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This is a photo of the National Register of Historic Places listing with reference number 7000063

Tuesday, May 31, 2011


The following is from the Sec web site:

" SEC v. ALFRED S. TEO, SR. AND M.A.A.A. TRUST, 04 Civ. 1815 (DNJ) (SW)
On Wednesday, May 25, 2011, a jury in federal court in Newark, New Jersey, returned a verdict in favor of the U.S. Securities and Exchange Commission finding Alfred S. Teo, Sr. liable for securities fraud and disclosure violations under the Securities Exchange Act of 1934. The jury also found the M.A.A.A. Trust, a trust for Teo’s children, liable for disclosure violations under the Exchange Act. The Commission had charged that Teo and the M.A.A.A. Trust made false public filings with the Commission, and failed to make required filings, thereby materially misrepresenting their ownership of stock in the Musicland Stores Corporation.

The jury found that Teo violated Sections 10(b) and Rule 10b-5 thereunder and 13(d) of the Exchange Act. The jury also found that the M.A.A.A. Trust violated Sections 13(d) and 16(a) of the Exchange Act. The jury found the M.A.A.A. Trust not liable for violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. United States District Court Judge Susan D. Wigenton, who presided over the trial, previously granted the Commission’s motion for summary judgment with regard to Teo’s liability pursuant to Section 16(a) of the Exchange Act.
Teo, age 65, is a resident of Kinnelon, New Jersey and Fisher Island, Florida. The M.A.A.A. Trust is a resident of New Jersey.
Judge Wigenton will determine the relief. The Commission is seeking an injunction, disgorgement, prejudgment interest and civil penalties.”


Most people who have lived through fascism, socialism, communism and various forms of strong man governments and feudalistic states know that the free enterprise system can do the most good for the most people in the long run unless, criminal minds run both business and government. Criminal minds believe in fixed enterprise. They believe that the government is there to protect those who pay off public officials. The funny thing is that criminals will almost always call those who point out their criminal pursuits, a communist, socialist or, fascist. In truth, the free enterprise system works best when there is true competition free of politicians picking winners and losers in the market placed based solely upon political contributions. The following speech by Mary Schapiro is in regards to companies who use felons and bad actors in their commerce:

"Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Item 1 — Felons and Bad Actors
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
May 25, 2011
Good morning. This is an Open Meeting of the Securities and Exchange Commission on May 25, 2011.
Today, the Commission will consider two actions.
First, we will consider proposing a rule that would deny certain securities offerings from qualifying for an exemption from registration if the offerings involve certain “felons and other bad actors.”
And second, we will consider adopting a rule to create a whistleblower program that would reward individuals who provide the agency with high-quality tips leading to successful enforcement actions.
Both sets of rules are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
* * *
We begin with the “bad actor” rule — a rule that would deny securities offerings the benefit of one of the most commonly used exemptions from SEC registration if a felon or other bad actor is involved in the offering.
To understand the rule, one first must appreciate that federal law generally requires securities offerings to be registered with the SEC — unless of course an exemption is available.
Regulation D of the Securities Act of 1933 provides three exemptive rules that a company can use to avoid having to register an offering.
The most widely used provision of Regulation D is Rule 506. More than 90 percent of all offerings made under Regulation D are done under that rule.
If an offering qualifies for Rule 506, issuers can raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors.
Section 926 of the Dodd-Frank Act requires the Commission to adopt rules that would make this safe harbor unavailable if a “felon and other ‘bad actor’” is involved in the offering.
When the section was added, Senator Dodd noted that the disqualification provision would “reduce the danger of fraud in private placements,” and expressed his belief that it would “protect investors from … unscrupulous persons while encouraging capital formation.” One important consequence of this change is that private offerings that include felons and other bad actors would no longer automatically qualify for state securities law preemption.
The proposal before us would advance these goals by implementing the requirements of the Act in a balanced and tailored way.
The proposed rule would apply to a wide swath of persons, including issuers; directors and officers of the issuer; and, placement agents. Bad actor disqualification would apply if any of them has been convicted of — or is subject to court or administrative sanctions for — securities fraud or other specified violations.
Meredith Cross and her Division of Corporation Finance staff will speak in greater detail about the proposed rule, but I would like to address one important aspect. Under the proposal, the new rules would take account of all disqualifying events, regardless of whether they occurred before or after the new rules come into effect.
I believe that taking into account disqualifying events that occurred prior to the effective date of the new rules fulfills Congress’ mandate to protect investors from felons and other bad actors. Nonetheless, I recognize that there may be concerns about the effects of applying the proposed rules to pre-existing convictions and sanctions.
That is why we are seeking comment on this approach.
We also are seeking comment on whether, and if so how, we should make these “bad actor” provisions uniform with the “bad actor” provisions contained in other Securities Act exemptions.
Further, we are seeking comment on whether to extend the proposed bad actor provision to all offerings under Regulation D, not just those under Rule 506.
Through such uniformity, we could potentially make our exemptive rules easier to understand and apply.
At the same time, we are mindful of the need to consider the relative costs and benefits of such an approach. For that reason, we are also very interested in public comment on the many questions posed in the release on this topic.
Before I turn to Meredith Cross, the Director of the Division of Corporation Finance, I would like to thank her and other staff including Lona Nallengara, Mauri Osheroff, Gerry Laporte, Karen Wiedemann, Johanna Losert and Jennifer Zepralka from the Division of Corporation Finance for their hard work in preparing the recommendations before us.
I also appreciate the contributions from Rich Levine, David Fredrickson and Bob Bagnall from the Office of the General Counsel; Emre Carr, Scott Bauguess and Ayla Kayhan from the Division of Risk, Strategy, and Financial Innovation; Hunter Jones, Barbara Chretien-Dar, Amy Miller and Martin Kimel from the Division of Investment Management; Lourdes Gonzalez, Daniel Fisher and Robert Cushmac from the Division of Trading and Markets; and Charlotte Buford and Laurita Finch from the Division of Enforcement.
And thank you to my colleagues on the Commission and to our counsels.
Now, I turn the meeting over to Meredith to hear more about the Division’s recommendations.”

Monday, May 30, 2011


It seems like the allegations against sub-prime lenders will never stop. Although it might be a good thing that the SEC et. al. have been agresively pursuing these cases it is very sad that there are so many of them. The following is an alleged fraud scheme which has been excerpted fromt SEC web site:

April 14, 2011
"The Securities and Exchange Commission announced that it filed a civil injunctive action today 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.
According to the SEC’s complaint filed in federal court in Boston, Inofin and the executives materially misrepresented Inofin’s financial performance beginning as early as 2006 and continuing through 2011. Inofin had a negative net worth and a progressively deteriorating financial condition caused not only by the failure of Inofin’s undisclosed business activities, but also by management’s decisions in 2007, 2008, and 2009 to sell some of its auto loan portfolio at a substantial discount to solve ever-increasing cash shortages that Inofin concealed from investors. Nonetheless, Inofin and its principal officers continued to offer and sell Inofin securities while knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and sound investment.
The SEC further alleges that beginning in 2006 and continuing to April 2010, Inofin’s executives defrauded investors while maintaining Inofin’s license to do business as a motor vehicle sales finance company by preparing and submitting materially false financial statements to its licensing authority, the Massachusetts Division of Banks. The SEC’s complaint charges Cuomo, Mann, and George with violating the antifraud and registration provisions of the federal securities laws, and seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties.
The SEC’s charges against the two sales agents — David Affeldt and Thomas K. (Kevin) Keough — allege that they promoted the offering and sale of Inofin’s unregistered securities. They were unjustly enriched with more than $500,000 in referral fees between 2004 and 2009. Affeldt and Keough are charged with selling the unregistered Inofin securities and failing to register with the SEC as a broker-dealer, and the SEC seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties. 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.
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 pre-judgment 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.
The SEC appreciates the assistance of the Secretary of the Commonwealth of Massachusetts William F. Galvin, who today filed charges against Inofin, Cuomo, Mann, George, Affeldt, Kevin Keough, and Nancy Keough based on the same conduct. The SEC also appreciates the assistance of the Massachusetts Division of Banks, which previously took action requiring Inofin to surrender its license to operate as a subprime auto lender in Massachusetts.”

