Rel. No. 33-9135 (August 18, 2010)
The SEC charged the State of New Jersey with securities fraud for misrepresenting and
failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was
underfunding the state's two largest pension plans.
According to the SEC's order, New Jersey offered and sold more than $26 billion worth
of municipal bonds in 79 offerings between August 2001 and April 2007. The offering
documents for these securities created the false impression that the Teachers' Pension and
Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being
adequately funded, masking the fact that New Jersey was unable to make contributions to TPAF
and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a
result, investors were not provided adequate information to evaluate the state's ability to fund the
pensions or assess their impact on the state's financial condition.
New Jersey is the first state ever charged by the SEC for violations of the federal
securities laws. New Jersey agreed to settle the case without admitting or denying the SEC's
findings. The SEC's order finds that New Jersey made material misrepresentations and omissions
about the underfunding of TPAF and PERS in such bond disclosure documents as preliminary
official statements, official statements, and continuing disclosures.
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The SEC's order further finds that New Jersey failed to provide certain present and
historical financial information regarding its pension funding in bond disclosure documents. The
state was aware of the underfunding of TPAF and PERS and the potential effects of the
underfunding. Furthermore, the state had no written policies or procedures about the review or
update of the bond offering documents and the state did not provide training to its employees
about the state's disclosure obligations under accounting standards or the federal securities laws.
Due to this lack of disclosure training and inadequate procedures for the drafting and review of
bond disclosure documents, the state made material misrepresentations to investors and failed to
disclose material information regarding TPAF and PERS in bond offering documents.
The SEC's order requires the State of New Jersey to cease and desist from committing or
causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the
Securities Act of 1933. New Jersey consented to the issuance of the order without admitting or
denying the findings. In determining to accept New Jersey's offer to settle this matter, the
Commission considered the cooperation afforded the SEC's staff during the investigation and
certain remedial acts taken by the state.
SEC v. Harold H. Jaschke
The SEC filed an action charging Harold H. Jaschke ("Jaschke") with defrauding two
Florida municipalities. The SEC alleges that Jaschke reaped commissions of over $14 million by
engaging in unauthorized and unsuitable trading on behalf of the City of Kissimmee, Fla. and the
Tohopekaliga Water Authority (collectively, the "Municipalities"), and by churning their
accounts. While associated with the brokerage firm First Allied Securities, Inc., Jaschke lied to
his customers about his fraudulent trading, which resulted in an aggregate, unrealized loss of
approximately $60 million for a two year period.
The SEC’s complaint alleges that Jaschke engaged in a high risk, short term trading
strategy involving zero-coupon United States Treasury bonds, the value of which were very
sensitive to interest rate changes. The complaint alleges that Jaschke exposed the Municipalities
to greater risks when he leveraged their accounts using repurchase agreements. Jaschke
employed repurchase agreements to finance the bond purchases the Municipalities would not
otherwise have been able to afford. The complaint alleges this strategy dramatically increased the
risks as Jaschke caused the Municipalities to borrow large sums of money to hold larger bond
positions.
The complaint alleges Jaschke knew the Municipalities' ordinances prohibited his trading
strategy and that the Municipalities prohibited the use of repurchase agreements for investment.
According to the complaint, had the bond market not swung sharply in Jaschke's favor allowing
the Municipalities to close their accounts with a modest profit, the Municipalities could have lost
millions of dollars as a result of his misconduct.
The SEC's complaint alleges that Jaschke violated the antifraud provisions of the federal
securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities
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Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and aided and abetted
violations of the broker-dealer books and records provisions, Section 17(a) of the Exchange Act
and Rule 17a-4(b)(4) thereunder. The SEC's complaint seeks a permanent injunction and
disgorgement with prejudgment interest and a civil penalty.
SEC v. Charles E. LeCroy, and Douglas W. MacFaddin
The SEC charged Charles E. LeCroy and Douglas W. MacFaddin, two former directors
of J.P. Morgan Securities Inc. with fraud in connection with an unlawful payment scheme which
allowed J.P. Morgan Securities to obtain $5 billion in Jefferson County, Alabama municipal
bond offerings and swap agreement transactions.
The SEC alleges that between October 2002 and November 2003, LeCroy and
MacFaddin directed over $8 million in payments from J.P. Morgan Securities to close friends of
Jefferson County commissioners (County commissioners) who either owned or worked at local
broker-dealers. These broker-dealers had no official role and performed few, if any, services on
the transactions. In connection with these payments, according to the SEC’s complaint, the
County commissioners voted to select J.P. Morgan Securities as managing underwriter and swap
provider for the largest municipal auction rate securities and swap agreement transactions in J.P.
Morgan Securities’ history.
The SEC’s complaint alleges that LeCroy and MacFaddin knew that these were sham
transactions designed to ensure that County officials selected J.P. Morgan Securities. LeCroy and
MacFaddin referred to the payments in taped telephone conversations as “payoffs,” “the price of
doing business” or “giving away free money.” J.P. Morgan Securities incorporated the costs of
these unlawful payments by charging Jefferson County higher interest rates on the swap
transactions.
The SEC further alleges that LeCroy and MacFaddin failed to disclose any of these
payments, and the inherent conflicts of interest raised by the payments, either to the County or
investors in bond offerings, or to the County in the swap agreements at issue. This conduct
deprived Jefferson County and its investors of objective and impartial bond underwriting
processes and swap agreement negotiations.
The SEC’s complaint charges LeCroy and MacFaddin with violations of Section 17(a) of
the Securities Act of 1933, Sections 10(b) and 15B(c)(1) of the Securities Exchange Act of 1934,
and Rule 10b-5 thereunder, and Municipal Securities Rulemaking Board Rules G-17 and G-20.
The SEC’s complaint seeks judgments against each defendant providing for permanent
injunctions and disgorgement with prejudgment interest.
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In the Matter of J.P. Morgan Securities Inc.
The SEC charged J.P. Morgan Securities Inc. and two of its former managing directors,
Charles LeCroy and Douglas MacFaddin, for their roles in an unlawful payment scheme that
enabled them to win business involving municipal bond offerings and swap agreement
transactions with Jefferson County, Ala. This is the SEC's second enforcement action arising
from Jefferson County's bond offerings and swap transactions.
The SEC alleges that J.P. Morgan Securities, LeCroy and MacFaddin made more than $8
million in undisclosed payments to close friends of certain Jefferson County commissioners. The
friends owned or worked at local broker-dealer firms that performed no known services on the
transactions. In connection with the payments, the county commissioners voted to select J.P.
Morgan Securities as managing underwriter of the bond offerings and its affiliated bank as swap
provider for the transactions.
J.P. Morgan Securities did not disclose any of the payments or conflicts of interest in the
swap confirmation agreements or bond offering documents, yet passed on the cost of the
unlawful payments by charging the county higher interest rates on the swap transactions.
Without admitting or denying the SEC’s charges, J.P. Morgan Securities agreed to settle
by paying $50 million to the county for the purpose of assisting displaced county employees,
residents and sewer rate payers; forfeiting more than $647 million in termination fees it claims
the county owes under the swap transactions; and paying a $25 million penalty that will be
placed in a Fair Fund to compensate harmed investors and the county in the municipal bond
offerings and the swap transactions.
The SEC's order instituting settled administrative proceedings against J.P. Morgan
Securities finds that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933,
Section 15B(c)(1) of the Securities Exchange Act of 1934 and Municipal Securities Rulemaking
Board (MSRB) Rule G-17. In addition to the monetary relief described above, the SEC's order
censures J.P. Morgan Securities and directs it to cease-and-desist from committing or causing
any further violations of the provisions charged.
CASES INVOLVING SELF-REGULATORY ORGANIZATIONS
In the Matter of Salvatore F. Sodano
The SEC instituted public administrative proceedings pursuant to Section 19(h)(4) of the
Securities Exchange Act of 1934 against Salvatore F. Sodano, the former Chairman and Chief
Executive Officer of the American Stock Exchange LLC. As the Amex's Chairman and Chief
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Executive Officer, Sodano was one of the individuals who had an obligation to enforce
compliance during the relevant period by the Amex's members and associated persons with the
Exchange Act, the Exchange Act rules and regulations, and the Amex's own rules. From at least
1999 through June 2004, the Amex had critical deficiencies in its surveillance, investigative, and
enforcement programs for assuring compliance with its rules as well as the federal securities
laws. These regulatory deficiencies resulted in part from Sodano's failure to take adequate steps
to ensure that he and the Amex were meeting their regulatory obligations. In addition, the Amex
failed to furnish accurate records and, as a result, violated Section 17(a)(1) of the Exchange Act
and Exchange Act Rule 17a-1. As CEO, Sodano, without reasonable justification or excuse,
failed to enforce compliance by Amex's members and associated persons with the Exchange Act,
the Exchange Act rules and regulations, and the Amex's own rules, within the meaning of
Section 19(h)(4) of the Exchange Act.
In the Matter of Boston Stock Exchange, Inc. and James B. Crofwell
The SEC instituted a settled enforcement action against the Boston Stock Exchange
(Exchange) and its former president, James Crofwell, for failure to enforce compliance by Exchange
dealers with exchange rules protecting investor trading priority. At the same time, the SEC instituted a
related settled civil action against Crofwell. The SEC's order against the Exchange and Crofwell
found that from 1999 to 2004, the Exchange and Crofwell failed to enforce Exchange rules that
prohibited Exchange dealer specialist firms from trading securities for their own benefit at the expense
of their customers. The Exchange failed to conduct adequate surveillance to detect and prevent
violations of the customer priority rules, which expressly prohibit specialists from trading for their
own accounts ahead of marketable customer orders. The Order found that the Exchange's failure
allowed hundreds, if not thousands, of violations per day to go undetected and continued even after the
SEC staff had repeatedly warned the Exchange of the need to improve surveillance systems. Crofwell
knew that the procedures then in effect were inadequate, but failed to devote resources necessary to
correct the problem.
Without admitting or denying the findings in the SEC's order, the Exchange and Crofwell
agreed to an order censuring each of them and requiring the Exchange to cease and desist from
committing or causing any violations and any future violations of Section 19(g) of the Exchange Act
and Crofwell to cease and desist from causing any violations and any future violations of that section.
The Exchange further agreed to comply with specific undertakings contained in the order, including
expenditure of at least $1 million to retain a third party consultant to conduct comprehensive
compliance audits, and implementation of the consultant's recommendations.
Crofwell also consented to entry of a final judgment in a settled civil action filed in the U.S.
District Court for the District of Massachusetts, without admitting or denying the allegations of the
complaint in that action. The judgment ordered him to pay a $75,000 civil penalty for aiding and
abetting the Exchange's violations of Section 19(g) of the Exchange Act.
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CASES INVOLVING HEDGE FUNDS
In the Matter of Level Global Investors, L.P.
A.P. Rel. No. 34-64763 (June 28, 2011)
Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e)
of the Investment Advisers Act of 1940, Making Findings, and Imposing a Cease-and-Desist
Order and Remedial Sanctions (Order) against Level Global Investors, L.P. (Level Global). The
Order finds that Level Global, a New York based hedge fund adviser, which is in the process of
winding down, violated Rule 105 of Exchange Act Regulation M (Rule 105), which prohibits
buying shares of an equity security through a public offering after having sold short the same
equity security during a restricted period (generally defined as five business days before the
pricing of the offering).
The Order finds that Level Global willfully violated Rule 105 twice during 2009. In April
2009, and again in May 2009, Level Global bought stock through a public offering after it had
sold the same stock short within the restricted period. The Commission further found that, at the
time of the violations, Level Global had no written policies, procedures or controls in place
designed to detect or prevent Rule 105 violations.
Based on the above, the Order censures Level Global and requires the firm to cease and
desist from committing or causing any violations and any future violations of Rule 105. Level
Global will pay $2,679,515 in disgorgement and $189,656 in prejudgment interest, along with a
$375,000 civil monetary penalty. Level Global consented to the issuance of the Order without
admitting or denying any of the findings contained therein.
SEC v. John Clement & Edgefund Capital, LLC
Lit. Rel. No. 21971 (May 16, 2011)
The SEC filed an emergency enforcement action to halt a fraudulent scheme being
conducted by John Clement of Encinitas, Calif., and his company Edgefund Capital LLC.
The SEC alleges that Clement ran a purportedly profitable day trading business out of his
home and raised at least $2.1 million since August 2008 from 22 investors in the San Diego area.
Clement hyped the profit potential by falsely promising returns of 1 to 2 percent per month to
investors in his hedge funds (The Edgefund, LP and The Edge Fund Ltd., LP). He falsely
claimed that the risk potential was limited because of his purported 5 percent stop-loss rule, and
he falsely assured investors that they could request a return of their investments at any time upon
written request. The SEC alleges that Clement has misappropriated and misspent all of the
investor funds.
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The SEC obtained an immediate freeze of the assets of Clement and Edgefund Capital
and an order prohibiting Clement and Edgefund Capital from destroying evidence.
The SEC alleges that in order to conceal his fraud, Clement sent fabricated account
statements to at least one investor that reflected an inflated fund balance of $8.2 million. In fact,
the hedge fund accounts at that time were not even funded. Beginning SEC 29, 2011, Clement
began telling investors that an SEC investigation had impacted his ability to communicate with
them, frozen his bank accounts, and blocked his securities trading activities. Although the SEC
was investigating Clement’s operations, he lied in his other assertions to investors.
The SEC’s complaint charges Clement and Edgefund Capital with violating the antifraud
provisions, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the
Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, of the federal securities laws. In
addition to the emergency relief, the complaint seeks preliminary and permanent injunctions,
disgorgement, prejudgment interest, and financial penalties.
SEC v. IU Group, Inc., Elijah Bang, and Daniel Lee
Lit. Rel. No. 21947 (April 25, 2011)
The SEC obtained an emergency court order to shut down a Beverly Hills, Calif. hedge
fund and wealth management business targeting retirees, university professors, and members of
the Christian community.
The SEC alleges that IU Group Inc., its principal Elijah Bang, and its salesperson Daniel
Lee targeted retirees and claimed on websites to have been founded by “devoted Christians who
believe in God, Jesus Christ, and the Holy Spirit.” Lee allegedly also sent “cold call” e-mail
solicitations to university professors.
It appears that IU Group was unsuccessful in obtaining any hedge fund investors or
wealth management clients before the SEC’s emergency action halted its operations.
The SEC alleges that Bang and Lee solicited potential investors and wealth management
clients using various company names and websites, including IU Wealth Management, LLC and
Icon Capital Management LLC. Lee also tried to find potential investors and clients using “cold
call” e-mail solicitations.
On May 19, 2009, California’s Department of Corporations ordered IU Investments LLC,
Bang, and Lee to desist and refrain from the unlawful offer or sale of securities and from the
fraudulent sale of securities.
The SEC’s complaint charges all defendants with violations of the registration and
antifraud provisions of Sections 5(c) and 17(a) of the Securities Act of 1933. The complaint also
charges defendant Bang with violations of the investment adviser antifraud provisions of
Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8
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thereunder. The Honorable Margaret M. Morrow, U.S. District Judge for the Central District of
California, granted the SEC’s request for emergency relief for investors, including an order
temporarily enjoining defendants IU Group and Bang from future violations of the antifraud
provisions.
SEC v. Perry A. Gruss
Lit. Rel. No. 21923 (April 8, 2011)
The SEC filed a civil injunctive action against Perry A. Gruss ("Gruss"), the former chief
financial officer of D.B. Zwirn & Co., L.P. ("DBZCO"), alleging aiding and abetting fraud in
connection with the improper transfer of client cash, both between client funds and from client
funds to DBZCO and third parties. DBZCO, now defunct, was an investment adviser that, at
various times during the period 2002 through 2009, managed five hedge funds including the
D.B. Zwirn Special Opportunities Fund, Ltd. (the "Offshore Fund") and D.B. Zwirn Special
Opportunities Fund, L.P. (the "Onshore Fund"), along with several managed accounts. The
Offshore Fund and the Onshore Fund were separate entities with largely distinct pools of
investors.
According to the Commission's complaint, during the period SEC 2004 through July
2006, Gruss knowingly misused the signatory and approval authority he had over funds held in
client accounts and directed and/or authorized more than $870 million in improper transfers of
client cash, both between client funds and from client funds to DBZCO and third parties. The
complaint alleges that the improper transfers directed and/or approved by Gruss included: (i)
$576 million in transfers between SEC 2004 and July 2006 from the Offshore Fund to the
Onshore Fund or directly to third parties to fund Onshore Fund investments; (ii) $273 million in
transfers between June 2005 and May 2006 from the Offshore Fund to repay a revolving credit
facility of the Onshore Fund; (iii) $22 million in transfers from client accounts between May
2004 and SEC 2006 to pay management fees to DBZCO before due and payable in order to
cover DBZCO's operating cash shortfalls; and (iv) a total of $3.8 million taken from the Onshore
Fund and a managed account in September 2005 to fund a portion of the $17.95 million purchase
price of a Gulfstream IV aircraft purchased by DBZCO's managing partner. The complaint
further alleges that the improper transfers were not permitted by the offering documents or the
management agreements, were not disclosed to clients or documented as loans, and no interest
was paid to clients for the unauthorized use of their funds at the time. Facing termination, Gruss
resigned in October 2006, when at least $108 million of the unauthorized transfers remained
outstanding. All of the money improperly transferred was eventually repaid with interest, but
only after an internal investigation.
The complaint alleges that the defendant violated the antifraud provisions of the federal
securities laws by aiding and abetting DBZCO's violations of Sections 206(1) and 206(2) of the
Investment Advisers Act of 1940. The SEC seeks a permanent injunction, disgorgement of any
ill-gotten gains plus prejudgment interest and monetary penalties.
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SEC v. Lawrence R. Goldfarb et al.
Lit. Rel. No. 21870 (March 1, 2011)
The SEC charged a Bay Area hedge fund manager with concealing more than $12 million
in investment proceeds that he owed investors in his fund.
The SEC alleges that Lawrence R. Goldfarb of Larkspur, Calif., and his company Baystar
Capital Management LLC (BCM) instead diverted the cash to other entities he controlled,
ultimately funding a real estate venture and a San Francisco record company. Goldfarb also
comingled investor funds in a bank account which he used to pay for unauthorized personal
expenses including entertainment and charitable donations.
The SEC also alleges that Goldfarb also took steps to conceal the side pocket profits from
the fund’s third party administrator. For example, he directed money to the bank account of an
entity that no longer existed.
Without admitting or denying the SEC’s allegations, Goldfarb and BCM consented to
permanent injunctions against violations of Section 206(1), (2) and (4) of the Investment
Advisers Act of 1940 and to pay disgorgement of $12,112,416 and prejudgment interest of
$1,967,371, which will be distributed to the fund’s investors. Goldfarb also agreed to pay a
$130,000 penalty, be barred from associating with any investment adviser or broker (with the
right to reapply in five years), and be barred from participating in any offering of penny stock.
SEC v. Francisco Illarramendi and Michael Kenwood Capital Management, LLC
The Commission obtained a court order freezing the assets of a Stamford, Conn.-based
investment adviser and its principal, Francisco Illarramendi, charging that they misappropriated
at least $53 million in investor funds and used the money for self-dealing transactions.
The SEC alleges that Illarramendi defrauded investors in the several hedge funds he
managed by improperly transferring their money into bank accounts that he personally
controlled. He then invested the money for his own benefit or for the benefit of the entities that
he controlled, rather than for the benefit of the hedge fund investors.
According to the SEC's complaint filed in U.S. District Court for the District of
Connecticut on January 14, 2011, Illarramendi is the majority owner of the Michael Kenwood
Group LLC – a holding company for, among other entities, investment adviser Michael
Kenwood Capital Management LLC. Through this adviser entity, Illarramendi manages several
hedge funds, including one that contains up to $540 million in assets. The SEC’s complaint
alleges that Illarramendi took at least $53 million in investor money out of this hedge fund
without the knowledge or consent of the hedge fund’s investors
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The SEC sought an asset freeze and other emergency relief because it alleged that
Illarramendi was imminently planning to make additional investments using investor funds
without the knowledge or consent of the investors. Since the filing of the complaint, the
Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, has held a
series of hearings pertaining to the SEC’s request for an emergency relief against Illarramendi
and Michael Kenwood Capital Management. Judge Arterton then entered an order freezing the
assets of the defendants.
SEC v. Stanley J. Kowalewski and SJK Investment Management, LLC
The SEC filed a civil injunctive action in U.S. District Court for the Northern District of
Georgia, charging Stanley J. Kowalewski ("Kowalewski") and SJK Investment Management,
LLC ("SJK"), a registered investment adviser, with violations of the federal securities laws for
defrauding investors in two hedge funds managed by SJK.
The Commission's Complaint alleges that, beginning in the summer of 2009, SJK and
Kowalewski, the firm's CEO, raised a total of $65 million for two hedge funds, the SJK Absolute
Return Fund, LLC, and the SJK Absolute Return Fund, Ltd. (collectively, the "Absolute Return
Funds") and represented to investors that: (1) "substantially all" of the monies invested in the
Absolute Return Funds would be invested in "unaffiliated" underlying hedge funds pursuing
complex investment strategies, (2) no single underlying fund would be allocated more than 15%
of the Absolute Return Funds' monies, and (3) as compensation for its services, SJK would
receive no more than a 1% annual asset management fee and a 10% profits incentive fee.
Contrary to these representations, Kowalewski and SJK formed a new, undisclosed fund, the
Special Opportunities Fund, LP (the "Special Opportunities Fund"), which they used to divert to
themselves millions of dollars through various self-dealing transactions, including having the
Special Opportunities Fund: (1) buy Kowalewski's personal home for $2.8 million, almost $1
million more than its 2006 purchase price, (2) purchase a vacation home for Kowalewski for
$3.9 million, (3) pay approximately $1 million of Kowalewski and SJK's personal and business
expenses, and (4) pay SJK an unfounded $4 million "administration" fee, which Kowalewski
then paid himself as a "salary draw."
In its Complaint, the Commission alleges that Kowalewski and SJK violated Section
17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange
Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and
206(4) of the Investment Advisers Act ("Advisers Act") and Rule 206(4)-8 thereunder.
On January 6, 2011, the Honorable Timothy C. Batten, Sr., United States District Judge
for the Northern District of Georgia, entered an order temporarily restraining the defendants from
violations of the federal securities laws identified above, instituting an asset freeze, and ordering
other relief.
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In the Matter of American Pegasus LDG, LLC, et al.
The SEC charged two San Francisco-based investment adviser firms along with their
former CEO, former general counsel, and former portfolio manager with defrauding investors in
a $100 million hedge fund that invested in subprime automobile loans.
The SEC found that former CEO Benjamin P. Chui and former portfolio manager
Triffany Mok — who managed the American Pegasus Auto Loan Fund — together with former
general counsel Charles E. Hall, Jr., engaged in improper self-dealing, misused client assets, and
failed to disclose conflicts of interest.
The firms — American Pegasus LDG and American Pegasus Investment Management —
and Chui, Hall, and Mok settled the SEC’s charges by agreeing to sanctions including bars from
the industry and more than $1 million in penalties and repayments to the fund.
The SEC’s order instituting administrative proceedings finds that unbeknownst to
investors, in mid-2007, Chui used more than $18 million in loans and advances from the Auto
Loan Fund to buy the fund’s sole supplier of auto loans for himself, Hall, and Mok. This created
a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the fund’s
performance while at the same time had an interest in generating profits for the loan supplier
they secretly owned.
The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund
to prop up other hedge funds he managed. By late 2008, roughly 40 percent of the Auto Loan
Fund’s assets consisted of “loans” to the fund managers’ related businesses — with fund
investors being charged fees based on these undisclosed related-party payments.
According to the SEC’s order, Chui, Hall, and Mok then essentially wiped much of this
debt to the fund off the books by selling assets to the fund at a 300 percent mark-up. Chui, with
help from Hall and Mok, purchased an auto loan portfolio for $12 million in February 2009 —
then sold it to the Auto Loan Fund the same day for more than $38 million. The fraudulently
inflated sale was used to erase money owed to the fund for the various related-party transactions.
The Commission’s order finds violations of multiple antifraud statutes by Chui, Hall,
Mok, and their two adviser firms. Without admitting or denying the SEC’s findings, the
respondents agreed to the following settlement terms. Chui, who lives in San Carlos, Calif.,
agreed to pay a $175,000 penalty and be barred from associating with an investment adviser for
five years. Hall, who lives in Carlisle, Penn., agreed to pay a $100,000 penalty and be barred
from associating with an investment adviser for three years and from appearing or practicing
before the Commission as an attorney for three years. Mok, who lives in Fremont, Calif., agreed
to pay a $75,000 penalty and be suspended from associating with an investment adviser for one
year. The two adviser firms must disgorge $850,000 in management fees deemed improper by
the SEC.
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SEC v. Alero Odell Mack, Jr., et al.
The SEC filed a complaint in the United States District Court for the Central District of
California against Alero Odell Mack, Jr., Steven Enrico Lopez, Sr., Easy Equity Asset
Management, Inc., Easy Equity Management, L.P., Easy Equity Partners, L.P., Alero Equities
The Real Estate Company LLC, and Alero I.X. Corp. The SEC alleges that the defendants
perpetrated a $4 million hedge fund investment fraud.
The SEC alleges that Mack and Lopez made various false and misleading statements
when offering or selling the investments, including touting double-digit past performance and
future returns. They also represented that investor money would be used to trade securities, that
Mack's entities had unique access to the NYSE trading floor, and that Mack was a "funding
partner" with a major Wall Street investment bank. However, the SEC's complaint alleges that
the performance claims were inflated and a large amount of investor money was used for
purposes other than trading. The complaint also alleges that Mack's entities did not have unique
access to the NYSE trading floor and Mack was not a "funding partner" of any Wall Street
investment bank.
According to the SEC's complaint, Mack and Lopez used no more than $1.3 million of
the $4 million of investor funds raised to trade securities. Mack and Lopez misappropriated the
remaining investor funds for undisclosed personal purposes, and to pay referral fees to investors
for bringing in new investors.
The SEC's complaint charges Mack, Lopez, Easy Equity Asset Management, Inc., Easy
Equity Management, L.P., Easy Equity Partners, L.P., Alero Equities The Real Estate Company
LLC, and Alero I.X. Corp. with violations of Section 17(a) of the Securities Act of 1933, and all
of these defendants except Alero I.X. Corp. with violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the SEC's complaint charges
Mack, Lopez and Easy Equity Management, L.P. with violations of Sections 206(1), 206(2), and
206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC seeks
permanent injunctions, disgorgement of profits, and financial penalties against all defendants.
SEC v. Southridge Capital Management LLC, Southridge Advisors LLC, and Stephen M.
Hicks
The Commission charged hedge fund manager Stephen M. Hicks and his investment
advisory businesses with defrauding investors in funds managed by Southridge Capital
Management LLC and Southridge Advisors LLC by overvaluing the largest position held by the
funds. The SEC alleges that the hedge fund manager also made material misrepresentations to
investors and misused investor money to pay legal and administrative expenses of other funds
managed by Hicks and Southridge.
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The SEC alleges that Hicks, of Ridgefield Connecticut, overvalued the largest position
held by the funds by fraudulently misstating the acquisition price of the assets. According to the
SEC's complaint, Hicks arranged a transaction in which a telecommunications company acquired
by the Southridge funds when the company defaulted on a $769,000 note, was sold to Fonix
Corporation in exchange for securities with a stated valued of $33 million in early 2004. The
complaint further alleges that neither the asset sold nor the securities obtained in the transaction
were accurately valued by Southridge and Hicks. Thereafter, the SEC alleges, the Fonix position
was wrongfully valued at its acquisition cost, and the funds paid or accrued hundreds of
thousands in management fees every year since 2004.
The SEC further alleges that beginning in late 2003, Hicks fraudulently solicited
investors to put money in new funds by telling them that the majority of their investments would
be placed in unrestricted, free-trading shares (meaning shares that were available to be sold),
cash, or near cash. According to the complaint, Hicks raised $80 million for the new funds
between 2004 and 2007. The complaint further alleges that, at year-end 2006, more than onethird of the assets in one new fund (and more than half of the assets in another new fund) were
invested in relatively illiquid deals. By 2007, the SEC alleges, many investors in these funds
were having difficulty redeeming their money because it had been invested in relatively illiquid
securities.
The SEC also alleges that between 2005 and 2008, Southridge and Hicks caused certain
of the funds that had available cash to pay approximately $5 million of legal and administrative
expenses of older funds that were illiquid and had no available cash. The SEC's complaint
alleges that investors in the funds from which money was taken were not told about this
misappropriation of fund assets while it was taking place. According to the SEC's complaint, in
February 2009, Hicks sent a letter to investors admitting that certain legal and administrative
expenses had been improperly allocated between the funds. Rather than repaying the money to
the funds, however, the SEC alleges that Southridge and Hicks transferred certain illiquid
securities to the funds.
The SEC complaint charges defendants with violations of Section 17(a) of the Securities
Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections
206(1), 206(2) and 206(4) if the Investment Advisers Act and Rule 206(4)-8 thereunder. The
Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial
penalties.
SEC v. Paul T. Mannion, Jr., Andrew S. Reckles, PEF Advisors LLC, and PEF Advisors
Ltd.
The SEC charged hedge fund portfolio managers Paul T. Mannion, Jr., of Norcross,
Georgia, and Andrews S. Reckles, of Milton, Georgia, and investment adviser entities they
control with defrauding Palisades Master Fund, L.P. investors by overvaluing illiquid fund assets
they placed in a so-called "side pocket" and by misappropriating other fund assets. The
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Commission also charged Mannion, Reckles, and their investment adviser entities with making
material misrepresentations in connection with a private stock offering. A "side pocket" is a type
of account hedge funds use to separate particular, typically illiquid, investments from the
remainder of the investments in the fund.
According to the SEC's complaint filed in the U.S. District Court for the Northern
District of Georgia, from August through at least October 2005, Mannion and Reckles, through
PEF Advisors LLC and PEF Advisors Ltd., two investment adviser entities they controlled,
placed the hedge fund's investments in World Health Alternatives, Inc. in a "side pocket" and
valued those investments in a manner that was both inconsistent with fund disclosures and
contrary to Mannion's and Reckles' undisclosed internal assessment of their value. As the
complaint alleges, the fraudulent valuations enabled Mannion and Reckles to report to investors
misleadingly inflated net asset values and allowed Mannion and Reckles to take excessive
management fees from the fund.
In addition, the SEC's complaint alleges that Mannion and Reckles stole more than one
million warrants in World Health that belonged to the fund. At the time Mannion and Reckles
exercised those warrants, they were worth $1.6 million. The defendants also improperly used
investors' cash to pay for their own personal investments. In July 2005, Mannion and Reckles,
without disclosure, took $2 million from the fund as an apparent short-term loan to finance their
personal investments, and separately used approximately $13,000 from the fund to pay for
services not rendered to the fund and to purchase warrants for their personal accounts.
Finally, the SEC alleges in its complaint that Mannion, Reckles, and their investment
adviser entities made material misrepresentations in connection with a February 2004 "PIPE" (an
acronym for private investment in public equity) offering conducted by Radyne ComStream Inc.
The SEC complaint charges defendants with violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the
Investment Advisers Act of 1940. The Commission seeks injunctive relief, disgorgement of
profits, prejudgment interest, and financial penalties. The complaint also seeks disgorgement
from the fund as a relief defendant for profits obtained through the illegal trading in Radyne
securities.
CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS
SEC v. Sam Otto Folin, Benchmark Asset Managers LLC, and Harvest Managers LLC
Lit. Rel. No. 22036 (July 12, 2011)
The SEC charged Sam Otto Folin (Folin), his Philadelphia-based registered investment
adviser, Benchmark Asset Managers LLC (Benchmark) and its parent company, Harvest
Managers LLC (Harvest) with misappropriating approximately $8.7 million from advisory
clients, friends and family through material misrepresentations and omissions.
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According to the SEC’s complaint, from approximately 2002 through October 2010,
Folin, Benchmark and Harvest offered and sold securities in Harvest, Benchmark, and Safe
Haven Portfolios LLC (Safe Haven), a pooled investment vehicle, promising investors that their
funds would be invested in public and private companies with “socially responsible” goals and
purposes. Instead, the complaint alleges that Folin, Benchmark and Harvest diverted a portion of
the invested funds to pay previous investors as well as to sustain Benchmark’s and Harvest’s
expenses which included paying Folin’s salary.
Without admitting or denying the allegations in the SEC’s complaint, Folin and
Benchmark have consented to the entry of a final judgment enjoining them from future violations
of Sections 17 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and
Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and
Rule 206(4)-8 thereunder. Harvest has consented to the entry of a final judgment enjoining it
from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder. Folin, Benchmark and Harvest have also consented to pay, jointly
and severally, disgorgement of $8,706,620 plus prejudgment interest of $1,454,177. In addition,
Folin has consented to pay a civil penalty of $150,000 and Harvest and Benchmark have
consented to pay civil penalties of $750,000 each. The settlements are subject to court approval.
Without admitting or denying the Commission's findings, Folin also consented to the issuance of
an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment
Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which bars him from
association with any broker, dealer, investment adviser, municipal securities dealer, transfer
agent, municipal advisor, or nationally recognized statistical ratings organization based upon the
entry of the final judgment. Similarly, without admitting or denying the Commission’s findings,
Benchmark consented to the issuance of an Order Instituting Administrative Proceedings
Pursuant to Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and
Imposing Remedial Sanctions which revokes its investment adviser registration based upon the
entry of the final judgment.
In the Matter of Brookside Capital, LLC
A.P. Rel. No. 34-6476 (June 28, 2011)
Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e)
of the Investment Advisers Act of 1940, Making Findings, and Imposing a Cease-and-Desist
Order and Remedial Sanctions (Order) against Brookside Capital, LLC (Brookside). The Order
finds that Brookside, a Boston based registered investment adviser and manager of investment
funds, violated Rule 105 of Exchange Act Regulation M (Rule 105), which prohibits buying
shares of an equity security through a public offering after having sold short the same equity
security during a restricted period (generally defined as five business days before the pricing of
the offering).
The Order finds that Brookside willfully violated Rule 105 once during 2009. In June
2009, a fund managed by Brookside bought stock through a public offering after changing its
investment thesis, even though the same fund had sold the same stock short three days before
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during the restricted period. The Commission further found that, at the time of the violation,
Brookside had no policies, procedures or controls in place designed to detect or prevent Rule 105
violations.
Based on the above, the Order censures Brookside and requires the firm to cease and
desist from committing or causing any violations and any future violations of Rule 105.
Brookside will pay $1,658,660 in disgorgement and $90,419 in prejudgment interest, along with
a $375,000 civil monetary penalty. Brookside consented to the issuance of the Order without
In the Matter of Wunderlich Securities, Inc., Tracy L. Wiswall, and Gary K. Wunderlich,
Jr.
A.P. Rel. No. 34-64558 (May 27, 2011)
Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections
203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, Making Findings, and
Imposing Remedial Sanctions and Cease-and-Desist Orders (Order) against Wunderlich
Securities, Inc. (WSI), Tracy L. Wiswall (Wiswall), and Gary K. Wunderlich, Jr. (Wunderlich).
The Order finds that, from at least 2007 through 2009, WSI: overcharged advisory clients for
commissions and other transactional fees in violation of Section 206(2) of the Investment
Advisers Act of 1940 (Advisers Act); failed to satisfy the disclosure and consent requirements of
Section 206(3) of the Advisers Act when WSI engaged in principal trades with advisory clients;
failed to adopt, implement and review written policies and procedures as required by
Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder; and failed to establish,
maintain, and enforce a written code of ethics as required by Section 204A of the Advisers Act
and Rule 204A-1 thereunder. The Order further finds that Wiswall willfully aided and abetted
and caused WSI's violations of Sections 204A and 206(4) of the Advisers Act and Rules 204A-1
and 206(4)-7 thereunder and caused WSI's violations of Section 206(3) of the Advisers Act. In
addition, the Order finds that Wunderlich willfully aided and abetted and caused WSI's
violations of Sections 204A and 206(4) of the Advisers Act and Rules 204A-1 and 206(4)-7
thereunder.
Based on the above, the Order orders WSI, Wiswall and Wunderlich to cease and desist
from committing or causing their respective violations and any future such violations, and
imposes censures against each of them. The Order also imposes, against WSI, disgorgement of
$369,336.15 plus prejudgment interest of $38,288.54, with the disgorgement amount to be
distributed to certain affected advisory clients of WSI in accordance with the Order. In addition,
the Order imposes civil penalties of $125,000 against WSI, $50,000 against Wiswall, and
$45,000 against Wunderlich. Furthermore, the Order imposes certain undertakings, including
WSI's undertaking to retain an independent compliance consultant to perform periodic
compliance reviews of WSI's operations over a three-year period. WSI, Wiswall and Wunderlich
each consented to the issuance of the Order without admitting or denying any of the findings in
the Order, except jurisdiction, which they admitted.
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SEC v. Jupiter Group Capital Advisors, LLC, and Rick Cho
Lit. Rel. No. 21961 (May 10, 2011)
The SEC obtained a court order against an investment firm purportedly located in
Kirkland, Wash., and its president, who lives in Honolulu, for making false statements in a report
to the SEC and refusing to allow the Commission’s staff to review the firm’s books and records.
U.S. District Court Judge Leslie E. Kobayashi issued a temporary restraining order on May 9
requiring the firm to produce the firm’s books and records for examination and providing
additional equitable relief.
