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

Saturday, August 31, 2013

CFTC GETS INJUNCTION GETS INJUNCTION FORCING MAN AND COMPANY TO PAY RESTITUTION AND PENALTY

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Federal Court in Maryland Orders Sidney J. Charles, Jr. and his Company, The Borrowing Station, LLC, to pay over $600,000 to Settle CFTC Forex Fraud Action

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court consent Order of permanent injunction requiring Defendants Sidney J. Charles, Jr., formerly of Bowie, Maryland, and his company, The Borrowing Station, LLC (Borrowing Station) of Bowie, Maryland, jointly and severally to pay $254,236 in restitution and a $350,000 civil monetary penalty in connection with an off-exchange leveraged foreign currency (forex) Ponzi scheme.

The Order, entered on August 23, 2013, by Judge Paul W. Grimm of the U.S. District Court of the District of Maryland, also imposes permanent registration and trading bans against both Defendants and prohibits them from further violations of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged. The court’s Order stems from a CFTC complaint filed on April 23, 2012, that charged Defendants with solicitation fraud, misappropriation, issuing false statements, and registration violations (see CFTC Press Release 6247-12).

The Order finds that, from at least October 2009 through at least July 2011, Defendants fraudulently solicited $369,326 from 18 individuals or entities for participation in a pooled investment vehicle managed by Borrowing Station, through Charles, that traded forex. According to the Order, Defendants solicited pool participants directly and through a website. In their solicitations, Defendants promised substantial investment returns such as 25 percent per year or 10 percent per month, and falsely claimed that pool participant funds were guaranteed against trading losses. The Order finds that Defendants deposited only a portion of pool participant funds into trading accounts and lost a majority of those funds unsuccessfully trading forex.

The Order also finds that Defendants issued checks to pool participants that represented purported “monthly returns” or “return on investment.” However, any purported profits that Defendants paid to pool participants came from the principal of other pool participants in the manner of a Ponzi scheme. In addition, Charles misappropriated pool participant funds to pay for personal expenses and to fund Borrowing Station’s operations, according to the Order.

The Order further finds that Borrowing Station and Charles failed to register as a Commodity Pool Operator (CPO) and Associated Person of a CPO, respectively, as required under the CEA and CFTC Regulations.

The CFTC appreciates the assistance of the U.K. Financial Conduct Authority.

CFTC Division of Enforcement staff responsible for this case are Kara Mucha, Kassra Goudarzi, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.

Friday, August 30, 2013

CFTC FILES TO REVOKE REGISTRATION OF COMMODITY TRADING ADVISOR

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Files Action to Revoke Registration of Commodity Trading Advisor Prestige Capital Advisors, LLC

Washington, DC- The U.S. Commodity Futures Trading Commission (CFTC) today filed a Notice of Intent (Notice) to revoke the registration of Prestige Capital Advisors, LLC (Prestige) of Charlotte, North Carolina, as a Commodity Trading Advisor (CTA).

The CFTC Notice alleges that Prestige is subject to statutory disqualification from CFTC registration based on an Order of default judgment and permanent injunction entered against Prestige in the U.S. District Court for the Western District of North Carolina on January 25, 2013 (see CFTC Press Release 6615-13). The Order finds that Prestige fraudulently solicited and accepted more than $4.7 million from multiple pool participants for investment in one or more commodity pools that traded among other things, commodities and futures contracts. The Order also finds that Prestige misappropriated pool participant funds, posted false trading returns on a website called BarclayHedge (where fund managers could post unverified historical returns for prospective clients to view), sent false trading results to at least one Prestige pool participant, and issued false account statements. As a result, Prestige was ordered to pay approximately $6.9 million in civil monetary penalties and restitution of over $4.1 million.

CFTC Division of Enforcement staff members responsible for this case are Eugenia Vroustouris, Daniel Jordan, Michael Loconte, Erica Bodin, Rick Glaser, and Richard Wagner.

Thursday, August 29, 2013

Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

SEC CHARGES PRINCIPAL OF MEDICAL BUSINESS FOR ROLE IN FRAUD SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Principal of Purported Biomedical Company with Fraud

The Securities and Exchange Commission ("Commission") filed a civil injunctive action on August 19, 2013 in the United States District Court for the Southern District of Indiana relating to Timothy E. Cook's fraudulent offer and sale of shares in his purported biomedical company, Xytos, Inc. (Xytos). The Commission charged Cook, of Indianapolis, and Xytos, a Nevada corporation based in Indianapolis, with securities fraud for engaging in a fraudulent scheme that garnered Cook more than $500,000 in illicit profits. The Commission also charged Cook and Asia Equities, Inc., a Nevada corporation Cook controlled, with related registration violations.

The Commission's complaint alleges that, between 2010 and March 2013, Cook misrepresented Xytos to the investing public as an operational biomedical company specializing in cancer treatment. Meanwhile, according to the compliant, Cook sold millions of his own Xytos shares on the open market and lived off the more than $400,000 in proceeds from those fraudulent sales.