Sunday, May 29, 2011


Executives of failing businesses will often misrepresent the condition of their business to investors. Enron was a prime example of a failing conglomerate that had executives lie about financial condition to shareholders. The following is an excerpt from the SEC web site which alleges that six executives hid information from investors :

“ Washington, D.C., May 4, 2011 – The Securities and Exchange Commission today charged six former leading executives affiliated with a Kansas-based financial corporation with hiding critical information from investors and conducting a financial fraud.
The SEC alleges that senior executives at Brooke Corporation and two subsidiaries – whose line of business was insurance agency franchising and providing loans to franchisees – misrepresented their deteriorating financial condition in filings to investors and other public statements in 2007 and 2008. Meanwhile, behind the scenes they engaged in various undisclosed schemes to meet almost weekly liquidity crises, and falsified reports and made accounting maneuvers to conceal the rapid deterioration of the loan portfolio.

Five of the six executives have agreed to settle the SEC’s charges against them. The Brooke companies are no longer in business.
“The unscrupulous senior corporate executives at Brooke Corporation orchestrated a massive scheme to conceal the company’s deteriorating financial condition through virtually any means necessary, including reporting inflated asset values, double-pledging collateral, and diverting funds for improper uses,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The fallout from their fraud had a devastating impact on the livelihood of hundreds of insurance franchisees that depended on Brooke and on the balance sheets of regional banks and other lenders, all of whom mistakenly relied on the good faith and honesty of these executives.”
The SEC’s complaint filed in federal court in Kansas charged two brothers and four other leading executives at Brooke Corporation and its two publicly-traded subsidiaries – Brooke Capital Corporation (insurance agency franchisor) and Aleritas Capital Corporation (lender to insurance agency franchises and other businesses).
Robert D. Orr – founder and former chairman of the board of Brooke Corporation, former CEO and chairman of the board of Brooke Capital, former CFO of Aleritas.
Leland G. Orr – former CEO, CFO, and vice chairman of the board of Brooke Corporation, and former CFO of Brooke Capital.
Kyle L. Garst – former CEO, president, and member of the board of Brooke Capital.
Michael S. Hess – former CEO and member of the board of Aleritas.
Michael S. Lowry – former CEO and member of the board of Aleritas.
Travis W. Vrbas – former CFO of Brooke Corporation and Brooke Capital.
According to the SEC’s complaint, Brooke Capital’s former management inflated the number of franchise locations by including failed and abandoned locations in company totals. They concealed that the financial assistance to franchisees was so burdensome that Robert and Leland Orr secretly borrowed funds received from Brooke insurance customers to pay company operating expenses. That money was supposed to be held in trust for payment of insurance premiums. They also hid Brooke Capital’s inability to timely pay funds owed to profitable franchisees and creditors. Aleritas’s former management hid the company’s inability to repurchase millions of dollars of short-term loans sold to its network of regional lenders. They sold or pledged the same loans as collateral to multiple lenders, and improperly diverted payments from borrowers for the company’s operating expenses. Aleritas’s former management concealed the deterioration of the company’s loan portfolio by falsifying loan performance reports to lenders, understating loan loss reserves, and failing to write-down its residual interests in securitization and credit facility assets.
In October 2008, Brooke Corporation declared Chapter 11 bankruptcy and suspended most of their operations. The companies were unable to reorganize in bankruptcy. The rapid collapse of the Brooke Companies had a devastating regional impact as hundreds of its franchisees failed. As a result of losses suffered on Aleritas loans, several regional banks also failed.
The SEC’s complaint charges violations of, among other things, the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. The complaint seeks permanent injunctions, officer and director bars, and monetary remedies against the Brooke executives.
Robert Orr, Leland Orr, Hess, Lowry, and Vrbas agreed to settle the charges against them without admitting or denying the SEC’s allegations. The settlements are subject to the approval of the U.S. District Court for the District of Kansas. The executives each consented to orders of permanent injunction and permanent officer and director bars. Lowry agreed to pay a disgorgement of $214,500, prejudgment interest of $24,004, and a $175,000 penalty. Hess agreed to pay a $250,000 penalty, and Vrbas agreed to pay a $130,000 penalty. Robert Orr and Leland Orr agreed to pay penalties and disgorgement in amounts to be determined by the court.
The SEC’s case against Garst continues in litigation.
The SEC acknowledges the assistance and cooperation of the Office of the Kansas Securities Commissioner, the Kansas City Field Office of the Federal Bureau of Investigation, and the U.S. Attorney's Office for the District of Kansas.”


The following insider trading case is an excerpt from the SEC web site:

"The United State Securities and Exchange Commission (“Commission”) today announced that on May 24, 2011, the United States District Court for the Southern District of New York entered a Final Judgment as to the Defendant Giuseppe Tullio Abatemarco, a Swiss resident.

The Commission’s previously filed amended complaint, Securities and Exchange Commission v. Giuseppe Tullio Abatemarco, Civil Action No. 10 Civ. 9527 (WHP) (S.D.N.Y. filed April 20, 2011), alleges that Abatemarco engaged in illegal insider trading in connection with his purchase of the securities of Martek Biosciences Corporation, a Delaware corporation headquartered in Columbia, Maryland. Abatemarco, age 40, is a Swiss resident and insurance salesman. On December 21, 2010, Martek and Royal DSM, N.V., a Dutch company, announced that DSM would commence a cash tender offer to acquire all the outstanding shares of the common stock of Martek. The price of Martek stock rose 35% after the announcement. The amended complaint further alleges that in the days preceding the announcement, Abatemarco purchased 2,616 Martek call options based on material nonpublic information about the impending tender offer that he learned from a colleague who is the common-law wife of a DSM employee who was working on the tender offer. Abatemarco knew or should have known that the information was material and nonpublic. He stood to profit by about $1.2 million from the sale of the call options. On the Commission’s motion, the court froze the sale proceeds on December 22, 2010.

The amended complaint alleges that Abatemarco violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rules 10b-5 and 14e-3. The complaint seeks a permanent injunction, disgorgement with prejudgment interest civil money penalties.

Abatemarco has consented, without admitting or denying the allegations in the amended complaint, to the entry of a proposed final judgment: (1) permanently enjoining him from violating Sections 10(b) and 14(e) of the Exchange Act, and Exchange Act Rules 10b-5 and 14e-3; (2) ordering him to disgorge his trading profits in the amount of $1,193,594, plus pay prejudgment interest of $1,438.85; and (3) ordering him to pay a civil penalty of $250,667.15 pursuant to Section 21A of the Exchange Act."

Saturday, May 28, 2011


Many small investors dream of have a big payoff if they could just get in on the right deal at the right time. There are of course people who will target such investors with scams such as amazing real estate development deals or perhaps an initial public offering of a stock. Certainly, if you could have purchased some Microsoft stock before the company became public you could have become very wealthy. Unfortunately, such deals are usually reserved for investment bankers and small investors have very little chance of investing in any legitimate profitable company when it is on the verge of becoming public. I remember when a Mutual Savings and Loan company that I had an account with offered to sell stock to its staff and account holders just before the firm became a publicly traded entity. I did not buy stock because I thought the company had questionable loan practices. For sure the company went public and within two years it was insolvent. The stock price never moved much above the IPO price which was not much different than the price paid for the stock before the offering.