The SEC alleges that Jupiter Group Capital Advisors LLC and Rick Cho falsely reported
that the advisory firm managed $153 million in 38 investor accounts. The false statements were
made on Jupiter Group’s Form ADV filing – the public form used by investment advisers to
register with the SEC or state securities authorities. When SEC staff sought to conduct an
examination of Jupiter Group after the filing was made, Cho initially failed to respond and then
later claimed that the filing referred to estimated future assets and stated that Jupiter Group has
no client accounts.
According to the SEC’s complaint, Cho refused to provide any evidence for his claim
that the assets identified on Jupiter Group’s March 2010 Form ADV filing with the SEC belong
to an unrelated business venture. He also failed to explain why the document originally filed in
October 2009 was amended to show an increased number of clients and assets under
management, when in reality there weren’t any client accounts. The SEC alleges that Jupiter
Group did not manage $25 million or more of client assets for any reporting period, and
therefore was not eligible for SEC registration. In addition, from December 2010 to the present,
Jupiter Group and Cho have refused to submit to an examination.
The SEC alleges that Jupiter Group violated Sections 203A, 204, and 207 of the
Investment Advisers Act, and that Cho violated Section 207 of the Advisers Act and aided and
abetted Jupiter Group’s violations of Sections 203A and 204 of the Advisers Act. The parties
stipulated to the terms of the May 9 temporary restraining order prohibiting Jupiter Group from
making false statements in Commission filings, and orders requiring Jupiter Group to submit to
an examination of its books and records, requiring withdrawal of Jupiter Group’s Form ADV,
prohibiting Jupiter Group and Cho from destroying documents, requiring accountings, and
granting expedited discovery. The Commission also requested a preliminary injunction,
permanent injunction, and civil penalties.
In the Matter of Aristeia Capital, LLC
A.P. Rel. No. 34-64374 (May 2, 2011)
Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act)
and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing
Remedial Sanctions and a Cease-and-Desist Order (the Order) against Aristeia Capital, LLC.
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The Order finds that, on four occasions from January through June 2008, Aristeia, a registered
investment adviser and hedge fund manager, willfully violated Rule 105 of Regulation M under
the Exchange Act. In each instance, the Order finds that Aristeia bought offered shares from an
underwriter or broker or dealer participating in a follow-on public offering after having sold
short the same security during the restricted period. The Order further finds that these violations
collectively resulted in profits of approximately $1.2 million.
Based on the above, the Order censures Aristeia, requires it to cease and desist from
committing or causing any violations and any future violations of Rule 105 of Regulation M, and
requires it to pay disgorgement in the amount of $1,221,571 and prejudgment interest of
$141,205, and a civil penalty in the amount of $400,000. Aristeia consented to the issuance of
the Order without admitting or denying any of findings in the Order.
In the Matter of Aletheia Research and Management, Inc., Peter J. Eichler, Jr. and Roger
B. Peikin
A.P. File No, 3-14374 (May 9, 2011)
The Commission issued an Order Instituting Administrative Proceedings, Pursuant to
Sections 15(b) of the Securities Exchange Act of 1934 and Sections 203(e), 203(f) and 203(k) of
the Investment Advisers Act, Making Findings, and Imposing Remedial Sanctions and A Ceaseand-Desist Order against Aletheia Research and Management, Inc. (Aletheia), Peter J. Eichler,
Jr. (Eichler), and Roger B. Peikin (Peikin). Aletheia is a registered investment adviser based in
Santa Monica, California that manages approximately $7 billion for retail accounts, institutional
clients, and two private hedge funds. Eichler is Aletheia’s co-founder, CEO and largest
shareholder. Peikin is Aletheia’s co-founder and second largest shareholder and was Aletheia’s
chief compliance officer during the conduct described below.
The Order finds that: (1) Aletheia and Peikin disseminated proposals to client and
potential clients that failed to disclose requested information regarding prior Commission
examinations in violation of Section 206(2) of the Advisers Act; (2) Aletheia and Peikin failed to
implement existing procedures to enforce Aletheia’s policies regarding responding to requests
for proposals from prospective institutional clients in violation of Section 206(4) of the Advisers
Act and Rule 206(4)-7; (3) Aletheia, Eichler and Peikin failed to have an annual surprise
examination of Aletheia’s hedge funds and to provide the hedge fund investors with quarterly
account statements, or provide the hedge fund investors with timely annual audit reports in
violation of Section 206(4) of the Advisers Act and Rule 206(4)-2(a); and (4) Aletheia, Eichler
and Peikin failed to make and/or keep copies of the employees’ acknowledgments of receipt of
Aletheia’s code of ethics in violation of Section 204(a) of the Advisers Act and Rule 2042(a)(12).
Based upon the above, Aletheia, Eichler and Peikin consented to a censure and were
ordered to cease-and-desist from future violations of the above provisions and were ordered to
pay civil penalties in the amounts of $200,000, $100,000 and $100,000, respectively. In addition,
Aletheia was ordered to comply with certain undertakings.
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In the Matter of Gualario & Co., LLC
A.P. Rel. No. 33-9202 (April 8, 2011)
Proceedings Pursuant to Section 8A of the Securities Act of 1933 (Securities Act), Sections
15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act), Sections 203(e), 203(f)
and 203(k) of the Investment Advisers Act of 1940 (Advisers Act), and Section 9(b) of the
Investment Company Act of 1940 and Notice of Hearing (Order) against Gualario & Co. LLC
and Ronald Gualario.
In the Order, the Division of Enforcement alleges that the respondents, Gualario & Co., a
registered investment adviser, and its sole owner and president, Ronald Gualario, made material
misrepresentations and omissions in the sale of promissory notes to their advisory clients
regarding the use of proceeds and the financial condition of Gualario & Co. The Division also
alleges that the respondents obtained commissions in the sale of real estate limited partnership
investments without registration with the Commission as a broker-dealer or being associated
with a registered broker-dealer. The Division further alleges that the respondents breached their
fiduciary duty by failing to disclose a material change in their hedge fund investment strategy to
their advisory clients who invested in the fund.
Based on the above, the Division of Enforcement alleges that the respondents willfully
violated Section 17(a) of the Securities Act, Sections 10(b) and 15(a)(1) of the Exchange Act and
Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act, and that Gualario &
Co. willfully violated and Gualario caused and aided and abetted Gualario & Co.’s violation of
Section 206(4) of the Advisers Act and Rule 206(4)-4(a)(1) thereunder.
SEC v. MAM Wealth Management, LLC, MAMW Real Estate Fund General Partner,
LLC, Alex Martinez, and Raphael R. Sanchez
Lit. Rel. No. 21921 (April 7, 2011)
The SEC filed a civil injunctive action MAM Wealth Management, LLC (MAM),
MAMW Real Estate General Partner, LLC (MAMW), Alex Martinez and Ralph Sanchez,
alleging fraud in connection with client investments in a $10.3 million risky real estate venture.
According to the Commission's complaint, from July 2007 through March 2009,
Martinez, a MAM and MAMW principal, and Ralph Sanchez, a MAM registered representative
and MAMW principal, had 50 of their advisory clients invest in MAM Wealth Management Real
Estate Fund, LLC (Fund). The complaint alleges that Martinez and Sanchez misrepresented to
some clients that the Fund was a safe, relatively liquid investment, was earning 9% per year, and
would show profits in three years. The complaint alleges that they used their discretionary
authority over other clients’ funds to invest them in the Fund, even though it was unsuitable for
their conservative investment goals. The complaint alleges that many accounts were retirement
accounts and that the Fund was an unsuitable investment for clients who did not have the ability
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and willingness to accept the risks of losing their entire investment. The complaint further
alleges that the defendants caused the Fund to use client funds to make risky mortgage loans.
The complaint alleges that the defendants have violated the antifraud provisions of the
federal securities laws, including violations of Section 17(a) of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by MAM,
MAMW, Martinez and Sanchez and Sections 206(1) and 206(2) of the Investment Advisers Act
by MAM and Martinez and aiding and abetting violations of Sections 206(1) and 206(2) of the
Investment Advisers Act by Sanchez. The SEC seeks permanent injunctions, disgorgement of illgotten gains plus prejudgment interest, and monetary penalties.
SEC v. Marlon Quan, Acorn Capital Group, LLC and Stewardship Investment Advisors,
LLC
Lit. Rel. No. 21906 (March 28, 2011)
The SEC obtained an emergency court order to halt an attempt by a Connecticut-based
fund manager to divert to himself and others settlement funds intended for U.S. victims of a
Ponzi scheme operated by Minnesota businessman Thomas Petters.
The SEC has charged Marlon M. Quan with facilitating the Petters fraud and funneling
several hundred million dollars of investor money into the scheme. The SEC alleges that Quan
and his firms (Stewardship Investment Advisors LLC and Acorn Capital Group LLC) invested
hundreds of millions of hedge fund assets with Petters while pocketing more than $90 million in
fees. They falsely assured investors that their money would be safeguarded by “lock box
accounts” to protect them against defaults. When Petters was unable to make payments on
investments held by the funds that Quan managed, Quan and his firms concealed Petters’s
defaults from investors by concocting sham round trip transactions with Petters.
In its emergency court action, the SEC alleges that Quan, despite a glaring conflict of
interest, more recently negotiated an agreement to divert a settlement payment of approximately
$14 million relating to a receivership and a bankruptcy of Petters’s entities. Although he
purportedly negotiated on behalf of his U.S. fund investors, Quan’s U.S. victims would receive
no money under this agreement.
The SEC previously charged Petters and Illinois-based fund manager Gregory M. Bell
with fraud, and filed additional charges against Florida-based hedge fund managers Bruce F.
Prévost and David W. Harrold for facilitating the Petters Ponzi scheme.
The SEC alleges that Quan and his firms funneled money into the Petters Ponzi scheme
beginning as early as 2001 and continuing through 2008. Quan, who lives in Greenwich, Conn.,
sold interests in his Stewardship Funds to individuals, charities, companies and other hedge
funds. He falsely assured investors of several procedures that Acorn Capital Group purportedly
undertook to protect the investors in his hedge funds. However, Quan and his firms implemented
none of these safeguards. Quan also falsely assured existing and new investors that the Quan
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Hedge Funds were doing well when in reality Petters began defaulting on the investments they
held.
The SEC’s complaint charges Quan and his firms with violations of Section 17(a) of the
thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8)
thereunder. The SEC seeks entry of a court order of permanent injunction against Quan and his
firms as well as an order of disgorgement, prejudgment interest and financial penalties. The SEC
also seeks equitable relief against relief defendants Florene Quan, wife of Defendant Quan, and
Asset Based Resource Group LLC, an affiliate of Acorn Capital Group LLC.
SEC V. Timothy J. Roth, et al.
Lit. Rel. No. 21895 (March 23, 2011)
The SEC obtained an emergency court order freezing the assets of Urbana, Illinois money
manager Timothy J. Roth for stealing more than $6 million of his clients’ mutual fund shares,
liquidating the shares, and sending the ill-gotten gains to various accounts and companies under
his control. The Court also entered a temporary restraining order prohibiting Roth from violating
the anti-fraud provisions of the federal securities laws.
According to the civil complaint filed by the SEC, Roth worked for Comprehensive
Capital Management, Inc. (“CCM”), a New Jersey-based registered investment adviser. The
SEC’s complaint alleges that from October 2010 through February 2011, Roth stole more than
$6 million worth of mutual fund shares from several employee deferred compensation plans
(“Plans”) for whom he provided investment advice. The SEC alleges that Roth, who worked out
of CCM’s office near Urbana, Illinois, secretly caused the Plans’ mutual fund shares to be
transferred to an account under his control, even though no such transfer had been requested or
authorized by the Plans or the Plans’ participants. The SEC alleges that after selling the Plans’
shares, Roth funneled the cash proceeds to various accounts and companies under his control or
for his benefit. According to the SEC’s complaint, at the time he was engaging in his scheme,
Roth did not tell the Plans or their participants about the transfers. Instead, Roth sent them bogus
account statements that deliberately omitted his surreptitious transfer of the mutual fund shares.
Thus, the account statements overstated the Plans’ account holdings and concealed Roth’s theft.
The SEC's complaint charges Roth with violating Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder and with aiding and abetting violations of
Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-2
thereunder. In addition to the emergency relief already obtained, the complaint seeks preliminary
and permanent injunctions, disgorgement, and civil penalties from Roth. The SEC’s complaint
also names Roth’s companies as relief defendants and seeks disgorgement from them. The
Court’s freeze order extends to the assets of the relief defendants.
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SEC v. JSW Financial Inc., James S. Ward, David S. Lee, Edward G. Locker, Richard F.
Tipton and David C. Lin
Lit. Rel. No. 21839 (March 22, 2011)
The SEC charged Mountain View, Calif.-based JSW Financial Inc. and five officers for
defrauding investors in two real estate funds, alleging that the firm used investor funds to prop
up the officers’ own failing real estate development projects while concealing the loss of $17
million of investors’ money.
The SEC alleges that from 2002 to 2008, JSW and its predecessor, Jim Ward &
Associates (JWA), created two real estate investment funds – Blue Chip Realty Fund and
Shoreline Investment Fund – and told investors that their money would be used to make loans
secured by residential real estate. In reality, according to the SEC, the firms’ officers used most
of the money to make unsecured and undocumented loans to entities that the officers themselves
controlled, which were suffering mounting losses and protracted delays on Silicon Valley real
estate development projects. Meanwhile, as the enterprise collapsed, investors continued
receiving monthly statements showing steady growth in the value of their portfolios.
The SEC’s complaint charges JSW, Ward, Lee, Locker, Tipton and Lin with violating
Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. The complaint also charges JSW with violating Sections
206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule
206(4)-8 thereunder, and charges Ward, Lee, Locker, Tipton and Lin with aiding and abetting
violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8
thereunder. The SEC seeks injunctive relief and disgorgement of ill-gotten gains against JSW,
Ward, Lee, Locker, Tipton and Lin, as well as monetary penalties against the five officers. The
complaint also seeks disgorgement of ill-gotten gains and appointment of a receiver over Blue
Chip and Shoreline as relief defendants.
In the Matter of SBM Investment Certificates, Inc., f/k/a 1st Atlantic Guaranty Corp., SBM
Certificate Company, Geneva Capital Partners, LLC and Eric M. Westbury, Sr.
A.P. Rel. No. 33-9195 (March 4, 2011)
Proceedings Pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Section
21C of the Securities Exchange Act of 1934 (Exchange Act), Section 203(f) of the Investment
Advisers Act (Advisers Act) and Sections 9(b) and 9(f) of the Investment Company Act
(Investment Company Act), Making Findings, and Imposing Remedial Sanctions and a Ceaseand-Desist Order (Order). The Order finds that SBM Investment Certificates, Inc., f/k/a 1st
Atlantic Guaranty Corp. (SBMIC) and SBM Certificate Company (SBMCC), failed to maintain
adequate qualified reserves and, together with Eric M. Westbury, failed to fully and truthfully
disclose to investors material facts related to the financial condition and operations of these
companies from January 1, 2003 through April 4, 2006. In addition, the Order finds that, in the
issuance of certain fixed interest rate certificates, Geneva Capital Partners, LLC (Geneva), the
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parent of SBMIC and SBMCC, together with Westbury, failed to fully and truthfully disclose
material information regarding these investments and made misstatements concerning assets held
in Geneva’s custody on behalf of a purchaser of these fixed interest rate certificates.
Based on the above, the Order finds that SBMIC and SBMCC willfully violated Sections
28(a) and (b) of the Investment Company Act, and that SBMIC, SBMCC, Geneva and Westbury
willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and
Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in
connection with the purchase or sale of securities. Pursuant to Section 8A of the Securities Act,
Section 21C of the Exchange Act and Section 9(f) of the Investment Company Act with regard to
SBMIC and SBMCC, Section 8A of the Securities Act, Section 21C of the Exchange Act,
Section 203(f) of the Advisers Act, and Section 9(b) of the Investment Company Act with regard
to Westbury, and Section 8A of the Securities Act and Section 21C of the Exchange Act, with
regard to Geneva, the Order provides that Westbury is censured; SBMIC, SBMCC, Geneva and
Westbury are ordered to cease and desist from committing or causing any violations and any
future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act,
and Rule 10b-5 thereunder; and that Westbury shall pay a civil money penalty in the amount of
$130,000 to the United States Treasury.
Further, in connection issuance of the Order, Westbury has agreed that, within sixty (60)
days of its entry, he will no longer be an affiliated person, as defined in Section 2(a)(3) of the
Investment Company Act (or an affiliated person of an affiliated person), of SBM Financial,
LLC, the investment adviser to SBMIC and SBMCC, and will not in the future be an affiliated
person (or affiliated person of an affiliated person) of any investment adviser to SBMIC and
SBMCC. Westbury further agreed that upon the entry of the Order he will no longer serve as
President of SBMIC and SBMCC, but that he will remain as Chairman and Chief Executive
Officer of SBMIC and SBMCC to ensure that SBMIC and SBMCC comply with the
undertakings imposed by a Final Consent Judgment entered by the United States District Court
for the District of Maryland in the action captioned Securities and Exchange Commission v.
SBM Investment Certificates, Inc. et al, 8:06-cv-00866-DKC (Civil Action). However, upon
termination of the independent consultant’s duties set forth in the Final Consent Judgment
entered in the Civil Action, Westbury agreed that he will no longer serve in any officer, director,
employee or consulting positions or capacities with SBMIC and SBMCC, and will no longer be
involved in the daily operations or investment decisions of those entities.
SBMIC, SBMCC, Geneva and Westbury consented to the issuance of the Order without
SEC v. William Landberg, Kevin Kramer, Steven Gould, Janis Barsuk, West End
Financial Advisors LLC, et al.
The SEC charged three affiliated New York-based investment firms and four former
senior officers with fraud, misuse of client assets, and other securities laws violations involving
their $66 million advisory business.
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The SEC alleges that the operation's investment adviser William Landberg and president
Kevin Kramer - through the firms West End Financial Advisors LLC (WEFA), West End Capital
Management LLC (WECM), and Sentinel Investment Management Corporation - misled
investors into believing that their money was in stable, safe investments designed to provide
steady streams of income. However, in reality West End faced deepening financial problems
stemming from Landberg's failed investment strategies. When starved for cash to meet
obligations of the West End funds or for his personal needs, Landberg misused investor assets,
fraudulently obtained more than $8.5 million from a bank, and used millions of dollars from an
interest reserve account for unauthorized purposes.
The SEC also charged West End's chief financial officer Steven Gould and controller
Janis Barsuk for their roles in the scheme.
According to the SEC's complaint filed in U.S. District Court for the Southern District of New
York, the misconduct occurred from at least January 2008 to May 2009. The SEC alleges that
Landberg used substantial amounts of fraudulently-obtained bank loans to make distributions to
certain West End fund investors, thereby sustaining the illusion that West End's investments
were performing well. During the same period, Landberg also misappropriated at least $1.5
million for himself and his family. Landberg's wife Louise Crandall and their family partnership
are named as relief defendants in the SEC's complaint.
The SEC further alleges that Gould and Barsuk knew, or were reckless in not knowing,
that Landberg was defrauding a bank that provided loans to a West End fund by misusing funds
in a related interest reserve account. Both officers nevertheless participated in the fraud by
facilitating Landberg's misappropriations from that account. The SEC alleges that Gould
conceived and used improper accounting methods to conceal aspects of the fraud, and he issued
account statements to investors showing false investment returns. Barsuk facilitated Landberg's
uses of investor money to cover his personal obligations. Similarly, Kramer knew, or was
reckless in not knowing, that West End faced severe financial problems and had difficulty
obtaining sufficient financing to sustain its investment strategy. Nevertheless, Kramer failed to
disclose those material facts to investors as he continued to market the funds to new and existing
investors through April 2009.
SEC v. Warren D. Nadel, Warren D. Nadel & Co. and Registered Investment Advisers,
LLC
The SEC filed a civil action in the United States District Court for the Eastern District of
New York against Warren D. Nadel, his broker-dealer, Warren D. Nadel & Co. (“WDNC”), and
his investment advisory firm, Registered Investment Advisers, LLC (“RIA”). The Commission
alleges that these Defendants fraudulently induced clients to invest tens of millions of dollars in a
purported investment program in order to receive over $8 million in commissions and fees from
2007 through 2009. Defendants deliberately overstated the value and liquidity of client holdings
in the Strategy, by misrepresenting and concealing critical information about the way they were
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supposedly executing it. Although Defendants informed clients repeatedly that they were
executing open-market transactions on the clients’ behalf, the vast majority of transactions,
however, were not executed on the open market. Most simply consisted of trades between
advisory client accounts controlled by Defendants at inflated prices made up by Nadel himself.
Defendants thus created the false impression that there was a liquid market for these securities
and that the market prices for the securities were consistent with the inflated values that
Defendants reported to their clients.
SEC v. Charles Schwab Investment Management, Charles Schwab & Co., Inc., and
Schwab Investments
Lit Rel. No. 21806 (January 11, 2011)
Lit Rel. No. 21805 (January 11, 2011)
The SEC charged Charles Schwab Investment Management (CSIM) and Charles Schwab
& Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund
and failing to establish, maintain and enforce policies and procedures to prevent the misuse of
material, nonpublic information. The SEC also charged CSIM and Schwab Investments with
deviating from the YieldPlus fund’s concentration policy without obtaining the required
shareholder approval. CSIM and CS&Co. agreed to pay more than $118 million to settle the
SEC’s charges.
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion
in assets and over 200,000 accounts, making it the largest ultra-short bond fund in the category.
The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets
fall from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and
declining asset values.
According to the complaint filed in federal court in San Francisco and a related order
issued by the Commission, CSIM and CS&Co. failed to inform investors adequately about the
risks of investing in the YieldPlus Fund. For example, they described the fund as a cash
alternative that had only slightly higher risk than a money market fund. The statements were
misleading because the fund was more than slightly riskier than money market funds, and the
Schwab entities did not adequately inform investors about the differences between YieldPlus and
money market funds. In particular, the maturity and credit quality of the YieldPlus Fund’s
securities were significantly different than those of a money market fund.
The SEC also found that the YieldPlus Fund deviated from its concentration policy when
it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities
(MBS). Mutual funds and other registered investment companies are required to state certain
investment policies in their SEC filings, including a policy regarding concentration of
investments. Once established, a fund may not deviate from its concentration policy without
shareholder approval. Schwab’s bond funds, including the YieldPlus Fund and the Total Bond
Market Fund, had a policy of not concentrating more than 25% of assets in any one industry,
including private-issuer MBS. The funds violated this policy, and the Investment Company Act,
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by investing approximately 50% of the assets of the YieldPlus Fund and more than 25% of the
Total Bond Fund’s assets in private-issuer MBS without obtaining shareholder approval.
According to the complaint and the related order, the YieldPlus Fund’s NAV began to
decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007.
Unlike a money market fund, few of the fund’s assets were scheduled to mature within the next
several months. As a result, the fund had to sell assets in a depressed market to raise cash. While
the YieldPlus Fund’s NAV declined, CSIM and CS&Co. held conference calls, issued written
materials, and had other communications with investors that contained a number of material
misstatements and omissions concerning the fund.
The Commission also found that CSIM and CS&Co. did not have policies and procedures
reasonably designed, given the nature of their businesses, to prevent the misuse of material,
nonpublic information about the fund. For example, they did not have specific policies and
procedures governing redemptions by portfolio managers who advised Schwab funds of funds,
and did not have appropriate information barriers concerning nonpublic and potentially material
information about the fund. As a result, several Schwab-related funds and individuals were free
to redeem their own investments in YieldPlus during the fund’s decline.
Without admitting or denying the allegations in the Commission’s complaints, CSIM and
CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees
by CSIM, a $52,327,149 penalty against CSIM, a $5,000,000 penalty against CS&Co., and prejudgment interest of $9,290,698. CSIM’s disgorgement may be deemed satisfied, up to a
maximum of $26,944,996, for payments made within the next 60 days to settle related
investigations by FINRA or state securities regulators. The Commission seeks to have payments
placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other
regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair
Fund are subject to approval by the United States District Court for the Northern District of
California.
The Commission also instituted related cease-and-desist proceedings against CSIM,
CS&Co. and Schwab Investments for the same conduct. In connection with these proceedings,
CSIM, CS&Co. and Schwab Investments consented to a Commission order requiring them to
cease and desist from committing or causing future violations of the federal securities laws. The
Commission order also requires them to comply with certain undertakings, including correction
of all disclosures regarding the funds’ concentration policy. In addition, the Commission
censured CSIM and CS&Co., and required them to retain an independent consultant to review
and make recommendations about their policies and procedures to prevent the misuse of
material, nonpublic information.
SEC v. Alfred Clay Ludlum III, et al.
The Commission filed civil injunctive action against Alfred Clay Ludlum III of
Wilmington, Delaware and his wholly-controlled companies, Printz Capital Management, LLC,
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a registered investment adviser, Printz Financial Group, Inc., and PCM Global Holdings, LLC
(the "Printz Entities"), accusing them of defrauding investors and Ludlum's advisory clients out
of approximately $852,000.
The SEC's complaint, filed in U.S. District Court in Philadelphia, alleges that from
approximately June 2006 through June 2009, Ludlum raised approximately $700,000 from at
least 27 investors through unregistered offerings of equity and debt securities in the Printz
Entities. At least 21 of Ludlum's investors were his advisory clients, including some of his most
trusting and financially unsophisticated clients. The complaint also alleges that Ludlum
fraudulently obtained approximately $80,000 in loans from one of his advisory clients and
misappropriated approximately $72,000 more from three advisory clients' accounts without their
authorization.
According to the SEC's complaint, Ludlum told investors and his advisory client lender
that their funds would be used for working capital and to grow and operate the businesses of the
Printz Entities. In fact, however, Ludlum used most of the funds to support his lavish lifestyle,
pay his personal expenses, and repay other investors. During the relevant period, Ludlum
withdrew more than $445,000 from the Printz Entities' three main business accounts in the form
of cash withdrawals, wire transfers to his personal accounts, and checks written to himself and
his family trusts. In addition to these direct withdrawals, Ludlum also spent approximately
$251,000 from the three primary Printz Entity business accounts on personal expenses such as
bars and restaurants, rent for his luxury riverside condominium, lease payments for his car,
groceries, and medical bills. Ludlum induced investors, including his advisory clients to whom
he owed a fiduciary duty, to buy securities by promising superior rates of return, but failed to
disclose that the Printz Entities earned little revenue and were unable to cover their expenses out
of earnings. The Printz Entities failed to register their securities offerings with the Commission,
even though no exemption from registration applied, and Printz Capital violated multiple
provisions governing registered investment advisers.
The SEC's complaint charges Ludlum and the Printz Entities with violations of Sections
5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges Ludlum
and Printz Capital with violations of Sections 206(1) and (2) of the Investment Advisers Act of
1940 ("Advisers Act"), charges Printz Capital with violations of Advisers Act Sections 203A,
204, and 207, and charges Ludlum with aiding and abetting those Advisers Act violations. The
complaint also charges Printz Financial with violations of Securities Act Rule 503(a) of
Regulation D. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with
prejudgment interest, and civil penalties against Ludlum and the Printz Entities.
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SEC v. Cohmad Securities Corp., et al.
Lit. Rel. No. 21095 (Jun. 22, 2009)
On November 2, 2010, in its Madoff-related action, SEC v. Cohmad Securities Corp., et
al., the Honorable Louis L. Stanton entered partial judgments on consent permanently enjoining
defendants Robert M. Jaffe, Maurice J. Cohn, Marcia B. Cohn and Cohmad Securities Corp.
("Cohmad"), from future violations of certain provisions of the federal securities laws, including,
in the case of Jaffe, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
("Exchange Act"), and in the case of Cohmad and the Cohns, Section 17(a)(2) of the Securities
Act of 1933 ("Securities Act").
The amended complaint, filed on November 1, 2010, alleges the defendants made
material misrepresentations and omissions by referring hundreds of investors to Bernard L.
Madoff and his firm, Bernard L. Madoff Investment Securities Corporation LLC ("BMIS"),
while the defendants were aware of and failed to disclose facts that should have raised serious
questions about the propriety of the Madoff investment. The investors referred to BMIS by the
Defendants provided BMIS with more than one billion dollars. In consenting to partial
judgments, each defendant neither admitted nor denied the allegations of the amended complaint,
except that solely for purposes of the Court's later determination of monetary relief, the
allegations of the amended complaint are accepted as and deemed true by the Court. Under the
terms of the respective partial judgments:
Jaffe is permanently enjoined from (1) violating Section 17(a) of the Securities Act and
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) aiding and abetting violations
of Sections 15(b)(7) and 17(a) of the Exchange Act and Rules 15b7-1 and 17a-3 thereunder; and
(3) violating, or aiding and abetting violations of, Sections 206(1), 206(2) and 206(4) of the
Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-3 thereunder.
Maurice J. Cohn and Marcia B. Cohn are permanently enjoined from (1) violating
Section 17(a)(2) of the Securities Act; (2) aiding and abetting violations of Sections 15(b)(1) and
17(a) of the Exchange Act and Rules 15b3-1 and 17a-3 thereunder; and (3) violating, or aiding
and abetting violations of, Section 206(4) of the Advisers Act and Rule 206(4)-3 thereunder.
Cohmad is permanently enjoined from: (1) violating Section 17(a)(2) of the Securities
Act; (2) violating Sections 15(b)(1) and 17(a) of the Exchange Act and Rules 15b3-1 and 17a-3
thereunder; and (3) violating, or aiding and abetting violations of, Section 206(4) of the Advisers
Act and Rule 206(4)-3 thereunder.
Each partial judgment provides that the issue of disgorgement, prejudgment interest and
civil penalty relief against the defendants will be decided at a later time.
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The Commission filed its original complaint against the defendants on June 22, 2009. On
February 1, 2010, Judge Stanton dismissed certain of the Commission's claims against
defendants, including the claims against all defendants under Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of
the Advisers Act, and the claims against the Cohns under Section 15(b)(7) of the Exchange Act
and Rule 15b7-1 thereunder. In issuing that decision, Judge Stanton granted the Commission
leave to replead its claims in an amended complaint.
SEC v. Carlo G. Chiaese, et al.
The Commission filed an emergency enforcement action to halt a fraudulent scheme by
investment adviser, Carlo G. Chiaese, age 38 and resident of Springfield, New Jersey, and his
company, C.G.C. Advisors, LLC. The Commission also charged Chiaese's wife, Micol Chiaese,
age 38 and resident of Chester, New Jersey, as a relief defendant for her unjust enrichment from
the scheme.
The Commission's complaint, filed in the District of New Jersey, alleges that, between
2008 and the present, Chiaese and CGC misappropriated at least approximately $2.5 million
from at least six of their advisory clients, including a union pension trust fund for the benefit of
approximately 880 members. Chiaese repeatedly made false and misleading statements to his
clients regarding the clients' investments, including creating and providing to clients fictitious,
self-generated account statements that (i) misrepresented the value of their investments and (ii)
falsely stated that their investments were safely held at a broker-dealer, when in fact, Chiaese
and CGC had misappropriated their clients' funds. Instead of investing these funds as Chiaese
promised, he used much of his clients' funds to support his lavish lifestyle, including: mortgage
payments on a million dollar home; approximately $32,000 on landscaping; approximately
$70,000 on multiple country clubs; approximately $12,000 on his child's private school tuition;
approximately $4,000 at a New York City hotel on New Year's Eve 2008; thousands of dollars
on expensive cars; tens of thousands of dollars per month in living expenses; and numerous cash
withdrawals. Micol Chiaese, an officer of CGC, benefited from this fraud by directly receiving at
least $261,300 of clients' funds.
The Complaint charges Chiaese and CGC with violating Section 17(a) of the Securities
Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder,
and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
The Commission is seeking, among other emergency relief, a temporary restraining
order, which prohibits Chiaese and CGC from committing further violations of the federal
securities laws and freezes the assets of Chiaese, Micol Chiaese and CGC. In its enforcement
action, the Commission is seeking additional relief, including orders enjoining Chiaese and
CGC, preliminarily and permanently, from committing future violations of the foregoing federal
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securities laws, and a final judgment ordering Chiaese, Micol Chiaese and CGC to disgorge their
ill-gotten gains plus prejudgment interest, and assessing civil penalties against Chiaese and CGC.
SEC v. ICP Asset Management, LLC, et al.
Lit. Rel. No. 21563 (June 22, 2010)
The SEC filed a civil action charging the investment advisory firm ICP Asset
Management, LLC ("ICP"), its founder, owner and, president, Thomas Priore, its affiliated
broker-dealer, ICP Securities, LLC, and its holding company, Institutional Credit Partners, LLC,
with fraudulently managing multi-billion-dollar collateralized debt obligations ("CDOs").
The complaint alleges that, in connection with its management of what were known as
the Triaxx CDOs, ICP engaged in fraudulent practices and misrepresentations that caused the
CDOs to lose tens of millions of dollars. Priore and his companies also improperly obtained tens
of millions of dollars in advisory fees and undisclosed profits at the expense of their clients and
investors. The SEC further alleges that ICP and Priore directed more than a billion dollars of
trades for the Triaxx CDOs at what they knew were inflated prices. ICP and Priore repeatedly
caused the Triaxx CDOs to overpay for securities in order to make money for ICP and protect
other ICP clients from realizing losses. The prices for such trades often exceeded market prices
by substantial margins. In some trades, ICP caused the CDOs to pay a price that was
substantially higher than the price another ICP client paid for the security earlier the same day.
According to the SEC's complaint, ICP and Priore caused the CDOs to make numerous
prohibited investments without obtaining necessary approvals, and they later misrepresented
those investments to the trustee of the CDOs and to investors. The prices of many of these
investments were intentionally inflated to allow ICP to collect millions of dollars in advisory fees
from the CDOs. The SEC further alleges that ICP and Priore executed undisclosed cash transfers
from a hedge fund they managed in order to allow another ICP client to meet the margin calls of
one of its creditors. Priore subsequently misrepresented the transfers to the hedge fund's
investors.
The complaint alleges that ICP, ICP Securities, Institutional Credit Partners, and Priore
violated Section 17(a) of the Securities Act of 1933 (Marchurities Act) and directly violated and
aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange
Act) and Rule 10b-5 thereunder. The complaint further alleges that ICP and Priore directly
violated and ICP Securities, Institutional Credit Partners, and Priore aided and abetted violations
of Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule
206(4)-8 thereunder. The complaint alleges that ICP and Priore violated Section 206(3) of the
Advisers Act. The complaint alleges that ICP violated Sections 204 and 206(4) of the Advisers
Act, and Rules 204-2 and 206(4)-7 thereunder. The complaint further alleges that ICP Securities
directly violated and ICP and Priore aided and abetted violations of Section 15(c)(1)(A) of the
Exchange Act and Rule 10b-3 thereunder. Finally, the complaint alleges violations by Priore of
Sections 10(b) and Section 15(c)(1)(A) of the Exchange Act and Rules 10b-3 and 10b-5
thereunder as a control person.
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The SEC's complaint seeks a final judgment permanently enjoining the defendants from
future violations of the federal securities laws and ordering them to pay civil penalties and
disgorgement of ill-gotten gains plus prejudgment interest.
SEC v. Kenneth Ira Starr, et al.
Lit. Rel. No. 21541 (June 1, 2010)
The SEC filed an emergency civil injunctive action charging an investment adviser, his
investment advisory firm, and his business management firm with securities fraud. The SEC
alleged that Kenneth Ira Starr, Starr Investment Advisors, LLC (SIA), and Starr & Company,
LLC (Starrco) violated the securities laws by, among other things, misappropriating client
money.
According to the SEC’s complaint, Starr and SIA — an entity that Starr controls —
provide investment advisory services to more than thirty high net-worth clients. In addition, Starr
and Starrco — another entity that Starr controls — provide advisory, accounting, tax preparation,
business management, bill-paying, and "concierge" services to a larger but overlapping group of
approximately 175 clients. Defendants have power of attorney or signatory authority over many
bank and investment accounts belonging to their clients. The Commission's complaint charges
that Defendants have abused the signatory power that they hold over their clients' bank and
investment accounts by misappropriating client funds for their own purposes.
Specifically, the SEC's complaint alleges that between April 13 and April 16, 2010,
Defendants transferred $7 million from the accounts of three SIA and Starrco clients. The
transfers from the accounts of the three SIA and Starrco clients were not authorized. These funds
were ultimately used on April 16, 2010, to purchase an apartment in which Starr and Passage
reside.
The complaint alleges additional instances, beyond those in April 2010, of where
Defendants misappropriated client funds. Starting in August 2009, Defendants transferred
approximately $1.7 million from the personal account of an investor and from the account of a
charity run by that investor. These were all unauthorized transfers. In April 2010, Defendants
attempted to transfer an additional $750,000 from one of that investor's accounts but the bank
notified the investor, who halted the transfer. When that investor confronted Defendants over
these transactions, Defendants paid the investor back with money that again appears to have
come from the bank account of another unrelated party.
According to the complaint, the Defendants' ability to misappropriate client funds was
enhanced by SIA's failure to comply with custodial rules. Indeed, SIA failed to engage an
independent public accountant for the years 2006-2009 to perform a surprise examination of its
advisory clients' assets over which Defendants had custody. Moreover, certain assets of SIA
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clients were held in a physical form in a safe in Starrco's offices despite the fact that none of
Defendants are qualified custodians.
The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment
interest on a joint and several basis and civil monetary penalties against all of the Defendants.
The SEC also seeks an order requiring that Relief Defendants disgorge all assets of Defendants'
clients that improperly were transferred to them, together with prejudgment interest, including,
but not limited to, the apartment purchased by Colcave in which Starr and Passage reside.
SEC v. Onyx Capital Advisors, LLC et al.
Lit. Rel. No. 21500 (April 23, 2010)
The SEC charged a private equity firm, its founder and his friend with participating in a
fraudulent scheme through which they stole more than $3 million invested by three Detroit-area
public pension funds. The Honorable Denise Page Hood of the United States District Court for
the Eastern District of Michigan granted the SEC's request for a temporary restraining order and
asset freeze against all three Defendants.
The SEC's complaint alleges that Detroit-based Onyx Capital Advisors, LLC and its
founder Roy Dixon, Jr., recently of Atlanta, Georgia, raised approximately $23.8 million from
three public pension funds for a start-up private equity fund and then illegally withdrew money
invested by the pension funds to cover personal and other business expenses. Assisting in the
scheme was Dixon's friend Michael A. Farr, also of Atlanta, Georgia, who controls three
companies in which the Onyx Fund invested millions of dollars.
In the complaint, the SEC alleges that shortly after the three pension funds made their
first contributions to the Onyx Fund in early 2007, Dixon and Onyx Capital began illegally
siphoning money. Dixon and Onyx Capital took more than $2.06 million from the Onyx Fund
under the guise of excess or advanced management fees and Farr assisted in diverting nearly
$1.05 million more from the Onyx Fund's purported investments in the companies that he
controlled.
According to the complaint, Onyx Capital invested more than $15 million from the Onyx
fund in three related entities controlled by Farr — Second Chance Motors, SCM Credit LLC, and
SCM Finance LLC. Farr diverted a portion of the pension fund investments in Farr's companies
to 1097 Sea Jay, LLC, another entity that Farr controlled. Farr then withdrew large sums of cash
and provided most of it to Dixon while retaining at least $229,000 for his own benefit. Farr also
used Sea Jay's bank accounts to make at least $522,000 in payments to construction companies
performing work on Dixon's house in Atlanta.
The SEC further alleges that Dixon and Onyx Capital made numerous false and
misleading statements to Onyx Capital's public pension fund clients. For example, one pension
fund had concerns about Dixon's inexperience in private equity. To allay these concerns and
convince the pension fund to fund the investment, Dixon sent a letter falsely stating that a
purported joint owner of Onyx Capital with substantial experience evaluating private equity
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investments would devote all of his efforts to the Onyx Fund. The letter contained a forged
signature of that individual, who had reviewed certain investment opportunities for the Onyx
Fund during his spare time but has never owned or been employed by Onyx Capital. He instead
has been working full-time for another company since 1996.
In its complaint, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains
and civil monetary penalties.
SEC v. Gryphon Holdings, Inc. et al.
Lit. Rel. No. 21494 (April 20, 2010)
The SEC charged a Staten Island, N.Y.-based investment advisory firm, its owner, and
four associates with operating an Internet-based scam that misleads investors into paying fees for
phony stock tips and investment advice from fictional trading experts. The SEC obtained an
emergency court order to freeze the assets of the firm and individuals involved.
The SEC alleges that Gryphon Holdings Inc., owner Kenneth E. Marsh, and the Gryphon
associates induced investors to pay fees of up to $250,000 for securities recommendations that
they falsely claim are based on sound research and successful strategies of trading experts with
superior knowledge. In an effort to lend legitimacy to the firm's advisory business, Gryphon
touts trading experts with fake names who boast millions of dollars in trading riches as well as
top-notch educational backgrounds and prominent experience at major Wall Street firms.
Gryphon representatives even fabricated glowing testimonials from George Soros and purported
clients who profited by trading securities the firm recommended.
According to the complaint, investors who followed the guidance of Gryphon's purported
experts have suffered significant losses by trading on those tips or, in at least one instance, by
allowing Gryphon to trade on their behalf.
In addition to Gryphon and Marsh, the complaint charges Baldwin Anderson, Robert
Anthony Budion, Jeanne Lada, and James Levier.
According to the complaint, Gryphon obtained more than $17.5 million from its
operations over the past three years. Gryphon and its associates made numerous material
misrepresentations and omissions since at least 2007 to entice unsuspecting clients to purchase
its services. Gryphon's representatives used high-pressure tactics to obtain additional fees from
clients to purportedly give those clients access to "better" yielding investment tips, even if
Gryphon had not provided all the advisory services for which the client had already paid.
The complaint alleges that Gryphon made many material misrepresentations in the course
of inducing clients to purchase investment services or providing personalized securities
recommendations to clients.
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In the Matter of Morgan Asset Management, Inc., et al.
A.P. File. No. 3-13847 (April 7, 2010)
These proceedings involve Morgan Asset Management and Morgan Keegan &
Company’s material inflation of the daily net asset value (“NAV”) of the Helios Funds
(“Funds”). The Funds’ valuation policies and procedures required that dealer quotes be obtained
for certain securities. James C. Kelsoe, Jr. (“Kelsoe”), a senior portfolio manager for Morgan
Asset, contributed to the fraud by actively screening and manipulating the dealer quotes that the
Fund’s Independent Auditor obtained from at least one broker-dealer. Kelsoe also failed to
advise Fund Accounting or the Funds’ Board of Directors when he received information
indicating that the Funds’ prices for certain securities should be reduced. Kelsoe’s actions
fraudulently forestalled declines in the NAV’s of the Funds that would have occurred as a result
of the deteriorating subprime mortgage market, absent his intervention. Morgan Keegan
fraudulently published NAV’s for the Funds without following procedures reasonably designed
to determine that the NAV’s were accurate.
In filings with the SEC, the Funds stated that the fair value of securities would be
determined by Morgan Asset’s Valuation Committee using procedures adopted by the Funds. In
fact, the responsibility was delegated to Morgan Keegan, which primarily staffed the Valuation
Committee. Morgan Keegan and the Valuation Committee failed to comply with the Funds’
procedures in several ways. Among other things: (1) the Valuation Committee left pricing
decisions to lower level employees in Fund Accounting who did not have the training or
qualifications to make fair value pricing determinations; (ii) Fund Accounting personnel relied
on Kelsoe’s “price adjustments” to determine the prices assigned to portfolio assets, without
obtaining any basis for or documentation supporting the price adjustments or applying the factors
set forth in the procedures; (iii) Fund Accounting personnel gave Kelsoe excessive discretion in
validating the prices of portfolio securities by allowing him to determine which dealer quotes to
use and which to ignore, without obtaining documentation to support his adjustments; and (iv)
the Valuation Committee and Fund Accounting did not ensure that the fair value prices assigned
to many of the portfolio securities were periodically re-evaluated, allowing them to be carried at
stale values for many months at a time.
Between at least January 2007 and July 2007, Kelsoe had his assistant send
approximately 262 “price adjustments” to Fund Accounting who calculated the Funds’ NAVs.
The adjustments were communications by Kelsoe to Fund Accounting concerning the price of
specific portfolio securities. In many instances, these adjustments were arbitrary and did not
reflect fair value. Kelsoe’s price adjustments were routinely entered upon receipt by the staff
accountant into a spreadsheet used to calculate the NAVs of the Funds. Kelsoe knew his prices
were being used to compute the Funds’ NAVs. Among other things, he received bi-weekly
reports on the Funds’ holdings and their prices which, by comparison with previous reports,
indicated that his price adjustments were being used and were directly affecting the NAVs.
The SEC also brought charges against Joseph Thompson Weller (“Weller”), Morgan
Keegan’s Controller and head of its Fund Accounting Department. The SEC alleged that he
knew, or was highly reckless in not knowing, of the deficiencies in the implementation of
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valuation procedures set forth above, and did nothing to remedy them or otherwise to make sure
fair-valued securities were accurately priced and the Funds’ NAVs were accurately calculated.
Among other things, Weller knew that: (i) the Valuation Committee did not supervise Fund
Accounting’s application of the valuation factors; (ii) Kelsoe was supplying fair value price
adjustments for specific securities to Fund Accounting; (iii) the members of the Valuation
Committee did not know which securities Kelsoe supplied fair values for or what those fair
values were, and did not receive supporting documentation for those values; and (iv) the only
pricing test regularly applied by the Valuation Committee was the “look back” test, which
compared the sales price of any security sold by a Fund to the valuation of that security used in
the NAV calculation for the five business days preceding the sale. The test only covered
securities after they were sold; thus, at any given time, the Valuation Committee never knew
how many securities’ prices could ultimately be validated by it. Weller nevertheless signed the
Funds’ annual and semi-annual financial reports on Forms N-CSR, filed with the SEC, including
certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Morgan
Keegan, acting through Weller and Fund Accounting, failed to employ reasonable procedures to
price the Funds’ portfolio securities and, as a result of that failure, did not calculate accurate
NAVs for the Funds. Despite these failures, Morgan Keegan recklessly published daily NAVs of
the Funds which it could not know were accurate and, as distributor of the Funds’ shares, sold
shares to investors based on those NAVs.
As a result of the conduct described above, the following violations allegedly occurred:
Respondents Morgan Asset, Kelsoe, Morgan Keegan and Weller willfully violated Section 17(a)
of the Securities Act; Section 10(b) of the Exchange Act and Rule 10b-5. Respondent Morgan
Asset also willfully violated, and Respondent Kelsoe willfully aided and abetted and caused
violations of, Section 206(4) and of the Advisers Act and Rule 206(4)-7. Morgan Asset willfully
violated, and Respondents Kelsoe and Morgan Keegan willfully aided and abetted and caused
violations of, Sections 206(1) and 206(2) of the Advisers Act. Respondents Morgan Asset,
Kelsoe and Weller willfully violated, and Respondent Morgan Keegan willfully aided and
abetted and caused violations of, Section 34(b) of the Investment Company Act.
SEC v. Enrique F. Villalba, Jr.
Lit. Rel. No. 21464 (March 29, 2010)
The SEC filed fraud charges against an unregistered investment adviser for
misrepresenting the safety and nature of his investment strategy, and for misappropriating
millions of dollars in funds from investors in California, Illinois, Ohio, Tennessee, and
Washington.
The SEC's complaint charges Enrique F. Villalba, Jr. with misappropriating
approximately $6 million of client funds. The complaint alleges that Villalba solicited
prospective clients through his former investment advisory business, Money Market Alternative,
L.P. and affiliated entities, Money Market Alternative Ltd., Money Market Plus, and Hybrid
Money Market Management LLC. The complaint alleges that Villalba touted an investment
strategy he developed that he falsely claimed was conservative, relatively risk free and would
preserve his clients' principal capital while still earning them returns of 8% to 12% annually. To
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substantiate the safety of his investment strategy, the complaint alleges that Villalba falsely
claimed that he placed stop orders approximately 2% above or below the entry price of the
investments. The complaint also alleges that Villalba further enticed prospective clients by
assuring them their money would only be used for investments in securities, including S&P 500
Index contracts, treasury bills or interest earning money market accounts, and that his
management fees would be limited to between 12% and 15% of the profits he generated on their
behalf.
According to the SEC's complaint, from 1996 through June 2009, Villalba attracted over
$39 million in client funds, and from 1998 through 2009, Villalba lost, through trading, over $17
million of his clients' money. The SEC's complaint also alleges that Villalba misappropriated
client funds by (i) paying over $4.1 million for Villalba's management fees, salary and his
company's overhead, (ii) purchasing over $700,000 in real property, (iii) investing over $1.2
million in two start-up coffee businesses Villalba owned, and (iv) making Ponzi-like payments.
The complaint further alleges that Villalba, to hide his investment failures and his
misappropriation of client funds, prepared and provided his clients with false quarterly accounts
statements, which always showed that his clients' accounts had overall increased in value. The
complaint also alleges that Villalba provided one investor with falsified brokerage statements
using the letterhead of a brokerage firm.
The SEC's complaint charges Villalba with violating Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the
Investment Advisers Act of 1940. In addition to a permanent injunction, the complaint seeks
disgorgement with prejudgment interest and a civil penalty.
In the Matter of Value Line, Inc., Value Line Securities, Inc., Jean Bernhard Buttner, and
David Henigson
The SEC charged Value Line Inc., its CEO, its former Chief Compliance Officer and its
affiliated broker-dealer with defrauding the Value Line family of mutual funds by charging over
$24 million in bogus brokerage commissions on mutual fund trades funneled through Value
Line's affiliated broker-dealer, Value Line Securities, Inc. (VLS).
Value Line, its CEO Jean Buttner, its former Chief Compliance Officer David Henigson,
and VLS agreed to settle the SEC's charges by consenting, without admitting or denying the
SEC's findings, to the entry of a cease-and-desist order that also requires total payments of nearly
$45 million in monetary remedies, including civil penalties. The SEC's order also imposes
industry and officer and director bars and other relief.
The SEC's order finds that Value Line, VLS, Buttner and Henigson violated Section
Rule 10b-5 thereunder; Value Line violated Sections 206(1) and 206(2) of the Investment
Advisers Act of 1940, and VLS, Buttner and Henigson aided and abetted Value Line's violations
of Sections 206(1) and 206(2) of the Advisers Act; Value Line violated Section 207 of the
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Advisers Act and Section 15(c) of the Investment Company Act of 1940; Value Line, Buttner
and Henigson violated Section 34(b) of the Investment Company Act; and Value Line and VLS
violated Section 17(e)(1) of the Investment Company Act.
The SEC's order requires that Value Line pay $24,168,979 in disgorgement, $9,536,786
in prejudgment interest, and a $10 million penalty; Buttner pay a $1 million penalty; and
Henigson pay a $250,000 penalty. In addition, Buttner and Henigson are each barred from
association with any broker, dealer, investment adviser and investment company; and are
prohibited from acting as an officer or director of any public company. Value Line, VLS, Buttner
and Henigson further consented to censures and cease-and-desist orders prohibiting them from
violating the above provisions of the securities laws.
SEC v. Regions Bank
The SEC filed a settled civil action against Regions Bank (Regions) for its role in
connection with a Florida-based offering fraud by unregistered broker-dealers U.S. Pension Trust
Corp. and U.S. College Trust Corp. (collectively, USPT). For over six years, Regions or its
predecessor bank served as trustee of investment plans through which USPT defrauded
thousands of investors (residing primarily in Latin America) by charging exorbitant, undisclosed
commissions and fees in connection with the sale of mutual funds.
The SEC alleges that since 1996, USPT has offered and sold mutual funds to investors
through a trust created at a U.S. bank. USPT sells the funds through a series of investment plans
that give investors a choice of making either annual contributions for multiple years or a single,
lump-sum contribution. Until SEC 2006, USPT did not disclose to new investors that it
subtracted from their contributions up to 85% of investor's initial contributions in the annual
plans, and as much as 18% in the single contribution plans, for payment of sales commissions,
USPT's "net profit," and insurance premiums.
According to the Commission's Complaint, Regions—which has served as trustee of the
plans since October 2001 (through its predecessor bank)—contributed to the investment scheme
because a primary selling point for USPT's investment plans was the trust relationship created
between the investor and the U.S. bank. As trustee, Regions allowed USPT to use its name in
marketing materials, prepared a promotional video that was posted on USPT's website, and sent
representatives to Latin America to meet with sales agents and prospective investors to explain
Regions' role as trustee. Regions entered into individual trust relationships with all investors,
processed their contributions, and purchased the selected mutual funds for them. However, when
it sent them confirming certificates (prepared by USPT but signed by a Regions representative),
it failed to disclose the amounts taken out for USPT's fees and commissions. Regions' own Trust
Agreement and Trust Summary were also misleading and failed to disclose the nature and
amounts of the commissions and fees that USPT charged (except for Regions' own trust fees).
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Regions stopped accepting new USPT investor trust relationships in January 2008, and stopped
accepting additional contributions under existing plans in August 2009.
The SEC's Complaint charges Regions with violations of Sections 17(a)(2) and 17(a)(3)
of the Securities Act of 1933, and with aiding and abetting USPT's violations of Section 15(a)(1)
of the Securities Exchange Act of 1934 by serving as trustee.
In the Matter of Morgan Stanley & Co. Incorporated; In the Matter of William Keith
Phillips
A.P. Rel. No. 34-60342/ File No. 3-13558 (July 20, 2009)
A.P. Rel. No. 34-61278 (January 4, 2010)
The SEC instituted settled cease-and-desist proceedings against Morgan Stanley, alleging
that the investment adviser breached its fiduciary duty to its advisory clients in its Nashville,
Tennessee branch office by making material misstatements about a program through which the
firm assisted clients in developing investment objectives and in selecting properly vetted money
managers. Contrary to its disclosures, Morgan Stanley recommended some money managers
who had not been approved for participation in the firm’s advisory programs and had not been
subject to the firm’s due diligence review. William Keith Phillips, then a top producer at Morgan
Stanley, steered clients to three unapproved managers in particular. Unbeknownst to investors,
Morgan Stanley and Phillips received substantial brokerage commissions or fees from these three
unapproved managers.
The SEC’s order against Morgan Stanley finds that the firm violated Section 206(2) of
the Advisers Act; failed reasonably to supervise Phillips; and failed to maintain certain books
and records as required by Section 204 of the Advisers Act.
Subsequently, Phillips submitted an offer of settlement, which the Commission
determined to accept. Pursuant to Section 15(b) of the Exchange Act and Sections 203(f) and
203(k) of the Advisers Act, it was ordered that: (1) Phillips cease and desist from committing or
causing any violations and any future violations of Section 206(2) of the Advisers Act; (2)
Phillips be suspended from association with any investment adviser for a period of four months;
(3) Phillips be suspended from association with any broker or dealer for a period of four months;
and (4) Phillips pay a civil money penalty in the amount of $80,000.
SEC v. Stanley Chais
Lit. Rel. No. 21096 (June 22, 2009)
The SEC charged Stanley Chais, a California-based investment adviser, who acted as
adviser to, and general partner of, three funds that invested all of their assets with Bernard
Madoff, with fraud for misrepresenting his role in managing the funds’ assets and for distributing
account statements that he should have known were false.
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In its complaint, the SEC alleges that Chais made a number of misrepresentations over
the years to the Funds’ investors, indicating that he formulated and executed the Funds’ trading
strategy. But Chais was actually an unsophisticated investor who simply turned all the assets to
Madoff, and charged the Funds over $250 million in fees for his purported “services.” Many of
the investors did not know that Chais invested with Madoff until Chais informed them about his
arrest. The SEC also alleges that Chais ignored red flags indicating that Madoff’s reported
returns were false.
The SEC’s complaint alleges that Chais violated Section 17(a) of the Securities Act of
1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4)
of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC's complaint
seeks financial penalties and a court order requiring Chais to disgorge his ill-gotten gains.
SEC v. Founding Partners Capital Management Company, William Gunlicks, Sun Capital,
Inc., Sun Capital Healthcare, Inc., Founding Partners Stable-Value Fund, LP, Founding
Partners Stable-Value Fund II, LP, Founding Partners Global Fund, Ltd., and Founding
Partners Hybrid-Value Fund, LP
Lit. Rel. No. 21010 (April 23, 2009)
The SEC obtained an emergency asset freeze and the appointment of a receiver over a
Naples, Fla.-based investment adviser that has been charged with defrauding investors by
misrepresenting the nature of $550 million in investments. The receivership and asset freeze also
extend to the funds managed by the investment adviser.
According to the SEC's complaint, the Defendants misrepresented to investors that their
primary fund loaned money to two companies that purchased primarily short-term, highly liquid
account receivables that fully secured the loans. The companies instead purchased account
receivables that were longer-term, less liquid, and much riskier in nature. The complaint also
alleges that the Defendants solicited new investors for their primary fund without disclosing that
the fund was facing significant redemption requests.
The SEC also charged the Defendants with misappropriating fund assets for personnel
use, and misrepresenting that its funds had audited financial statements for 2007 when they did
not. Additionally, the Defendants allegedly failed to disclose to all investors and to comply with
a prior SEC order entered against them.
The SEC's complaint alleges that Gunlicks and Founding Partners violated Section 17(a)
of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder, and Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and
Rule 206(4)-8 thereunder. The SEC also alleges that they violated a prior SEC order requiring
that they cease and desist from committing or causing any violations and any future violations of
Section 17(a)(2) of the Securities Act. In addition to emergency relief, the SEC's complaint seeks
disgorgement of the defendants' ill-gotten gains, prejudgment interest, and financial penalties.
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Subsequently, in a settled administrative proceeding instituted pursuant to Section 203(f)
of the Advisers Act, Gunlicks was barred from association with any investment adviser. (See
A.P. Rel. No. IA-3004 (March 17, 2010), http://www.sec.gov/litigation/admin/2010/ia-3004.pdf.)
CASES INVOLVING INSIDER TRADING
SEC v. Compania International Financiera S.A., et al.
Lit. Rel. No. 22049 (July 20, 2011)
The SEC obtained asset freezes and other emergency relief against three Swiss-based
entities it has charged with insider trading. The SEC alleges that defendants traded ahead of a
July 11 public announcement that Swiss-based Lonza Group Ltd. will acquire Connecticut-based
Arch Chemicals, Inc.
According to the Commission’s complaint, which was filed within days of the alleged
insider trading, Compania International Financiera S.A., Coudree Capital Gestion S.A., and
Chartwell Asset Management Services purchased more than a million common shares of Arch
Chemicals between July 5 and July 8, mostly in accounts based in London, England.
Immediately after the acquisition announcement on July 11, the firms began selling the recentlypurchased shares of Arch Chemicals common stock for millions of dollars in profits. The
Commission’s complaint alleges that, at the time the defendants purchased the shares, they are
believed to have been in possession of material, non-public information about Lonza’s proposed
acquisition of Arch Chemicals.
In filing its complaint, the Commission requested emergency relief, noting that because
the defendants are foreign entities and placed their trades in overseas accounts, there was a
substantial risk that, upon clearance at U.S. brokerage firms, the proceeds of the trades likely
would be transferred overseas.
Among other things, the court’s order froze certain assets of the defendants and ordered
repatriation of all assets obtained from the trading described in the Commission’s complaint.
The Commission’s complaint charges the defendants with violating Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5. In addition to a preliminary injunction, asset
freeze and other equitable relief, the complaint seeks a permanent injunction, disgorgement of
illegal trading profits plus prejudgment interest, and civil monetary penalties.
SEC v. Phillip E. (Rick) Powell
Lit. Rel. No. 21996 (June 13, 2011)
The SEC charged Phillip E. (Rick) Powell, former chairman of the board of First Cash
Financial Services, Inc. (“First Cash”), with illegal insider trading. The SEC’s Complaint alleges
that in early March 2008 Powell, while he was serving as the chairman of the board of First
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Cash, learned material, non-public information about the commencement of a company share
buyback.
According to the Complaint, on November 6, 2007, the company had announced that it
had authorized a buyback of up to 1 million First Cash shares. That announcement did not
disclose when the authority would be exercised or even whether management would actually
exercise the authority. The SEC alleges that Powell later learned that First Cash had decided to
actually exercise its repurchase authority and was set to begin the repurchase.
According to the Complaint, Powell, armed with this material, non-public information,
called his broker on March 11, the same day that First Cash entered into an agreement with JP
Morgan Securities to facilitate the repurchase and the day before First Cash began repurchasing
its shares. He instructed the broker to buy 100,000 First Cash shares. According to the SEC’s
Complaint, Powell insisted that the purchase needed to be made that day.
As alleged in the Complaint, Powell’s pre-buyback purchases caused First Cash to
overpay $36,000 for its own securities between March 12 and March 14, 2008. In addition, the
SEC alleges that, as a result of the share price increase following disclosure that the buyback had
commenced, Powell profited in the amount of $124,000 from his illegal purchase.
Powell is alleged to have repeatedly tried to hide his trading from First Cash and its
shareholders. For example, the Complaint alleges that he misled another board member when he
was warned against purchasing in advance of the buyback, and later he misled First Cash’s chief
executive officer when he asked about the trade. In addition, after his broker warned him that
Commission rules required him to file a Form 4 disclosing his trade, he refused to do so and
delayed filing his Form 4 until April 30, 2009, over thirteen months after it was required by
Commission rules and only after he knew the Commission was investigating his trades.
The SEC’s complaint alleges that, as a result of his conduct, Powell violated Sections
10(b) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 16a-3 thereunder.
The Commission seeks permanent injunctive relief, disgorgement of illicit profits with
prejudgment interest, a monetary penalty, and an order barring Powell from serving as an officer
or director of a public company.
SEC v. One or More Unknown Purchasers of Securities of Telvent GIT S.A.
Lit. Rel. No. 21991 (June 6, 2011)
The SEC obtained a Temporary Restraining Order freezing assets and trading proceeds of
certain unknown purchasers of the securities of Telvent GIT S.A. (the “Unknown Purchasers”).
The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal
insider trading in the days preceding the June 1, 2011 announcement that Schneider Electric
S.A., a French company, and Telvent, a company based in Madrid, Spain, had entered into an
agreement under which Schneider would offer to acquire all of the outstanding common stock of
Telvent at a price of $40 per share, a 16% premium over the previous day’s closing price. The
Commission’s complaint alleges that the Unknown Purchasers, through their insider trading,
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violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the
imposition of civil money penalties.
The Commission’s complaint alleges that between April 29, 2011 and May 27, 2011, the
Unknown Purchasers bought 1,200 Telvent call option contracts through an account at Pershing
LLC. About two-thirds of the call option contracts were purchased within five calendar days (or
two trading days) before the acquisition announcement and comprised as much as 52% of the
volume of that series of call options that day. The price of the call options held by the Unknown
Purchasers rose dramatically. In one instance, the price of the options increased by about 480%.
The complaint alleges that, as a result, the Unknown Purchasers realized total profits of
approximately $475,000 from the sale of the call options.
In addition to freezing the assets relating to the trading, the Temporary Restraining Order
requires the Unknown Purchasers to identify themselves, imposes an expedited discovery
schedule, and prohibits the defendants from destroying documents.
SEC v. Cheng Yi Liang, et al.
Lit. Rel. No. 21987 (June 2, 2011)
The SEC filed an amended complaint against Cheng Yi Liang, a chemist who worked at
the U.S. Food and Drug Administration (FDA) alleging Liang traded in advance of a 28th drug
approval announcement and through an additional brokerage account in the name of a sixth
nominee.
On March 29, 2011, the SEC filed a complaint in federal court in Maryland alleging that
Liang illegally traded in advance of at least 27 public announcements about FDA drug approval
decisions involving 19 publicly traded companies, garnering more than $3.6 million in illicit
profits and avoided losses. The amended complaint alleges that Liang traded in advance of a 28th
announcement involving a 20th publicly-traded company, XenoPort, Inc. (See Lit. Rel. No.
21907 (March 29, 2011), http://sec.gov/litigation/litreleases/2011/lr21907.htm.)
As alleged in the amended complaint, Liang accessed a confidential FDA database that
contained critical documents and information about the FDA’s review of Horizant, a drug
developed by XenoPort to treat restless leg syndrome. Between January 6 and March 24, 2011,
Liang accessed the confidential FDA database at least 52 times to monitor the status of the
FDA’s review of Horizant. Then between February 22 and March 24, 2011, Liang purchased
43,000 shares of XenoPort in accounts in the name of three nominees: Hui Juan Chen,
Zhongshan Chen, and Andrew Liang. On March 29, 2011, Liang was charged by the SEC and
arrested by the criminal authorities in a parallel criminal investigation. One week later, on April
6, 2011, XenoPort announced that the FDA had approved Horizant, which caused XenoPort’s
shares to rise 56% and resulted in imputed profits to Liang of over $126,000.
The amended complaint, in addition, alleges that Liang used an eighth brokerage account
in the name of his 87-year-old father, Zhaozheng Liang, to trade beginning in January 2011 and
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in advance of the XenoPort and Clinical Data, Inc. announcements. The amended complaint also
names Zhaozheng Liang as a relief defendant.
The SEC’s amended complaint alleges that Liang violated Section 17(a) of the Securities
Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, and seeks a permanent injunction against future violations, disgorgement of unlawful
trading profits and losses avoided plus prejudgment interest, and a financial penalty. The SEC’s
amended complaint names Liang’s wife Yi Zhuge and the account holders for the eight trading
accounts Liang used – Liang’s mother Hui Juan Chen, his son Andrew Liang, his father
Zhaozheng Liang, Shuhua Zhu, Zhongshan Chen, and Honami Toda – as relief defendants for
the purpose of recovering ill-gotten funds to which they have no legitimate claim.
SEC v. Donald L. Johnson
Lit. Rel. No. 21981 (May 26, 2011)
The SEC filed a civil injunctive action in the United States District Court for the
Southern District of New York charging Donald L. Johnson, a former managing director of The
NASDAQ Stock Market, with multiple instances of insider trading.
According to the SEC’s complaint, Johnson held various positions at the NASD and
NASDAQ for 20 years, until his retirement from NASDAQ in September 2009. From at least
January 2000 to October 2006, Johnson worked in NASDAQ’s Corporate Client Group (CCG).
He then transferred to the Market Intelligence Desk, a specialized department within the CCG
that provides issuers with general market updates, overviews of their company’s sector, and
commentary regarding the factors influencing day-to-day trading activity in their stocks.
The SEC alleges that, through his positions in the CCG and Market Intelligence Desk,
Johnson had frequent and significant interactions with senior executives of NASDAQ-listed
issuers, including CEOs, CFOs, and investor relations officers at his assigned companies. In
those interactions, company executives routinely shared confidential information with Johnson
regarding impending public announcements that could affect the price of their stocks. The
executives who shared nonpublic information with Johnson did so based on the understanding
that it would be kept confidential and that Johnson could not use the information for his personal
benefit.
According to the SEC’s complaint, Johnson unlawfully traded in advance of nine
announcements of material nonpublic information involving NASDAQ-listed companies from
August 2006 to July 2009. Johnson took advantage of both favorable and unfavorable
information that was entrusted to him in confidence by NASDAQ and its listed companies,
shorting stocks on several occasions and establishing long positions in other instances. The
complaint also states that Johnson often placed the trades directly from his work computer
through an online brokerage account in his wife’s name. The SEC alleges that Johnson reaped
illicit profits in excess of $755,000 from his illegal trading.
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The SEC’s complaint charges Johnson with violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks permanent injunctive relief,
disgorgement of illicit profits with prejudgment interest and a monetary penalty. Johnson’s wife
Dalila Lopez is named as a relief defendant in the SEC’s complaint.
SEC v. Patrick M. Carroll, et al.
Lit. Rel. No. 21954 (May 3, 2011)
The SEC charged four executives at a Louisville-based steel processing company and
four of their family and friends with illegal insider trading in advance of the company’s
acquisition.
The SEC alleges that Patrick Carroll, William “Tad” Carroll, David Mark Calcutt and
David Stitt – who are vice presidents of sales at Steel Technologies – traded based on
confidential information about their company’s acquisition by Mitsui & Co. (USA) Inc. The SEC
alleges that three of the four executives illegally tipped family members or friends. The ring of
eight traders together purchased $578,000 of Steel Technologies stock in the month prior to the
public announcement of the acquisition and made $320,000 in illegal profits.
Specifically, the SEC alleges that Patrick Carroll tipped his son James Carroll, and
Calcutt tipped his brother Christopher Calcutt. David Stitt tipped his friend John Monroe, who
then tipped another friend Stephen Somers.
According to the SEC’s complaint filed in U.S. District Court for the Western District of
Kentucky, Patrick and Tad Carroll are brothers of Michael Carroll, who is the president and chief
operating officer of Steel Technologies. Patrick traded after Michael introduced him to Mitsui
representatives who were touring the Steel Technologies facility where Patrick worked. Patrick
tipped his son James, who then purchased his own Steel Technologies stock shortly before the
acquisition was publicly announced. Tad bought more than $84,000 of Steel Technologies stock
approximately one week before the public announcement following his own communications
with Michael.
The SEC alleges that before getting inside information about the forthcoming acquisition,
Calcutt liquidated nearly all of his company stock. However after he went on a hunting trip with
Michael Carroll, Calcutt soon started aggressively buying Steel Technologies stock at higher
prices. He also tipped his brother Christopher Calcutt, who then sold all of his shares in another
company for a loss and used that money to buy Steel Technologies stock on margin to increase
his illicit gains.
According to the SEC’s complaint, Stitt, Monroe and Somers have known each other
since childhood. Stitt learned about the forthcoming acquisition on the Friday before the public
announcement and immediately purchased Steel Technologies stock that same day. Over the
weekend, Stitt told Monroe about the forthcoming acquisition. On Monday, Monroe passed the
inside information to Somers. That same day, Monroe told his broker to immediately open a new
account so he could buy Steel Technologies stock. Somers also immediately traded based on the
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inside information. During the SEC’s investigation, Stitt and Monroe contradicted each other’s
testimony about their communications and advance knowledge of the acquisition.
The SEC’s complaint charges the eight defendants with securities fraud in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment
interest, and the imposition of monetary penalties against all defendants.
SEC v. Joseph F. “Chip” Skowron III, et al.
Lit. Rel. No. 21928 (April 13, 2011)
The SEC charged a former hedge fund portfolio manager with insider trading in a biopharmaceutical company based on confidential information about negative results of the
company’s clinical drug trial.
The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six
health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund
holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a
medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly
announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the
hedge funds avoided at least $30 million in losses.
The SEC previously charged the medical researcher – Dr. Yves M. Benhamou – who
illegally tipped Skowron with the non-public information and received envelopes of cash in
return according to the SEC’s amended complaint filed in federal court in Manhattan to
additionally charge Skowron. The hedge funds, which have been charged as relief defendants in
the SEC’s amended complaint, have agreed to pay back $33 million in ill-gotten gains.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced
criminal charges against Skowron.
According to the SEC’s amended complaint, Benhamou served on the Steering
Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C. While
serving on the Steering Committee, Benhamou provided consulting services to Skowron through
an expert networking firm. But over time, he and Skowron developed a friendship. By April
2007, many of their communications were independent of the expert networking firm. Benhamou
tipped Skowron with material, non-public information about the trial as he learned of negative
developments that occurred during Phase 3 of the trial.
The SEC alleges that Skowron acted on confidential information he received from
Benhamou prior to the public announcement and ordered the sale of the entire position in HGSI
stock – approximately six million shares held by the six health-care related funds that Skowron
co-managed. These sales occurred during the six-week period prior to HGSI’s public
announcement. Skowron caused the hedge funds to sell two million shares in a block trade just
before the markets closed January 22, 2008. Changes to the trial resulting from the negative
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developments were announced publicly on January 23, 2008. When HGSI’s share price dropped
44 percent by the end of the day, the hedge funds avoided losses of at least $30 million.
According to the SEC’s amended complaint, Skowron gave Benhamou an envelope of
containing 5,000 Euros while they were attending a medical conference in Barcelona, Spain in
April 2007. The cash was in appreciation for Benhamou’s work as a consultant. In February
2008, after the illegal HGSI trades were completed, Skowron asked Benhamou to lie about his
communications with Skowron, which he did. In late February 2008, Skowron met Benhamou in
Boston and attempted to hand him a bag containing cash in appreciation for his tips on the
Albuferon trial and his continued silence. Benhamou refused the cash. However, while attending
a medical conference in Milan, Italy in April 2008, Skowron gave Benhamou another envelope
containing $10,000 to $20,000 in cash that Benhamou accepted.
The SEC charged Skowron and Benhamou with violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities
Act of 1933 and seeks permanent injunctions, disgorgement of any ill-gotten gains with
prejudgment interest, and financial penalties against them.
SEC v. Matthew H. Kluger and Garrett D. Bauer
Lit. Rel. No. 21917 (April 6, 2011)
The SEC charged a corporate attorney and a Wall Street trader with insider trading in
advance of at least 11 merger and acquisition announcements involving clients of the law firm
where the attorney worked.
The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini
Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but
were linked only through a mutual friend who acted as a middleman to facilitate the illegal
scheme. Kluger and Bauer communicated with the middleman using public telephones and
prepaid disposable mobile phones in order to avoid detection. According to the SEC’s complaint,
Kluger accessed information on 11 mergers and acquisitions involving the law firm’s clients and
then tipped the middleman. In at least nine instances, the middleman passed the information on
to Bauer, who illegally traded for illicit profits totaling nearly $32 million.
According to the SEC’s complaint filed in federal court in Newark, N.J., Kluger, Bauer
and the middleman deliberately structured their communications and trading so that Kluger and
the middleman could share in the insider trading proceeds while Bauer could illegally trade and
profit without being connected to Kluger as a possible source of information. Bauer withdrew
cash from his bank accounts and kicked back hundreds of thousands of dollars to the middleman,
who in turn delivered at least $500,000 to Kluger for his role in the scheme.
According to the SEC’s complaint, over the past five years Kluger accessed and then
tipped confidential information in advance of 11 mergers and acquisitions between April 2006
and March 2011:
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The middleman traded in two deals on the basis of information that he received from
Kluger and profited at least $690,000.
The SEC alleges that Kluger and Bauer violated Sections 10(b) and 14(e) of the
Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking
permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial
penalties.
SEC v. Kim Ann Deskovick and Brian S. Haig
Lit. Rel. No. 21890 (March 18, 2011)
The SEC filed a civil injunctive action in the United States District Court for the District
of New Jersey charging a former director of First Morris Bank and Trust (“First Morris”), at the
time a publicly traded regional New Jersey bank, with illegally tipping a friend about First
Morris’s confidential efforts to be acquired by another bank, and a New Jersey accountant with
illegally trading on the basis of that inside information. The accountant is also charged with
tipping a business associate about the potential sale of First Morris. Both defendants have agreed
to settle the Commission’s charges and to pay a total of $188,699 in disgorgement and civil
penalties.