In the following case the SEC alleges that mUrgent Corporation ran a high pressure boiler room operation to sell stock in the company prior to an imminent initial public offering:

“On April 21, 2011, the Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California 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.”

Friday, May 27, 2011


The following case an excerpt from the SEC web site:

“May 12 , 2011
SEC v. Luis Felipe Perez, Case No. 1:10-CV-21804-Martinez/McAliley (S.D. Fla.)
The Commission announced that on May 9, 2011, the Honorable Jose E. Martinez, United States District Court Judge for the Southern District of Florida, entered judgment of permanent injunction against Luis Felipe Perez. Perez consented to the entry of an injunction against future 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. In addition, the Commission dismissed its claims for disgorgement, prejudgment interest, and a civil penalty against Perez based on his criminal sentences and restitution orders in Case Nos. 10-20584-CR and 10-20411-CR before the Southern District of Florida.
On June 2, 2010, the Commission filed its complaint against Perez alleging that he orchestrated a $40 million Ponzi scheme with funds primarily raised from investors in the Miami Hispanic community to purportedly support jewelry businesses and pawn shops.”


The following is an excerpt from the SEC web site:

April 18, 2011
“The Securities and Exchange Commission today announced a proposed settlement with two Italian citizens, Oscar Ronzoni and Paolo Busardò, their investment vehicle, Tatus Corp. (“Tatus”), and another related entity, A-Round Investment SA (“A-Round”), for alleged insider trading in the securities of DRS Technologies, Inc. (“DRS”). In October 2010, the Commission amended its Complaint in its previously-filed action against unknown purchasers of DRS and American Power Conversion Corp. (“APCC”) call options to name these defendants, in addition to two others who have previously settled with the Commission. Ronzoni, Busardo, and their related entities have agreed to settle the Commission’s charges by, among other things, paying approximately $1.46 million in disgorgement and penalties.
In its October 2010 Amended Complaint, the Commission alleges that Ronzoni, Busardò, Tatus, and A-Round purchased DRS call options that were out-of-the-money and set to expire in the near term while in possession of material, nonpublic information concerning the acquisition of DRS. According to the Amended Complaint, the settling defendants purchased the DRS call options in advance of a May 8, 2008 Wall Street Journal article reporting advanced merger negotiations between Finmeccanica S.p.A. and DRS, and confirmation by DRS the same day that it was engaged in talks regarding a potential strategic transaction. On May 5 and 6, 2008, Ronzoni purchased a total of 340 DRS call options; on May 7, 2008, Ronzoni also purchased, through Tatus, 800 DRS call options; and, on May 7, 2008, Busardò through A-Round purchased a total of 130 DRS call options. Following the May 8th Wall Street Journal article, Ronzoni made a profit of $156,400, Tatus made a profit of $695,459.97, and Busardò, through A-Round, made a profit of $115,840 after liquidating their DRS call option stakes.

Under the terms of the proposed settlement, Ronzoni, Busardò, Tatus, and A-Round would 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 to be jointly and severally liable for the payment of $967,699.97 in disgorgement, $8,689 in prejudgment interest, and a civil penalty of $483,849.99. The settlement remains subject to the approval of the U.S. District Court for the Southern District of New York. If approved, the settlement would bring this litigation to a close and bring the total disgorgement and penalties collected in this civil action to approximately $4.4 million. For more information, please see Litigation Release Nos. 20654 (July 25, 2008) and 21687A (October 7, 2010).
The SEC acknowledges the assistance of the U.S. Department of Justice, the Options Regulatory Surveillance Authority, the Swiss Financial Market Supervisory Authority, and the Swiss Federal Office of Justice in this matter.”

Thursday, May 26, 2011


The following is an excerpt from the Department of Justice web site:

WASHINGTON – A former managing director of the NASDAQ Stock Market pleaded guilty today for his participation in an insider trading scheme in which he purchased and sold stock in NASDAQ-listed companies based on material, non-public information he obtained in his capacity as a NASDAQ executive, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division, U.S. Attorney Neil H. MacBride of the Eastern District of Virginia and Postal Inspector in Charge of Criminal Investigations Gerald O’Farrell of the U.S. Postal Inspection Service (USPIS).

Donald Johnson, 56, a resident of Ashburn, Va., pleaded guilty before U.S. District Judge Anthony J. Trenga in the Eastern District of Virginia to one count of securities fraud. In pleading guilty, he admitted that he purchased and sold stock in NASDAQ-listed companies based on material, non-public information, or inside information, on several different occasions from 2006 to 2009.

“Mr. Johnson was a fox in a hen-house,” said Assistant Attorney General Breuer. “NASDAQ-listed companies entrusted him with their sensitive, non-public information so that he could provide them with analyses about their stock. He then used that very information to cheat the system and make an illegal profit. Insider trading by a gatekeeper on a securities exchange is a shocking abuse of trust, and must be punished. The integrity of our securities markets is vital to the U.S. economy, and the Justice Department is determined to take on insider trading at every level.”
“Don Johnson used sensitive, confidential information as an executive at NASDAQ to pad his retirement by more than $600,000,” said U.S. Attorney MacBride. “He thought he could get away with it by using his wife’s account and inside information to make relatively small trades just a few times a year. But he learned what every other trader on Wall Street must now realize: We’re watching.”

“The U.S. Postal Inspection Service continues to identify and aggressively investigate those who commit securities fraud,” said Postal Inspector in Charge of Criminal Investigations O’Farrell. “The agency has placed a team of highly trained Postal Inspectors at the Department of Justice in Washington, D.C., working in partnership with Department of Justice attorneys, to assure that criminals who defraud innocent citizens are prosecuted to the fullest extent of the law.”

According to court documents, from 2006 to September 2009, Johnson was a managing director on NASDAQ’s market intelligence desk in New York. The market intelligence desk provides trading analysis and market information to the companies that list on NASDAQ. According to court documents, Johnson monitored the stock of companies traded on NASDAQ and offered NASDAQ-listed companies information and analyses concerning trading in their own stock. To enable him to perform these services, NASDAQ-listed companies routinely entrusted Johnson with material, non-public information about their stock, including advance notice of announcements concerning earnings, regulatory approvals and personnel changes. Johnson admitted that he repeatedly used this information to purchase or sell short stock in various NASDAQ-listed companies shortly before the information was made public. He would then generate substantial gains by reversing those positions soon after the announcement. According to court documents, to conceal his illegal trading, Johnson executed these trades in a brokerage account in his wife’s name. Johnson failed to disclose this account to NASDAQ in violation of NASDAQ rules.

Johnson admitted that he made illegal purchases and sales of stock in NASDAQ-listed companies on at least eight different occasions, generating gains totaling more than $640,000. The companies whose securities he traded were Central Garden and Pet Co.; Digene Corporation; Idexx Laboratories Inc.; Pharmaceutical Product Development Inc.; and United Therapeutics Corporation. According to court documents, in November 2007, Johnson used inside information related to successful trial results for United Therapeutics’ drug Viveta (now called Tyvaso) to purchase shares of United Therapeutics before the trial results were announced. Soon after the announcement, Johnson sold the shares and gained more than $175,000 in profits. According to court documents, in July 2009, Johnson used inside information about the approval of its drug Tyvaso to purchase shares of United Therapeutics before the approval was announced. He sold the shares after the announcement and gained more than $110,000 in profits.
Johnson is scheduled to be sentenced on Aug. 12, 2011. The maximum penalty for securities fraud is 20 years in prison and a fine of $5 million.
In a related action, the Securities and Exchange Commission today filed a civil enforcement action against Johnson in the Southern District of New York.