The Commission’s complaint alleges as follows: Defendant Kim Ann Deskovick, age 55,
was a director of First Morris during the relevant period. From June through September of 2006,
Deskovick received confidential information concerning First Morris’s efforts to be acquired by
another bank and the status of those merger negotiations. In breach of her fiduciary duty as a
director, Deskovick tipped a close friend that First Morris was for sale and periodically updated
her friend on the status of First Morris’s merger negotiations. Deskovick’s friend then tipped
defendant Brian S. Haig, age 45, a friend and business associate. Deskovick’s friend told Haig
that the friend had learned from Deskovick that First Morris was for sale and recommended that
Haig buy First Morris securities. Based on the tip from Deskovick’s friend, Haig purchased
4,000 shares of First Morris stock in September 2006. Haig also tipped a friend and business
associate, now deceased, about the pending sale of First Morris and the source of the
information. Based on Haig’s tip, Haig’s friend purchased 800 shares of First Morris stock in
September 2006. On October 16, 2006, First Morris and Provident Financial Services, Inc.
announced the execution of a merger agreement, and the price of First Morris stock increased by
approximately 14% that day. Haig sold his entire First Morris position on the day of the
announcement for a profit of $56,797, and his friend sold his entire First Morris position on the
following day for a profit of $11,480.
The complaint charges Deskovick and Haig with violating Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5. Simultaneous with the filing of the complaint, Deskovick
and Haig each consented, without admitting or denying the allegations in the complaint, to the
entry of final judgments: (1) permanently enjoining them from violating Section 10(b) of the
Exchange Act and Rule 10b-5; (2) ordering Haig to disgorge $68,277, the full amount of the
First Morris trading profits made by Haig and the person he tipped, and to pay prejudgment
interest of $18,007 on that amount; (3) ordering Deskovick to pay a civil penalty of $68,277; (4)
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ordering Haig to pay a civil penalty of $34,138; and (5) barring Deskovick from serving as an
officer or director of a public company for five years. In determining the amount of the penalty
sought from Haig, the Commission considered the significant cooperation he provided in
connection with this matter, including providing information about others that assisted the
Commission in bringing additional charges. The final judgments are subject to the Court’s
approval.
SEC v. Todd Leslie Treadway
Lit. Rel. No. 21877 (March 7, 2011)
The Commission charged attorney Todd Leslie Treadway with insider trading in advance
of two separate tender offer announcements during 2007 and 2008. According to the complaint,
while employed as an attorney in the New York office of Dewey & LeBoeuf, LLP, Treadway
provided advice on, among other things, the employee benefit and executive compensation
consequences of mergers and acquisitions and had access to material nonpublic information
concerning contemplated corporate acquisitions. The SEC alleges that in 2007, and again in
2008, Treadway used material, non-public information he obtained through his position at D&L
to purchase stock in two separate companies prior to the announcement of the acquisition: In
June 2007, Treadway purchased securities in Accredited Home Lenders Holding Company, and
in May 2008 Treadway purchased securities in CNET Networks, Inc. According to the
complaint, Treadway’s illegal trading resulted in profits of approximately $27,000.
SEC v. Jeffery J. Temple and Benedict M. Pastro
The SEC charged a former information technology (IT) manager at a prominent
Delaware law firm and his brother-in-law with insider trading on confidential information about
impending mergers and acquisitions by the law firm’s clients.
The SEC alleges that Jeffery J. Temple, a former Information Systems and Security
Manager at a Wilmington, Del.-based law firm, accessed material nonpublic information in the
course of his employment and then traded in advance of at least 22 merger and acquisition public
announcements involving 20 companies that retained his former employer as counsel in some
capacity. Temple also tipped his brother-in-law, Benedict M. Pastro, who traded in concert with
Temple in advance of twelve public announcements. The pair reaped over $182,000 in illegal
profits during their insider trading scheme. Temple was terminated from his position on October
11, 2010 once his illegal scheme was uncovered.
According to the SEC’s complaint filed in the U.S. District Court for the District of
Delaware, the scheme began in 2009 as Temple used his IT position to access nonpublic
information about impending deals involving law firm clients. Temple, who lives in Newark,
Delaware, corresponded with his online brokerage firm using his law firm e-mail address.
Electronic login records for Temple’s brokerage account reflect that he often placed trades from
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work. Frequent telephone calls around the time of the trades indicate that Temple closely
coordinated his trading with Pastro, who also lives in Newark.
Among the many deals mentioned in the Complaint, the SEC alleges, for example, that
Temple and Pastro conducted insider trading based on confidential information Temple accessed
about an impending merger and acquisition involving DynCorp International, Inc. Temple’s law
firm was hired on October 6, 2009 to act as special Delaware outside counsel to Dyncorp’s
Board of Directors in connection with its possible acquisition by Cerberus Capital Management
L.P. Temple and Pastro purchased stock and call options in DynCorp shortly before an April 12,
2010 public merger and acquisition announcement. Immediately following the announcement,
Temple and Pastro sold their positions for illicit trading profits of more than $34,000.
The SEC further alleges that Temple and Pastro also traded on nonpublic information that
Temple obtained about an impending deal between Facet Biotech Corporation and Abbott
Laboratories, Inc. Temple’s law firm was retained as counsel to Facet on or before August 25,
2009, in connection with Abbott Labs’s proposed tender offer to Facet. Temple and Pastro
bought stock and call options only days before the March 9, 2010 public announcement that
Facet agreed to be acquired by Abbott Labs. Pastro and Temple sold all of their positions
immediately after the announcement for combined trading profits of more than $23,000.
The SEC also alleges that Temple was trading on material nonpublic information
obtained during the course of his employment and profiting from his scheme as recently as
September.
SEC v. Brett A. Cohen and David V. Myers
The SEC charged a Baltimore-based business consultant and his uncle with insider
trading in the stock of two biotechnology companies based on material, nonpublic information
that he obtained from his fraternity brother.
The SEC alleges that Brett A. Cohen received coded e-mails referencing the movie Wall
Street from his fraternity brother, who was being tipped with inside information by his own
brother, a patent agent for San Diego-based Sequenom, Inc. Cohen subsequently made phone
calls from an outdoor pay phone to tip his uncle David V. Myers of Cleveland, who then traded
on the illegally obtained inside information and garnered more than $600,000 in illicit profits.
According to the SEC’s complaint, filed in the U.S. District Court for the Southern
District of California, the patent agent learned about two corporate events involving Sequenom
prior to the public release of the information:
Sequenom’s January 2009 offer to acquire Exact Sciences Corporation (EXAS).
Sequenom’s April 29, 2009 announcement that previously announced test data from its Down
syndrome screening test could no longer be relied upon.
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According to the SEC’s complaint, the patent agent conducted intellectual property due diligence
with respect to the EXAS transaction, and he was the patent agent assigned to the company’s
Down syndrome test.
The SEC alleges that the patent agent tipped material, non-public information about the
EXAS transaction to his brother, who relayed it to his fraternity brother Cohen. For example, the
patent agent’s brother sent Cohen an e-mail asking, “[a]ny word related to Blu H@rsesh0e? La
Jolla says the times are ripe.” The movie Wall Street uses the phrase, “Blue Horseshoe loves
Anacot Steel,” as a code for insider trading. “La Jolla” references the fact that the patent agent
lived and worked near La Jolla, Calif.
The SEC alleges that the patent agent also tipped his brother ahead of Sequenom’s
announcement that investors could no longer rely on previously disclosed data related to its
Down syndrome test. The announcement caused Sequenom’s stock price to drop by more than
75 percent in one day. Cohen illegally obtained and tipped inside information just prior to the
company’s announcement through a series of communications, including a call he placed from a
pay phone near his workplace to convey information to Myers, who immediately purchased risky
Sequenom put options just minutes before the markets closed on April 29, 2009. The next
morning, Myers sold his entire Sequenom position for illegal profits of more than $570,000.
The SEC’s complaint charges that Cohen and Myers violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking permanent
injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties
against them.
The U.S. District Court for the Southern District of New York entered a Temporary
Restraining Order freezing assets and trading proceeds of certain One of More Unknown
Purchasers of the Securities of Wimm-Bill-Dann Foods OJSC (the “Unknown Purchasers”) and
prohibiting the Unknown Purchasers from obtaining the securities or the proceeds from any sale
of the securities. The Commission filed a complaint alleging that the Unknown Purchasers
engaged in illegal insider trading in the last three days before the December 2, 2010,
announcement that PepsiCo, Inc. intended to acquire a 66 percent interest in Wimm-Bill-Dann
Foods OJSC (“WBD”) for $3.8 billion, pending required government approvals. (The $3.8
billion price for 66 percent implies a total enterprise value of $5.4 billion.) WBD is a Russian
corporation that manufactures and sells dairy and fruit juice products. It has American
Depositary Receipts (“ADRs”) that trade on the New York Stock Exchange. The Commission’s
complaint alleges that the Unknown Purchasers, through their insider trading, violated Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks
permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil
monetary penalties.
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The Commission’s complaint alleges that, in an account maintained at SG Private
Banking (Suisse) SA in Geneva, Switzerland, the Unknown Purchasers placed orders to buy
107,500 ADRs on November 29, 2010; another 132,500 ADRs on November 30, 2010; and an
additional 160,000 ADRs on December 1, 2010. The Unknown Purchasers’ buys on November
29th comprised 23 percent of the total trading volume of WBD ADRs that day; their purchases
on November 30th comprised 13 percent of that day’s total trading volume of WBD ADRs; and
their December 1st purchases comprised 21 percent of that day’s total trading volume of WBD
ADRs.
The complaint further alleges that, after the acquisition announcement, the price of WBD
ADRs rose approximately 28 percent for the day. As a result, the Unknown Purchasers are in a
position to realize total profits of approximately $2.7 million from the sale of the ADRs.
The Court's Temporary Restraining Order prohibits the transfer of the illegally purchased
WBD ADRs, or proceeds from their sale, to the Unknown Purchasers. In addition, the Order
requires the Unknown Purchasers to identify themselves, imposes an expedited discovery
schedule, and prohibits the defendants from destroying documents.
SEC v. Arnold McClellan and Annabel McClellan
The SEC charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking
confidential merger and acquisition information to family members overseas in a multi-million
dollar insider trading scheme.
The SEC alleges that Arnold McClellan and his wife Annabel, who live in San Francisco,
provided advance notice of at least seven confidential acquisitions planned by Deloitte’s clients
to Annabel’s sister and brother-in-law in London. After receiving the illegal tips, the brother-inlaw took financial positions in U.S. companies that were targets of acquisitions by Arnold
McClellan’s clients. His subsequent trades were closely timed with telephone calls between
Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider
trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be
funneled back to Annabel McClellan.
The UK Financial Services Authority (FSA) has announced charges against the two
relatives – James and Miranda Sanders of London. The FSA also charged colleagues of James
Sanders whom he tipped with the nonpublic information in the course of his work at his Londonbased derivatives firm. Sanders’s tippees and clients of his trading firm made approximately $20
million in U.S. dollars by trading on the inside information.
According to the SEC’s complaint, Arnold McClellan had access to highly confidential
information while serving as the head of one of Deloitte’s regional mergers and acquisitions
teams. He provided tax and other advice to Deloitte’s clients that were considering corporate
acquisitions.
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The SEC alleges that between 2006 and 2008, James Sanders used the non-public
information obtained from the McClellans to purchase derivative financial instruments known as
“spread bets” that are pegged to the price of the underlying U.S. stock. The trading started
modestly, with James Sanders buying the equivalent of 1,000 shares of stock in a company that
Arnold McClellan’s client was attempting to acquire. Subsequent deals netted significant trading
profits, and eventually James Sanders was taking large positions and passing along information
about Arnold McClellan’s deals to colleagues and clients at his trading firm as well as to his
father.
The SEC’s complaint charges Arnold and Annabel McClellan with violating the antifraud
provisions of the federal securities laws. The complaint seeks permanent injunctive relief,
disgorgement of illicit profits with prejudgment interest, and financial penalties.
SEC v. Dr. Yves M. Benhamou
The SEC charged a French doctor/consultant with unlawfully tipping a hedge fund
portfolio manager material, non-public information concerning Human Genome Science, Inc.'s
("HGSI's") clinical trial for the drug Albumin Interferon Alfa 2-a ("Albuferon"), a potential drug
to treat hepatitis-C, in advance of HGSI's January 23, 2008 negative announcement.
The complaint, filed in the Southern District of New York, alleges that Yves M.
Benhamou, M.D., the French doctor and a member of the Steering Committee overseeing HGSI's
clinical trial of Albuferon, tipped the portfolio manager about problems encountered during
Phase 3 of the trial. While serving on the Steering Committee, Benhamou also provided
consulting services to the portfolio manager, with whom he had also developed a friendship over
the years. According to the complaint, the portfolio manager, based on the material, non-public
information provided by Benhamou, ordered the sale of the entire position of HGSI stock held by
the six healthcare-related hedge funds that he co-managed, or approximately six million shares,
during the six and a half weeks preceding HGSI's January 23, 2008 announcement. As a result of
the sales, the hedge funds avoided losses of at least $30 million.
The complaint alleges that Phase 3 of HGSI's clinical trial consisted of three arms: (1) a
1200 microgram dosage of Albuferon; (2) a 900 microgram dosage of Albuferon; and (3) a
dosage of the current leading hepatitis C drug on the market. HGSI expected Phase 3 of the trial
to show that the 1200 microgram dosage performed better than the current leading hepatitis C
drug and had fewer side effects and thus great commercial potential. According to the complaint,
from no later than December 1, 2007, until prior to the announcement, Benhamou learned of (i)
two serious adverse events, including one death, that occurred in the 1200 microgram arm of the
trial; (ii) the possibility and ultimate recommendation by an independent safety committee
monitoring the trial to stop the 1200 microgram dosage; and (iii) HGSI's decision to follow the
committee's recommendation, reduce the dosage for the patients on the 1200 microgram arm to
900 micrograms, and publicly announce the changes to the trial. The complaint alleges that
Benhamou tipped material non-public information about the trial to the portfolio manager, in
stages, immediately upon learning of each new negative development. According to the
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complaint, the portfolio manager knew or should have known that Benhamou was affiliated with
the Albuferon trial, that it was improper for Benhamou to consult with the portfolio manager
about Phase 3 of the trial, and that Benhamou breached his duty of confidentiality to HGSI when
he tipped the portfolio manager material, non-public information about the trial. The complaint
alleges that the portfolio manager, based on the material, non-public information tipped by
Benhamou, caused the six hedge funds to sell approximately six million shares of HGSI between
December 7, 2007 and January 22, 2008, including two million shares sold in a block trade just
before the markets closed on January 22, 2008. On January 23, 2008, when HGSI announced it
was dropping the 1200 microgram arm of the Albuferon trial at the recommendation of the
independent safety committee, HGSI's share price dropped to $5.62 by the end of the day,
representing a 44 percent drop from the close of the prior day. The hedge funds avoided losses of
at least $30 million.
SEC v. Gianluca Di Nardo, et al.
Lit. Rel. No. 21687A (October 7, 2010)
http://sec.gov/litigation/litreleases/2010/lr21687a.htm
The Commission proposes to settle with Gianluca Di Nardo, an Italian citizen, and his
investment vehicle Corralero Holdings, Inc., (“Corralero”) for alleged insider trading in the
securities of two issuers, DRS Technologies, Inc. (“DRS”) and American Power Conversion
Corp. (“APCC”). DiNardo, the beneficial owner of Corralero, agreed to settle the charges with
the Commission by paying approximately $3 million in disgorgement and penalties. The
Commission amended its Complaint in its previously-filed action against unknown purchasers of
DRS and APCC call options to name these settling defendants. The Amended Complaint also
names other previously-unknown defendants who allegedly engaged in insider trading in DRS
securities.
In its Amended Complaint, the Commission alleges that Di Nardo, through Corralero,
made highly profitable and suspicious purchases of DRS and APCC call options ahead of public
disclosures announcing the acquisitions of these companies. The Amended Complaint alleges
that, between September 21 and 22, 2006, Di Nardo bought 2,400 APCC call options at a cost of
approximately $299,800 while in possession of material, nonpublic information. According to
the Amended Complaint, Di Nardo liquidated all APCC call options and made a profit of
approximately $1.4 million following the announcement by Schneider Electric SA on October
30, 2006, that it would acquire all of APCC’s outstanding shares for $31 a share. In addition, the
Commission alleges that on April 29, 2008, Di Nardo bought 550 DRS call options that were
out-of-the-money and set to expire in the near term while in possession of material, nonpublic
information. According to the Amended Complaint, Di Nardo liquidated all DRS call options,
reaping a profit of approximately $669,750 following a May 8, 2008, Wall Street Journal article
reporting the advanced merger negotiations between Finmeccanica S.p.A. and DRS, and after
confirmation by DRS that it was engaged in talks regarding a potential strategic transaction.
Under the terms of the proposed settlement, Di Nardo and Corralero consent, without
admitting or denying the allegations of the Amended Complaint, to the entry of final judgments
permanently enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder, and ordering them jointly and severally liable for the payment of
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$2,110,600 in disgorgement, $191,345.77 in prejudgment interest, and a civil penalty of
$700,000. The settlement remains subject to the approval of the U.S. District Court for the
Southern District of New York.
SEC v. Marleen Jantzen and John Jantzen
The SEC charged Austin, Texas resident and former Dell Inc. employee Marleen Jantzen
and her husband, John Jantzen, a licensed broker employed by an SEC-registered broker-dealer,
with insider trading around the public announcement of Dell's tender offer for Perot Systems in
September 2009.
In the SEC's complaint, filed in the U.S. District Court for the Western District of Texas,
Austin Division, the SEC alleges that Marleen Jantzen learned about the deal during the course
of her duties for Dell and was under explicit, written instructions not to trade. Nevertheless, the
Complaint alleges, on the last trading day before the deal announcement, Marleen Jantzen made
a highly unusual cash transfer to a brokerage account held jointly by both Jantzens. According to
the Complaint, within minutes of the cash transfer, John Jantzen started buying Perot Systems
call options and common stock in the joint account-in total, purchasing 500 shares of Perot
Systems common stock and 24 Perot Systems call option contracts.
According to the Complaint, the public announcement of the deal on September 21, 2009
resulted in a substantial increase in the price of Perot System shares. Immediately following the
announcement, the Jantzens liquidated their entire position in Perot Systems stock and call
options. The complaint alleges that, as a result of their illegal trading in Perot Systems securities,
Defendants realized net trading profits totaling $26,813.58.
The SEC's complaint alleges that the Jantzens violated Sections 10(b) and 14(e) of the
Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. In addition, the
Complaint alleges that Marleen Jantzen violated Exchange Act Rule 14e-3(d). The SEC has
asked the Court to permanently enjoin the Jantzens from future violations of these provisions of
the federal securities laws, and to order them to pay financial penalties and disgorgement of illgotten gains with prejudgment interest.
This is the second case filed by the SEC charging insider trading ahead of the Dell-Perot
Systems deal announcement. The Commission previously filed an emergency action against
former Perot Systems employee Reza Saleh for his insider trading ahead of the transaction, and
successfully recovered $8.6 million in illicit profits.
SEC v. Wyly, et al.
Lit. Rel. No. 21607 (July 29, 2010)
The SEC alleged in a civil enforcement action that Samuel E. Wyly and his brother,
Charles J. Wyly, Jr. (hereinafter the "Wylys"), engaged in a 13-year fraudulent scheme to hold
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and trade tens of millions of securities of public companies while they were members of the
boards of directors of those companies, without disclosing their ownership and their trading of
those securities. According to the complaint, the Wylys' scheme defrauded the investing public
by materially misrepresenting the Wylys' ownership and trading of the securities at issue while
enabling the Wylys to realize hundreds of millions of dollars of undisclosed gain and other
material benefits in violation of the federal securities laws governing the ownership and trading
of securities by corporate insiders.
The public companies involved in the Wylys' scheme to defraud were Michaels Stores,
Inc., Sterling Software, Inc., Sterling Commerce, Inc., and Scottish Annuity & Life Holdings
Ltd. (now known as Scottish Re Group Limited) ("Scottish Re") (hereinafter collectively referred
to as "the Issuers"). The complaint alleges that shares of the Issuers were traded on the New
York Stock Exchange throughout the period of the Wylys' scheme. The apparatus of the fraud
was an elaborate sham system of trusts and subsidiary companies located in the Isle of Man and
the Cayman Islands (collectively hereinafter the "Offshore System") created by and at the
direction of the Wylys. The complaint alleges that the Offshore System enabled the Wylys to
hide their ownership and control of the Issuers' securities (hereinafter "Issuer Securities")
through trust agreements that purported to vest complete discretion and control in the offshore
trustees. In actual fact and practice, according to the complaint, the Wylys never relinquished
their control over the Issuer Securities and continued throughout the relevant time period to vote
and trade these securities at their sole discretion.
The complaint alleges that through their use of the Offshore System, the Wylys were able
to sell without disclosing their beneficial ownership over $750 million worth of Issuer Securities,
and to commit an insider trading violation resulting in unlawful gain of over $31.7 million.
According to the complaint, the Wylys' attorney and fellow director of three of the Issuers,
Michael C. French ("French"), and their stockbroker, Louis J. Schaufele III ("Schaufele"),
substantially assisted the Wylys' fraudulent scheme, each reaping financial rewards for doing so.
The complaint alleges that each also committed primary violations of the antifraud provisions of
the securities laws. By depriving existing shareholders and potential investors of information
deemed material by the federal securities laws, and by making materially false SEC filings, the
Wylys were able to sell, in large-block trades alone, more than 14 million shares of Issuer
securities over many years, realizing gains in excess of $550 million.
The complaint further alleges that throughout the course of their scheme, the Wylys,
French and Schaufele engaged in fraud, deception and material misrepresentation to conceal
their actions; and that these acts included: (i) the making of hundreds of false and materially
misleading statements to the Issuers, the Issuers' attorneys, investors, the Commission, and, in
the case of Schaufele, to brokerage firm intermediaries, (ii) the establishment and operation of an
offshore "Wyly family office" in the Cayman Islands as a conduit and repository for
communications and records "which should not be seen in the USA," and (iii) the allocation of
the Wylys' offshore holdings of Issuer Securities among different, and often newly created,
offshore entities, all under the Wylys' control, solely to avoid making required Commission
filings. Both Franch and Shcaufele used their positions to assist the Wylys and personally profit.
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The complaint charges that all four defendants violated, and that French and Schaufele
also aided and abetted the Wylys' violations of, Section 10(b) of the Securities Exchange Act of
1934 (the "Exchange Act") and Rule 10b-5 thereunder. The complaint further charges the Wylys
and French with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") as
well as Exchange Act Sections A13(d), 14(a) and 16(a) and Rules 13d-1 13d-2, 14a-3, 14a-9,
16a-2 and 16a-3 thereunder. The complaint further charges the Wylys with violations of
Securities Act Sections 5(a) and 5(c); and charges the Wylys and French with aiding and abetting
(i) the Issuers' violations of Exchange Act Sections 13(a) and 14(a) and Rules 13a-1, 14a-3 and
14a-9 thereunder and (ii) three of the Wylys' offshore trustees' violations of Exchange Act
Section 13(d) and Rules 13d-1 and 13d-2 thereunder. Finally, the complaint charges French with
aiding and abetting the Wylys' violations of Exchange Act Sections 13(d), 14(a) and 16(a) and
Rules 13d-1, 13d-2, 14a-3 and 14a-9 thereunder. The SEC seeks injunctions against future
violations of the relevant statutes and rules, disgorgement of unlawful profits with prejudgment
interest, civil monetary penalties, and officer and director bars against the Wylys and French.
In the Matter of David E. Zilkha
A.P. Rel. No. 34-62186 (May 27, 2010)
This matter concerns insider trading in the securities of Microsoft Corporation
(“Microsoft”) in April 2001 by Zilkha, then a Microsoft employee who had accepted an
employment offer from Pequot Capital Management, Inc. (“Pequot”), a registered investment
adviser. Amidst rumors that Microsoft would miss its earnings estimates for the quarter that had
ended on SEC 31 (the “Third Quarter”), Pequot’s chairman and chief executive officer, Arthur J.
Samberg (“Samberg”), emailed Zilkha seeking information about whether Microsoft would meet
its estimates. That weekend, Zilkha contacted colleagues at Microsoft and learned that Microsoft
would meet or beat those estimates. He promptly conveyed to Samberg a recommendation to
purchase Microsoft securities based on this material, nonpublic information. On April 9, 2001
and thereafter, Samberg traded in Microsoft options on behalf of funds managed by Pequot with
the expectation that Microsoft’s stock price would rise.
On April 19, 2001, after the market had closed, Microsoft announced its Third Quarter
earnings. Consistent with the information Zilkha had conveyed to Samberg, Microsoft beat its
earnings estimates. Microsoft’s stock closed at $69 per share on April 20, the first trading day
after the announcement, a rise of 96 cents per share from the close the previous day and of
$12.43 per share from the morning of April 9. As a result of the trading by Samberg and Pequot,
the Pequot funds received gains of $14,769,960, approximately $4.1 million of which were
attributable to stakes held by Pequot and Samberg in the funds and to certain performance and
management fees they generated.
By virtue of his conduct, Zilkha willfully violated Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder.
The SEC instituted cease-and-desist proceedings pursuant to Section 21C of the
Exchange Act, and public administrative proceedings pursuant to Section 203(f) of the Advisers
Act and Section 9(b) of the ICA.
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SEC v. Yonni Sebbag and Bonnie Jean Hoxie
Lit. Rel. No. 21536 (May 26, 2010)
The SEC filed a complaint charging a Walt Disney Company employee and her
boyfriend in a scheme to sell confidential information about Disney's quarterly earnings to hedge
funds.
The SEC's complaint alleges that Bonnie Jean Hoxie — an administrative assistant to a
high-level Disney executive — and her boyfriend Yonni Sebbag sent anonymous letters in 2010
to more than 20 hedge funds in the U.S. and Europe, offering to provide pre-release results of
Disney's second quarter 2010 earnings in exchange for a fee. In early May, Hoxie obtained
confidential information concerning Disney's quarterly earnings and provided it to Sebbag, who
in turn sold it to an FBI agent posing as an investment manager.
According to the SEC's complaint, Hoxie had regular access to confidential information
concerning Disney's financial performance and operating plans. Hoxie and Sebbag orchestrated a
scheme to sell information to hedge funds to be used for purposes of insider trading.
The SEC also alleges that Sebbag told FBI agents posing as investment managers that he
wanted to establish a business relationship to share confidential information on a regular basis,
and wanted to be compensated. Sebbag also expressed his understanding of the risks involved
and his desire to avoid being caught.
The SEC's complaint further alleges that two days before Disney's earnings
announcement, Sebbag e-mailed the undercover agents a 107-page confidential document that
contained a series of talking points for Disney executives during an upcoming quarterly earnings
conference call. It contained very detailed information about the quarterly performance and
future prospects of Disney's various business segments. The SEC also alleges that Hoxie learned
that Disney's Earnings Per Share (EPS) for the quarter and provided that information to Sebbag,
who in turn provided it to an undercover agent approximately two hours before its public release.
According to the SEC's complaint, Sebbag made arrangements to meet the undercover
agents in person so he could collect his payment. At a May 14 meeting in New York, Sebbag
told the agents he wanted "to make a lot of money" through the arrangement and asked for their
advice on how to open up an off-shore account to deposit his proceeds from the scheme, stating
that he didn't "want to go to jail." Sebbag left the meeting with an envelope containing $15,000
in cash, and he subsequently made arrangements to meet with them again in California to
continue building the illicit relationship. The FBI arrested Sebbag and Hoxie on May 26, 2010.
By offering to sell and selling material non-public information to be used for the purposes
of insider trading, Sebbag and Hoxie engaged in acts or practices that constitute violations of the
anti-fraud provisions of the federal securities laws. The SEC's complaint seeks an order
providing for permanent injunctive relief against Sebbag and Hoxie pursuant to Section 21(d)(1)
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of the Securities Exchange Act of 1934, permanently enjoining each defendant from violating
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
SEC v. Igor Poteroba, et al.
Lit. Rel. No. 21460 (March 24, 2010)
The SEC charged Igor Poteroba, an investment banker at a global financial institution,
Aleksey Koval, a securities industry professional, and their friend, Alexander Vorobiev, in a
serial insider trading scheme that profited from highly confidential merger and acquisition
information. The defendants, all Russian citizens, repeatedly tipped and/or traded on
misappropriated inside information to obtain approximately $1 million in illicit profits.
According to the SEC's Complaint, from at least July 2005 through the present, Poteroba,
an investment banker in UBS Securities LLC's Global Healthcare Group in New York City,
misappropriated from UBS highly confidential inside information about at least eleven
impending acquisitions, tender offers, or other business transactions. UBS had been retained as a
financial adviser in ten of these transactions, and had been confidentially solicited as a source of
capital in the eleventh. The Complaint alleges that, in advance of each transaction, Poteroba
tipped his friend and financial professional, Koval (a/k/a Alexei Koval), with inside information
concerning the impending transaction. After receiving the inside information, Koval traded on all
the deals and tipped Vorobiev, a friend of both Koval and Poteroba, who traded on four of the
deals. Based on the information tipped by Poteroba, Koval and Vorobiev traded in stocks and
options of the companies targeted for acquisition.
According to the SEC's Complaint, the scheme began in at least July 2005 when Koval
and Vorobiev traded in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI
Pharma, Inc. Using, among other means of communication, coded email messages that referred
to securities as "frequent flier miles" and "bonus miles," Poteroba urged Koval to purchase
Guilford securities prior to the public announcement of the Guilford acquisition.
With respect to subsequent transactions, the SEC's Complaint alleges that Poteroba also
supplied information to Koval using coded email messages that referred to securities or money as
Macy's wedding registry gifts or "potatoes." For example, in discussing the need to purchase
Molecular Devices Corporation securities prior to the imminent public announcement of its
merger, Poteroba wrote to Koval, "Let me know if you've started your wedding registry at
Macy's" and "Happy to talk about sales items and etc. . . . sale ends soon . . . so hurry up."
The SEC's complaint charges the Defendants with violating Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act") and Rule 10-b5 thereunder, the general
antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and
Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent
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injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of
financial penalties against Poteroba, Koval, and Vorobiev, and disgorgement of illicit profits
with prejudgment interest from the Relief Defendants. The court issued an emergency order
temporarily freezing the assets of the Defendants and Relief Defendants.
SEC v. Arthur J. Cutillo, et al.
The SEC filed insider trading charges against nine defendants in a case involving serial
insider trading by a ring of Wall Street traders and hedge funds who made over $20 million
trading ahead of corporate acquisition announcements using inside information tipped by an
attorney at the international law firm of Ropes & Gray LLP, in exchange for kickbacks. The SEC
alleges that Arthur J. Cutillo, an attorney in the New York office of Ropes & Gray,
misappropriated from his law firm material, nonpublic information concerning at least four
corporate acquisitions or bids involving Ropes & Gray clients — the 2007 acquisitions of
Alliance Data Systems Corp. ("ADS"), Avaya Inc. ("Avaya"), 3Com Corp. ("3Com"), and Axcan
Pharma Inc. ("Axcan").
The SEC alleges that Cutillo, through his friend and fellow attorney Jason Goldfarb,
tipped inside information concerning these acquisitions to Zvi Goffer, a proprietary trader at the
broker-dealer Schottenfeld Group, LLC ("Schottenfeld"). The complaint further alleges that Zvi
traded on this information for Schottenfeld, and had numerous downstream tippees who also
traded on the information, including other professional traders and portfolio managers at two
hedge fund advisers.
As a result of conduct described in the complaint, the SEC alleges that each of the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. The SEC's complaint seeks permanent injunctive relief, disgorgement of illicit profits
with prejudgment interest, and the imposition of civil monetary penalties.
“GALLEON” CASES
SEC v. Adam Smith
Southern District of New York alleging that Adam Smith — a former portfolio manager of the
Galleon Emerging Technology funds (f/k/a the Galleon Communications funds) engaged in
insider trading in the securities of ATI Technologies, Inc. The SEC alleges that Smith caused the
Galleon funds he advised to purchase shares of ATI based on material non-public information
concerning Advanced Micro Devices Inc.’s $5.4 billion takeover of ATI in July, 2006. The
trading generated over $1.3 million in illicit profits.
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According to the SEC’s complaint, Smith obtained material non-public information
concerning the AMD/ATI transaction from an investment banking source that Smith had known
for years. This source, according to the SEC, provided Smith with the tip in order to win favors
from Galleon such as securing investment banking work from, or obtaining future employment
with, Galleon. The complaint filed on this day related to a pending enforcement action, SEC v.
Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR).
The SEC’s complaint charges Smith with violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a final judgment
permanently enjoining Smith from future violations of the above provisions of the federal
securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and
ordering him to pay civil penalties.
SEC v. Michael Cardillo
The SEC brought insider trading charges against Michael Cardillo, a former trader at the
hedge fund investment adviser Galleon Management, LP, for trading ahead of September 2007
announced acquisition of 3Com Corp., and November 2007 announced acquisition of Axcan
Pharma Inc.
The SEC’s complaint alleges that Arthur J. Cutillo and Brien P. Santarlas, former
attorneys with the international law firm Ropes & Grey LLP, misappropriated from their law
firm material, nonpublic information concerning the acquisitions of 3Com and Axcan. The SEC
alleges that they tipped this inside information, through another attorney, to Zvi Goffer, a former
proprietary trader at the broker-dealer Schottenfeld Group, LLC, in exchange for kickbacks. The
SEC further alleges that Goffer tipped information about these acquisitions to Craig Drimal, a
trader who worked out of the offices of Galleon, who then tipped the inside information to
Cardillo. According to the complaint, Cardillo then traded in the securities of 3Com and Axcan
on behalf of a Galleon hedge fund, resulting in more than $730,000 in illicit profits.
The SEC’s complaint charges Cardillo with violating Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive
relief, disgorgement of illicit profits prejudgment interest, and civil monetary penalties.
In a related criminal case filed by the U.S. Attorney’s Office for the Southern District of New
York, Cardillo has pled guilty to criminal charges in connection with this insider trading scheme.
The Commission thanks the U.S. Attorney’s Office and the Federal Bureau of Investigation for
their cooperation and assistance in connection with this matter.
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SEC v. Robert Feinblatt, Jeffrey Yokuty, Trivium Capital Management LLC, Sunil Bhalla,
and Shammara Hussain
Southern District of New York alleging that Robert Feinblatt – a co-founder and principal of
New York-based hedge fund investment adviser Trivium Capital Management LLC – and
Trivium analyst Jeffrey Yokuty engaged in insider trading in the securities of Polycom, Hilton,
Google and Kronos. The complaint charges Trivium with insider trading as well. The SEC
further alleges that Polycom senior executive Sunil Bhalla and Shammara Hussain, an employee
at investor relations consulting firm Market Street Partners that did work for Google, tipped the
inside information that enabled the insider trading by Feinblatt and Yokuty on behalf of
Trivium’s hedge funds for illicit profits of more than $15 million. The complaint filed on this
day relates to pending enforcement actions, SEC v. Galleon Management, LP, et al., 09-CV8811 (S.D.N.Y.) (JSR) and SEC v. Hardin, 10-CV-8600 (S.D.N.Y.) (JSR).
In the SEC’s complaint,the SEC alleges that Feinblatt and Yokuty traded on behalf of
Trivium in connection with two corporate takeovers and two quarterly earnings announcements
based on material nonpublic information that Feinblatt and Yokuty allegedly received from
Roomy Khan, an individual investor who had, herself, received such information from various
sources.
The SEC’s complaint alleges that Bhalla tipped Khan to inside information about
Polycom’s 2005 fourth quarter earnings, and that Khan traded on that information and tipped
others. The complaint alleges that the tippees included Feinblatt and Yokuty, who traded on
behalf of Trivium based on the information. It further alleges that Bhalla also tipped Khan with
inside information about Polycom’s 2006 first quarter earnings. Khan traded on the information
and tipped Rajaratnam, who traded on behalf of Galleon based on the information. The SEC also
alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside
information that Khan received from a Moody’s rating agency analyst about an impending
takeover of Hilton by The Blackstone Group. Feinblatt and Yokuty then traded on behalf of
Trivium based on the information.
The SEC further alleges that Hussain tipped Khan among others with inside information
about Google’s 2007 second quarter earnings. Khan traded on the information and also tipped
Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. The SEC also
alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside
information that she received about the impending acquisition of Kronos by Hellman &
Friedman. Feinblatt and Yokuty then traded on behalf of Trivium based on the information.
The SEC’s complaint charges the defendants with violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Bhalla, with violations of
Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently
enjoining the defendants from future violations of the above provisions of the federal securities
laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering
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them to pay financial penalties. The complaint also seeks to permanently prohibit Bhalla from
acting as an officer or director of any registered public company.
SEC v. Lanexa Management LLC and Thomas C. Hardin; SEC v. Franz N. Tudor
The SEC brought insider trading charges against Lanexa Management LLC, a hedge fund
investment adviser, and a former managing director, Thomas Hardin, for trading ahead of the
September 28, 2007 announced acquisition of 3Com Corp. (See Lit. Rel. No. 21740 (November
15, 2010), http://sec.gov/litigation/litreleases/2010/lr21740.htm.) In a separate complaint, the
SEC also charged Franz Tudor, a former proprietary trader at the broker-dealer Schottenfeld
Group LLC, for insider trading in connection with the November 29, 2007 announced
acquisition of Axcan Pharma Inc.