This case is being prosecuted by Trial Attorney Justin Goodyear of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Raymond E. Patricco Jr., of the Eastern District of Virginia. The case was investigated by USPIS. The Financial Industry Regulatory Authority provided assistance. Brigham Cannon, formerly a Trial Attorney of the Criminal Division, also assisted with the investigation.
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. “


In the following case the SEC alleges a fraudulent offering of promissory notes. The case below is an excerpt from the SEC web site:
“On April 8, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Central District of California against Luis Garg, Jason Zakocs, and four companies owned and/or controlled by Garg, RealFund Investment Trust ("RealFund"), First Atlanta, LP ("First Atlanta"), Weatherby LP ("Weatherby"), and Citiprop Corporation ("Citiprop"), for allegedly participating in fraudulent offerings of promissory notes. RealFund and Citiprop are based in, and Garg and Zakocs reside in, Los Angeles, California. First Atlanta and Weatherby are based in Atlanta, Georgia.

The Complaint alleges that, from at least April 2008 through January 2010, the defendants raised approximately $1 million from 20 to 30 investors who invested in high-yield promissory notes, issued by RealFund, First Atlanta, and Weatherby, the proceeds from which were to be used for real estate development projects. According to the Complaint, the defendants told investors that their investments were risk-free and guaranteed annual returns ranging from 8% to 24%. In addition to alleging that these representations were false, the Complaint alleges that the defendants falsely advised investors that their promissory notes would be fully secured by equity in the underlying real estate projects. The Complaint further alleges that, notwithstanding the defendants' assurances as to the safety of their investment program and unbeknownst to investors, one of the note issuers and real estate development companies for the investment program, First Atlanta, had been involved in bankruptcy proceedings for nearly the entire offering period. In addition, the Complaint alleges that, notwithstanding First Atlanta's default on some of the promissory notes beginning in September 2009, the defendants failed to disclose this information to new investors and continued to offer and sell their promissory notes as a safe and guaranteed investment through January 2010. According to the Complaint, the note offerings were not registered with the Commission, RealFund was not registered with the Commission as a broker or dealer, and neither Garg nor Zakocs were associated persons of a registered broker or dealer at the time they sold the promissory notes.
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 RealFund, Garg, and Zakocs violated Section 15(a) of the Exchange Act.”


Insider trading is the way you can make incredible amounts of money on Wall Street. Fortunately, for investors no privy to insider information the Obama Administration has created a champion in the current SEC. In the following case excerpted from the SEC web site the SEC sets forth the charges against a former managing director of the NASDAQ Stock Exchange:

“Washington, D.C., May 26, 2011 — The Securities and Exchange Commission today charged a former managing director of The NASDAQ Stock Market with insider trading on confidential information that he stole while working in a market intelligence unit that communicates with companies in advance of market-moving public announcements.

The SEC alleges that Donald L. Johnson traded in advance of such public announcements as corporate leadership changes, earnings reports and forecasts, and regulatory approvals of new pharmaceutical products. He often placed the illegal trades directly from his work computer through an online brokerage account in his wife’s name. Johnson obtained illicit trading profits of more than $755,000 during a three-year period.
Johnson also has been charged in a parallel criminal action announced by the U.S. Department of Justice today.
“This case is the insider trading version of the fox guarding the henhouse,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Instead of protecting NASDAQ client confidences, Johnson secretly traded on client information for personal gain, even using his NASDAQ office computer to make the trades.”

Antonia Chion, Associate Director of the SEC’s Division of Enforcement, added, “Johnson brazenly stole nonpublic information from NASDAQ and its listed companies in breach of his duties of confidentiality to his employer and clients. Johnson assured at least one corporate official that she could share material nonpublic information with him because he was obligated as a NASDAQ employee to hold such information in confidence, and then he illegally traded on it.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Johnson illegally traded in advance of nine announcements 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 company clients, shorting stocks on several occasions and establishing long positions in other instances. Johnson lives in Ashburn, Va., and worked in various positions for the NASD and NASDAQ for 20 years until his retirement from NASDAQ in September 2009.
According to the SEC’s complaint, Johnson worked in NASDAQ’s Corporate Client Group (CCG) from January 2000 to October 2006. 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 Johnson had frequent and significant interactions with senior executives of NASDAQ-listed issuers, including CEOs, CFOs, and investor relations officers at his assigned companies. The corporate 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.
For example, the SEC alleges that Johnson obtained illicit profits of approximately $175,000 by insider trading in the stock of United Therapeutics Corp. (UTHR). Johnson spoke by phone with executives at UTHR including the CFO and general counsel on Oct. 30, 2007, and he became aware of the successful completion of a trial for its drug Viveta (later renamed Tyvaso). Despite the nonpublic and highly confidential nature of the Viveta trial results discussed with him, Johnson purchased 10,000 shares of UTHR stock in his wife’s brokerage account on October 31. After UTHR issued a press release on November 1 announcing the successful trial results, Johnson began selling all of the stock that he had purchased the day before, placing sell orders online from his office computer at NASDAQ.
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 for the purpose of recovering illicit profits in her possession.

The SEC acknowledges the assistance of the Fraud Section of the Justice Department’s Criminal Division and the U.S. Postal Inspection Service. The SEC brought its enforcement action in coordination with these other members of the Financial Fraud Enforcement Task Force. The SEC also acknowledges FINRA and NASDAQ for their assistance in this investigation.”

If these allegations are true, then one might come to the conclusion that most of the people in power in the United States are just big crooks. At least the SEC, DOJ and, USPS seem to have some people working for these agencies who do not believe that fraud is just an excellent business practice used by America’s most talented entrepreneurs.


In the following case the SEC alleges that a hedge fund manager profited from insider information. The case below is an excerpt from the SEC web site:

April 13, 2011
“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 today 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 today, 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 Jan. 22, 2008. Changes to the trial resulting from the negative developments were announced publicly on Jan. 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.
Simultaneous with the filing of the SEC’s amended complaint, the six hedge funds named as relief defendants agreed to settle with the Commission and pay disgorgement of $29,017,156.00 plus prejudgment interest of $4,003,669.00 without admitting or denying the allegations. The proposed settlement is subject to court approval. The six hedge funds are FrontPoint Healthcare Flagship Fund, L.P., FrontPoint Healthcare Horizons Fund, L.P., FrontPoint Healthcare I Fund, L.P., FrontPoint Healthcare Flagship Enhanced Fund, L.P., FrontPoint Healthcare Long Horizons Fund, L.P., and FrontPoint Healthcare Centennial Fund, L.P.”

Unfortunately, insider trading is just the way things have been done on Wall Street. If capitalism is just about who is the best at swindling others then the way the entire world economy is organized may have to be rethought. For if there are no rules then investors today need to try to gauge how a security is going to be manipulated by the unscrupulous and pay little attention at all to the fundamental health of a companies earnings growth. Perhaps the SEC is the institution riding a pale horse and bringing an apocalypse to the forces of financial thievery and thus saving capitalism.


Selling products that don’t exist is certainly a very creative way to avoid both fixed and variable overhead costs. Of course selling stock in a company that makes products that don’t exist can be incredibly lucrative. The following is an excerpt from the SEC web site which harkens back to the days of the bubble. Many companies had soaring stock prices and never developed any kind of revenue stream because there was never any viable product or service to sell.