According to the SEC’s complaints, which were filed in federal court in Manhattan on
November 12, 2010, Arthur Cutillo and Brien Santarlas, two former attorneys with the
international law firm of Ropes & Gray LLP, misappropriated from their law firm material,
nonpublic information concerning the acquisitions of 3Com and Axcan. The SEC alleges that
they tipped this inside information, through another attorney, to Zvi Goffer, a former proprietary
trader at Schottenfeld, in exchange for kickbacks.
The SEC’s complaint against Lanexa Management and Hardin alleges that Goffer tipped
inside information concerning the 3Com acquisition to Gautham Shankar, a fellow proprietary
trader at Schottenfeld, who then tipped Hardin this inside information. According to the
complaint, Hardin then traded in the securities of 3Com on behalf of a Lanexa Management
hedge fund, resulting in approximately $640,000 in illicit profits.
In a separate complaint, the SEC alleges that Goffer also tipped material, nonpublic
information concerning the proposed acquisition of Axcan to Tudor, another fellow proprietary
trader at Schottenfeld. The SEC alleges that, based on this inside information, Tudor purchased
shares of Axcan in two separate personal trading accounts as well as in a proprietary account at
Schottenfeld. The SEC alleges that Tudor made approximately $75,000 in illicit profits.
The SEC’s complaints charge Lanexa Management, Hardin, and Tudor with violating Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaints seek
permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and civil
monetary penalties.
SEC v. Galleon Management, LP, et al.
The SEC filed a Second Amended Complaint ("SAC") in its ongoing Galleon action,
containing new allegations of insider trading in the securities of two additional companies by two
defendants in this action, Raj Rajaratnam ("Rajaratnam") and Anil Kumar ("Kumar"). The
insider trading now alleged in the Commission's enforcement action cumulatively generated
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more than $52 million in illicit trading profits or losses avoided. The SAC also recounts details
of an illicit payment scheme between Rajaratnam and Kumar, in which Rajaratnam paid Kumar
for material non-public information that Rajaratnam then used to trade on behalf of his hedge
fund, Galleon Management, LP ("Galleon"), generating almost $20 million in illicit profits. From
2003 to October 2009, Rajaratnam paid Kumar $1.75 to $2 million for inside information, and
Kumar reinvested some of those funds in a nominee account at Galleon, earning, together with
the profits on such reinvestments, a combined total of roughly $2.6 million for his participation
in the scheme. The SAC adds a claim relating to these allegations against Kumar for violation of
Section 17(a) of the Securities Act of 1933 ("Securities Act").
The SEC's initial Complaint, filed on October 16, 2009, alleged that six individuals,
including Rajaratnam and Kumar, and two hedge funds, engaged in widespread and repeated
insider trading that generated over $25 million in profits. (See Lit. Rel. No. 21255 (October 16,
2009), http://www.sec.gov/litigation/litreleases/2009/lr21255.htm.) Rajaratnam is the founder
and a Managing General Partner of Galleon, a New York hedge fund which at the time had
billions of dollars under management. When the complaint was filed, Kumar, a friend of
Rajaratnam's and a Galleon investor, was a director at the global consulting firm McKinsey &
Co. ("McKinsey"). The Commission's complaint alleged that Rajaratnam unlawfully traded
based on inside information involving eight different companies. It further alleged that Kumar
acquired material non-public information while working as a McKinsey consultant and passed
that information to Rajaratnam, who traded on it. The complaint charged Rajaratnam and Kumar
with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and
Rule 10b-5 thereunder, and Rajaratnam with violations of Section 17(a) of the Securities Act. On
November 5, 2009, the SEC filed a First Amended Complaint charging an additional ten
individuals and four entities with illegal insider trading that generated nearly $8 million more in
unlawful profits. (See Lit. Rel. No. 21284 (November 5, 2009), http://www.sec.gov/litigation/
litreleases/2009/lr21284.htm.)
CASES INVOLVING MARKET MANIPULATION
SEC v. Brian Gibson; SEC v. Douglas Newton and Real American Brands, Inc., n/k/a Real
American Capital Corp.; SEC v. Donald W. Klein and KCM Holdings Corp.; SEC v.
Thomas Schroepfer a/k/a Thomas Schroepfer Baetsen, Charles Fuentes, and Smokefree
Innotec, Inc.
Lit. Rel. No. 22018 (June 30, 2011)
The SEC charged three CEOs, their companies, and two penny stock promoters with
securities fraud for their roles in various schemes to manipulate the volume and price of
microcap stocks and illegally generate stock sales. The complaint alleges that the schemes
featured illicit kickbacks, a bribe to a purported corrupt broker, and the creation of a website to
deliver e-mail blasts to potential investors.
The SEC worked closely with the U.S. Attorney's Office for the Southern District of
Florida and the Federal Bureau of Investigation as the separate schemes were uncovered through
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an FBI undercover operation. The operation was conducted in such a way that no investors
suffered harm. The U.S. Attorney's Office on this day also announced criminal charges against
the same individuals facing SEC civil charges.
According to the SEC's complaints filed in U.S. District Court for the Southern District
of Florida, most of the schemes involved the payment of kickbacks to a purportedly corrupt
pension fund manager, in exchange for the fund's purchase of restricted shares of stock in the
various microcap companies. Another scheme involved a bribe that was to be paid to a purported
corrupt stockbroker who agreed to use his ability to buy stock in his customers' discretionary
accounts to purchase a microcap company's stock in the open market. What the insiders and
promoters did not know was that the people with whom they arranged these illegal transactions
were actually undercover FBI agents or confidential sources participating in an undercover
operation. A final scheme involved a stock promoter who created a website to tout a penny stock
company through a volley of e-mail blasts and who posted phony testimonials from fake
investors. The defendants reside or are based in South Florida, California, Texas, and Nevada.
These charges follow a series of cases filed in October and December 2010, in which the
SEC charged more than fourteen penny stock promoters and their companies with similar stock
manipulation schemes.
The SEC alleges that the company officers and a promoter in most of the schemes
understood they needed to disguise the kickbacks as payments to phony consulting companies,
which they knew would perform no actual work. They also knew the purported corrupt fund
trustee would be violating his fiduciary duties to his clients by taking part in the kickbacks. In
other instances, they knew that their illegal activities were meant to artificially inflate the
companies' stock price.
The SEC's complaints allege the defendants violated Section 17(a) of the Securities Act
of 1933, and/or Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC
is seeking permanent injunctions and financial penalties against all the defendants; disgorgement
plus prejudgment interest against the defendants who received ill-gotten gains; and penny stock
bars against all the individual defendants.
In the Matter of Huntleigh Securities Corporation and Jeffrey S. Christanell
A.P. Rel. No. 34-64336 (April 25, 2011)
The Commission instituted a settled administrative proceeding finding that Jeffrey S.
Christanell, former head of equity trading at Huntleigh Securities Corporation (Huntleigh),
willfully violated the antifraud provisions of the Securities Exchange Act of 1934 by engaging in
trading activity known as “marking the close” in certain thinly traded securities. The
Commission also charged Huntleigh with failing reasonably to supervise Christanell.
“Marking the close” involves placing orders at or near the close of the market to
artificially affect the closing prices of a security. The Commission found that, from September
2009 through December 2009, Christanell, on behalf of, and at the direction of, an SEC-
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registered investment adviser, placed buy orders at prices well above the most recent previous
trade shortly before the markets closed, thereby affecting the closing prices of those securities.
The Commission further found that Huntleigh failed to establish procedures or to have a system
to implement existing policies and procedures reasonably designed to prevent and detect
Christanell’s marking-the-close trading.
Under the terms of the settlement, Christanell consented to the issuance of an
administrative order: (i) requiring him to cease and desist from committing or causing any
violations and any future violations of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder; (ii) requiring him to pay a civil penalty of $15,000; and (iii) barring him
from association with any broker or dealer as well as collateral industry bars with the right to
reapply for association after one year. Huntleigh consented to the issuance of an administrative
order: (i) censuring it; and (ii) requiring it to comply with certain undertakings, including
adopting and implementing procedures requiring daily review of trade execution blotters and
exception reports by compliance personnel and provision to and review of daily trading
exception reports by compliance personnel. The Commission declined to impose a civil penalty
against Huntleigh based on Huntleigh’s representations in sworn financial statements and other
documents filed with the Commission. Christanell and Huntleigh consented to the issuance of the
order without admitting or denying any of the findings in the order.
In the Matter of Donald L. Koch and Koch Asset Management LLC
A.P. Rel. No. 34-64337 (April 25, 2011)
Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act),
Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (Advisers Act), and
Section 9(b) of the Investment Company Act of 1940 to determine whether Donald L. Koch
(Koch) and Koch Asset Management LLC (KAM) willfully violated the antifraud provisions of
the Exchange Act and the Advisers Act and the books-and-records provisions of the Advisers
Act. KAM is a Missouri limited liability company and investment adviser that has been
registered with the Commission since 1992. Koch, age 64, resides in St. Louis, Missouri and is
the President, Chief Compliance Officer, and founder of KAM.
The Division of Enforcement alleges in the Order after an investigation that from
September 2009 through December 2009, Koch and KAM engaged in a scheme to “mark the
close” of certain thinly traded securities held in KAM’s clients’ investment accounts and thereby
willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit
fraudulent conduct in connection with the purchase or sale of securities, and Sections 206(1) and
206(2) of the Advisers Act, which prohibit fraudulent conduct by an investment adviser.
“Marking the close” is a trading strategy that involves the placing of orders at or near the close of
market trading to artificially affect the reported closing price of a security. The Division of
Enforcement alleges that KAM, by marking-the-close in a security held by many of its advisory
accounts, was able to artificially improve the reported monthly performance for each account
holding that security.
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The Division of Enforcement further alleges that KAM and Koch failed to seek best
execution of orders placed for their advisory clients. Finally, the Division of Enforcement alleges
in the Order that KAM willfully violated, and Koch willfully aided and abetted and caused
violations of, Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which requires
investment advisers to implement written policies and procedures reasonably designed to prevent
violations of the Advisers Act and the rules that the Commission has adopted thereunder, and
Section 204 of the Advisers Act and Rule 204-2(a)(7) thereunder, which require the maintenance
of certain books and records.
SEC v. Todd M. Ficeto, et al.
The SEC charged two securities professionals, a hedge fund trader, and two firms
involved in a scheme that manipulated several U.S. microcap stocks and generated more than
$63 million in illicit proceeds through stock sales, commissions and sales credits.
The SEC alleges that Florian Homm of Spain and Todd M. Ficeto of Malibu, Calif.,
conducted the scheme through their Beverly Hills, Calif.-based broker-dealer Hunter World
Markets Inc. (HWM) with the assistance of Homm’s close associate Colin Heatherington, a
trader who lives in Canada. They brought microcap companies public through reverse mergers
and manipulated upwards the stock prices of these thinly-traded stocks before selling their shares
at inflated prices to eight offshore hedge funds controlled by Homm. Their manipulation of the
stock prices allowed Homm to materially overstate by at least $440 million the hedge funds’
performance and net asset values (NAVs) in a fraudulent practice known as “portfolio pumping.”
The SEC additionally brought administrative proceedings against HWM’s trader and
chief compliance officer, who each agreed to settle the SEC’s charges against them.
According to the SEC’s complaint filed in the U.S. District Court for the Central District
of California, Homm along with Ficeto and Heatherington conducted the scheme from
September 2005 to September 2007. Homm misused the assets of the hedge funds to allow him,
Ficeto, Heatherington and HWM to manipulate upward the prices of the U.S. microcap stocks in
which the hedge funds held a position. They used a number of classic manipulative techniques
such as placing matched orders, placing orders that marked the close or otherwise set the closing
price for the day, and conducting wash sales. This manipulation enabled Ficeto, Homm and
Heatherington to generate enormous profits through Ficeto’s and Homm’s co-ownership of
HWM and their sale of the microcap stock shares to the hedge funds at inflated prices. Ficeto
garnered further illicit profits through his control of Hunter Advisors, LLC, which directed the
investment activities of a “fund of funds” that also participated in the stock manipulation.
The SEC’s complaint alleges that the principal traders at HWM and the London-based
hedge funds manager Absolute Capital Management Holdings Limited (ACMH) exchanged
hundreds of instant messages (IMs) that were recorded on a secret, alternate messaging system
that allowed them to communicate freely without fear that their scheme would be detected by the
SEC. As reflected in those secret IM messages, ACMH’s trader (typically Heatherington) under
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Homm’s direction would instruct Ficeto or HWM’s trader (Tony Ahn) acting under Ficeto’s
direction to place matched orders, transactions that marked the close, or wash sales for the
purpose of artificially raising or stabilizing the microcap stock prices.
The SEC instituted separate but related administrative proceedings against Ahn and
HWM’s former chief compliance officer Elizabeth Pagliarini, who each agreed to settle their
cases without admitting or denying the SEC’s findings. Ahn agreed to pay a $40,000 penalty,
comply with certain undertakings, and be barred from association with a broker and dealer for
five years. Pagliarini agreed to a $20,000 penalty and one-year suspension as a supervisor with a
broker or dealer.
SEC v. Jonathan R. Curshen, et al.
The Commission filed a complaint against Jonathan R. Curshen, 46, a Sarasota, Florida
resident who allegedly founded and led Red Sea Management Ltd., (“Red Sea”), a Costa Rican
asset protection company that, according to the complaint, effected pump-and-dump schemes on
behalf of its clients and laundered millions of dollars in trading proceeds out of the United States
to its clients; David C. Ricci, 39, and Ronny Morales Salazar, 39, of San Jose, Costa Rica, whom
the complaint describes as Red Sea stock traders; Ariav “Eric” Weinbaum, 37, and Yitzchak (or
Izhack) Zigdon, 47, of Israel, allegedly two of Red Sea’s clients; Robert L. Weidenbaum, 44, of
Coral Gables, Florida, allegedly a stock promoter who operates a company called CLX &
Associates, Inc.; and Michael S. Krome, 49, a Lake Grove, New York lawyer, who allegedly
wrote a fraudulent opinion letter, for their respective roles in a fraudulent pump-and-dump
scheme in the common stock of CO2 Tech Ltd. that was carried out from late 2006 through April
2007. According to the complaint, the defendants’ coordinated misconduct enabled them to sell
CO2 Tech stock at artificially inflated prices, resulting in profits of over $7 million. Defendant
Ricci simultaneously offered to settle with the Commission in a consent submitted for the
Court’s consideration.
According to the complaint, CO2 Tech Ltd. was a sham company without significant
assets or operations whose stock prices were quoted in the Pink Sheets. The complaint alleges
that CO2 Tech falsely touted business relationships that the company had not formed, including
a relationship with the Boeing Company when in fact there had been no communications,
correspondence or understandings between CO2 Tech and Boeing.
SEC v. Gregg M.S. Berger, et al.
The SEC filed fraud charges against the operators of a $33 million international microcap
stock scheme involving the stocks of eight small U.S. companies headquartered in the People's
Republic of China, Canada, and Israel.
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In a complaint filed in U.S. District Court for the Eastern District of Michigan, the SEC
charged three companies and eight individuals with engaging in unlawful spam e-mail
campaigns to pump and dump securities of microcap companies.
The SEC also charged four corporate insiders for their participation in the pump-anddump schemes and for engaging in a fraudulent scheme to conceal the sales of millions of shares
of their companies' securities:
The SEC alleges that at various times between January 2005 and December 2007, each of
the defendants engaged in one or more schemes to pump up the price and volume of the
securities of one or more of the companies by paying for false spam e-mail campaigns.
SEC v. Alternate Energy Holdings, Inc., et al.
The SEC charged a self-described power company in Idaho with fraudulently raising
funds for a $10 billion nuclear power project. The SEC is seeking an emergency court order to
freeze the assets of the company and two executives.
The SEC alleges that Alternate Energy Holdings Inc. (AEHI) has raised millions of
dollars from investors in Idaho and throughout the U.S. and Asia while fraudulently
manipulating its stock price through misleading public statements that conceal the secret profits
reaped by its CEO Donald L. Gillispie and Senior Vice President Jennifer Ransom. Gillispie has
touted the company as a tremendous investment opportunity that could rival Exxon Mobil in
profitability, despite the fact that AEHI has essentially no revenue and minimal operations.
SEC v. Jennifer L. Dodge, Grant M. Carroll, Tamara M. Davis, and The Cornerstone
TKD, LLC
The SEC filed a civil action in United States District Court in Austin, Texas against
Jennifer Dodge, Grant Carroll, Tamara Davis, and The Cornerstone TKD, LLC (Cornerstone).
The Commission's complaint alleges that, from April 2007 to May 2008, the defendants raised
approximately $9 million from 20 investors nationwide by selling unregistered, high-yield
interests in a Prime Bank scheme through the now-defunct company, Quantum Funding
Strategies, LLC. Prime Bank schemes lure investors with the promise of astronomical profits and
the chance to be a part of an exclusive, international investing program.
The Commission's complaint alleges that investors were told that their funds would be
pooled and placed with an escrow agent and then used to secure money from high-net worth
"funders." That money would be held in a "blocked funds account" and would be used as
collateral for "traders" to buy and sell bank notes and other instruments. Dodge, together with
Carroll, Davis and her company, Cornerstone, promised investors they would receive between
25% and 100% weekly returns on their investments, without risking loss of investment principal.
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According to the complaint, Dodge also misled investors about her past success with similar
trading schemes, and Carroll misrepresented that he was a licensed securities broker and that he
had verified the validity of the Private Placement program. The complaint further alleges that
investors never earned any returns because the defendants never completed the promised
transactions.
The Commission's complaint alleges that Dodge and Carroll violated Section 17(a) of the
Securities Act of 1933 (Marchurities Act), and Section 10(b) of the Securities Exchange Act of
1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint further alleges that all the
defendants violated Sections 5(a) and 5(c) of Securities Act, and 15(a)(1) of the Exchange Act.
The complaint seeks disgorgement from Dodge and Carroll, and injunctive relief and civil
money penalties from all the defendants. Without admitting or denying the Commission's
allegations, Dodge partially settled the Commission's charges by consenting to the entry of an
agreed judgment enjoining her from violating Securities Act Sections 5(a), 5(c) and 17(a) and
Exchange Act Section 10(b) and Rule 10b-5 thereunder. Dodge also consented to a court order
providing that, upon motion of the Commission, the court will determine the appropriateness and
amounts of disgorgement, prejudgment interest and civil money penalty.
SEC v. Javeed A. Matin and Wilshire Equity, Inc.
The Commission charged a Southern California businessman, Javeed Matin, age 52, of
Diamond Bar, Calif., for engaging in a scheme to pump up the stock of his former apparel
company, Veltex Corp.
The Commission's complaint alleges that, beginning in at least 2006 through August
2008, Matin perpetuated a "pump and dump" scheme in which he arranged for a company to
acquire newly issued shares of Veltex, made false representations about Veltex's business
prospects, and then caused the company to sell its shares into the resulting market. According to
the complaint, while Matin was Veltex's CEO, he funneled about 10.5 million Veltex shares in
an unregistered offering to a company he controlled, Wilshire Equity, Inc. The complaint further
alleges that Matin enlisted a figurehead over Wilshire, Mazhar Ul Haque, who immediately
resold Veltex shares to the public at Matin's direction. The complaint also alleges that Matin
contemporaneously touted Veltex by issuing a series of false and misleading press releases
grossly inflating Veltex's revenues, embellishing its overseas operations, and assuring investors
that Veltex's financial statements were being audited. The complaint alleges during this time
Veltex's stock price fluctuated between $0.33 and $3.30 and that Matin generated approximately
$6.5 million from the sale of Veltex shares through Wilshire.
The complaint alleges that Matin and Wilshire violated the securities registration and
antifraud provisions of the securities laws. The Commission seeks permanent injunctions against
each defendant, and disgorgement, prejudgment interest, and civil penalties, and additionally as
to Matin, a conduct-based injunction barring him from offering unregistered securities in the
future.
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SEC v. BroCo Investments and Valery Maltsev
Lit. Rel. No. 21452 (March 16, 2010)
Lit. Rel. No. 21571 (June 25, 2010)
The SEC filed an emergency action in the United States District Court for the Southern
District of New York to freeze the assets of Defendants, located in Russia, responsible for a hitech market manipulation scheme. The Honorable Richard J. Holwell, granted the SEC’s request
to freeze the Defendants' assets pending a preliminary hearing, including an account that holds
assets in excess of $500,000.
The SEC's complaint alleges that BroCo Investments, Inc., its president Valery Maltsev,
and/or individuals acting in concert with them hijacked the online brokerage accounts of
unwitting investors using stolen usernames and passwords and subsequently placed unauthorized
trades through the compromised accounts to manipulate the markets of at least thirty-eight
issuers between August 2009 and December 2009. In almost every instance, prior to intruding
into these accounts, the Defendants acquired positions in their own account. Then, just minutes
later, without the accountholders' knowledge, the Defendants, and/or individuals acting in
concert with them, placed scores of unauthorized buy orders at above-market prices using the
compromised accounts. After these unauthorized buy orders were placed, the Defendants sold
the positions held in their own account at the artificially inflated prices. In other instances, the
Defendants profited by covering short positions previously established in their account while
placing unauthorized sell orders through the compromised accounts at substantially lower prices.
This illicit account activity artificially affected the share price and trading volume for each of the
thinly-traded issuers and enabled the Defendants to sell their holdings at a substantial profit,
realizing at least $255,532 in ill-gotten gains.
The complaint further alleges that the Defendants violated Section 17(a) of the Securities
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder and seeks permanent injunctions against future violations by the Defendants and
disgorgement of all ill-gotten gains, including prejudgment interest and civil penalties.
On June 17, 2010, the Honorable Richard J. Holwell entered a preliminary injunction
against defendants BroCo Investments and Valery Maltsev. Among other things, the Court order
froze the defendants' U.S. assets and ordered defendants to repatriate $400,000.
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SEC v. East Delta Resources Corp., Victor Sun, David Amsel and Mayer Amsel
The SEC filed a complaint against East Delta Resources Corp. (East Delta), Victor Sun,
David Amsel and Mayer Amsel in United States District Court for the Eastern District of New
York, alleging that they violated the Federal securities laws in a scheme to manipulate the market
for the securities of East Delta. According to the complaint, from 2004 through at least 2006, the
Defendants pumped up the volume of market activity of East Delta stock, issued false press
releases and illegally sold East Delta shares that they had received from East Delta at little or no
cost. The fraudulent proceeds from this scheme totaled more than $1,400,000.
The SEC's complaint alleges that East Delta, Sun and the Amsels violated or aided and
abetted violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Marchurities
Act), Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and
Exchange Act Rules 10b-5, 12b-20 and 13a-1. The complaint alleges that East Delta also
violated Exchange Act Rule 13a-13, and that Sun violated Exchange Act Section 16(a) and Rules
13a-14 and 16a-3. It seeks a judgment permanently enjoining Defendants from violating these
securities laws, requiring an accounting and the payment of disgorgement plus prejudgment
interest, requiring the payment of civil monetary penalties, barring Sun and the Amsels from
participating in future penny stock offerings, and barring Sun and David Amsel from serving as
an officer or director of a registered issuer.
Separately, on January 13, 2010 the SEC suspended trading in East Delta securities for
failure to file periodic reports, and ordered that administrative proceedings be instituted to
determine whether to revoke or suspend the registration of the securities of East Delta.
SEC v. Scott R. Sand and Ingen Technologies, Inc; SEC v. Jeffrey Galpern; SEC v. Jean R.
Charbit and Tzemach David Netzer Korem; SEC v. Anthony Mellone, Alex Parsinia, Larry
Wilcox, Macada Holding, Inc. f/k/a Tri-Star Holdings, Inc., Zcom Networks, Inc., and The
UC HUB Group; SEC v. Bruce Palmer and AccessKey IP, Inc.; SEC v. John "Buckeye"
Epstein, Steven E. Humphries, Earthworks Entertainment, Inc., and The Fight Zone, Inc.
a/k/a Gold Recycle Corp.
The SEC charged more than a dozen penny stock promoters and their companies with
securities fraud for their roles in various illicit kickback schemes to manipulate the volume and
price of microcap stocks and illegally generate stock sales.
The SEC worked closely with the U.S. Attorney's Office for the Southern District of
Florida and the Federal Bureau of Investigation as the separate schemes were uncovered through
FBI undercover operations conducted in such a way that no investors suffered harm. The U.S.
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Attorney announced criminal charges against some of the same individuals facing SEC civil
charges.
The defendants reside or are based in South Florida, Nevada, California, New Mexico,
and Texas. According to the SEC's complaints, which were all filed in the United States District
Court for the Southern District of Florida, most of the schemes involved the defendants paying
kickbacks to purported corrupt pension fund managers or stockbrokers, who in return would use
their clients' accounts to purchase the publicly traded stock of microcap issuers the defendants
controlled or promoted. In one other scheme, a promoter paid another apparently dishonest
promoter to make a microcap company's share price rise through false and misleading press
releases, e-mail blasts, and newsletters. In all of the schemes, what the defendants did not know
was that the individuals with whom they arranged the illegal transactions were actually FBI
agents or confidential sources participating in an undercover operation. The undercover
operation was conducted in such a way that no investors suffered harm.
The Commission's complaints allege that the defendants in some of the schemes,
understood that they needed to disguise the kickbacks as payments to phony consulting
companies, which they knew would perform no actual work. In other instances, the defendants
knew that the purported corrupt fund managers and brokers would be violating their fiduciary
duties to their clients by taking part in the kickback schemes.
The complaints allege the defendants violated Section 17(a) of the Securities Act of 1933,
and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC is seeking:
permanent injunctions and financial penalties against all the defendants; disgorgement plus
prejudgment interest against the defendants that received ill-gotten gains; officer and director
bars against the individual defendants who served as officers or directors of the microcap
companies involved; and penny stock bars against all the individual defendants.
In the Matter of Carlson Capital, L.P.
The SEC charged Dallas-based hedge fund adviser Carlson Capital, L.P. with improperly
participating in four public stock offerings after selling short those same stocks. Carlson agreed
to pay more than $2.6 million to settle the SEC's charges.
According to the SEC's order, Carlson violated Rule 105 on four occasions and had
policies and procedures that were insufficient to prevent the firm from participating in the
relevant offerings. For one of those occasions, the SEC found a Rule 105 violation even though
the portfolio manager who sold short the stock and the portfolio manager who bought the
offering shares were different.
In its order, the SEC found that the "separate accounts" exception to Rule 105 did not
apply to Carlson's participation in that offering. If certain conditions are met, this exception
allows the purchase of an offered security in an account that is "separate" from the account
through which the same security was sold short. The Commission found that the combined
activities of Carlson's portfolio managers violated Rule 105 and did not qualify for the separate
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accounts exception because the firm's
positions and trade reports, and could
reported to a single chief investment
authority over the firm's positions; and
with respect to trading.
portfolio managers could access each others' trading
consult with each other about companies of interest;
officer who supervised the firm's portfolios and had
were not prohibited from coordinating with each other
The SEC further found that the portfolio manager who sold short the particular stock during
the restricted period received information — before the short sales were made — that indicated
the other portfolio manager intended to buy offering shares.
Without admitting or denying the SEC's findings, Carlson agreed to pay a total of
$2,653,234, which includes $2,256,386 in disgorgement of improper gains or avoided losses, a
$260,000 penalty, and pre-judgment interest of $136,848. Carlson also consented to an order that
imposes a censure and requires the firm to cease and desist from committing or causing any
violations and any future violations of Rule 105. During the SEC's investigation, the adviser took
remedial measures including implementation of an automated system that helps review the firm's
prior short sales before it participates in offerings.
In the Matter of Peter G. Grabler
A.P. Rel. No. 34-62073 (May 11, 2010)
Lit. Rel. No. 21522 (May 11, 2010)
These proceedings arise out of numerous violations of Rule 105 of Regulation M, a rule
designed to protect the independent pricing mechanism of the securities market shortly before
follow-on and secondary offerings, by Peter G. Grabler. Grabler violated Rule 105 in connection
with offerings from at least February 2006 through November 2008 (the "relevant period").
Grabler engaged in a strategy of participating in numerous secondary offerings of stock in public
companies in order to improve his access to initial public offerings ("IPOs") underwritten by the
same broker-dealers through which he participated in the secondary offerings. At all relevant
times through October 9, 2007, Rule 105 prohibited covering a short sale with securities obtained
in a public offering when the short sale occurred during a restricted period, generally five
business days before the pricing of the offering. Since October 9, 2007, Rule 105 prohibits any
person effecting a short sale during the restricted period from purchasing shares offered in a
secondary offering.
Grabler violated Rule 105 in connection with at least 119 offerings between February
2006 and November 2008, resulting in gains of $636,123. These violations include at least 60
violations prior to October 9, 2007 ("preamendment violations") and at least 59 violations after
that date ("post-amendment violations").
Grabler's pre-amendment violations involve two types of transactions: (1) direct covering
of short positions with offering shares, and (2) transactions in which, rather than directly
covering a short position with offering shares, Grabler placed orders before the market opened to
both buy shares in the market in one or more accounts and sell offering shares in one or more
different accounts in what amounted to riskless transactions.
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An example of Grabler's post-amendment violations is his trading in the shares of
American International Group, Inc. ("AIG") in May 2008. From May 9, 2008 through May 12,
2008, Grabler sold short 35,000 shares of AIG stock in three accounts at a weighted average
price of $38.99 per share. On May 12, 2008, after the markets closed, AIG priced its secondary
offering. On May 13, 2008, Grabler purchased 71,400 AIG shares in four accounts at the
offering price of $38.00 per share in connection with that secondary offering. Grabler's short
sales of AIG stock were within 5 days of the pricing of the offering and thus fell within the
restricted period under Rule 105. As a result, Grabler violated Rule 105 when he purchased the
AIG offering shares after having sold AIG stock short during the restricted period.
As a result of the conduct described above, the SEC instituted settled cease-and-desist
proceedings against Peter G. Grabler. In connection with these proceedings, Grabler, without
admitting or denying the SEC’s findings, agreed to an order requiring him to cease and desist
from committing or causing any violations and any future violations of Rule 105 of Regulation
M under the Securities Exchange Act of 1934 and to pay disgorgement of $636,123 and
prejudgment interest in the amount of $35,232.
Subsequently, the SEC filed a settled civil action against Grabler for committing multiple
violations of Rule 105 of Regulation M. Without admitting or denying the allegations of the
complaint, Grabler agreed to pay a civil money penalty in the amount of $31,806.
In the Matter of Leonard J. Adams
A.P. Rel. No. 34-62072 (May 11, 2010)
Lit. Rel. No. 21521 (May 11, 2010)
These proceedings arise out of numerous violations of Rule 105 of Regulation M, a rule
designed to protect the independent pricing mechanism of the securities market shortly before
follow-on and secondary offerings, by Leonard J. Adams. Adams violated Rule 105 in
connection with offerings from at least SEC 2006 through December 2008 (the "relevant
period"). Adams engaged in a strategy of participating in numerous secondary offerings of stock
in public companies in order to improve his access to initial public offerings underwritten by the
same broker-dealers through which he participated in the secondary offerings. At all relevant
times through October 9, 2007, Rule 105 prohibited covering a short sale with securities obtained
in a public offering when the short sale occurred during a restricted period, generally five
business days before the pricing of the offering. Since October 9, 2007, Rule 105 prohibits any
person effecting a short sale during the restricted period from purchasing shares offered in a
secondary offering. Adams violated Rule 105 in connection with at least 94 offerings between
SEC 2006 and December 2008, resulting in gains of $331,387.
During the relevant period, Adams engaged in transactions prohibited by Rule 105 on at
least 94 occasions involving secondary offerings by at least 86 issuers. These violations include
at least 27 violations prior to October 9, 2007 ("pre-amendment violations"), and at least 67
violations after that date ("post-amendment violations").
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Adams' pre-amendment violations involve two types of transactions: (1) direct covering
of short positions with offering shares; and (2) transactions in which, rather than directly
covering a short position with offering shares, Adams placed orders before the market opened to
both buy shares in the market and sell offering shares in what amounted to riskless transactions.
An example of Adams' post-amendment violations is his trading in the shares of Wells
Fargo in November 2008. From November 3, 2008 through November 6, 2008, Adams sold
short 39,900 shares of Wells Fargo stock in six accounts at an average price of $28.87 per share.
On November 6, 2008, after the markets closed, Wells Fargo priced its secondary offering. On
November 7, 2008, Adams purchased 35,000 Wells Fargo shares at the offering price of $27 per
share in connection with that secondary offering. Adams' short sales of Wells Fargo stock were
within 5 days of the pricing of the offering and thus fell within the restricted period under Rule
105. As a result, Adams violated Rule 105 when he purchased the Wells Fargo offering shares.
As a result of the conduct described above, the SEC instituted settled cease-and-desist
proceedings against Adams. In connection with these proceedings, Adams, without admitting or
denying the SEC’s findings, agreed to an order requiring him to cease and desist from
committing or causing any violations and any future violations of Rule 105 of Regulation M
under the Securities Exchange Act of 1934 and to pay disgorgement of $331,387 and
prejudgment interest in the amount of $16,613.
Subsequently, the SEC filed a settled civil action against Leonard J. Adams for
committing multiple violations of Rule 105 of Regulation M. The complaint alleged that Adams
violated Rule 105 in connection with at least 94 offerings between SEC 2006 and December
2008, resulting in ill-gotten gains of $331,387. Without admitting or denying the allegation of
the complaint, Adams agreed to pay a civil money penalty in the amount of $165,693.
SEC v. Spongetech Delivery Systems, Inc., et al.
Lit. Rel. No. 21515 (May 5, 2010)
The SEC filed a civil injunctive action against Spongetech Delivery Systems, Inc.
("Spongetech"), affiliated company RM Enterprises International, Inc. ("RM"), Chief Executive
Officer Michael Metter ("Metter"), Chief Financial Officer, Chief Operating Officer, Chief
Accounting Officer and Secretary Steven Moskowitz ("Moskowitz"), Jack Halperin ("Halperin")
and Joel Pensley ("Pensley"), two of Spongetech's former attorneys, and George Speranza
("Speranza"), a stock promoter, for their roles in a massive pump and dump scheme.
The Commission's complaint alleges that beginning as early as April 2007, and
continuing to the present, Metter, Moskowitz, and Spongetech engaged in a scheme to increase
demand illegally for, and profit from, the unregistered sale of publicly-traded stock in
Spongetech, a company that sells soap-filled sponges. Metter, Moskowitz, and Spongetech
accomplished this by, among other things, "pumping" up demand for Spongetech stock through
false public statements about non-existent Spongetech customers, bogus sales orders, and phony
revenue. They also repeatedly and fraudulently understated the number of Spongetech's
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outstanding shares in press releases and public filings. The purpose of flooding the market with
false public information was to fraudulently inflate the price for Spongetech shares so Metter,
Moskowitz, and Spongetech could then "dump" the shares by illegally selling them to the public
through affiliated entities in unregistered transactions.
Metter, Moskowitz, and Spongetech illegally distributed approximately 2.5 billion
Spongetech shares in unregistered transactions through RM Enterprises and other affiliates,
which acted as conduits for Metter, Moskowitz, and Spongetech to distribute restricted shares in
unregistered transactions to the public. Metter, Moskowitz, Spongetech, and RM Enterprises
used false and baseless attorney opinion letters rendered by Pensley and by Halperin to distribute
shares of Spongetech to the public. Pensley and Halperin made false or misleading statements in
their attorney opinion letters to Spongetech's transfer agents who then improperly removed the
restrictive legends from Spongetech shares. Metter, Moskowitz, and Spongetech also used false
and misleading attorney opinion letters, forged in Pensley's name and in the name of a fictitious
lawyer, David Bomart, which Moskowitz transmitted and caused to be transmitted to
Spongetech's transfer agents.
Speranza participated in the fraud by, among other things, creating internet websites and
virtual office space for the fictitious customers with which Spongetech claimed to be doing
millions of dollars of business so that actual or prospective shareholders would believe the
customers were legitimate. Metter, Moskowitz, and Spongetech also spent portions of their illicit
profits to advertise with professional sports teams and events to support their claims that
Spongetech was prosperous, such as highly visible sponsorship deals with professional teams in
Major League Baseball, the National Football League, the National Basketball Association, the
National Hockey League, and the United States Tennis Association.
The SEC seeks preliminary and permanent injunctions against Spongetech enjoining it
from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act")
and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Securities Exchange Act of
1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-13, 15d-1, 15d-11, and
15d-13; and RM Enterprises enjoining it from violating Sections 5(a), 5(c), and 17(a) of the
Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
The SEC also seeks preliminary and permanent injunctions against Metter and
Moskowitz enjoining them from violating Sections 5(a), 5(c), and 17(a) of the Securities Act,
Sections 10(b) and 13(b)(5) of the Exchange Act, Exchange Act Rules 10b-5, 13b2-1, 13b2-2
(Moskowitz only), and 15d-14, and Section 304 of the Sarbanes-Oxley Act of 2002, from aiding
and abetting Spongetech's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the
Exchange Act and Exchange Act Rules 12b-20, 13a-13, 15d-1, 15d-11, and 15d-13; enjoining
Speranza from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and
from aiding and abetting violations of Sections 10(b) of the Exchange Act and Exchange Act
Rule 10b-5; and enjoining Pensley and Halperin from violating Sections 5(a), 5(c), and 17(a) of
the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5.
The SEC further seeks civil penalties, disgorgement with prejudgment interest of all illgotten gains, and accountings from all defendants; asset freezes against Spongetech, RM
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Enterprises, Metter and Moskowitz; conduct-based bars against Halperin and Pensley; officer
and director bars against Metter and Moskowitz; penny stock bars against Metter, Moskowitz,
Speranza, Pensley and Halperin; as well as forfeiture proceedings against Metter and Moskowitz
pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.