“The United States Securities and Exchange Commission (“Commission”) announced that on April 11, 2011, the Honorable Richard A. Jones, United States District Court Judge for the Western District of Washington, entered judgments of permanent injunction and other relief against Defendants David M. Otto, Todd Van Siclen, Charles Bingham and Wall Street PR, Inc.
The final judgment against Otto enjoins the Seattle attorney from violating Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”), and Sections 10(b) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 16a-13 promulgated thereunder. In addition to the injunctive relief, the final judgment against Otto orders him to pay $180,000 in civil penalties, $38,610.18 in disgorgement together with $6,751.15 in prejudgment interest and bars him from participating in an offering of penny stock for five years. Otto consented to the entry of the judgment without admitting or denying the allegations in the complaint.
The final judgment against Seattle attorney Van Siclen enjoins him from violating Sections 5 and 17(a)(3) of the Securities Act. In addition to the injunctive relief, the final judgment against Van Siclen orders him to pay $10,000 in civil penalties and bars him from participating in an offering of penny stock for three years. Van Siclen consented to the entry of the judgment without admitting or denying the allegations in the complaint.
The final judgment against Texas stock promoter Bingham and his company Wall Street PR enjoins them from violating Sections 5 and 17(a)(2) and 17(a)(3) of the Securities Act. In addition to the injunctive relief, the final judgment against Bingham orders him to pay $50,000 in civil penalties, $80,153 in disgorgement together with $15,608.43 in prejudgment interest. Bingham and Wall Street PR consented to the entry of the judgments without admitting or denying the allegations in the complaint.
On July 13, 2009, the Commission filed its complaint against the Defendants alleging that they violated the anti-fraud and registration provisions of the federal securities laws by, among other things, conducting a “pump-and-dump” scheme in which the defendants used a false and misleading public relations campaign to tout their client MitoPharm Corporation’s products. In reality, the products did not exist. Otto sold MitoPharm stock at a profit before its stock price plunged after the close of the promotional campaign.
In addition to the relief described above, Otto and Van Siclen each consented to the entry of an order in separate Commission administrative proceedings suspending them, pursuant to Rule 102(e) of the Commission's Rules of Practice, from appearing or practicing as attorneys before the Commission with the right to apply for reinstatement after three years and one year, respectively.”

This case describes some pretty incredible actions taken by officers of the court. Based upon this case and other similar cases, I question what law schools are teaching now days.


The following case involves the hot topic of commodities. Commodity price ran up for several months but have been softening recently. Fraud in securities, commodities, real estate etc., usually is not looked into by the public while prices are falling. It is more usual that it is when prices fall that people start taking an interest in any possible fraud cases. The case below is an excerpt from the SEC web site:

April 21, 2011
‘The Securities and Exchange Commission 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 March 2011.
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 March 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.”


The following excerpt is from the SEC web site and discusses rules of the whistleblower program as prescribed by the Dodd-Frank Act:

“Washington, D.C., May 25, 2011 – The Securities and Exchange Commission today adopted rules to create a whistleblower program that rewards individuals who provide the agency with high-quality tips that lead to successful enforcement actions.

The new SEC whistleblower program, implemented under Section 922 of the Dodd-Frank Act, is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.
To be considered for an award, the SEC’s rules require that a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.
“For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” said SEC Chairman Mary L. Schapiro. “While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law. We expect this trend to continue, and these final rules map out simplified and transparent procedures for whistleblowers to provide us critical information.”
The SEC’s rules will be effective 60 days after they are submitted to Congress or published in the Federal Register.
# # #
Establishing a Whistleblower Program
SEC Open Meeting
May 25, 2011
Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the SEC to pay rewards to individuals who provide the Commission with original information that leads to successful SEC enforcement actions and certain related actions.
In passing the Dodd-Frank Act, Congress substantially expanded the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to the Act, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action.
Rules Requirements
The final rules define a whistleblower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur.
To be considered for an award, the final rules require that a whistleblower must:
Voluntarily provide the SEC …
In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it directly from the whistleblower or the whistleblower’s representative.
… with original information …
Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.
… that leads to the successful enforcement by the SEC of a federal court or administrative action …
A whistleblower’s information can be deemed to have led to a successful enforcement action if:
The information is sufficiently specific, credible and timely to cause the Commission to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation.
The conduct was already under investigation when the information was submitted, and the information significantly contributed to the success of the action.
The whistleblower reports original information through his or her employer’s internal whistleblower, legal, or compliance procedures before or at the same time it is passed along to the Commission; the employer provides the whistleblower’s information (and any subsequently-discovered information) to the Commission; and the employer’s report satisfies prongs (1) or (2) above.
… in which the SEC obtains monetary sanctions totaling more than $1 million.
The rules permit aggregation of multiple Commission cases that arise out of a common nucleus of operative facts as a single action. These may include proceedings involving the same or similar parties, factual allegations, alleged violations of the federal securities laws, or transactions or occurrences.
The final rules further define and explain these requirements.
Key Concepts
Avoiding Unintended Consequences:
Certain people generally will not be considered for whistleblower awards under the final rules.
These include:
People who have a pre-existing legal or contractual duty to report their information to the Commission.
Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules).
People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law.
Foreign government officials.
Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
Compliance and internal audit personnel.
Public accountants working on SEC engagements, if the information relates to violations by the engagement client.
However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:
The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.
Certain other people – such as employees of certain agencies and people who are criminally convicted in connection with the conduct – are already excluded by Dodd-Frank.
Under the final rules, the Commission also will not pay culpable whistleblowers awards that are based upon either:
The monetary sanctions that such culpable individuals themselves pay in the resulting SEC action.
The monetary sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned or initiated.
The purpose of this provision is to prevent wrongdoers from benefitting by, in effect, blowing the whistle on themselves.
Providing Information to the Commission and Seeking a Reward:
The rules also describe the procedures for submitting information to the SEC and for making a claim for an award after an action is brought. The claim procedures provide opportunities for whistleblowers to fairly present their claim before the Commission makes a final award determination.
Under the final rules, the SEC also will pay an award based on amounts collected in related actions brought by certain agencies that are based upon the same original information that led to a successful SEC action.
Clarifying Anti-Retaliation Protection:
Under the rules, a whistleblower who provides information to the Commission is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement.
Supporting Internal Compliance Programs:
The final rules do not require that employee whistleblowers report violations internally in order to qualify for an award. However, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to utilize their own company’s internal compliance programs when appropriate to do so.
For instance, the rules:
Make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations.
Treat an employee as a whistleblower, under the SEC program, as of the date that employee reports the information internally – as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC.
Provide that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.
Other Recent Actions
Office of the Whistleblower:
In addition to whistleblower rules, the Dodd-Frank Act called upon the SEC to create an Office of the Whistleblower. That office, now headed by Sean McKessy, works with whistleblowers, handles their tips and complaints, and helps the Commission determine the awards for each whistleblower. The initial staffing of the office has been completed and the Investor Protection Fund, which will be used to pay awards to eligible whistleblowers, has been fully funded.”

Wednesday, May 25, 2011


The following is an excerpt from the Department of Justice web site and deals with corruption. This excerpt is a speech given by Assistant Attoney General Lanny A. Breuer to the World Bank. The Discussion Assistant Attorney General Breuer has relating to the Foreign Corupt Policies Act is pertinant to this Web Site which is dedicated to Corporate Fraud however, the rest of his speech does a nice job of setting forth the reasons corruption in the United States and other courtries should not and will not be tolerated:

"Assistant Attorney General Lanny A. Breuer of the Criminal Division Speaks at the Franz-Hermann Brüner Memorial Lecture at the World Bank
Washington, D.C. ~ Wednesday, May 25, 2011

Thank you, Leonard, for that generous introduction. I am delighted to be here today, and honored to join you all on the occasion of this important, 12th International Investigators Conference.

The World Bank is a historic institution. Founded at Bretton Woods, it is an engine of economic development throughout the world, and a shining light in the fabric of our international institutions. At the outset, I want to recognize Leonard McCarthy for his leadership as Integrity Vice President. The World Bank is a leader in the worldwide fight against corruption – an institution that others look to – and Leonard has been at the helm of the Institutional Integrity Department over the critical period of the past three years.