CASES INVOLVING SECURITIES OFFERINGS
SEC v. Copper King Mining Corp, Alexander Lindale, LLC., Mark D. Dotson, Wilford R.
Blum and Stephen G. Bennett
Lit. Rel. No. 21995 (June 9, 2011)
The SEC filed a complaint against Copper King Mining Corp. (Copper King), Alexander
Lindale, LLC (Alexander Lindale), Mark D. Dotson (Dotson), Wilford R. Blum (Blum) and
Stephen G. Bennett (Bennett). The complaint alleges that Copper King and its prior President
and CEO, Dotson, authored and distributed false and misleading information on Copper King’s
Internet website regarding the company’s ability to produce revenue, its ability to extract
significant amounts of copper and other metals, its receipt of an irrevocable purchase order for its
copper, and its receipt of a firm funding commitment for $100 million to pay for operations and
build an ore processing mill.
The complaint further alleges that Dotson knowingly allowed Alexander Lindale and
Blum, a Salt Lake City stock promoter, to issue additional false press releases and conduct an
unregistered offer and distribution of Copper King stock. Alexander Lindale and Blum were
assisted by Bennett, a disbarred Utah attorney, who authored bogus stock tradability opinion
letters when he was not properly licensed to issue such opinions. Bennett’s stock tradability
opinion letters were used as the legal authority that enabled Copper King’s stock transfer agent
to issue and distribute the company’s stock pursuant to Blum’s instructions.
The complaint also alleges that Alexander Lindale and Blum raised an approximate
$12,280,419 in proceeds from Blum’s improper sales Copper King stock from 2008 through
2010. Blum provided Copper King with approximately $9,063,567 in cash or services while
Alexander Lindale received approximately $3,291,352 from Blum’s sales Copper King stock.
The complaint alleges that Alexander Lindale and Blum also operated as unregistered brokers or
dealers.
The Commission’s complaint charges Copper King, Dotson and Bennett with violations
of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b)
of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The
complaint charges Alexander Lindale and Blum with violations of Section 5(a) and 5(c) of the
Securities Act and Section 15(a) of the Exchange Act. The complaint seeks injunctive relief,
disgorgement, civil penalties and penny stock bars from defendants.
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SEC v. Association for Betterment Through Education and Love, Inc., et al.
Lit. Rel. No. 21988 (June 3, 2011)
The SEC charged Association for Betterment through Education and Love, Inc.
(“ABEL”) and its principal, Anthony O. DeGregorio, Sr., with offering and selling securities in
unregistered transactions and obtained an emergency court order to halt the offerings and
preserve assets for investors. The Complaint also names Margherita DeGregorio as a relief
defendant.
The Commission's complaint, filed in the District of New Jersey, alleges that ABEL and
DeGregorio have raised more than $1.3 million through unregistered securities offerings since
ABEL’s inception in 1989, obtaining more than $1 million in the last four years through offering
purported “CDs.” According to the Complaint, ABEL’s purported purpose was to invest funds
raised in securities offerings and use investment profits to pay a “guaranteed” return to investors,
and donate a portion to charity. The Complaint alleges that ABEL and DeGregorio offered
securities in the form of charitable gift annuities, without complying with state registration
requirements, and offered purported CDs that carried above-market interest rates. The Complaint
also charges that, at times, ABEL used the proceeds from new offerings of securities to make
promised interest payments to earlier investors.
The Complaint charges ABEL and DeGregorio with violating Sections 5(a) and (c) of the
Securities Act of 1933.
The court issued a temporary restraining order, which prohibits ABEL and DeGregorio
from committing further violations of the federal securities laws and places a freeze on their
assets and the assets of Margherita DeGregorio. In its enforcement action, the Commission is
seeking additional relief, including orders enjoining ABEL and DeGregorio, preliminarily and
permanently, from committing future violations of the foregoing federal securities laws, and a
final judgment ordering ABEL and DeGregorio to disgorge their ill-gotten gains plus
prejudgment interest, and assessing civil penalties against them.
SEC v. Advanced Optics Electronics, Inc., Leslie S. Robins, JDC Swan, Inc. and Jason
Claffey
Lit. Rel. No. 21967 (May 13, 2011)
The SEC charged Advanced Optics Electronics, Inc. (ADOT), its former Chairman Leslie
S. Robins, JDC Swan, Inc. and its former President, Jason Claffey with engaging in an unlawful
public offering of the securities of ADOT.
The Commission’s complaint alleges that from at least as early as January 2006, through
June 2007, ADOT, acting through Robins, issued a total of over 9.8 billion shares of ADOT to
JDC Swan through the use of purchase agreements that represented falsely that the shares were
registered and free trading. The complaint further alleges that Claffey arranged to have the
ADOT shares sold through a securities account he established at Divine Capital Markets, LLC, a
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registered broker-dealer located in New York. According to the SEC’s complaint, the defendants
raised over $2 million through the offer and sales of ADOT shares into public market without a
registration statement on file, or declared effective by the SEC. The complaint alleges that
Claffey acquired the shares with a view to distribution and that there was no applicable
exemption from registration to the offers and sales.
According to the SEC’s complaint, Claffey retained approximately 30% of the proceeds
of the ADOT sales and wired the remainder to an ADOT account controlled by Robins. The
complaint further alleges that ADOT, Robins, JDC Swan and Claffey’s offers and sales of
ADOT shares violated Sections 5(a) and (c) of the Securities Act.
The SEC’s complaint against ADOT, Robins, JDC Swan and Claffey seeks a final
judgment permanently enjoining the defendants from future violations of the Sections 5(a) and
(c) and ordering them to pay civil money penalties, disgorge their ill gotten gains, plus
prejudgment interest, and prohibiting them from participating in an offering of penny stock
pursuant to Section 20(g) of the Securities Act
The Commission also instituted related cease-and-desist and administrative proceedings
against registered broker-dealer Divine Capital Markets, LLC (Divine Capital), its CEO and
President Danielle Hughes, and Divine Capital employee, Michael Buonomo. In the Matter of
Divine Capital Markets, Danielle Hughes and Michael Buonomo, Release No. 34-63980
(February 25, 2011). In the contested proceedings, the Commission’s Division of Enforcement
alleges that Divine and Buonomo each violated sections 5(a) and (c) of the Securities Act and
that Hughes and Divine failed to supervise Buonomo with a view to preventing his violations.
The Division seeks administrative sanctions, penalties and disgorgement against all three
respondents.
SEC v. George Garcy a/k/a Jose Garcia, et al.
Lit. Re. No. 21963 (May 11, 2011)
The SEC charged the co-founders of a New York-based beverage and food carrier
company with orchestrating an $8 million securities fraud and spending at least half of investor
money for their personal use.
The SEC alleges that Angelo Cuomo of Staten Island and George Garcy of Aventura,
Fla., fraudulently obtained investments in E-Z Media Inc. while falsely telling investors that their
company owned several patents for beverage and food carriers and had contracts to sell its
carriers to such major companies as Heineken, Anheuser Busch, and Aramark Corporation. They
also misrepresented their plans to conduct an initial public offering (IPO), their use of offering
proceeds, and the projected share price. E-Z Media never actually had any contracts or other
agreements to sell its carriers to any major company, including the brand-name companies that
Cuomo and Garcy touted to investors. E-Z Media never took even the basic steps to prepare for a
purported IPO.
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The SEC’s complaint seeks a final judgment permanently enjoining Garcy and Cuomo
from future violations of the federal securities laws, barring Garcy and Cuomo from acting as
officers and directors of any public company, requiring Garcy and Cuomo to pay financial
penalties, and requiring the defendants and relief defendants to disgorge all ill-gotten gains plus
prejudgment interest, among other relief.
SEC v. mUrgent Corporation, et al.
Lit. Rel. No. 21944 (April 21, 2011)
The SEC filed a complaint against mUrgent Corporation, Vladislav Walter Bugarski
(Walter), and his twin sons Vladimir Boris Bugarski (Boris) and Aleksander Negovan Bugarski
(Aleks). The SEC alleges that the defendants defrauded investors in a $10 million boiler room
scheme.
The SEC alleges that mUrgent, chief executive officer Boris Bugarski, chief financial
officer Walter Bugarski, and chief operating officer Aleks Bugarski operated a boiler room at the
company to sell mUrgent stock. Boiler room employees cold-called investors, used high pressure
sales tactics, and misrepresented to investors that mUrgent had a prospering business and would
imminently conduct an initial public offering (IPO). The SEC also alleges that mUrgent and the
Bugarskis falsely told investors that stock sale proceeds would not be used to pay cash salaries to
the Bugarskis.
According to the SEC’s complaint, mUrgent and the Bugarskis conducted two
unregistered securities offerings beginning in 2008 that raised nearly $10 million from at least
130 investors nationwide. The Bugarskis misused investor money to fund more than $1.3 million
in cash salary and bonuses for themselves. They also established a separate “slush fund” of more
than $500,000, and used investor funds to pay for luxury cars and other personal expenses.
The SEC seeks permanent injunctions against mUrgent and the Bugarskis for violations of the
antifraud, offering registration, and broker registration provisions of the federal securities laws,
disgorgement, civil penalties, and an order prohibiting the Bugarskis from serving as officers or
directors of any public company.
As alleged in the SEC’s complaint, the defendants violated Sections 5(a), 5(c) and 17(a)
of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder.
SEC v. Commodities Online, LLC and Commodities Online Management, LLC
Lit. Rel No. 21940 (April 21, 2011)
The SEC obtained the appointment of a receiver over two South Florida companies and
permanent injunctions on April 1, 2011 and April 8, 2011, respectively, for conducting a
fraudulent $27.5 million investment scheme with funds raised by offering and selling
unregistered securities to investors nationwide from January 2010 until SEC 2011.
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In its Complaint the SEC alleges that Commodities Online, LLC (“Commodities Online”)
and Commodities Online Management, LLC (“Commodities Management,” and together, the
“Defendants”), beginning in January 2010, represented to investors that Commodities Online
was in the business of arranging and funding commodities contracts. The SEC further alleges
that the Defendants represented to potential investors that Commodities Online purchased
commodities only after arranging for a buyer and a seller. Defendants claimed that Commodities
Online made money based on the price spread and told investors they would “earn 5% or more
per month without price speculation.” Commodities Online sold participation units in such
contracts and claimed to have invested at least $24 million raised from investors. Commodities
Online also claimed to have raised at least $2.4 million from investors who invested in
membership units in Commodities Online. Neither the participation units nor the membership
units were registered with the Commission.
In its Complaint, the Commission alleges that Defendants made numerous material
misrepresentations in connection with the offering and sale of the participation units and
membership units. Although Commodities Online claimed on its website that, as of SEC 14,
2011, it had offered and paid a total of 48 contracts and that all completed contracts had returned
the promised level of profits to the investors, the Commission alleges that in fact all completed
contracts did not return the promised level of profit to investors and Commodities Online
performed only a limited percentage of the commodities transactions it promised investors.
Instead, according to the Complaint, Commodities Online dissipated investor funds by sending
millions of dollars to companies controlled by its co-founder and former managing member and
to one of its vice presidents. Further, Commodities Online held itself out as providing a viable,
profitable investment vehicle to prospective investors, but, the Commission alleges, in reality it
did not earn any net profits from entities it dealt with in connection with the purported
commodities contracts. In addition, Commodities Online failed to disclose to prospective
investors that its co-founder and former managing member is a convicted felon and failed to
disclose that a vice president pled guilty to federal bank fraud and other felonies and is currently
serving a term of supervised release.
The SEC’s Complaint charges Commodities Online and Commodities Management with
violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Defendants consented to the
appointment of a Receiver, to the entry of permanent injunctions against future violations of the
provisions of the securities laws with which they were charged, and to disgorgement,
prejudgment interest, and civil money penalties in amounts to be determined by the Court.
The Court appointed David Mandel, an attorney with the law firm of Mandel & Mandel LLP of
Miami, Florida, as a receiver over the Defendants. Among other things, the receiver is
responsible for marshaling and safeguarding assets held by these entities.
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SEC v. Inofin, Inc., Michael J. Cuomo, Kevin J. Mann, Sr., Melissa George, Thomas Kevin
Keough, David Affeldt, and Nancy Keough
Lit. Rel. No. 21929 (April 14, 2011)
Pres Rel. No. 2011-92 (April 14, 2011)
The SEC filed a civil injunctive action in federal district court in Massachusetts charging
Massachusetts-based subprime auto loan provider Inofin Inc. and three company executives with
misleading investors about their lending activities and diverting millions of dollars in investor
funds for their personal benefit. The SEC also charged two sales agents with illegally offering to
sell company securities without being registered with the SEC as broker-dealers.
The SEC alleges that Inofin executives Michael Cuomo of Plymouth, Mass., Kevin Mann
of Marshfield, Mass., and Melissa George of Duxbury, Mass., illegally raised at least $110
million from hundreds of investors in 25 states and the District of Columbia through the sale of
unregistered notes. Investors in the notes were told that Inofin would use the money for the sole
purpose of funding subprime auto loans. As part of the pitch, Inofin and its executives told
investors that they could expect to receive returns of 9 to 15 percent because Inofin loaned
investor money to its subprime borrowers at an average rate of 20 percent. But unbeknownst to
investors, and starting in 2004, approximately one-third of investor money raised was instead
used by Cuomo and Mann to open four used car dealerships and begin multiple real estate
property developments for their own benefit.
Inofin is not registered with the SEC to offer securities to investors.
The Commission’s complaint alleges that Inofin, Cuomo, Mann, and George violated
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder and that Kevin Keough, and David Affeldt
violated Sections 5(a), and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The
Commission seeks the entry of a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and the imposition of civil monetary penalties against Inofin, Cuomo, Mann,
George, Kevin Keough, and David Affeldt. Keough’s wife Nancy Keough is named in the
complaint as a relief defendant for the purposes of recovering proceeds she received as a result of
the violations.
SEC v. Paul Nicholson and Professional Investment Exchange, Inc.
Lit. Rel. No. 21924 (April 8, 2011)
The SEC filed a civil action against Paul N. Nicholson, and his former firm, Professional
Investment Exchange, Inc. (“PIE”), alleging that they directed two fraudulent oil-and-gas
offerings. According to the complaint, from May 2007 through October 2009, Nicholson and PIE
fraudulently raised approximately $8.2 million from investors through two limited partnerships,
Energy Opportunity Fund — VI, LLLP and Energy Opportunity Fund — VII, LLLP.
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The Commission’s complaint alleges, in particular, that Nicholson, who formerly
operated broker-dealer Macarthur Strategies, Inc. (“Macarthur”), and PIE, an entity Nicholson
controlled, misused and misappropriated investor funds, including, among other things, using
investor funds to pay undisclosed commissions to unlicensed salespeople, to pay Macarthur’s
expenses and to pay undisclosed personal salary and expenses. The complaint also alleges that in
communications with potential and existing investors, Nicholson engaged in conduct that
operated as a fraud and deceit on investors, including by omitting material information about the
use of investor proceeds and about the past performance of Nicholson’s and PIE’s oil-and-gas
ventures. The complaint further alleges that Nicholson sold unregistered securities and that he
operated PIE as an unregistered broker-dealer. In early 2010, Nicholson transferred control of
PIE to new management and deregistered Macarthur.
Without admitting or denying the allegations in the Commission’s complaint, and subject
to court approval, Nicholson and PIE have consented to the entry of judgments that would enjoin
them from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933,
Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
Nicholson has also agreed to pay disgorgement of $234,081 with prejudgment interest of
$10,722. The Commission will ask the Court to impose a civil money penalty against Nicholson.
Nicholson has also agreed to entry of a Commission order barring him from association with any
broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent,
or nationally recognized statistical rating organization, or from participating in an offering of
penny stock.
SEC v. Mike Watson Capital, LLC, Michael P. Watson and Joshua F. Escobedo
Lit. Rel. No. 21898 (March 24, 2011)
The SEC filed a civil action in the United States District Court for the District of Utah
against Mike Watson Capital, LLC, a company based in Provo, Utah, Michael P. Watson, a
resident of Mapleton, Utah, and Joshua F. Escobedo, a resident of Spanish Fork, Utah, alleging
that each of the Defendants violated the antifraud and securities offering registration provisions,
and that Watson and Escobedo violated the broker-dealer registration provisions of the federal
securities laws.
In its Complaint, the Commission alleges that from October 2004 through February 2009,
Defendants raised more than $27.5 million from more than 120 investors through Mike Watson
Capital’s issuance of promissory notes. According to the Complaint, Watson and Escobedo told
investors that returns were generated by real estate investments, and backed by substantial equity
and cash flow produced by company properties. In reality, the properties never generated
sufficient income to cover investment interest or redemptions, and therefore investor returns
were paid primarily from new investors’ funds.
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SEC v. St. Anselm Exploration Co. et al.
Lit. Rel. No. 21891 (March 18, 2011)
The SEC filed a civil injunctive action in the United States District Court for the District
of Colorado charging Denver-based St. Anselm Exploration Co. (St. Anselm); its three
principals, Michael A. Zakroff, Anna M.R. Wells, and Mark S. Palmer; and Steven S. Etkind, its
vice president of corporate development, with securities fraud. Specifically, the Commission’s
complaint alleges that from at least January 2007 through August 16, 2010, the Defendants
engaged in a fraudulent high-interest promissory note program to fund St. Anselm’s operations.
The Commission’s complaint specifically alleges that defendants Zakroff, Wells, and
Palmer, all of whom reside in Colorado, and Etkind, who resides in New Mexico, solicited
investors in New Mexico, Colorado, and other states and offered high annual investment returns
ranging from 18-36%. The complaint also alleges that as of September 30, 2010, St. Anselm
owed approximately 200 investors a total of over $62 million in outstanding notes. The
complaint further alleges that the Defendants solicited investors by falsely representing and
implying that St. Anselm was profitable and able to pay investors both from the recurring
revenue from oil and gas production and from the larger, but less frequent, sales of asset
packages. The complaint also alleges that the Defendants failed to disclose to investors St.
Anselm’s true financial condition and that St. Anselm depended on the proceeds of new
promissory note sales to service its debt. In fact, from January 2007 to August 16, 2010, St.
Anselm had paid investor returns and note redemptions almost exclusively with funds from other
investors in Ponzi-like fashion.
SEC v. Timothy S. Durham, et al.
Lit. Rel. No. 21888 (March 16, 2011)
The Commission filed a civil action in the United States District Court for the Southern
District of Indiana, charging three senior executives at Akron, Ohio-based Fair Finance
Company (“Fair Finance”) with orchestrating a $230 million fraudulent scheme involving at
least 5,200 investors – many of them elderly.
The Commission’s complaint alleges that after purchasing Fair Finance Company, chief
executive officer Timothy S. Durham, chairman James F. Cochran and chief financial officer
Rick D. Snow, deceived investors while selling them interest-bearing certificates. Fair Finance
had previously operated for decades as a privately-held consumer finance company. But under
the guise of loans, Durham and Cochran schemed to divert investor proceeds to themselves and
others, as well as struggling and unprofitable entities that they controlled. Durham and Cochran
further misused investor funds to buy classic cars and other luxury items to enhance their own
lavish lifestyles.
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SEC v. Jason Bo-Alan Beckman and Oxford Private Client Group, LLC, et al.
Lit. Rel. No. 21879 (March 9, 2011)
The SEC obtained an emergency court order freezing the assets of Jason Bo-Alan
Beckman, of Plymouth, Minnesota, and his registered investment advisory firm Oxford Private
Client Group, LLC, for their role in a massive foreign currency trading scheme that raised at
least $194 million from nearly 1,000 investors. The court also entered a freeze order against the
assets of Beckman’s wife, Hollie Beckman, who also received investor funds. In addition, the
court issued an order appointing a receiver over all of these assets.
The SEC alleges that for their part in the scheme, Beckman and Oxford Private Client
Group raised at least $47.3 million from at least 143 investors from August 2006 to July 2009
through a fraudulent, unregistered offering of investments in a purported foreign currency
trading venture (the “Currency Program”). According to the SEC’s complaint, Beckman told
investors that each investor’s money would be invested in the Currency Program, their money
would be held in a segregated account, there was little or no risk to their money, they would
receive guaranteed returns ranging from 10.5% to 12% per year, and they could withdraw their
money at any time. The SEC alleges that these representations were false. According to the
SEC’s complaint, a significant portion of the investors’ funds were never invested in the
Currency Program but instead were used to make purported interest and return of principal
payments to other investors and also diverted to Beckman and others’ personal accounts.
Beckman and his wife Hollie Beckman received approximately $7.7 million of investor funds.
None of the funds was ever placed in segregated accounts at banks or foreign currency trading
firms and the funds sent to the trading firms sustained significant losses.
SEC v. Joseph A. Dawson
Lit. Rel. No. 21878 (March 8, 2011)
The SEC filed a civil injunctive action against Joseph A. Dawson and the president and
owner of Dawson Trading, LLC. Dawson purportedly operated Dawson Trading as a pooled
investment vehicle to invest in securities including, stocks, bonds, commodities, currencies, and
options for family and friends. The SEC alleges that Dawson used Dawson Trading to perpetrate
a fraudulent offering scheme through which he raised approximately $3.8 million. The SEC
further alleges that Dawson, after misappropriating confidential information from a family
member regarding a pending acquisition of SPSS Inc. by International Business Machines
Corporation (“IBM”)¸ caused Dawson Trading to purchase call options of SPSS, reaping profits
of $437,770.
The complaint alleges that from October 2004 through December 2009, Dawson used
Dawson Trading to perpetrate a fraudulent offering scheme through which he raised
approximately $3.8 million from 31 investors. Dawson offered investors promissory notes which
purportedly provided a guaranteed interest rate, generally 5% compounded quarterly, plus a
certain percentage of profits made with the investor’s funds. Contrary to the representations
Dawson made to investors, instead of investing the $3.8 million in safe investments, Dawson
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misappropriated approximately $2.1 million of investors’ monies for his own personal expenses
and purposes, and lost approximately $945,000 from trading securities. Despite having never
invested the funds or losing the funds that were invested, Dawson provided false quarterly
account statements to investors which showed significant returns. In addition, when investors
redeemed their investments, Dawson, in the nature of a Ponzi scheme, paid them with other
investors’ funds based upon the inflated returns reflected in the previously issued false account
statements.
The SEC’s complaint further alleges that between June 4, 2009 and July 22, 2009,
Dawson caused Dawson Trading to purchase call options of SPSS in advance of a July 28, 2009
announcement of an acquisition of SPSS by IBM, after learning from a family member and close
friend and neighbor of a then-current officer of SPSS, that SPSS would be acquired by IBM. The
family member and the officer routinely shared confidences regarding personal and business
matters, including information concerning the pending acquisition of SPSS. Dawson began
purchasing SPSS call options shortly after the family member sought financial advice from
Dawson as to whether the family member could do anything with the confidential information he
had learned from the officer.
The SEC’s complaint charges Dawson with violating Sections 5(a), 5(c), and 17(a) of the
Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act
of 1940 and Rule 206(4)-8 thereunder. Dawson has agreed to settle the SEC’s charges without
admitting or denying the allegations. Dawson has consented to the entry of a final judgment,
subject to the Court’s approval, permanently enjoining him from engaging in the above
violations, and requiring him to pay disgorgement and prejudgment interest.
On November 18, 2010, Dawson pled guilty to three counts of wire fraud for conduct
arising out of the fraudulent offering scheme described in the Complaint and on March 8, 2011,
Dawson was sentenced to 54 months in prison and was ordered to pay restitution in the amount
of $3.3 million.
SEC v. Michael W. Perry and A. Scott Keys; SEC v. S. Blair Abernathy
The SEC charged three former senior executives at IndyMac Bancorp with securities
fraud for misleading investors about the mortgage lender’s deteriorating financial condition.
The SEC alleges that former CEO Michael W. Perry and former CFOs A. Scott Keys and
S. Blair Abernathy participated in the filing of false and misleading disclosures about the
financial stability of IndyMac and its main subsidiary, IndyMac Bank F.S.B. The three
executives regularly received internal reports about IndyMac’s deteriorating capital and liquidity
positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to
investors as IndyMac sold millions of dollars in new stock.
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IndyMac Bank was a federally-chartered thrift institution regulated by the Office of
Thrift Supervision (OTS) and headquartered in Pasadena, Calif. The OTS closed the bank on
July 11, 2008, and placed it under FDIC receivership. IndyMac filed for bankruptcy protection
later that month.
SEC v. Petroleum Unlimited, LLC, et al.
The SEC brought an action against Petroleum Unlimited, LLC, Petroleum Unlimited II,
LLC, their two operators, escrow agent manager, and three boiler room managers for defrauding
investors through the sale of securities in violation of the antifraud provisions of the federal
securities laws. From SEC 2008 until July 2008, the companies raised approximately $2.9
million through offerings of their securities to investors for the purported purpose of funding oil
and gas exploration and drilling projects. According to the SEC's complaint, the private
placement memoranda for the offerings misrepresented the use of the offering proceeds and
failed to disclose that 49% to 74% of investors' funds were paid as commissions to offering sales
agents. The private placement memoranda further stated without any reasonable basis that
investors could earn annual returns ranging from 14% to 141%. Ultimately, the companies used
only about $534,000 of the $2.9 million raised from investors for oil drilling and never found any
oil
The SEC alleges that Roger A. Kimmel, Jr., and Harry Nyce, and the boiler room
managers Michel-Jean Geraud, Robert Rossi, and Joseph Valko drafted, reviewed or distributed
the private placement memorandum given to investors. The SEC further alleges that Geraud,
Rossi, and Valko conducted the offerings through multiple sales offices and knew that their sales
agents and the offering materials were not advising investors about the sales commissions of
49% to 74%. Morgan Petitti performed escrow functions for the offering and, among other
things, distributed commissions to the sales agents that were inconsistent with the private
placement memoranda, which she typed.
The SEC also issued anOrder Instituting Administrative Proceedings Pursuant to Section
15(b) of the Securities Exchange Act of 1934, and Notice of Hearing against Geraud based on
his criminal convictions by the United States District Court for the Southern District of Florida
for one count of conspiracy to commit mail fraud (United States v. Michael Geraud, Case No.10cr-80070 (S.D. Fla.)) and one count of conspiracy to defraud the United States in an income tax
evasion scheme (United States v. Michael Geraud, Case No. 10-cr-60091 (S.D. Fla.)). The count
of criminal information in Case No.10-cr-80070 alleged, among other things, that Geraud, in
connection with the offer and sale of Petroleum Unlimited's securities, defrauded investors and
obtained money and property by, among other things, misrepresenting the company's use of
offering proceeds, and failing to disclose exorbitant sales commissions.
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SEC v. Raymond P. Morris, et al.
The Commission filed a complaint against Raymond P. Morris (Morris), James L. Haley
(Haley), Jay J. Lindford (Lindford), attorney Luc D. Nguyen (Nguyen), E&R Holdings, LLC
(E&R Holdings), Wise Financial Holdings, LLC (Wise Financial), Momentum Leasing, LLC
(Momentum), Cornerstone Capital Fund, LLC (Cornerstone), Vantage Point Capital, LLC
(Vantage Point) and Freedom Group, LLC (Freedom Group), alleging unregistered fraudulent
offers, sales and purchases of securities that bilked at least 90 investors out of no less than $60
million.
The complaint alleges that from at least SEC 2007 through January 2009, Morris, through
his entities E&R Holdings, Wise Financial and Momentum, offered and sold unregistered
promissory notes to investors and in doing so made misrepresentations and omissions designed
to convince investors that they were purchasing high yield notes that were risk free. Morris told
investors that their funds would be deposited into a secure account and would be used only to
verify deposits. Instead of using the funds as represented Morris used investor funds to support
his extravagant lifestyle and to make Ponzi payments to certain investors.
The complaint further alleges that Haley, Linford and Nguyen assisted Morris in the
fraud, soliciting funds from investors through misrepresentations, recklessly repeating Morris'
misrepresentations.
The Commission's complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings,
Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group with violations of
Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint also charges
Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The complaint
seeks an injunction, disgorgement and civil penalties.
SEC v. Pharma Holdings, Inc., Edward Klapp IV and Edward Klapp Jr.
The SEC charged Jupiter, Florida-based Pharma Holdings, Inc., its CEO Edward Klapp
IV, and its CFO Edward Klapp Jr., with violations of the antifraud provisions of the federal
securities laws. The SEC's complaint alleges that from 2005 through September 2009, Pharma
Holdings, purportedly in the pharmaceutical supply business, and the Klapps raised
approximately $5 million from at least 80 European investors, primarily residing in the United
Kingdom, through the fraudulent offer and sale of Pharma Holdings stock.
The SEC's complaint alleges that Pharma Holdings and the Klapps engaged various sales
offices and agents to conduct Pharma Holdings' offerings, and also directly offered shares in later
offerings to existing shareholders. According to the SEC's complaint, in connection with its stock
offerings, Pharma Holdings issued false press releases and made false postings on its website
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overstating Pharma Holdings' sales revenues and net profits, and touting non-existent business
agreements with multinational corporations.
The complaint further alleges that Pharma Holdings and its sales agents repeatedly told
investors and prospective investors, both in written materials from Klapp IV and on the
company's website, that Pharma Holdings would soon conduct an IPO or be bought out by a
large corporation or mutual fund. The complaint also alleges that Klapp Jr. falsely promised
investors an imminent IPO. Further, the complaint alleges that Pharma Holdings and the Klapps
failed to disclose that Edward Klapp IV had been criminally convicted of a felony involving
fraud.
The SEC's enforcement action charges Pharma Holdings and the Klapps with violating
Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5, thereunder. The SEC is seeking permanent injunctions, disgorgement and
financial penalties against Pharma Holdings, Klapp IV and Klapp Jr., and the imposition of
officer and director bars against Klapp IV and Klapp Jr.
.
SEC v. Robert L. Buckhannon, et al.
The Commission filed a civil injunctive action against Robert Buckhannon, Terry
Rawstern, Dale St. Jean and Gregory Tindall (the "Managing Members"), the four managing
members of two now-defunct hedge funds, Arcanum Equity Fund, LLC and Vestium Equity
Fund, LLC (the "Funds"), through which they conducted an offering fraud that raised $34
million from 101 investors throughout the U.S. and Canada. The SEC also charged Imperium
Investment Advisors, LLC, a registered investment adviser which served as trustee for Vestium
Equity Fund, and its three principals, Richard Mittasch, Christopher Paganes and Glenn
Barikmo, for their roles in the scheme.
The SEC's complaint, filed in the U.S. District Court for the Middle District of Florida,
alleges that from April 2008 through April 2010, the Managing Members raised funds promising
investors that they would generate substantial returns through conservative investments in highgrade debt instruments and, in some cases, limited physical commodities transactions.
Additionally, the offering materials and prospectus for Vestium Equity Funds further assured
investors that Imperium would safeguard their funds from impermissible uses. Contrary to these
assurances, however, the defendants disregarded the Funds' respective investment parameters
and used investor funds for illiquid private investments and loans to affiliate entities.
Additionally, although the Funds incurred investment losses of at least $8.1 million, the
Managing Members disseminated monthly statements falsely depicting consistent profits and
paid at least $6 million to investors in alleged profits. The Managing members further paid
themselves over $1.3 million in compensation that was improperly based on inflated asset values
and fictitious profits. The SEC's complaint further alleges that Buckhannon, Mittasch, Paganes
and Barikmo collectively misappropriated at least $734,000 of investor funds to themselves and
others.
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The SEC's complaint alleges that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, that Buckhannon and Rawstern violated
Section 17(a) of the Securities Act of 1933, and that defendants Buckhannon, Rawstern, St. Jean
and Tindall also violated, and Mittasch, Paganes, Barikmo and Imperium aided and abetted
violations of, Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and
Rule 206(4)-8 thereunder. The SEC's complaint seeks permanent injunctive relief, disgorgement
and prejudgment interest thereon, and civil penalties.
Without admitting or denying the SEC's allegations, Buckhannon settled the
Commission's action by consenting to a final judgment providing for permanent injunctive relief,
disgorgement with prejudgment interest in the amount of $1,239,176 and a civil penalty in the
amount of $130,000. Rawstern also partially settled the Commission's action by consenting to
the entry of a judgment providing for injunctive relief and for the imposition of disgorgement
and a civil penalty, in amounts to be determined at a later date upon the Commission's motion.
The matter remains in litigation with respect to the remaining defendants.
SEC v. William K. Harrison, et al.
The Commission fileda civil injunctive action in Charlotte, North Carolina on December
15, 2010, alleging that William K. Harrison (“Harrison”) and Eddie W. Sawyers (“Sawyers”)
violated the antifraud provisions of the federal securities laws.
The Commission’s complaint alleges that between approximately December 2007 and
October 2008, Harrison and Sawyers used misrepresentations and omissions of material fact to
defraud at least forty-two Wachovia brokerage customers of at least $8 million in customer
funds. The complaint further alleges that on or around December 2007, Harrison and Sawyers,
acting under the d/b/a “Harrison/Sawyers Financial Services,” began offering their Wachovia
customers an investment opportunity that they misrepresented was guaranteed to make a 35%
return, with no risk of loss of principal. In those instances when customers were informed that
their monies would be used for trading options, Harrison and Sawyers misrepresented the
riskiness of their trading strategy by telling customers that they had a foolproof approach to
trading options and that their principal investment was secure and would make handsome returns
regardless of market volatility.
Harrison and Sawyers either opened accounts with
optionsXpress in the client’s name or commingled the client’s funds in accounts opened in
Harrison’s wife’s name or a joint account in the name of Harrison and his wife. So as to not
draw attention to their conduct, Harrison and Sawyers placed “limited trading authorizations”
and other related documentation associated with their scheme in the name of Harrison’s wife.
Although the trading strategy that Harrison and Sawyers employed was initially successful, it
soon resulted in substantial investor losses. By October 2008, they had depleted the vast
majority of the money they had raised from investors. On October 13, 2008, Harrison submitted
to Wachovia a resignation letter in which he confessed to “misdirecting” $6.6 million from
seventeen of his Wachovia customers in order to trade online. He also admitted that he had
conducted this online trading without first securing the authorization of these 17 individuals.
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SEC v. Clifton K. Oram, et al.
The Commission filed a civil injunctive action in Salt Lake, Utah on November 30, 2010
alleging that Clifton K. Oram, Don C. Winkler and William R. Michael engaged in fraud by
offering and selling investments in a foreign currency exchange trading ("Forex") program
issued by a Mexican entity known as MexGroup or MexBank.
The Commission's complaint alleges that since at least 2007, Oram, Winkler and Michael
collectively raised tens of millions from investors nationwide for MexGroup's Forex trading
program. The defendants attracted investors by, among other things, touting impressive monthly
returns posted on MexGroup's web site. In early December 2008, however, investors learned that
their accounts were virtually wiped out in the previous month. MexGroup gave a number of
explanations, eventually blaming allegedly illegal conduct by a Swiss Forex trading firm through
which it executed trades.
The Complaint further alleges that beyond the fact that none of the defendants understood
how the Forex market or Forex trading functioned, neither Oram, Winker or Michael took any
significant steps to investigate MexGroup, its principals, or the viability of the investment.
Instead, they blindly accepted MexGroup's representations about its background, veracity, and
track record. Further, Michael and his company used MexGroup's purported performance
numbers on his company's website and made misleading representations and omissions regarding
their own Forex trading experience. Even more egregious, Winkler and Oram continued to offer
and sell the MBFX offering even after the November 2008 collapse.
In its Complaint, the Commission alleges that the defendants violated Sections 5(a), 5(c)
and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The Commission is seeking permanent
injunctions, disgorgement with prejudgment interest and civil penalties against all three
defendants.
This action arose from a joint SEC cooperative enforcement investigation with the
Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS) and the U.S.
Commodities Futures Trading Commission (CFTC). Notably, on November 30, 2010, the CFTC
filed a complementary action in the U.S. District Court for the District of Utah, entitled CFTC v.
MXBK Group S.A. de C.V., which alleges violations of U.S. federal commodities laws by
MXBK and MBFX, associated entities of MexGroup. The SEC thanks the FBI, the IRS and the
CFTC for their assistance.
SEC v. Joshua Konigsberg, Louis Fischler, and MediSys Corp.
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The SEC charged penny stock promoters Joshua Konigsberg and Louis Fischler with
securities fraud for their roles in various illicit schemes to manipulate the volume and price of
four microcap stocks and illegally generate stock sales. The SEC also charged microcap
company MediSys Corp., of which defendant Konigsberg is the president and chief executive
officer, in connection with one of those schemes.
The SEC's complaint, filed in the United States District Court for the Southern District of
Florida, alleges that Konigsberg and Fischler sought to manipulate the volume and price of four
different microcap stocks and to generate stock sales through the payment of illegal kickbacks
and bribes. Konigsberg and Fischler thought they were paying-off a corrupt pension fund
employee, stockbroker, and middlemen. In reality, the pension fund employee and the
stockbroker were fictitious persons, and the middlemen were an undercover FBI agent and a
cooperating witness.
According to the SEC's complaint, two of the schemes involved Konigsberg and Fischler
paying kickbacks to a purported corrupt pension fund employee to buy restricted shares of stock
in two microcap companies, MediSys Corp. and Casino Management of America, Inc., n/k/a
Crosslands Energy Corp. The SEC's complaint alleges Konigsberg and Fischler understood they
needed to disguise the kickbacks as payments to a phony consulting company that they knew
would perform no actual work. According to the complaint, in two other schemes, Konigsberg
and Fischler paid bribes to a purported corrupt stockbroker, who in return would use his clients'
accounts to purchase the publicly traded stock of microcap issuers Pavillion Energy Resources,
Inc. and Xtreme Motorsports International, Inc. The fraudulent buying would create the false
impression in the market that these companies were developing active trading supporting a rising
stock price.
SEC v. Overland Energy, Inc., et al.
The SEC filed an emergency civil action against Garry B. Smith, Robert J. Nelson and
their Lewisville, Texas-based companies, Overland Energy, Inc. and Acorn Energy, Inc., for
their roles in defrauding investors in oil and gas securities offerings. The Commission also
charged one of Overland's most prolific salesmen, Steven M. Ray, with violating federal brokerregistration requirements. Another entity Smith and Nelson control, Tega Operating Company,
was named as a relief defendant.
The same day, Judge Schneider of the U.S. District Court for the Eastern District of
Texas entered a temporary restraining order against Smith, Nelson and Acorn. The Court also
froze the assets of Overland, Acorn, Smith, Nelson and Tega, and granted the Commission other
legal and equitable relief.
The Commission's complaint alleges that, from at least September 2007 to the present,
Smith and Nelson raised approximately $11 million dollars from more than 180 investors
nationwide, through six securities offerings conducted through Overland and Acorn. The
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complaint further alleges that the first five offerings were sold by unregistered salespeople
employed by Overland, including Smith, Nelson and Ray. According to the Commission,
Overland and Acorn gave prospective investors private placement memoranda (PPM), approved
by Smith and Nelson, which contained material misrepresentations and omissions about the use
of offering proceeds, potential oil and gas production, and potential investment returns.
Specifically, the Commission contends that the PPMs represented that approximately 82% of
funds raised would be spent on leasehold costs and to drill, test, complete and equip oil and gas
wells. In fact, the Commission alleges that less than half of the funds raised went to these costs.
Instead, according to the complaint, Smith and Nelson diverted the majority of funds to other
purposes, including extensive international travel for themselves and family members; concerts;
fine restaurants; private flight instruction; and lavish bonuses and "dividends" they frequently
paid themselves. The complaint also alleges that the defendants enticed investors with claims
that the wells would be highly productive and would return investors' initial investment in one to
two years. The Commission contends that these claims were unfounded, speculative and
materially misleading.
The complaint charges that Overland, Smith and Nelson violated Sections 5(a), 5(c), and
17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 15(a) of the
Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Commission
also alleges that Acorn violated Sections 17(a) of the Securities Act and Sections 10(b) of the
Exchange Act and Rule 10b-5 thereunder. Ray is charged with violating Section 15(a) of the
Exchange Act. In addition to the relief already obtained, the Commission seeks appointment of a
receiver, civil penalties, preliminary and permanent injunctive relief and disgorgement of illgotten gains against the defendants. Against Tega, the Commission seeks to recover investor
funds it improperly received.
SEC v. Boston Trading and Research, LLC, Ahmet Devrim Akyil and Craig Karlis
The Commission filed a civil injunctive action in federal district court in Massachusetts
against Boston Trading and Research, LLC (BTR), and its principals Ahmet Devrim Akyil and
Craig Karlis for fraudulently raising approximately $40 million from approximately 750
investors in a purported foreign currency (Forex) trading venture. Among other things, the SEC
alleges that the defendants misappropriated some investor funds and lost the vast majority of
remaining investor funds through Forex trading activity after promising investors that most of
their funds were protected from such trading losses.
The Commission’s complaint alleges that BTR offered investors investments in a
program that traded in the Forex market. BTR solicited investments through a website, sales
representatives called “introducing brokers,” and live presentations by Karlis and Akyil. BTR
attracted investors from around the world, with many residing in Florida. BTR’s representations
to investors, included the following: (1) investors would have 100% transparency about what
was going on in their accounts through the provision of daily and monthly account statements
and twenty-four hour access to real-time trading information regarding the trading that Akyil was
doing on their behalf; (2) the BTR trading system was set up with a stop-loss program, so
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investors could lose no more than an agreed-upon percentage (typically 30%) of their initial
investment; and (3) BTR and its principals would be paid from profits only.
The SEC alleges that in fact Karlis and Akyil diverted some investor funds for their own benefit.
To conceal the fraud, BTR sent investors misleading account statements, while Akyil and Karlis
were actually depleting the investment pool through misappropriation and trading losses.
According to the Complaint, BTR collapsed in September 2008 due to significant losses
accrued as a result of concealed trading far past the stop loss limits promised to investors.
Ultimately, BTR distributed the remaining funds, which accounted for only approximately 10%
of account balances, to its investors. The Commission seeks the entry of a permanent injunction,
disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of civil monetary
penalties against BTR, Akyil, and Karlis.
SEC v. Steven Brewer, et al.
The Commission filed a civil action in the United States District Court for the Northern
District of Illinois, Eastern Division, against Brewer Financial Services, LLC ("BFS"), a
registered broker-dealer, Brewer Investment Advisors, LLC ("BIA"), a registered investment
adviser, Brewer Investment Group, LLC ("BIG"), their parent holding company, and their
managing principals/officers, Steven Brewer and Adam Erickson, for allegedly participating in a
fraudulent offering of promissory notes. BFS, BIA, and BIG are based in, and Brewer and
Erickson reside in, Chicago, Illinois.
The Complaint alleges that, from June 2009 through at least September 2010, the
defendants raised approximately $5.6 million from 74 investors who invested in promissory
notes issued by an Isle of Man company. Although investors were told that their money would be
used to repay certain debts of the issuer's parent company, and thereby release assets that would
be used to secure their promissory note obligations, the Complaint alleges that nearly all of the
offering proceeds were transferred to BIG and its subsidiaries. According to the Complaint, in
addition to misrepresenting the manner in which the offering proceeds would be used, the
defendants failed to tell investors that BIG and its subsidiaries were in a precarious financial
state. In addition to sustaining substantial operating losses from the inception of the offering
through the present, BIG had failed to make required interest payments to investors by July 1,
2010, and had failed to meet its own payroll obligations by August 2010. The Complaint alleges
that, notwithstanding, and without disclosing, this material information, the defendants continued
selling promissory notes to new investors for at least three additional months. According to the
Complaint, the note offerings were not registered with the Commission.
The Complaint claims that, based on this conduct, all of the defendants violated Sections
5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange
Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Complaint also claims that BFS
violated, and Brewer and Erickson aided and abetted the violation of, Exchange Act Section
15(c), and that BIA violated, and Brewer and Erickson aided and abetted the violation, Sections
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206(1) and 206(2) of the Investment Advisers Act. On the Commission's motion, and upon the
consent of all defendants, the Court issued Preliminary Injunctions and an Order Imposing Asset
Freeze and Other Ancillary Relief ("Order") on October 29, 2010. Among other things, the
Court's Order froze certain bank accounts of defendants BIG and BFS.
SEC v. Elite Resources, LLC, et al.
The SEC filed a civil injunctive action in Atlanta Georgia on October 29, 2010, alleging
that Patricia Diane Gruber (“Gruber”), Kadar Josey (“Josey”), and the companies they operated,
Elite Resources, LLC (“Elite”) and Elite3 Holding Corp. (“Elite3”), operated a fraudulent “Prime
Bank” scheme that violated the antifraud and securities and broker dealer registration provisions
of the federal securities laws.
The Commission’s complaint alleges from at least April 8, 2010 through at least August
20, 2010, the defendants raised approximately $2.85 million from at least nine investors. In
raising these funds, the complaint alleges the defendants represented that investors could draw
upon bank issued guarantees worth millions of dollars, in one case representing a 40,000% return
on investment, without having to repay the withdrawn funds. The defendants further represented
that investor funds would be held in escrow until the bank guarantees were issued. The
complaint alleges that both of these representations were false in that no such bank guarantees
existed and the defendants used almost all of the funds for several undisclosed purposes
immediately upon receipt. When investors demanded performance, the complaint alleges that
the defendants provided them with a fictitious guarantee certificate purportedly issued by
Barclays Bank.
In its Complaint, the Commission alleges that the defendants violated Sections 5(a) and
(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. Also on October 29, the court issued an
order temporarily restraining defendants from violating these provisions, freezing their assets,
providing for expedited discovery, prohibiting the destruction of documents and directing that
they provide an accounting for the funds received. A hearing on the Commission’s request for a
preliminary injunction will be held on a date yet to be determined.
SEC v. Jason K. Fifield
The SEC filed a civil injunctive action charging Jason K. Fifield, a resident of Temecula,
California, with violations of the antifraud provisions of the federal securities laws. Specifically,
the Commission's complaint alleges that Fifield, using JJF Management Company, Inc., raised
approximately $5.88 million through the sale of unsecured promissory notes issued to more than
70 investors. The complaint alleges Fifield promised to pay JJF Management's investors interest
at a rate of 7.5% per month, or 90% per year. The complaint also alleges that Fifield, through
offering memoranda, made misrepresentations to investors about how investor funds would be
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used, and that Fifield misused investor funds by recklessly placing investor funds in
"investments" inconsistent with the representations in the offering documents, by making Ponzilike payments, and by making unauthorized, and exorbitant, payments to himself and to benefit
himself and his relatives.
Finally, the complaint charges Fifield with violations of the broker-dealer registration
requirements of the federal securities laws and alleges Fifield sold securities without being
registered with a registered broker or dealer.
The complaint alleges Fifield violated Section 17(a) of the Securities Act of 1933 and
Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
Commission seeks the entry of a permanent injunction, disgorgement plus prejudgment interest
and post-judgment interest, and civil money penalties.
SEC v. Imperia Invest IBC
The SEC obtained a temporary restraining order and emergency asset freeze against
Imperia Invest IBC ("Imperia") for defrauding more than 14,000 investors worldwide. The
Commission's complaint alleges Imperia raised in excess of $7 million, $4 million of which was
collected primarily from deaf investors in the United States. In addition to the asset freeze, the
court has granted the Commission's motion for expedited discovery and prohibiting the
destruction of documents.
According to the Commission's complaint filed in the U.S. District Court for Utah,
Imperia defrauded investors by soliciting funds via the internet to purchase Traded Endowment
Policies ("TEP"), the British term for viatical settlements, claiming to pay investors a guaranteed
return of 1.2% per day. The Commission alleges that Imperia promised unrealistic returns to
investors. The Imperia website allegedly stated that an initial $50 investment would allow the
investor to obtain an $80,000 loan from an unnamed foreign bank which would be used by
Imperia to purchase a TEP; Imperia would then trade the TEPs and pay the investor the
guaranteed return. The Commission's complaint alleges that Imperia claimed to be licensed and
located in both the Bahamas and Vanuatu when, in fact, it is not licensed to do business or
located in either of those countries. It is also alleged that Imperia's website stated investors could
only access their profits by purchasing a Visa debit card from Imperia, but that Imperia has no
relationship with Visa and was using the Visa name without authorization. Additionally, the
complaint contends that Imperia took proactive steps to conceal the identity of its control persons
by using an anonymous browser to host its website, by communicating with all investors via
email without disclosing the identity of any control persons and by establishing off-shore Paypal
style bank accounts to conceal the recipient of the investment proceeds.
The Commission's complaint charges Imperia Invest IBC with violations of Sections
5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder.
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SEC v. Barbra Alexander et al.
The SEC charged a talk radio show host and two other executives at a Monterey, Calif.based firm with misappropriating $2.5 million of approximately $7 million they raised through
the fraudulent sale of interests in two real estate investment funds.
The SEC alleges that Barbra Alexander, the former president of APS Funding, used her
status as host of an internationally-syndicated radio show for entrepreneurs called MoneyDots to
lure investors who thought their money would be used to fund short-term loans secured by real
estate. Alexander along with the firm’s secretary/chief financial officer Beth Piña of Fairfield,
Idaho, and vice president Michael E. Swanson of Seaside, Calif., instead stole investor money to
pay themselves $1.2 million and finance MoneyDots and other unrelated businesses
unbeknownst to investors. Alexander even used $200,000 of investor funds to remodel her
kitchen.
According to the SEC’s complaint filed in federal district court in San Jose, Alexander,
Piña and Swanson raised nearly $7 million from 50 investors for two investment funds managed
by APS Funding. They claimed that the funds would make short-term secured loans to
homeowners and yield 12 percent annual returns to investors. Contrary to what investors were
told, $1.2 million of their money instead went directly to Alexander, Piña, and Swanson for
personal use, and $1.3 million in investor funds was used to finance other businesses owned by
Alexander and APS Funding, including MoneyDots.
The SEC further alleges that Alexander, Piña, and Swanson furthered the scheme by
sending monthly account statements to investors reflecting fictitious profits and, in classic Ponzi
scheme fashion, paying out purported returns that actually came from new investors.
In its federal court action, the SEC charges Alexander, Piña, Swanson, and APS Funding
with violating Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of
the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The SEC
also charges Alexander, Swanson, and APS Funding with violating Sections 5(a) and 5(c) of the
Securities Act. The SEC’s complaint seeks relief in the form of permanent injunctions against all
defendants enjoining them from future violations of the provisions charged, an order requiring
that they disgorge their ill-gotten gains, with prejudgment interest, and imposing civil penalties
against Alexander, Piña, and Swanson.
SEC v. Algird M. Norkus and Financial Update, Inc.
The Commission filed fraud charges against Algird M. Norkus, a resident of Sugar
Grove, Illinois and the corporation he controlled, Financial Update, Inc. ("Financial Update").
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The Commission's complaint alleges that Norkus, acting as President of Financial
Update, raised at least $6.4 million from at least 17 investors through the offer and sale of
promissory notes issued by Financial Update. The complaint further alleges that Norkus told the
investors that their money would be used to fund Financial Update's business activities and that
he enticed investors by promising interest rates between 11% and 24% per year.
The complaint goes on to allege that in reality, Norkus used investor money to pay for
personal expenses such as his mortgage and a car and that he also used the money provided by
newer investors to make interest and principal payments to earlier investors. The complaint
alleges that Norkus never disclosed to investors that he was using their money in this fashion.
SEC v. Pacific Asian Atlantic Foundation and Samuel M. Natt
The SEC filed fraud charges against Samuel M. Natt, president and chief executive
officer of Pacific Asian Atlantic Foundation ("PAAF"), a purported international humanitarian
organization, for fraudulently offering billions in worthless bonds to several U.S broker-dealers.
The SEC's complaint, charges Natt and PAAF for offering billions in fraudulent PAAF
bonds from late 2006 through 2009. The complaint alleges, among other things, that the
defendants created the false impression that the bonds were genuine debt securities by drafting
and disseminating fraudulent offering memoranda that misrepresented, among other things,
PAAF's assets and financial condition, its ability and intent to pay the principal and interest on
the bonds, the riskiness of the offering, and PAAF's intended use of the bond proceeds. The
complaint further alleges that Natt and PAAF attempted to legitimize the bonds by obtaining
corporate bond identification numbers from the CUSIP Service Bureau based upon PAAF's
misleading offering memoranda. According to the complaint, the defendants took these actions
to ensure that registered broker-dealers and other financial institutions would accept the
worthless bonds and deposit them into accounts held by PAAF.
Natt and PAAF have agreed to settle this case without admitting or denying the
allegations in the complaint. Natt and PAAF consented to a permanent injunction from further
violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933. In addition to the
permanent injunction, Natt consented to pay a $50,000 civil penalty.
SEC v. Berkshire Resources, L.L.C., et al.
Lit. Rel. No. 21074 (June 9, 2009)
The SEC filed a complaint charging Berkshire Resources, L.L.C. ("Berkshire"), a
Wyoming company purportedly involved in oil and gas exploration, its principals, Jason T. Rose
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and David G. Rose, and the six companies through which Berkshire carried out a securities
offering with securities fraud in connection with an oil and gas offering fraud. The complaint
also charged Berkshire's head sales agents, Mark D. Long and Yolanda C. Velazquez, with
securities registration and broker-dealer registration violations.
The SEC alleges that from April 2006 through December 2007, Berkshire raised
approximately $15.5 million from about 265 investors in the U.S. and Canada through a series of
unregistered, fraudulent offerings of securities in the form of "units of participation." The
defendants marketed the offerings to the public through cold call sales solicitations, and at trade
shows and "wealth expositions." The purported purpose of the offerings was to fund oil and gas
development projects that Berkshire was to oversee. According to the complaint, Jason Rose was
the public face of Berkshire and was held out as its lead manager with significant experience in
the oil and gas industry. In reality, Jason Rose had no experience managing an oil and gas
company, and David Rose, Jason's father, ran the company behind the scenes. David Rose has an
extensive disciplinary history for securities fraud and is facing a criminal indictment in
connection with another similar but unrelated oil and gas scam.
The complaint further alleges the Defendants also misled investors, among other things,
about the use of investor proceeds. The defendants assured investors they would use 100 percent
of their funds for the oil and gas drilling projects. Contrary to these representations, Berkshire
spent approximately $6.7 million on items having nothing to do with developing the projects.
Moreover, of the $6.7 million, approximately $1.3 million went directly to members of the Rose
family to pay for mortgages on their homes, home furnishings and electronics, cars, and personal
credit card charges. The complaint also alleges that to further their scheme, Jason and David
Rose enlisted Velazquez and Long to run two boiler-room type sales offices on Berkshire's
behalf. Long and Velazquez received commissions for their sales efforts, despite the fact that
neither they nor Berkshire were registered broker-dealers.
Subsequently, on November 20, 2009, the United States District Court for the Southern
District of Indiana entered a Default Judgment of Permanent Injunction and Other Relief against
Berkshire, Berkshire (40L), L.L.P., Berkshire 2006-5, L.L.P., Passmore-5, L.L.P., Gueydan
Canal 28-5, L.L.P., Gulf Coast Development #12, L.L.P., and Drilling Deep In the Louisiana
Water, J.V. (the "Berkshire Defendants"). The default judgment enjoined the Berkshire
Defendants from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder.
CASES INVOLVING AFFINITY FRAUDS
In the Matter of Armando Ruiz, and Maradon Holdings, LLC
A.P. Rel. No. 33-9209 (May 16, 2011)
Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the
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Securities Exchange Act of 1934 and Section 9(b) of the Investment Company Act of 1940
(Order) against Armando Ruiz and Maradon Holdings, LLC (Maradon). The Division of
Enforcement alleges that Ruiz defrauded investors in connection with an offering of securities
purportedly issued by Maradon, an entity that Ruiz controlled. Ruiz raised approximately
$817,500 from nine investors, all of whom were friends or family members, by purporting to sell
to them shares of preferred stock or other equity interests in Maradon. During the time that he
was selling these interests, Ruiz was, and still remains, a registered representative associated
with Legend Securities, Inc. (Legend), a registered broker dealer. Legend was not involved in the
Maradon offering, and the Division of Enforcement therefore also alleges that Ruiz acted as an
unregistered broker dealer.
In addition to representing that the investors were purchasing an equity interest, Ruiz told
the investors that their funds would be used to help develop Maradon into a financial services
company serving the Hispanic community. Ruiz’s representations were false because: (i)
Maradon was an LLC and could not issue stock and, in any event, the staff has not found any
record of Maradon properly issuing membership interests to the investors; and (ii) Ruiz used the
vast majority of the offering proceeds to pay personal expenses and trade securities, rather than
fund the development of Maradon’s business.
Based on the above, the Division of Enforcement alleges in the Order that Maradon
violated, and Ruiz willfully violated and committed and caused Maradon’s violations of, Section
17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder,
which prohibit fraudulent conduct in the offer and sale of securities and in connection with the
purchase or sale of securities. Based on the above, the Division of Enforcement also alleges that
Ruiz willfully violated Section 15(a) of the Securities Exchange Act, which prohibits a broker or
dealer from effecting transactions in, or inducing or attempting to induce the purchase or sale of,
any security unless such broker or dealer is registered with the Commission.
SEC v. Monroe L. Beachy
The Commission filed a civil injunction action in the United States District Court for the
Northern District of Ohio charging Monroe L. Beachy with conducting an unregistered and
fraudulent offering of securities that raised more than $33 million. The SEC alleges that Beachy,
a 77-year-old Amish man from Sugarcreek, Ohio, targeted his fellow Amish as investors in his
fraudulent offering.
The SEC’s complaint alleges that from as early as 1986 through June 2010, Beachy,
doing business as A&M Investments, raised at least $33 million from more than 2,600 investors
through the offer and sale of investment contracts. The vast majority of Beachy’s investors were
Amish. Beachy enticed investors by promising interest rates that were greater than banks were
offering at the time. Many of Beachy’s investors treated their investment accounts with Beachy
like money market accounts, from which they could withdraw their money at any time. Beachy
told his investors that their money would be used to purchase risk-free U.S. government
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securities, which would generate returns for the investors. In reality, Beachy used the money to
make speculative investments in high yield (junk) bonds, mutual funds, and stocks.
The complaint further alleges that Beachy suffered significant losses in investor principal,
which Beachy hid from his investors. Beachy mailed his investors monthly account statements
showing fabricated rates of return and exaggerated account balances. As of June 2010, Beachy’s
investors believed, based on the fraudulent monthly statements Beachy had sent them, that they
had approximately $33 million invested with Beachy. In reality, less than $18 million of investor
money remained. Beachy filed for Chapter 7 bankruptcy on June 30, 2010, and his assets are
currently under the control of a Chapter 7 bankruptcy trustee appointed by the bankruptcy court.
The SEC’s complaint charges Beachy with violating Sections 5(a), 5(c), and 17(a) of the
Securities Act of 1933 (Marchurities Act), and Section 10(b) of the Securities Exchange Act of
1934 (Exchange Act) and Rule 10b-5 thereunder. Beachy has agreed to settle the SEC’s charges
without admitting or denying the allegations. Beachy has consented to the entry of a final
judgment permanently enjoining him from violating Sections 5(a), 5(c), and 17(a) of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s
proposed judgment does not impose a civil penalty based on Beachy’s financial condition.
SEC v. Timothy S. Durham, et al.
Lit. Rel. No. 21888 (March 16, 2011)
The SEC charged three senior executives at Akron, Ohio-based Fair Finance Company
with orchestrating a $230 million fraudulent scheme involving at least 5,200 investors – many of
them elderly.
The SEC alleges that after purchasing Fair Finance Company, chief executive officer
Timothy S. Durham, chairman James F. Cochran, and chief financial officer Rick D. Snow
deceived investors while selling them interest-bearing certificates. Fair Finance had previously
operated for decades as a privately-held consumer finance company. But under the guise of
loans, Durham and Cochran schemed to divert investor proceeds to themselves and others as
well as struggling and unprofitable entities that they controlled. Durham and Cochran further
misused investor funds to buy classic cars and other luxury items to enhance their own lavish
lifestyles.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of
Indiana, Fair Finance historically raised funds by selling interest-bearing certificates to investors
and using the proceeds to purchase and service discounted consumer finance contracts.
Following the 2002 purchase, Durham and Cochran funneled millions of dollars to themselves
and their related companies. By November 2009, Durham, Cochran and their related businesses
owed Fair Finance more than $200 million, which accounted for approximately 90 percent of
Fair Finance’s total loan portfolio.
The SEC alleges that Durham and Cochran knew that neither they nor their related
companies had the earnings, collateral or other resources to ensure repayment on the purported
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loans. As CFO, Snow knew or was reckless in not knowing that neither Durham and Cochran nor
their entities could repay the funds they took from Fair Finance. Nonetheless, they continued to
raise hundreds of millions of dollars from investors by using false and misleading financial
statements and other information contained in the offering circulars to deceive investors about
Fair Finance’s true financial condition. Ultimately, Durham, Cochran and their related
companies never repaid these loans, and they used new investor proceeds to repay earlier
investors in the nature of a Ponzi scheme.
Durham and Cochran also distributed large amounts of money to family members and
friends, and misused investor funds to afford mortgages for multiple homes, a $3 million private
jet, a $6 million yacht, and classic and exotic cars worth more than $7 million. They also
diverted investor money to cover hundreds of thousands of dollars in gambling and travel
expenses, credit card bills, and country club dues, and to pay for elaborate parties and other
forms of entertainment.
According to the SEC’s complaint, Durham has residences in Los Angeles and Fortville,
Ind.; Cochran resides in McCordsville, Ind.; and Snow lives in Fishers, Ind. Durham currently is
the CEO at National Lampoon, and Snow currently is the CFO.
The SEC’s complaint charges Durham, Cochran and Snow with violating Section 17(a) of the
thereunder. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus
prejudgment interest, penalties and officer and director bars against each of the defendants.
SEC v. Amit V. Patel
The Commission brought fraud charges and an asset freeze against Amit V. Patel
(“Patel”), a resident of Shoreview, Minnesota, for operating a fraudulent scheme in which he
raised at least $2.5 million from at least five individuals that he met in the Indian-American
community and Hindu temples in Minnesota. The SEC's complaint, filed in the U.S. District
Court for the District of Minnesota, alleges that Patel, from at least 2008 through the present,
also received millions of dollars more from dozens of other individuals. The complaint alleges
that Patel took advantage of his cultural affinity and shared religious heritage with his victims,
and exploited their trust in his standing in the community.
At the SEC's request for emergency relief, the Hon. Joan N. Ericksen, United States
District Court, District of Minnesota, issued a temporary restraining order against Patel and an
order freezing all assets under the control of Patel, in addition to granting other emergency relief.
According to the allegations in the SEC complaint, Patel’s scheme had two parts. First,
the complaint alleges, Patel sold at least four investors nearly $1.4 million of promissory notes
by falsely promising to grow their money through a low-risk stock option trading strategy. Patel
guaranteed to pay these investors fixed monthly returns ranging from 1-2% from his trading
profits, and guaranteed the repayment of their principal. Patel actually misappropriated over
$572,000 of this money to pay his own living expenses; to repay personal debts to family,
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friends, and third parties; and to make the monthly payments promised to his other investors.
Patel pooled the rest of the money in his personal brokerage accounts, where he traded with a
self-described high risk and speculative strategy called Iron Condor. His trading lost almost all
of the investors’ money. Second, Patel persuaded at least four investors to grant him “limited
trading authority” over at least $1.1 million in additional funds deposited in investors’ online
brokerage accounts. Patel falsely promised to trade on their behalf using a safe and conservative
strategy. Patel again invested using the same high risk and speculative Iron Condor strategy,
which resulted in net losses of at least $947,815.
According to the SEC complaint, Patel violated Section 17(a) of the Securities Act of
1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and
Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8)
thereunder.
SEC V. Luis Felipe Perez
Lit. Rel. No. 21544 (June 2, 2010)
The SEC charged a Miami man for conducting a $40 million Ponzi scheme with funds
primarily raised from investors in the local Hispanic community to purportedly support jewelry
businesses and pawn shops.
The SEC alleges that Luis Felipe Perez arranged "no-risk" loan agreements with investors
and promised to pay them guaranteed annual returns of 18 percent to 120 percent through
monthly interest payments. Perez falsely told investors that their investments were collateralized
by diamonds, and even led some investors to believe they were beneficiaries on his life insurance
policy without disclosing that the policy had lapsed.
Rather than financing his jewelry businesses, the SEC alleges that Perez misused new
investor funds to pay prior investors, and he stole at least $6 million for lavish personal spending
on limousines, extravagant dinners, bodyguards, and political contributions that helped bolster
his image in the local community.
According to the SEC's complaint, Perez began his scheme in 2006 when he began
raising money from investors, many of them Hispanic, under the guise of investments in his
purported jewelry businesses. Perez was the president and sole owner of Lucky Star Diamonds
Inc. and Luis Felipe Jewelry Design Corp., neither of which ever had any employees. Both
companies have now ceased operations.
The SEC alleges that Perez boasted a successful track record of providing risk-free
investments in order to befriend new investors through word-of-mouth from previous investors.
The SEC alleges that Perez misused more than $6 million of investor money to fund his
extravagant lifestyle. According to the SEC's complaint, Perez's scheme collapsed in June 2009
when he was no longer able to recruit new investors.
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The SEC's complaint charges Perez with violating Section 17(a) of the Securities Act of
1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
SEC seeks a permanent injunction, sworn accounting, disgorgement of ill-gotten gains with
prejudgment interest, and a civil money penalty against Perez.
SEC v. Francois E. Durmaz Robert C. Pribilski, USA Retirement Management Services
Lit. Rel. No. 21445 (March 10, 2010)
The SEC obtained an emergency court order to shut down a Ponzi scheme targeting
retirees in California and Illinois by inviting them to estate planning seminars and later coaxing
them to buy promissory notes for purported Turkish investments.
The SEC alleges that USA Retirement Management Services ("USARMS") and
managing partners Francois E. Durmaz and Robert C. Pribilski mass-mailed promotional
materials to prospective investors and invited them to estate planning seminars held at country
clubs and banquet halls. They gained retirees' confidence in follow-up meetings and portrayed
themselves as educated and experienced in foreign investments specifically tailored to the needs
of seniors. Durmaz and Pribilski then pitched what they represented as safe, guaranteed
investments in "Turkish Eurobonds" through the purchase of USARMS promissory notes that
would earn annual returns between 8 and 11 percent.
The SEC alleges that USARMS raised at least $20 million from more than 120 investors,
but did not actually invest the money in Turkish Eurobonds as promised. Instead, returns were
paid to earlier investors with funds received from new investors in Ponzi-like fashion. Durmaz
and Pribilski further misused investor funds to finance their other businesses and purchase such
things as luxury automobiles, homes, vacations, and web-based pornography. They also wired
investor money into bank accounts belonging to individuals living in Turkey who are named as
relief defendants in the SEC's case.
USARMS and its securities are not registered with the SEC. USARMS is incorporated in
Illinois and has offices in Los Angeles; Irvine, Calif.; and Oakbrook Terrace, Ill. Durmaz resides
in Los Angeles and Streamwood, Ill., and Pribilski resides in Lisle, Ill. Neither of them is
registered with the SEC in any capacity nor do they hold any securities licenses.
The SEC's complaint charges all defendants with violations of the registration provisions
of Section 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act") and of the antifraud
provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange
Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The complaint also charges
defendants Durmaz and Pribilski with violations of the broker-dealer registration provisions of
Section 15(a) of the Exchange Act.
The Honorable George H. Wu, U.S. District Judge for the Central District of California,
granted the SEC's request for emergency relief for investors, including an order temporarily
enjoining defendants from future violations of the antifraud provisions and freezing their assets.
Judge Wu also granted the SEC's request for emergency relief against relief defendants Sibel
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Ince, Marlali Gayrimenkul Yatirimlari, Mehmet Karakus, Marlali Property Investment
Company, LLC, and Gulen Enterprises, Inc.
SEC v. NewPoint Financial Services, Inc., et al.
The SEC filed a complaint in the United States District Court for the Central District of
California against NewPoint Financial Services, Inc. ("NewPoint"), John Farahi and Gissou
Rastegar Farahi (the "Farahis"), and Elaheh Amouei (collectively, "the defendants") to halt the
fraudulent, unregistered offering and sale of securities by defendants and to prevent the
dissipation of investor funds. The court entered an order halting the alleged fraud and freezing
the defendants' assets and those of relief defendant, Triple "J" Plus, LLC ("Triple 'J'"), an entity
controlled by the Farahis.
The SEC's complaint alleges that the defendants engaged in an unregistered offering
fraud targeting the Los Angeles Iranian-American community. According to the complaint, most
investors learned of NewPoint, a corporation controlled by the Farahis, through a daily finance
radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area.
The SEC alleges that investors were typically solicited to invest in the debentures by the Farahis
and/or Elaheh Amouei, NewPoint's controller, after making an appointment to discuss
investment opportunities offered by NewPoint. The SEC's complaint alleges that since at least
2003, NewPoint has offered and sold more than $20 million worth of debentures to more than
one hundred investors.
In its lawsuit, the SEC obtained an order (1) freezing the assets of NewPoint, the Farahis,
and Triple "J"; (2) appointing a temporary receiver over NewPoint and Triple "J"; (3) preventing
the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple
"J"; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also seeks preliminary and
permanent injunctions and civil penalties against the defendants and disgorgement with
prejudgment interest against NewPoint, the Farahis, and Triple "J."
Subsequently, in a settled administrative proceeding instituted pursuant to Section
15(b)(6) of the Exchange Act, John Farahi was barred from association with any broker or
dealer. (See A.P. Rel. No. 34-61801 (March 30, 2010), http://www.sec.gov/litigation/admin/
2010/34-61801.pdf.)
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SEC v. Shidaal Express, Inc. and Mohamud Abdi Ahmed
The SEC's complaint names Mohamud A. Ahmed ("Ahmed"), age 45, of Spring Valley,
Calif., and his company, Shidaal Express, Inc. ("Shidaal Express"), which operates in the San
Diego area. The complaint alleges Ahmed formed Shidaal Express to provide check-cashing,
money transfer, and other financial services for the Somali immigrant community, and a sign at
one storefront location listed "Investment Opportunities" among the services provided.
According to the complaint, Ahmed raised at least $3 million, including $200,000 from a San
Diego mosque, by promising exorbitant guaranteed returns of 5% per month, or 60% annually.
The SEC charged Ahmed and Shidaal Express with committing securities fraud by
making false and misleading statements to persuade people to invest with them. According to the
complaint, Ahmed solicited investors through word-of-mouth, at a mosque in San Diego, at a
presentation given in a Seattle-Tacoma hotel, and through Shidaal Express's website. The SEC
alleges that Ahmed lured investors by assuring them they could receive their money back at any
time. While initially paying investors monthly returns, the complaint alleges Ahmed tried to
extract more money from the investors. The complaint alleges Ahmed eventually stopped paying
monthly returns but continued lulling investors.
The Honorable Jeffrey Miller, United States District Judge, granted the SEC's application
for emergency relief and froze the defendants' assets. The Judge also appointed Thomas Hebrank
as the temporary receiver over the assets of Shidaal Express and its affiliates. On November 30,
2009, the Court will hold a hearing on the SEC's motion for a preliminary injunction and
appointment of a permanent receiver.
The SEC's complaint charges defendants with violating the antifraud provisions, Section
17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, of the federal securities laws. In addition to the emergency relief, the
SEC's complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment
interest, and financial penalties against Ahmed and Shidaal Express.
Subsequently, the SEC obtained a preliminary injunction in this case. On November 30,
2009, the United States District Court for the Southern District of California entered a
preliminary injunction against Ahmed and Shidaal Express. The preliminary injunction enjoined
Ahmed and Shidaal Express from violating the antifraud provisions of the federal securities laws,
and the Court granted additional relief sought by the SEC including orders freezing the assets of
Ahmed and Shidaal Express, and appointing Thomas Hebrank as permanent receiver over
Shidaal Express.
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CASES INVOLVING PONZI SCHEMES
SEC v. John N. Irwin and Jacklin Associates, Inc.
Lit. Rel. No. 22033 (July 11, 2011)
The SEC filed a settled civil action against John N. Irwin (“Irwin”), a certified public
accountant, and his consulting firm, Jacklin Associates, Inc. (“Jacklin”). The Commission alleges
that, from at least February 1995 through December 2008, Irwin and Jacklin participated in a
multi-million dollar Ponzi scheme orchestrated and run by Joseph S. Forte (“Forte”) through his
limited partnership Joseph S. Forte, LP (“Forte LP”). In December 2008, Forte confessed to
federal authorities that, for over a decade, he had been operating a Ponzi scheme in which he
fraudulently obtained approximately $50 million from roughly 80 investors through the sale of
securities in the form of limited partnership interests in Forte LP. Subsequent investigation of
Forte’s confession has revealed over 100 investors who collectively invested over $75 million.
The Commission’s complaint against Irwin and Jacklin alleges that they participated in
Forte’s scheme by soliciting investors for Forte LP. In doing so, Irwin relied exclusively on
Forte’s misrepresentations about Forte LP’s stellar performance and, without performing any due
diligence, passed along to investors through Jacklin materially false and misleading information
about, among other things, Forte LP’s current value and growth, historical performance, rapidtrading strategy, and retention of an accountant. Irwin, through Jacklin, also performed back
office and bookkeeping functions for Forte LP, including creating and issuing to investors false
quarterly statements and tax documents prepared based on the false information provided by
Forte. In communicating the fraudulent information to investors, Irwin disregarded red flags that
should have alerted him that the information that he was passing on was false. Over the course of
the fraud, Irwin, through Jacklin, received ill-gotten gains exceeding $5 million in purported fees
and trading profits.
Irwin and Jacklin agreed to settle the Commission’s charges, without admitting or
denying the allegations in the Commission’s complaint. Under the settlement, which is subject to
the court’s approval, Irwin and Jacklin consented to a judgment permanently enjoining them
from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The judgment also
orders the defendants to pay disgorgement plus prejudgment interest, and permits the
Commission to ask the court to impose civil penalties, the amounts of which will be determined
at a later date. As part of the settlement, Irwin agreed to the entry of an order suspending him
from appearing or practicing before the Commission as an accountant.
SEC v. Eric Lipkin
Press. Rel. 2011-119 (June 6, 2011)
The SEC charged Eric Lipkin, a longtime employee at Bernard L. Madoff Investment
Securities LLC (BMIS), with helping Bernard L. Madoff and his firm deceive and defraud
investors and regulators about the massive Ponzi scheme.
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The SEC’s complaint, filed in U.S. District Court for the Southern District of New York,
alleges that for more than a decade, Lipkin helped Madoff defraud investors and mislead auditors
and regulators about Madoff’s fraudulent, multi-billion dollar advisory operations. According to
the complaint, Lipkin processed payroll records for “no-show” employees, falsified records of
investors’ account holdings, and played a role in executing the entirely fictitious investment
strategy that Madoff and BMIS claimed to be pursuing on behalf of its clients. In fact, Madoff
used investors’ funds to enrich himself, his family, and his associates, and to pay off other
investors. Lipkin also helped Madoff deceive regulators by preparing fake Depository Trust
Clearing Corporation (DTCC) reports showing the sham investments for clients. Lipkin received
annual bonuses from the firm, including for his work to mislead auditors and examiners, and he
received $720,000 from Madoff to purchase a house, an amount he never paid back.