Last week, not far from here, President Barack Obama delivered a historic speech. He addressed the sweeping change that is occurring in North Africa and throughout the Middle East, and he explained why the United States must “speak to the broader aspirations of ordinary people,” and act in a way that “advances self-determination and opportunity” wherever they are in short supply.

As the Assistant Attorney General of the Criminal Division at the Department of Justice, I am privileged to lead nearly 600 lawyers who enforce the nation’s federal criminal laws and help to develop and implement our criminal law policy. Today, I want to speak with you about how the Criminal Division’s work – in particular, our comprehensive approach to fighting corruption – supports the goals set forth by President Obama last week, and forms a critical piece of our government’s collective effort to capitalize on this historic moment.

I am honored to have the occasion of the Franz-Hermann Brüner Memorial Lecture to place our role in this context, and to advance the anti-corruption aims to which Mr. Brüner was so committed. A prosecutor for nearly two decades; Director General of OLAF, the European Commission’s Anti-Fraud Office, from 2000 until his death in 2009; and a member of numerous international anti-corruption bodies, Mr. Brüner dedicated his life to battling corruption and fraud across the globe. And I know from members of the Criminal Division and the U.S. Attorney’s Office in Miami who have worked closely with OLAF on a series of cigarette smuggling cases, that Mr. Brüner was not only an exceptional public servant and inspirational leader, but he was also a delightful and lovely man.

By now, it is well understood that the uprisings taking place in North Africa and the Middle East began with the confiscation of Mohammed Bouazizi’s fruit cart in a small town in Tunisia in December, and his subsequent self-immolation. As the President said last week, Bouazizi’s “act of desperation tapped into the frustration felt throughout the country,” leading hundreds and then thousands of protesters to take to the streets and demand the ouster of a dictator who had held power for more than 20 years.

Why did Bouazizi and his countrymen and women feel so desperate? There were undoubtedly many reasons. The reason I want to focus on is the pervasive corruption they were up against.

Corruption is commonly defined as the “abuse of entrusted power for personal gain.” Bouazizi faced corruption at the most personal level; his fruit stand and his electronic scale – in other words, his livelihood – were arbitrarily taken from him by a municipal inspector, who also humiliated him with a slap across the face, and authorities who refused to give him back his property. Bouazizi’s tale is not unique across North Africa and the Middle East; and, of course, the problem of corruption is not limited to that region of the world.

Corruption corrodes the public trust in countries rich and poor, and has particularly negative effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer tremendously. At a concrete level, roads are not built, schools lie in ruin, and basic public services go unprovided. At a more abstract, but no less important, level, political institutions lose legitimacy, threatening democratic stability and the rule of law, and people begin to lose hope that they will ever be able to improve their lot. As the President put it last week, you cannot reach your potential when you “cannot start a business without paying a bribe.”

There are of course many ways in which the U.S. government addresses the problem of corruption abroad. As the head of Criminal Division, I want to focus on three: our criminal prosecution efforts; our work to build the prosecutorial and law enforcement capacity of foreign nations; and our emerging focus on recovering and repatriating the proceeds of foreign official corruption.

Let me start with our prosecution of corrupt officials in the United States. In this country, we do not contend with the same, systemic corruption that Mohammed Bouazizi was facing. We have the right to choose our leaders through free and fair elections; we have a justice system designed to hold all people – whether rich or poor, powerful or not – accountable; and self-determination is a hallmark of the American way.

Nevertheless, corruption remains a serious problem here, and we treat it that way. At the Justice Department, we have a dedicated group of criminal prosecutors – in the Public Integrity Section – whose sole task, along with the nation’s 94 U.S. Attorneys’ Offices, is to prosecute corruption cases involving federal, state, and local officials. These are not easy cases. But they are absolutely essential to preserving the integrity of our democratic institutions.

Moreover, we could not be effective abroad if we did not lead by example here at home. And you can see from our cases that we do not shy away from prosecuting powerful people. Last week, we secured a five-year prison sentence for a former Senate Majority Leader in Puerto Rico who pleaded guilty to soliciting hundreds of thousands of dollars in exchange for proposing legislation, preventing legislative projects from being voted on, and other official acts. Earlier this year, a federal jury in San Juan convicted a second Puerto Rican Senator for engaging in another bribery scheme. Two weeks ago, a federal jury in Richmond, Virginia, convicted Phillip Hamilton, a former member of the Virginia House of Delegates, for attempting to secure a paid position at a university in exchange for introducing legislation to fund the position.

As we speak, the U.S. Attorney’s Office in Chicago is in trial against the former governor of Illinois on multiple corruption counts; and the Public Integrity Section is preparing for trial in the largest public corruption case ever prosecuted in Alabama, against four Alabama state legislators and several lobbyists and businessmen who allegedly engaged in a scheme to fix a specific piece of legislation, in exchange for millions of dollars.

I could give you literally dozens of other examples. But the bottom line is this: At home, we pursue corruption at every level. This is important for our domestic stability – it strengthens the legitimacy of our democratic institutions, and shows that no person here is above the law; and it is important for the work we do internationally – it shows the global community that we practice what we preach.

In the Criminal Division, we also investigate and prosecute corruption abroad – primarily through our enforcement of the Foreign Corrupt Practices Act. The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the Watergate scandal, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government.

In 1976, following certain prosecutions for illegal use of corporate funds arising out of Watergate, the U.S. Securities and Exchange Commission issued a report in which it determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the Senate concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the Senate Banking Committee said in its report on the legislation. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.”

That was true then, and it’s true now. And over the two-plus years of this Administration, we have dramatically increased our enforcement of the FCPA. The numbers speak for themselves. In 2004, the Justice Department charged two individuals under the Act and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16½ million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.

And we are only moving forward. Earlier this month, we secured the first jury conviction ever against a corporation in an FCPA case. The case, which also resulted in trial verdicts against the company’s president and its CFO, involved a scheme to pay bribes to Mexican government officials at CFE, a state-owned utility company.

Last week, the former CEO of a Miami-based telecommunications company pleaded guilty to conspiring to pay bribes to government officials in Honduras in connection with a scheme to secure contracts from Hondutel, the state-owned telecommunications authority. Last month, the former vice-president of sales for Europe, Africa, and the Middle East at the multi-national valve company Control Components Inc., or CCI, pleaded guilty to conspiring to bribe government officials in Saudi Arabia, Qatar, and other countries.

I could give you dozens of other examples, from countries across the world, including in Africa and the Middle East. But the point is this: FCPA enforcement matters. When U.S. businesspersons, foreign executives, and even foreign officials know that they risk liability under the FCPA and related statutes, behavior changes. In addition to motivating U.S. and foreign corporations to change the way they do business – something that I believe is already happening – the threat of liability can help corporations resist corrupt demands from foreign officials, which can lead the officials themselves to alter their practices. Beyond that, through our FCPA enforcement, we are also sending a signal to ordinary people – to Mohammed Bouazizis across the globe – that we stand with you: we support you in your desire to have fair and transparent institutions, and to have the chance to compete in marketplaces large and small.

Another important component of our efforts is the work we do in helping foreign countries build up the capacity to investigate and prosecute corruption cases on their own. Since 1991, in partnership with the U.S. Department of State, we have placed legal advisors in dozens of countries around the world, including throughout North and Sub-Saharan Africa and the Middle East, to work with foreign prosecutors and judges to develop and sustain effective criminal justice institutions. As just one example, until the recent unrest in Yemen forced us to evacuate, we had a legal advisor in Sanaa embedded with Yemen’s Supreme National Authority for Combating Corruption. And next month, we expect to deploy an Anti-Corruption Advisor to the emerging government of Southern Sudan, who will be embedded with the Anti-Corruption Commission there.