Without admitting or denying the allegations of the SEC’s complaint, Lipkin has
consented to a proposed partial judgment, which, if entered by the court, will impose a
permanent injunction against Lipkin and require him to disgorge ill-gotten gains and pay a fine
in an amount to be determined by the court at a later time.
The SEC’s complaint against Lipkin alleges that he violated Section 17(a) of the
Securities Act of 1933; violated and aided and abetted violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder; aided and abetted violations of
Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2
thereunder, and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3
thereunder.
SEC v. Art Intellect, Inc. et al.
Lit. Rel. No. 21937 (April 18, 2011)
The SEC obtained an emergency temporary restraining order and asset freeze in an
offering fraud and Ponzi scheme orchestrated by Patrick Merrill Brody (Brody) and Laura A.
Roser (Roser) through Art Intellect, Inc. d/b/a Mason Hill and Virtual MG (Mason Hill), a
company owned and controlled by Roser. In addition to the temporary restraining order and asset
freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of
investors. That Receiver is Wayne Klein.
The complaint alleges that, operating through Mason Hill, Brody, Roser, and Gregory D.
Wood (Wood) participated in a scheme to sell investment contracts in Mason Hill in unregistered
transactions, telling investors that Mason Hill will purchase distressed properties on their behalf,
rehabilitate these properties, find renters for the properties and remit a guaranteed profit of 10 to
30 percent to investors on a monthly basis. The complaint further alleges that investor funds
were not used to purchase properties on investors’ behalf but instead investor funds were used
for Mason Hill’s operations, payments for Brody and Roser’s lavish personal expenses and that
later investor funds were used to purchase properties for earlier investors, the hallmark of a
classic Ponzi scheme. Mason Hill, Brody, Roser, and Wood have raised more than $2.5 million
from approximately 75 investors.
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The Commission’s complaint charges Mason Hill, Brody, Roser and Wood with
violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the
Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and charges Brody, Roser and
Wood with violations of Section 15(a) of the Exchange Act. The complaint seeks a preliminary
and permanent injunction as well as disgorgement, prejudgment interest and civil penalties from
Mason Hill, Brody, Roser and Wood.
SEC v. David Ronald Allen, et al.
Lit. Rel. No. 21953 (May 3, 2011)
The SEC obtained a court order freezing the assets of China Voice Holding Corp., which
trades in over-the-counter markets and has claimed to have a portfolio of telecommunications
products and services in both the U.S. and China. The SEC alleges that China Voice’s cofounder and his two associates are operating an $8.6 million Ponzi scheme and misusing its
proceeds, in part, to help fund the company’s operations.
The SEC alleges that David Ronald Allen, who also was China Voice’s chief financial
officer, and his associates Alex Dowlatshahi and Christopher Mills promised investors in a series
of offerings of limited partnerships that they would earn returns of at least 25 percent on their
investments. Investors were falsely told that their money would be loaned to companies with a
demonstrated track record and large profit margins. Instead, Allen and his cohorts used investor
funds to pay back investors in earlier partnerships and funneled investor money to China Voice
and a complicated web of other companies that Allen controls. Allen and his associates also
siphoned investor money to enrich themselves and family members.
In addition to the Ponzi scheme, the SEC’s complaint charges China Voice, its former
chairman and CEO William F. Burbank IV, and Allen, for a series of fraudulent company
statements about its financial condition and business prospects.
The SEC also alleges that beginning in at least September 2006, China Voice overstated
its business in China by claiming to provide telephone and other communications software in
China on a much more extensive basis than it actually did.
The SEC’s complaint additionally charges two China Voice shareholders, Gerald Patera
and Ilya Drapkin, for helping Allen finance stock promotion campaigns to pump up the
company’s stock price.
The SEC’s complaint charges Allen, Dowlatshahi, Mills, and various related companies,
Development Capital Associates Joint Venture, Lucrative Enterprises, Corp., Silver Summit
Holdings, LLC, Sleeping Bear, LLC, Synergetic Solutions LLC, and Townhome Communities
Corp., with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a temporary
restraining order, preliminary and permanent injunctions, disgorgement of unlawful proceeds
plus prejudgment interest, and a financial penalty. The SEC’s complaint charges Burbank,
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Patera, Drapkin, and Wilson with violations of Section 10(b) of the Exchange Act and Rule 10b5 thereunder for their roles in the scheme. With regard to them, the SEC seeks a permanent
injunction, disgorgement of unlawful proceeds plus prejudgment interest, and a financial penalty.
The SEC’s complaint also seeks penny stock bars against Allen, Burbank, Patera, Drapkin, and
Wilson as well as officer and director bars against Allen and Burbank.
SEC v. James Clements and Zeina Smidi
Lit. Rel. No. 21910 (March 30, 2011)
The SEC charged two South Florida residents for conducting a $30 million Ponzi scheme
with funds primarily raised by offering and selling unregistered investment contracts and
promissory notes to hundreds of investors nationwide from 2005 until the summer of 2007.
The SEC alleges that James Clements and Zeina Smidi of Plantation, Florida, through the
companies they jointly controlled: MRT, LLC; MRT Holdings, LTD; and Maximum Return
Transaction, LLC, collectively “MRT”; operated a Ponzi scheme that offered investors
guaranteed monthly returns as high as 11%. From 2005 until the end of 2006, MRT, Clements
and Smidi told investors that MRT used investor proceeds to trade foreign currencies and touted
MRT’s investment success to draw in new investors. The SEC’s complaint further alleges that
MRT and Clements used certain investors who agreed to be “account managers” to solicit
hundreds of investors through informal gatherings and word of mouth.
The SEC’s complaint charges Clements with violating Sections 5(a), 5(c) and 17(a) of the
Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder. The SEC’s complaint charges Smidi with violating Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks a permanent
injunction, sworn accounting, disgorgement of ill-gotten gains with prejudgment interest, and a
civil money penalty against Clements and Smidi.
SEC v. John Scott Clark, Impact Cash, LLC and Impact Payment Systems, LLC
Lit. Rel. No. 21903 (Mar. 28, 2011)
The SEC obtained an emergency asset freeze in a $47 million offering fraud and Ponzi
scheme orchestrated by John Scott Clark (Clark) through Impact Cash, LLC and Impact Payment
Systems, LLC (collectively Impact), companies owned and controlled by Clark, which operated
an online payday loan company. In addition to the asset freeze, the court has appointed a receiver
to preserve and marshal assets for the benefit of investors. That Receiver is Gil A. Miller.
The complaint alleges that from March 2006 through September 2010, Impact and Clark
(by himself and through sales persons) raised more than $47 million from at least 120 investors
for the stated purposes of funding payday loans, purchasing lists of leads for payday loan
customers, and paying the operating expenses of Impact. The complaint further alleges that Clark
did not deploy investor capital to make payday loans as represented, but instead diverted investor
funds to maintain a lavish lifestyle, including buying expensive cars, art and a home theatre
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system. Clark also misappropriated investor money to fund outside business ventures and used
new investor funds to pay purported profits to earlier investors.
The Commission’s complaint charges Impact and Clark with violations of Sections 5(a),
5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934
(Exchange Act) and Rule 10b-5 thereunder, and charges Clark with violations of Section 15(a) of
the Exchange Act. The complaint seeks a preliminary and permanent injunction as well as
disgorgement, prejudgment interest and civil penalties from Impact and Clark.
SEC v. Richard Dalton and Universal Consulting Resources LLC
The SEC filed an emergency civil action in the United States District Court for the
District of Colorado against Richard Dalton and Universal Consulting Resources LLC (UCR) in
connection with a Ponzi scheme. The Commission is also seeking an order to freeze the assets of
Dalton’s wife, Marie Dalton, who is named as a relief defendant.
The Commission alleges that from about March 2007 through about June 2010, the Ponzi
scheme raised approximately $17 million from 130 investors in 13 states. Dalton and his
company, UCR, solicited investors for two fraudulent offerings that were generally referred to as
the “Trading Program” and the “Diamond Program” and promised returns of between 60% to
120% per year. The Commission alleges that investors in both programs received monthly
payments which Dalton told them were profits from successful trading. However, the majority of
funds that came into UCR bank accounts were from new investors, not from any actual profitgenerating activity. The complaint alleges that Dalton, who had no other employment or
legitimate source of income, funded his personal life at the expense of investors and also
transferred more than $900,000 in order to purchase a home in the name of his wife.
According to the complaint, Dalton told investors in the Trading Program that their
money would be held safely in an escrow account at a bank in the United States, and that a
European trader would use the value of that account, but not the actual funds, to obtain leveraged
funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough
that he was able to guarantee returns of four to five percent per month — or 48 to 60% per year
— to investors. Dalton claimed that he had successfully run the Trading Program for nine years.
The Commission alleges that in early 2009, UCR began offering the Diamond Program, which
Dalton claimed would profit by using investor funds for diamond trading. Similar to the Trading
Program, Dalton claimed that investor funds would be safely held in an escrow account. Under
the Diamond program, Dalton enticed investors with a guaranteed ten percent monthly return –
or 120% yearly return.
The SEC's complaint alleges that Dalton and UCR violated Sections 5(a), 5(c), and 17(a)
of the Securities Act of 1933, and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of
1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint also names Marie Dalton as a
relief defendant in order to recover investor assets now in her possession. In addition to seeking
an immediate asset freeze and temporary restraining order, the SEC will also seek permanent
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injunctions, disgorgement plus pre-judgment interest, and financial penalties against Dalton and
UCR, and disgorgement from Marie Dalton.
SEC v. Joseph Paul Zada and Zada Enterprises, LLC
The Commission filed a civil injunctive action against Joseph Paul Zada of Grosse Pointe
Shores, Michigan and his company, Zada Enterprises, LLC, accusing them of conducting a
fraudulent, unregistered offer and sale of at least $27.5 million in securities.
The SEC’s complaint, filed in U.S. District Court in Detroit, alleges that Zada raised at
least $27.5 million from at least 60 investors between January 2006 and August 2009 through the
offer and sale of promissory notes. According to the complaint, the promissory notes provided
various interest rates ranging from seven to twelve percent per year and Zada told some investors
that they would earn as much as 48 percent on their investment. The complaint alleges that Zada
told investors that he would invest their funds in oil-related investments. He also told investors
that he had exclusive access to certain oil investments and that he had business contacts in oilproducing countries in the Middle East. Zada also told investors that he had earned substantial
returns from prior oil-related investments.
The SEC alleges that Zada’s representations were false and that he never invested any
funds in oil-related investments or any other type of investment. According to the SEC’s
complaint, Zada was instead conducting a Ponzi scheme, utilizing funds from new investors to
pay earlier investors. Zada used approximately $12.4 million to make monthly “interest” and
return of principal payments to investors. He used all other available funds to pay his personal
and other expenses unrelated to any investments. Examples include approximately $8 million to
purchase and improve his personal residences in Grosse Pointe Shores, Michigan and his
equestrian facility in Palm Beach County, Florida, $2.3 million to pay personal credit card bills,
$505,000 to pay insurance premiums, $494,000 on legal and accounting fees, $417,000 for
jewelry, $221,000 to pay taxes, and $103,000 to buy cars.
The SEC’s complaint charges Zada and Zada Enterprises with violations of Sections 5(a),
5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The SEC is seeking a permanent injunction and
disgorgement of ill-gotten gains with prejudgment interest, jointly and severally, against Zada
and Zada Enterprises and a civil penalty against Zada.
SEC v. Bruce F. Prévost, David W. Harrold, Palm Beach Capital Management LP, and
Palm Beach Capital Management LLC
The SEC charged two Florida-based hedge fund managers and their firms with
fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme
operated by Minnesota businessman Thomas Petters.
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The SEC alleges that Bruce F. Prévost of Palm Beach Gardens and David W. Harrold of
Del Ray Beach falsely assured their investors and potential investors that the flow of their money
would be safeguarded by collateral accounts and described a phony process for protecting their
assets. When Petters was unable to make payments on investments held by the funds they
managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note
exchange transactions with Petters, who the SEC charged last year along with an Illinois-based
hedge fund manager who also facilitated the scheme.
The SEC's complaint filed in the U.S. District Court for the District of Minnesota alleges
that Prévost, Harrold, and their firms Palm Beach Capital Management LP and Palm Beach
Capital Management LLC invested more than $1 billion in hedge fund assets with Petters while
pocketing more than $58 million in fees. Petters promised investors that their money would be
used to finance the purchase of vast amounts of consumer electronics by vendors who then resold the merchandise to such "Big Box" retailers as Wal-Mart and Costco. In reality, Petters's
"purchase order inventory financing" business was merely a Ponzi scheme. There were no
inventory transactions. Petters sold promissory notes to feeder funds like those controlled by
Prévost, Harrold, and their firms and used some of the note proceeds to pay returns to earlier
investors, diverting the rest of the cash to his own purposes.
The SEC further alleges that Prévost, Harrold, and their firms devised with Petters a
series of bogus note exchange transactions beginning around February 2008. The Palm Beach
Funds on multiple occasions exchanged groups of mature notes that were due to be repaid on or
about the date of the exchange for newly-issued notes that were not due to be paid for six months
and purported to be collateralized by different merchandise associated with different inventory
finance transactions. Instead of receiving cash repayments and then reinvesting that cash in new
notes as they had done in the past, Prévost and Harrold simply began exchanging old IOUs for
new ones, ultimately swapping the vast majority of notes held by the funds. Meanwhile, they
continued to falsely report in monthly communications to investors that the funds were
generating the same steady profits they had generated since their inceptions. These overstated
rates of return resulted in the payment of excessive fees to Prévost, Harrold, and their firms.
The SEC's complaint charges Prévost, Harrold, and their firms with violations of Section
Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act
of 1940 and Rule 206-4(8) thereunder. The SEC seeks entry of a court order of permanent
injunction against Prévost, Harrold, and their firms, as well as an order of disgorgement,
including prejudgment interest and financial penalties.
SEC v. Robert R. Anderson and Rosand Enterprises, Inc.
The SEC charged a Chicago-area company and its owner for perpetrating a Ponzi scheme
in which they promised investors extraordinary returns generated from a purportedly successful
real estate business.
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The SEC alleges that Robert R. Anderson of Mt. Prospect, Ill., issued promissory notes
through his company Rosand Enterprises that he claimed would generate investor returns ranging
from 10 to 20 percent per month. Anderson misrepresented to investors that Rosand Enterprises
purchased, constructed, rehabbed, and sold homes in the Chicago area and other locations.
However, Anderson was not making any money in the real estate market and was instead
conducting a Ponzi scheme to pay earlier investors with funds from new investors. He also
helped himself to investor money to buy cars, make hefty credit card payments, and pay for his
daughter's wedding.
The SEC's complaint, filed in U.S. District Court in Chicago, alleges that Anderson
raised approximately $12 million from at least 77 investors between approximately December
2005 and May 2008. Anderson told investors that Rosand Enterprises purchased and
rehabilitated existing homes and constructed pre-fabricated modular homes. Anderson told
investors that their returns were to be generated from the sale of the homes.
The SEC alleges that Anderson's representations were false and he did not use investor
funds to construct or rehabilitate homes. Anderson invested $550,000 of the $12 million raised in
a company that he did not control that, in turn, purchased a piece of commercial real estate that
was not profitable and nearly all of the money that Rosand invested was lost. Rosand did not
disclose the investment loss to investors.
According to the SEC's complaint, Anderson used approximately $7.9 million to make
monthly "interest" and return of principal payments to investors, and he used approximately $1.9
million to invest in several suspicious offerings. He misused $632,000 to pay employees,
independent contractors, and office expenses with investor funds. Anderson also illegally
siphoned off $818,000 for his own and his family's personal expenses, including $326,000 for
credit card payments, $142,000 on tuition and a wedding for his daughter, and $38,000 on cars.
The SEC's complaint charges Anderson and Rosand Enterprises with violations of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act and Rule 10b-5 promulgated thereunder. The SEC is seeking a permanent
injunction and disgorgement of ill-gotten gains with prejudgment interest, jointly and severally,
against Anderson and Rosand and a civil penalty against Anderson.
SEC v. Merendon Mining Inc., et al.
Lit. Rel. No. 21552 (June 10, 2010)
The SEC filed an injunctive action charging six individuals and four companies with
securities fraud. The complaint alleges that Milowe Allen Brost, Gary Allen Sorenson, Larry Lee
Adair, Ward K. Capstick, Bradley Dean Regier, Martin M. Werner, Syndicated Gold Depository,
Merendon Mining Corp. Ltd., Merendon Mining (Nevada) Inc., and the Institute for Financial
Learning Group of Companies, Inc. perpetrated a $300 million Ponzi scheme on investors in a
purportedly successful gold mining operation.
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The SEC alleges that Brost and Sorenson of Calgary were the primary architects and
beneficiaries of the scheme that persuaded more than 3,000 investors across the U.S. and Canada
to invest their savings, retirement funds and even home equity. Brost and his sales team
presented themselves as an independent financial education firm that had discovered profitable
investment opportunities with companies involved in gold mining. They held seminars where
they promised investors they could earn 18 to 36 percent annual returns by investing with these
companies, and they claimed the investments were fully collateralized by gold.
Unbeknownst to investors, they were actually investing in shell companies owned or
controlled by Brost or Sorenson. Investor funds were often transferred multiple times through
numerous bank accounts held as far away as Asia, Europe and South America, and then
ultimately used to make "interest payments" to investors, fund the few unprofitable companies
that actually had operations, and personally enrich Brost, Sorenson and others involved in the
scheme.
According to the SEC's complaint, Brost and his sales team — called Structurists — sold
investors shares in a series of shell companies and then put their money through a "structuring"
process that culminated with the transfer of funds from Syndicated Gold Depository (SGD) to
Merendon Mining Corp. Ltd. — which was purportedly a successful gold mining and refining
company that would pay investors out of its profits. Sorenson, who controlled Merendon Mining
Corp. Ltd., claimed to be a successful businessman receiving loans from SGD through armslength transactions. Sorenson hosted tours by potential investors at his Honduran refinery and
demonstrated the pouring of gold bars while making false claims about the profitability of his
company. Brost and Sorenson concealed their ownership and control of SGD by using personal
aliases, corporate entities and trust agreements with nominee shareholders.
The SEC alleges that investor money whirled through accounts located in the U.S. and
Canada as well as the Bahamas, Belize, Bermuda, Ecuador, Honduras, Malaysia, Panama, Peru,
Portugal, and Venezuela. Brost and Sorenson diverted investor funds to their personal benefit,
using millions of dollars to purchase and renovate extravagant homes, ranches, and recreational
vehicles. Sorenson also purchased and outfitted a luxury fishing resort in South America.
Sorenson's wife and daughter are named as relief defendants in the case in order to
recover investor assets now in their possession. Sorenson used investor funds to pay off the
mortgage of daughter Laura Sorenson and invest in a film production company for her benefit,
and he purchased a home and other items for wife Thelma Sorenson.
SEC v. Nevin K. Shapiro
Lit. Rel. No. 21495 (April 21, 2010)
The SEC filed an injunctive action against Nevin K. Shapiro, alleging that he conducted a
$900 million offering fraud and Ponzi scheme targeting more than 60 investors nationwide.
The SEC's complaint alleges that from February 2003 through November 2009, Shapiro,
the president, Chief Executive Officer and sole shareholder of Capitol Investments USA Inc.,
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(Capitol), a Miami Beach, Florida-based grocery diverter, offered promissory notes claiming
annual returns of 10 to 26% purportedly backed by purchase orders and receivables generated by
Capitol's food brokerage business. In reality, Capitol was operating at a loss since late 2004 with
virtually no operations by 2005. Beginning in January 2005 through November 2009, Shapiro
operated a Ponzi scheme using new investor funds to pay principal and interest to earlier
investors.
According to the complaint, Shapiro used his business relationships and word of mouth to
solicit investors by selling them short term promissory notes, telling them that he would use their
funds as short term financing to purchase and resell groceries for Capitol's business. Shapiro
falsely touted Capitol's financial success (as well as his own) and assured investors that their
principal was secure because Capitol would not broker the sale of the goods without first
obtaining a purchase order from a buyer. Shapiro also falsely told investors that Capitol would
pay the principal and interest from the profits it received when it resold the goods. When
investors raised questions about Capitol's business, Shapiro showed them fabricated invoices and
purchase orders for nonexistent sales.
The complaint further alleges that Shapiro also misappropriated at least $38 million of
investor funds to finance outside business ventures unrelated to the grocery business, including a
sport representation business and real estate ventures, and to fund his lavish lifestyle. He also
used investor funds to pay large commissions to individuals who attracted additional investors.
The complaint charges Shapiro with violating Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks
a permanent injunction, sworn accounting, disgorgement of ill-gotten gains with prejudgment
interest, and a civil money penalty against the defendant. The SEC coordinated the filing of these
charges with the United States Attorney for the District of New Jersey who charged Shapiro
with securities fraud and money laundering. Shapiro surrendered this morning to special agents
of the Federal Bureau of Investigation and the Internal Revenue Service criminal investigation
unit. The SEC's investigation is continuing.
SEC v. Scott D. Farah, Donald E. Dodge, Financial Resources Mortgage, Inc., and C L and
M, Inc.
Lit. Rel. No. 21482 (April 9, 2010)
The SEC charged two individuals and the two entities that they operated out of Meredith,
New Hampshire in connection with a fraudulent Ponzi scheme involving a purported private
lending program. The Commission's complaint alleges that Scott D. Farah of Meredith, New
Hampshire, and Donald E. Dodge of Belmont, New Hampshire, acting through their businesses,
Financial Resources Mortgage, Inc. and C L and M, Inc., defrauded at least $20 million from at
least 150 investors beginning as early as 2005.
The Commission's complaint, filed in the United States District Court for the District of
New Hampshire, alleges that the scheme involved raising investor money to fund purported
loans to specific real estate construction projects and other businesses. According to the
202
Commission's complaint, Scott Farah and his mortgage brokerage company, Financial Resources
Mortgage, Inc. offered investors annual returns of 12% to 20% and falsely represented to
investors that invested monies would be segregated and invested in the specific project that the
investors had agreed to fund. The complaint alleged that Donald Dodge and his unlicensed loan
servicing company, C L and M, Inc., serviced all loans brokered through Scott Farah and
Financial Resources Mortgage, Inc. In reality, according to the Commission's complaint, the
Defendants did not segregate investor money and used it for a variety of purposes not authorized
by the offering documents, including paying returns to earlier investors, paying personal
expenses, paying operating expenses of Financial Resources Mortgage, Inc. and C L and M, Inc.,
and donating money to the Center Harbor Christian Church, a church founded and owned by
Scott Farah's father, and of which Scott Farah was treasurer. The complaint names the church as
a relief defendant, and seeks the return of investor funds diverted to it.
The Commission's complaint alleges that defendants Scott D. Farah and Financial
Resources Mortgage, Inc. violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933
and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that
Defendants Dodge and C L and M, Inc. violated Section 17(a) of the Securities Act of 1933 and
violated, or in the alternative, aided and abetted Farah's and/or Financial Resources Mortgage,
Inc.'s violations of, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The
Commission seeks, among other relief, the entry of permanent injunctions, disgorgement of illgotten gains plus pre-judgment interest, and the imposition of civil monetary penalties against
the defendants. The Commission also charged as a relief defendant the Center Harbor Christian
Church and seeks from it disgorgement plus prejudgment interest of investor funds that were
diverted to it.
SEC v. Daniel Bonventre
The SEC charged one of convicted Ponzi schemer Bernard Madoff’s key operatives with
falsifying accounting records to enable the multi-billion dollar fraud and illegally enrich himself,
Madoff, and Madoff’s family and employees.
As Madoff’s Director of Operations, Bonventre ran the back office at Bernard L. Madoff
Investment Securities LLC (BMIS) and oversaw the firm’s accounting and securities clearing
functions for at least 30 years. The SEC alleges that Bonventre knew that billions of dollars in
investor funds were not being used to purchase securities on behalf of investors. The SEC
further alleges that Bonventre made at least $1.9 million in illicit personal profits from the
scheme through fake, backdated “trades” in his own investor account at BMIS.
According to the SEC’s complaint, Bonventre was responsible for the firm’s general
ledger and financial statements that were materially misstated because they did not reflect the
manner in which investor funds were maintained and used. Bonventure ensured that BMIS
financial reports did not reflect the firm’s massive liabilities to investors or the corresponding
assets received from investors. To hide the fact that BMIS normally operated at a significant
203
loss, the firm used more than $750 million in investor funds to artificially improve reported
revenue and income.
The SEC further alleges that Bonventre personally siphoned $1.9 million from the
scheme by directing that profits from fake, backdated trades be put into his own investor account
at BMIS.
The SEC’s complaint specifically alleges that Bonventre violated Section 17(a) of the
Securities Act of 1933; violated and aided and abetted violations of Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; and aided and
abetted violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940
(Advisers Act) and Rule 206(4)-2 thereunder, Sections 15(c) and 17(a) of the Exchange Act and
Rules 10b-3, 17a-3, and 17a-5 thereunder, and Section 204 of the Advisers Act and Rule 204-2
thereunder. Among other things, the SEC’s complaint seeks financial penalties and a court order
requiring Bonventre to disgorge his ill-gotten gains.
SEC v. Jerome O'Hara, and George Perez
http://www.sec.gov/litigation/complaints/2009/ohara-perez-111309.pdf
The SEC charged Jerome O’Hara and George Perez, two computer programmers, for
their role in helping convicted Ponzi schemer Bernard L. Madoff cover up the fraud at Bernard
L. Madoff Investment Securities LLC (BMIS) for more than fifteen years.
The SEC previously charged Madoff and BMIS, DiPascali, and auditors David G.
Friehling and Friehling & Horowitz CPAs, P.C.. The SEC also charged certain feeders with
committing securities fraud through a Ponzi scheme perpetrated on advisory and brokerage
customers of BMIS. Madoff, DiPascali and Friehling have all pleaded guilty to criminal charges
related to their conduct.
The SEC's complaint specifically alleges that O'Hara and Perez aided and abetted
violations of Sections 10(b), 15(c) and 17(a) of the Exchange Act and Rules 10b-3, 10b-5 and
17a-3 thereunder, and Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2
thereunder. Among other things, the SEC's complaint seeks financial penalties and a court order
requiring O'Hara and Perez to disgorge their ill-gotten gains.
SEC v. Thomas J. Petters, Gregory M. Bell and Lancelot Investment Management LLC, et
al.
Lit. Rel. No. 21124 (July 10, 2009)
The SEC brought fraud charges against Thomas Petters for perpetrating a multi-billion
dollar Ponzi scheme through the sale of notes related to consumer electronics; and against
Gregory Bell, a hedge fund manger, and his firm, Lancelot Management LLC, for facilitating
this Ponzi scheme.
204
The SEC’s complaint alleges that Petters carried out his Ponzi scheme by promising
investors that proceeds from the notes would be used to finance the purchase of vast amounts of
consumer electronics by vendors who then re-sold the merchandise to large retailers like WalMart and Costco. Instead, this business was a complete sham, and the vendors secretly returned
most investor money to Petters, who diverted billions of dollars for his personal purposes. The
complaint alleges that Petters sold the notes to several feeder funds, including Bell and Lancelot,
that in turn raised their investment capital from hundreds of private investors. Bell and Lancelot
raised approximately $2.62 billion dollars, and helped conceal through a series of sham
transactions Petters’s scheme as it started to unravel.
The SEC’s complaint charges Bell, Lancelot Management, and Petters with violations of
Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. The complaint also charges Bell and Lancelot Management
with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940
and Rule 206-4(8). The SEC seeks entry of a court order of permanent injunction against Bell,
Lancelot Management and Petters, as well as an order of disgorgement, including prejudgment
interest and financial penalties. The SEC also seeks an order requiring the relief defendants to
disgorge all ill-gotten gains and pay prejudgment interest.
SEC v. Cohmad Securities Corporation, Maurice J. Cohn, Marcia B. Cohn, and Robert M.
Jaffe
Lit. Rel. No. 21095 (June 22, 2009)
The SEC charged Cohmad Securities Corporation, a New York-based broker-dealer, as
well as its chairman Maurice J. Cohn, CEO Marcia B. Cohn, and registered representative Robert
M. Jaffe, alleging that they collectively raised billions of dollars from investors for Bernard L.
Madoff’s Ponzi scheme.
In its complaint, the SEC alleged that the defendants actively marketed investment
opportunities with Madoff while knowingly or recklessly disregarding facts indicating that
Madoff was operating a fraud. According to the SEC, the defendants ignored and even
participated in many suspicious practices that clearly indicated that Madoff was engaged in a
fraud, for example, by filing false Forms BD and FOCUS reports that concealed Cohmad’s
primary business of bringing in investors for Madoff.
The SEC’s complaint alleges that Cohmad violated Section 17(a) of the Securities Act,
Sections 10(b), 15(b)(1), 15(b)(7), and 17(a) of the Exchange Act and rules 10b-5, 15b3-1, 15b71, and 17a-3 thereunder and aided and abetted violations of Sections 206(1), 206(2), and 206(4)
of the Advisers Act and Rule 206(4)-3 thereunder; that the Cohen violated Section 17(a) of the
Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5
thereunder and aided and abetted violations of Sections 10(b), 15(b)(1), 15(b)(7), and 17(a) of
the Exchange Act and Rule 10b-5, 15b3-1, 15b7-1 and 17a-3 thereunder and Sections 206(1),
206(2) and 206(4) of the Advisers Act of 1940 and Rule 206(4)-3 thereunder. The SEC's
complaint seeks injunctions, financial penalties and a court order requiring Cohmad, the Cohns,
and Jaffe to disgorge their ill-gotten gains.
205
SEC v. Stanford International Bank, Ltd., et al.
Lit. Rel. No. 21092 (June 19, 2009)
The SEC charged two accountants who produced bogus financial statements and an
Antigun regulator who took bribes to look the other way as Robert Allen Stanford conducted an
alleged $8 billion Ponzi scheme.
In its complaint, the SEC alleges that Mark Kuhrt and Gilberto Lopez, accountants for
Stanford-affiliated companies, fabricated financial statements to give investors the false illusion
that their investments were sold, safe, and secure. The SEC also alleges that Leroy King, the
administrator and chief executive officer of Antigua’s Financial Services Regulatory
Commission (FSRC), accepted thousands of dollars per month in bribes to ignore the Stanford
Ponzi scheme and supply Stanford himself with confidential information about the SEC’s
investigation.
The SEC’s complaint charges the defendants with violating and/or aiding and abetting
violations of Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder; Sections 206(1) and 206(2) of the Investment
Advisers Act of 1940; and Section 7(d) of the Investment Company Act of 1940. The SEC’s
action seeks permanent injunctions, financial penalties, and disgorgement of ill-gotten proceeds
plus prejudgment interest.
SEC v. Bradley L. Ruderman, Ruderman Capital Management, LLC, Ruderman Capital
Partners, LLC, and Ruderman Capital Partners A, LLC
Lit. Rel. No. 21017 (April 29, 2009)
The SEC obtained a court order halting Bradley L. Ruderman’s hedge fund fraud. The
complaint alleges that Ruderman raised at least $38 million from about twenty investors since at
least 2002 through his two hedge funds, Ruderman Capital Partners and Ruderman Capital
Partners A. The SEC alleges that Ruderman defrauded his hedge fund investors by
misrepresenting to them the hedge funds' investment returns and the assets under management.
Specifically, the SEC's complaint alleges that Ruderman falsely told investors that the
hedge funds had earned positive returns from 15% to 60% per year and had over $800 million in
assets. In reality, the hedge funds lost money and had less than $650,000 in assets. The complaint
further alleges that Ruderman made at least one Ponzi-like payment and that Ruderman falsely
told prospective investors that Lowell Milken (chairman of the Milken Family Foundation and
Michael Milken's younger brother) and Larry Ellison (the CEO of Oracle Corporation) were
investors in his hedge funds.
Subsequently, in a settled administrative proceeding instituted pursuant to Section 203(f)
of the Advisers Act, Ruderman was barred from association with any investment adviser. (See
A.P. Rel. No. IA-2908 (July 24, 2009), http://www.sec.gov/litigation/admin/2009/ia-2908.pdf.)
206
SEC V. David G. Friehling, C.P.A and Friehling & Horowitz, CPA's, P.C.
Lit. Rel. No. 20959 (March 18, 2009)
Accounting and Auditing Rel. No. 2992 (March 18, 2009)
The SEC charged the auditors of Bernard Madoff's broker-dealer firm with committing
securities fraud by falsely representing that they had conducted legitimate audits, when in fact
they had not. The complaint alleges that from 1991 through 2008, the defendants enabled
Madoff's Ponzi scheme by falsely stating, in annual audit reports, that financial statement audits
were conducted pursuant to Generally Accepted Auditing Standards (GAAS), including the
requirements to maintain auditor independence and perform audit procedures regarding custody
of securities.
Through their audit opinions, the defendants made representations that Bernard L.
Madoff Investment Securities LLC (BMIS) financial statements were presented in conformity
with Generally Accepted Accounting Principles (GAAP) and that there were no material
deficiencies in BMIS’ internal control procedures. According to the complaint, the defendants
knew that BMIS regularly distributed the annual audit reports to its customers and that the
reports were filed with the SEC and other regulators.
The complaint alleges that all of these statements were materially false because the
defendants failed to perform meaningful audits of BMIS and never even confirmed that the
securities BMIS purportedly held on behalf of its customers existed. Further, the defendants
allegedly failed to conduct any tests of BMIS’ internal control procedures. If the audits had been
performed in compliance with GAAS, BMIS’ financial statements would have shown that BMIS
owed tens of billions of dollars in additional liabilities to its customers and was therefore
insolvent.
The defendants are charged with violating Section 17(a) of the Securities Act, violating
and aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and aiding and abetting violations of Sections 206(1) and 206(2) of the Advisers Act,
Section 15(c) of the Exchange Act and Rule 10b-3 thereunder, and Section 17 of the Exchange
Act and Rule 17a-5 thereunder. The SEC is seeking permanent injunctions, civil penalties and a
court order requiring disgorgement of ill-gotten gains.
SEC v. Stanford International Bank, et al.
http://sec.gov/litigation/litreleases/2009/lr20901.htmhtm
The SEC charged Robert Allen Stanford and three of his companies for orchestrating a
fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program.
Stanford's companies include Antiguan-based Stanford International Bank (SIB),
Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and
investment adviser Stanford Capital Management. The SEC also charged SIB chief financial
207
officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford
Financial Group (SFG), in the enforcement action.
Pursuant to the SEC's request for emergency relief for the benefit of defrauded investors,
U.S. District Judge Reed O'Connor entered a temporary restraining order, froze the defendants'
assets, and appointed a receiver to marshal those assets.
The SEC's complaint, filed in federal court in Dallas, alleges that acting through a
network of SGC financial advisers, SIB has sold approximately $8 billion of so-called
"certificates of deposit" to investors by promising improbable and unsubstantiated high interest
rates. These rates were supposedly earned through SIB's unique investment strategy, which
purportedly allowed the bank to achieve double-digit returns on its investments for the past 15
years.
According to the SEC's complaint, the defendants have misrepresented to CD purchasers
that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in
"liquid" financial instruments (the portfolio); monitors the portfolio through a team of 20-plus
analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed
the news of Bernard Madoff's massive Ponzi scheme, SIB attempted to calm its own investors by
falsely claiming the bank has no "direct or indirect" exposure to the Madoff scheme.
According to the SEC's complaint, SIB is operated by a close circle of Stanford's family
and friends. SIB's investment committee, responsible for the management of the bank's multibillion dollar portfolio of assets, is comprised of Stanford; Stanford's father who resides in
Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales;
Pendergest-Holt, who prior to joining SFG had no financial services or securities industry
experience; and Davis, who was Stanford's college roommate.
The SEC's complaint also alleges an additional scheme relating to $1.2 billion in sales by
SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy
(SAS), by using materially false historical performance data. According to the complaint, the
false data helped SGC grow the SAS program from less than $10 million in 2004 to more than
$1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in
2007 and 2008. The fraudulent SAS performance was used to recruit registered investment
advisers with significant books of business, who were then heavily incentivized to reallocate
their clients' assets to SIB's CD program.
The SEC's complaint charges violations of the anti-fraud provisions of the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act, and registration
provisions of the Investment Company Act. In addition to emergency and interim relief that has
been obtained, the SEC seeks a final judgment permanently enjoining the defendants from future
violations of the relevant provisions of the federal securities laws and ordering them to pay
financial penalties and disgorgement of ill-gotten gains with prejudgment interest.
208
SEC v. Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC
The SEC's complaint, filed on December 11, 2008, in federal court in Manhattan, alleges
that Madoff and Defendant Bernard L. Madoff Investment Securities LLC committed a $50
billion fraud and violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of
the Advisers Act of 1940. The complaint alleges that Madoff, just prior to the filing of the
complaint on December 11, 2008, informed two senior employees that his investment advisory
business was a fraud. Madoff told these employees that he was "finished," that he had
"absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi
scheme." The senior employees understood him to be saying that he had for years been paying
returns to certain investors out of the principal received from other, different investors. Madoff
admitted in this conversation that the firm was insolvent and had been for years, and that he
estimated the losses from this fraud were at least $50 billion.
209

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