Since 1986, also in partnership with the State Department, we have also placed non-lawyer law enforcement professionals in dozens of countries abroad, in an effort to help foreign nations improve their capacity to investigate misconduct and corruption. In Iraq, for example, we assisted in building up the investigative capability of the Iraq Commission of Integrity, the governmental body tasked with investigating government corruption.

Last week, I visited Ghana and Liberia as part of a joint Justice and State Department mission to raise awareness of transnational illicit networks, and emphasize our partnership with West African nations to defeat those networks and the corrupting effect they have on democratic governments. As part of our commitment to this partnership, we will be sending a legal advisor to Ghana next month.

This capacity-building work is crucial – as crucial as our domestic prosecutions. It shows our faith in the rule of law; it helps countries that have the will to improve; and it forms part of the U.S. government’s multifaceted approach to improving the conditions for democracy abroad. That’s why, together with the Department of State, we devote as many resources to this work as we do.

There is one final aspect of our approach against corruption that I want to discuss with you today: our new Kleptocracy Asset Recovery Initiative. You heard President Obama say last week that the United States “will help newly democratic governments recover assets that were stolen.” In the Criminal Division’s Asset Forfeiture and Money Laundering Section, there is a dedicated group of prosecutors focused on doing exactly that.

The goal of the Kleptocracy Asset Recovery Initiative, which Attorney General Holder announced last July and which my team and I have been working to build over the past year, is to identify the proceeds of foreign official corruption, forfeit them, and repatriate the recouped funds for the benefit of the people harmed.

In the context of a criminal prosecution, a court can order forfeiture, upon conviction, as part of the defendant’s sentence. Thus, for example, if we were to bring a criminal case against a kleptocrat in the United States, we would be able to seek criminal forfeiture of his or her stolen assets.

Often, however, it may be impractical or impossible to bring a criminal prosecution against a kleptocrat. He or she may be immune from prosecution, beyond the jurisdiction of the United States, or otherwise unavailable. In these circumstances, the Kleptocracy Team can bring a civil forfeiture action to recover the stolen property. This is sometimes referred to internationally as non-conviction based confiscation.

The Kleptocracy Team recently brought its first cases, and we expect more to come in the near future. Let me provide a specific example. Diepreye Solomon Peter Alamieyeseigha, also known as DSP, was the elected governor of the oil-producing Bayelsa State in Nigeria from 1999 until his impeachment in 2005. According to court papers, DSP’s official salary for this entire period was approximately $81,000, and his declared income from all sources during the period was approximately $248,000. Nevertheless, as governor, DSP accumulated enormous wealth through corruption and other illegal activities. He acquired at least four properties in the United Kingdom worth approximately $8.8 million, he had money in bank accounts around the world, and he also acquired property in the United States. When he was ultimately arrested at Heathrow Airport in 2005, the Metropolitan Police Service in London found approximately $1.6 million in cash in his house.

In March and April of this year, we brought two separate civil forfeiture actions to recover over $1,000,000 in what we allege are DSP’s ill-gotten gains. In Maryland, we are seeking forfeiture of a private residence worth more than $600,000, and in Massachusetts we are seeking forfeiture of close to $400,000 in a Fidelity brokerage account.

We were able to bring these cases, even though DSP long ago absconded to Nigeria, because the law permits us to bring a civil action against the corrupt proceeds themselves rather than against the person to whom they belong.

At the World Bank, I know you understand the Kleptocracy Initiative’s importance, because you have been working hard to assist in the return of stolen assets and to promote non-conviction based confiscation abroad through the Stolen Asset Recovery Initiative, or StAR.

Like our criminal corruption prosecutions of domestic officials, our FCPA investigations, and our capacity-building efforts, our work to recover and repatriate the stolen assets of foreign corrupt officials sends the message that we believe in the dignity of every citizen, and stand against foreign leaders who steal from their people. The Kleptocracy Initiative cannot alone create hope where there is none, or bring respect to ordinary people who have not been shown enough. But we believe it is an extremely important building block in our approach to one of the world’s most intractable, and corrosive, problems.

Franz-Hermann Brüner was born in September 1945, weeks after the end of World WII. He knew about crucial moments in history. For the people of North Africa and the Middle East, this is one of those moments. The President last week called where we are today a moment of “historic opportunity,” comparing Mohammed Bouazizi’s fatal act of defiance with the Boston Tea Party and Rosa Parks’s refusal to give up her seat.

Prosecutors and law enforcement professionals in the Criminal Division of the Department of Justice are working hard to fight corruption at every level, at home and abroad. This work is one way in which we send the message loud and clear that public officials who abuse their power for personal gain – whether they are in the United States or the emerging democracies of North Africa and the Middle East or anywhere else around the world – are on the wrong side. And we will keep working and keep fighting to hold them to account. Thank you."

Tuesday, May 24, 2011


The following is an excerpt fromthe SEC online site:

SEC Sues Allen E. Weintraub and Sterling Global Holdings for Securities Fraud
The Securities and Exchange Commission announced today that it filed a Complaint alleging fraud and violations of a tender offer rule against AWMS Acquisition, Inc., d/b/a Sterling Global Holdings (Sterling Global), a shell company, and Allen E. Weintraub, Sterling Global’s sole owner, officer, director, and employee.

The Complaint, which was filed in U.S. District Court for the Southern District of Florida, alleges that Weintraub and Sterling Global deceived the public by making false and misleading statements regarding Sterling Global’s ability to purchase and operate two public companies–Eastman Kodak Company (Kodak) and AMR (AMR), the parent company of American Airlines. Specifically, the Complaint alleges:

On March 19, 2011, Weintraub, on behalf of Sterling Global, emailed a written tender offer to Kodak for all its “outstanding stock” at a total price of approximately $1.3 billion in cash. On March 29, 2011, Weintraub emailed substantially the same letter to AMR offering to purchase all AMR’s “outstanding stock” for approximately $3.25 billion in cash. These offer prices represented almost a 50% premium over each company's then current stock price.

In an effort to generate publicity, Weintraub emailed the purported tender offers to media outlets and financial investment research firms. In published media interviews, Weintraub boasted that he has 15 years experience buying distressed companies, that banks had agreed to finance the acquisitions, and that letters of credit could be readily provided.

Weintraub’s statements created the impression that Sterling Global's tender offers were legitimate and that the deals were capable of being completed; however, completion of either deal was impossible —Weintraub knew that neither he nor Sterling Global had any assets and that there were no agreements in place to finance the purported acquisitions.

Weintraub and Sterling Global also omitted to disclose the following material information about their backgrounds:

In a 2002 SEC enforcement action, SEC v. Florida Stock Transfer, Inc., et al., Lit. Rel. 17795 & 18021, the court entered a permanent injunction enjoining Weintraub from, among other things, violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (“Exchange Act”). The Court also barred him from acting as an officer and director of a public company and ordered him to pay disgorgement plus prejudgment interest of $930,000 and a civil penalty of $120,000.

Weintraub was convicted in Florida for fraud and grand larceny in 1992, 1998, and 2008. Weintraub is on probation for his 2008 conviction.

Weintraub filed for personal bankruptcy in 2007 and still owes a non-dischargeable prior judgment in favor of the SEC in the amount of approximately $1,050,000.

In September 2010, the State of Florida’s Division of Corporations administratively dissolved Sterling Global for failure to file its required annual report.

The Complaint charges Weintraub and Sterling Global with violations of Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-8. The Commission requests that the court permanently enjoin Weintraub and Sterling Global from violating the antifraud and tender offer provisions of the federal securities laws, order them to pay disgorgement plus prejudgment interest, and impose a civil money penalty against them."

Monday, May 23, 2011


The following is an excerpt from the SEC web page:

"The Securities and Exchange Commission approved rules on Sept. 10, 2010, to expand the existing circuit breaker program that currently is triggered by large, sudden price moves in an individual stock. The new rules follow changes adopted on June 10, 2010, that impose a uniform market-wide pause in trading in individual stocks whose price moves 10% or more in a five-minute period. The trading pause, which was proposed by U.S. exchanges and the Financial Industry Regulatory Authority (FINRA), initially was limited to stocks in the Standard & Poor’s 500 Index, but has been extended to stocks in the Russell 1000 Index and to certain exchange-traded products.

Why were stock-by-stock circuit breakers put in place?
The SEC staff asked U.S. exchanges and FINRA to propose rules in response to the unusually volatile trading that occurred on May 6, 2010. Although some stocks fell very sharply and quickly that afternoon, the downturn was not broad enough to trigger existing market-wide circuit breakers. Trading in some stocks was halted or slowed on some exchanges but continued on others, sometimes at drastically lower prices. Exchanges and FINRA later cancelled transactions at prices that moved 60% or more from prices just before the market drop, deeming these trades to be erroneous. The Commission is concerned that events such as these can seriously undermine the integrity of U.S. markets and is working to put policies in place to help prevent such events from recurring.

What do the new rules require?
Under the new rules, a U.S. stock exchange that lists a stock is required to issue a trading “pause” in a stock if the stock price moves up or down by 10% or more in a five-minute period. The same pause will be in effect on all other U.S. stock and stock option markets, and the single-stock futures market, resulting in a uniform halt. After five minutes, the exchange that issued the pause may extend it if there are still significant imbalances between orders to buy and sell shares of the affected stock. After a ten-minute pause, other exchanges are free to resume trading in the stock and once that occurs, trading may resume in the over-the-counter markets.

What securities are covered by the new rules?
The new rules first covered stocks in the S&P 500 Index. Starting the week of Sept. 13, the circuit breakers have been extended to stocks that are included in the Russell 1000 Index and to a list of exchange-traded products, including those that track broad-based stock indexes, such as the S&P 500. Some exchange-traded funds also experienced sharp price moves in trading on May 6.

Will the new stock-by-stock circuit breakers apply throughout the trading day? What about after-hours trading?
To avoid potential disruption to market openings and closings (which already have special procedures designed to maintain fair and orderly markets), the individual stock circuit-breakers are in effect from 9:45 a.m. Eastern Time until 3:35 p.m. Eastern Time. They do not apply to after-hours trading. On days when the markets close early, the individual stock circuit breakers are in effect until 25 minutes before the close of the markets, for example, until 1:35 p.m. if the markets are closing at 2:00 p.m.

Are these rules permanent?
The new rules were approved on a trial basis and are set to end on April 11, 2011, unless the industry self-regulatory organizations propose to extend the trial period or request permanent approval of the rules. Extending the trial period or giving permanent approval to the rules could only occur through the filing of proposed rule changes by the exchanges and FINRA.

How do these rules differ from what was in place?
Exchanges have had the ability to halt trading in stocks where there is a large imbalance between buy and sell orders, but those trading halts were not binding on other markets, which remained free to trade the stock. Under the new rules, once a trading pause in a stock is called, it applies to all U.S. stock markets, stock option markets and the single-stock futures market.

The new circuit breaker rules apply to individual stocks, unlike market-wide circuit breakers that were put into effect after market breaks in the 1980s. Market-wide circuit breakers halt trading in all stocks for between 30 minutes to several hours if the Dow Jones Industrial Average falls by 10%, 20% or 30% from preset levels during the course of a trading day. Under existing rules, the New York Stock Exchange sets the circuit breaker levels at the beginning of each calendar quarter based on the average closing level of the Dow Jones Industrial Average in the prior month.

Are other changes being considered?
The exchanges and FINRA may file additional proposed rule changes to expand the circuit breaker approach once more or modify the program in other ways. The SEC staff also has asked exchanges to revisit existing market-wide circuit breakers, which are set at a threshold that is rarely triggered. Other proposed changes may be forthcoming."


The following information has been excerpted from the SEC web site:

“The Office of Investor Education and Advocacy is issuing this Investor Bulletin to highlight information about life settlements and some of the risks these types of transactions may pose for investors. Individual investors considering a life settlement transaction may wish to keep the following points in mind and seek guidance from an unbiased financial professional who will not receive a commission or any other financial benefit from the transaction.
What is a life settlement?
In a “life settlement” transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value. The dollar amount offered by the investor usually takes into account the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy.
Why would a policy owner wish to sell a life insurance policy?
Due to changed family or other circumstances, a life insurance policy owner may no longer need the insurance provided by the policy. A spouse may have died, children may have grown up, or a company with life insurance on a key officer may have been sold or gone out of business. Other policy owners may have difficulty making premium payments or simply need cash. In such circumstances, many policy owners surrender their policies or let their policies lapse by ceasing to make premium payments. Selling a policy to an investor may be another alternative. Such sales may be made through life settlement brokers who charge commissions.
How does a life settlement take place and who are the parties involved?
A policy owner may discuss a possible settlement with his or her insurance agent or financial adviser, who then contacts a life settlement broker. In some cases, the policy owner may be solicited directly by a life settlement broker. Life settlement brokers may also be life insurance agents or securities brokers. Depending on the requirements of the states in which they do business, life settlement brokers may be licensed.
The life settlement broker obtains the insured’s authorization to release medical records and forwards the policy owner’s application and medical information to one or more companies known as life settlement providers. Many, but not all, states regulate life settlement providers, who also charge a commission.
The life settlement provider obtains life expectancy estimates on the insured and bids on the application. Life expectancy underwriters (who are not the insured’s personal physician) evaluate the risk of mortality of the insured based on his or her personal characteristics. If the life settlement provider’s bid is accepted, the provider may add that policy to a large group of policies, interests in which may be offered to investors. Institutional investors analyze the information provided by the life settlement provider, often obtaining their own life expectancy estimates. Retail investors, on the other hand, may have to rely on life settlement personnel or other investment professionals to assess the advantages and disadvantages of the transaction. In either case, the investor makes a cash payment to the policy owner or policy owners and continues to pay premiums necessary to keep the policy or policies in effect. Upon the insured’s death, the investor receives the death benefit.
Considerations for investors in life settlements
Before investing in a life settlement, investors may wish to keep the following points in mind.
The return on a life settlement depends on the insured’s life expectancy and the date of the insured’s death. As a result, the accuracy of a life expectancy estimate is essential. If the insured dies before his or her estimated life expectancy, the investor may receive a higher return. If the insured lives longer than expected, the investor’s return will be lower. If the insured lives long enough or if life expectancy is miscalculated, additional premiums may need to be paid and the cost of the investment could be greater than anticipated.
In response to investors’ concerns about the uncertainty of life expectancy estimates, some companies have incorporated purported life expectancy guarantee bonds into their offerings. These companies claim that if the insured does not die by the life expectancy date, they will pay investors the amount they would have received had the insured died by that date. Investors should be aware that the Commission has recently brought enforcement action against a company alleging that it made fraudulent claims about these bonds.

Under certain circumstances, the investor may not receive the death benefit. For example, the life insurance company that issued the policy may refuse to pay out the death benefit if it believes the policy was sold under fraudulent circumstances. In addition, the heirs of the insured may challenge the life settlement or the insurance company may go out of business.

The competence of a life expectancy underwriter and the accuracy of the life expectancy estimate are critical to the return on a life settlement. For the most part, life expectancy underwriters are not licensed or registered by state insurance regulators, and information about the methodologies and review procedures that life expectancy underwriters use is not generally disclosed.

Life settlements can give rise to privacy issues. Insured individuals generally wish to keep their medical records and personal information confidential. Investors, on the other hand, want access to the insured’s medical and other personal information to assess the advisability of their investment and to monitor it on a continuing basis.”