The Commission's complaint alleges that Cook also raised over $100,000 from several private offerings of Xytos shares. The complaint further alleges that Cook, after soliciting private investors with false and misleading offering documents, misappropriated investor money to pay for personal expenses such as clothing and entertainment. Additionally, the complaint alleges that Cook concealed his fraud from Xytos shareholders through a series of misleading shareholder updates.

The Commission's complaint alleges that Cook and Xytos violated the antifraud provisions of the securities laws in Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (Securities Act); that Cook aided and abetted these violations; and that Cook is liable for the Exchange Act violations as a control person of Xytos. Finally, the complaint alleges that Cook and Asia Equities engaged in unregistered offerings in violation of Section 5(a) and 5(c) of the Securities Act. The Commission's complaint seeks permanent injunctions, civil penalties, disgorgement and prejudgment interest against all defendants. As to Cook, the complaint also seeks penny stock and officer and director bars.

The Commission acknowledges the assistance of the Financial Industry Regulatory Authority.

Wednesday, August 28, 2013

SEC SETTLES FINANCIAL CRISIS FRAUD CHARGES WITH COO OF UCBH HOLDINGS, INC.

FROM:  SECURITIES EXCHANGE COMMISSION 
SEC Settles Claims Against Ebrahim Shabudin Arising from Understated Bank Losses During Financial Crisis

On August 8, 2013, the United States District Court for the Northern District of California approved a settlement of the Securities and Exchange Commission’s claims against Ebrahim Shabudin, the former Chief Operating Officer of UCBH Holdings, Inc.  The case against Mr. Shabudin and two other defendants involves fraudulent financial reporting for UCBH Holdings, Inc., the publicly-traded holding company for San Francisco-based United Commercial Bank.  The Commission alleges Mr. Shabudin and other defendants concealed losses on loans and other assets from the bank’s auditors and delayed the proper reporting of those losses.  The Commission’s complaint alleges Mr. Shabudin committed securities fraud by making false and misleading statements in connection with the 2008 annual report and misleading the bank’s independent auditors, among other allegations.

Without admitting or denying the allegations, Mr. Shabudin agreed to pay a civil money penalty of $175,000, with the penalty partially reduced by the amount paid as a civil penalty in a related administrative action brought against him by the Federal Deposit Insurance Corporation.

Mr. Shabudin also consented to the entry of a final judgment that permanently enjoins him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-11 thereunder.  The judgment also bars Mr. Shabudin from acting as an officer or director of a public company under the Exchange Act.


Tuesday, August 27, 2013

SEC FILES ACTION TO ENFORCE COMPLIANCE OF ORDER TO PAY

FROM:  U.S. SECURITIES EXCHANGE COMMISSION 
SEC Files Action Against Investment Adviser to Enforce Compliance with Order to Pay Disgorgement of Misappropriated Investor Funds, Interest and Civil Penalties

The Securities and Exchange Commission announced today that it filed an application in U.S. District Court for the Eastern District of New York against Anthony T. Vicidomine and North East Capital, LLC alleging that they violated an SEC Order requiring them to pay $346,132.04, consisting of $189,415 in disgorgement, $6,717.04 in prejudgment interest, and a $150,000 civil penalty. According to the application, Vicidomine and North East failed to make any payments by August 21, 2013, despite the SEC's Order and their consent to do so.

According to the SEC's August 16, 2013 order instituting a settled administrative proceeding, Vicidomine, the sole principal of North East Capital, LLC, an unregistered investment adviser, misappropriated $189,415 from the North East Capital Fund LP (the Fund), a pooled investment vehicle he managed, by charging the Fund unearned "incentive fees." Vicidomine disbursed the monies directly into his own personal account, to his other business ventures, and to North East to pay his personal expenses. Additionally, Vicidomine and North East made misrepresentations, both orally and in writing, concerning Vicidomine's own investment in the Fund and the policies and procedures Vicidomine and North East employed to minimize investors' risk of losses.

Based on the above, the SEC ordered Vicidomine and North East to cease and desist from committing or causing any violations and any future violations of Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Vicidomine and North East agreed to pay disgorgement of $189,415 plus prejudgment interest of $6,717.04 as well as a civil monetary penalty of $150,000 by August 21, 2013. They failed to make any payment.

The SEC's application seeks a district court order enforcing its August 16, 2013 Order requiring Vicidomine and North East to pay $346,132.04 in disgorgement, prejudgment interest and civil penalties.


Monday, August 26, 2013

MAN AND FIRM AGREE TO $18 MILLION SETTLEMENT AND ADMIT TO WRONGDOING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing.  Falcone also agreed to be barred from the securities industry for at least five years.

The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company.  In the settlement papers filed in court today, Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.

“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” said Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement.  “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry.”

The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty.  The Harbinger entities are required to pay a $6.5 million penalty.  Falcone has consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years.  The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.

tion and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.

During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.

In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed.  Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.

Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

The SEC’s investigation was conducted by Conway T. Dodge, Jr., Robert C. Besse, Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting.  The SEC’s litigation was handled by Mr. Stoelting, Mr. Besse, Mr. Salzberg, Kevin McGrath, David J. Gottesman, and Bridget Fitzpatrick.


Saturday, August 24, 2013

SEC CHARGES MAN AND COMPANY WITH OPERATING FRAUD SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged Appleton, Wisconsin resident Robert Narvett and his company Shield Management Group, Inc. ("Shield") with fraud, alleging that he operated a scheme that raised at least $940,000 from twenty investors.

In a complaint filed on August 16, 2013, filed in the U.S. District Court for the Eastern District of Wisconsin, the SEC alleges that beginning in at least March 2010, Narvett raised funds though the fraudulent offer and sale of promissory notes issued by Shield.

The SEC alleges that in exchange for their money, Narvett guaranteed investors that they would receive their principal investment plus a twenty percent return at the end of a specified term. Although he provided few details regarding how he would use their funds, Narvett told some investors that he would use the money as working capital to build Shield's business.

According to the SEC's complaint, instead of using investor money for Shield's business, Narvett misappropriated investor funds for his personal use. Narvett used investor money to, among other things, fund trading in his personal brokerage accounts, purchase a car and to pay for personal expenses such as his mortgage.

The SEC complaint alleges violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder by Narvett and Shield. As part of this action, the SEC seeks an order of permanent injunction against Narvett and Shield, the payment of disgorgement of ill-gotten gains, prejudgment interest and civil penalties.

Thursday, August 22, 2013

SPEECH BY SEC COMMISSIONER ELISSE B. WALTER AT STANFORD DIRECTORS COLLEGE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Corporate Disclosure: The Stage, the Audience and the Players

Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
Stanford Directors College, Palo Alto, CA

June 25, 2013

Thank you, [Joe], for your kind introduction. Joe and I have much in common — the same alma mater and a working relationship at the SEC more years ago than either of us would like to admit. That adds to my pleasure at being here today at the 19th annual Stanford Directors College.

As many of you know, I am nearing the end of my tenure as a Commissioner at the Securities and Exchange Commission. As a Commissioner, as Chair and as an SEC staffer, jobs spanning over two decades, I have delved into every aspect of the agency’s mission. And, looking back, it was my years in the Division of Corporation Finance that may have taught me the most important lesson: the cornerstone of securities regulation and investor protection is the timely disclosure to investors of accurate and complete information.

And by disclosure, I mean more than the numbers in the financial statements. I mean the information investors need to put those numbers into context — not just the “what?” and “how much?” but the “why?” And so today, in what may be one of the last speeches of my public career, I’d like to return to a subject that is an old favorite of mine: Management’s Discussion and Analysis, or MD&A. And I want to do that because I believe that you, as directors, need to take an active role in the company’s disclosure, and particularly the MD&A, and are in a special position to do so.

But before I get started, I do need to remind you that the views I express today are my own, and not those of the Commission, my fellow Commissioners or the Commission’s staff.1

Comprehensive corporate disclosure is critical to maintaining and improving investor confidence in the markets. And investor confidence in the quality of financial disclosures is what makes our markets work.

As directors of public companies, you serve a critical function as stewards of the robust, transparent communication with your company’s shareholders that builds this confidence. This is not only a responsibility, but also an opportunity. As I’ve said many times, you should not view disclosure as an obligation; instead, view it as a chance to tell your story.

“Mend your speech a little, lest it may mar your fortunes.”2 William Shakespeare wrote that sometime between 1603 and 1606 in his famous work, King Lear. Unfortunately, that approach to disclosure about affections didn’t work out so well for King Lear or his daughter Cordelia. And I certainly don’t mean for you to take King Lear’s approach in order for your considerations about corporate disclosure to be respected. Rather, my strongest desire is that companies and their shareholder-owners truly engage in an honest dialogue.

So, inspired by the Bard, I’d like to give you three things to think about when considering MD&A. First, set the stage. Second, know your audience. And finally, know your players.

“All the world’s a stage….”3 Shakespeare wrote that too. And I’m not even going to mention the one about lawyers.

When we talk about disclosure, SEC regulations merely set the stage. But they aren’t designed to tell the whole story. That’s where you and the managers you oversee come in — enter stage right.

Regulations are the floor but not the ceiling. They tell companies what, at a minimum, should be covered, but it’s up to the company to make sure the story gets told. That’s where MD&A becomes a real opportunity for the company to tell shareholders what’s really going on. And if the company’s management isn’t doing that, or isn’t doing it well, it’s up to the directors to ask questions, suggest changes, and require more information.

You should take this role very seriously. You are the investor’s voice and advocate, and they deserve a good story. Now, a good story may not always be a happy story. Shakespeare was a master of both tragedy and comedy. But the real story — and by that I mean the whole story — is the one that needs to be told.

I’m going to read you a comment that was actually issued by the staff of the Division of Corporation Finance to an issuer regarding its MD&A. Bear with me, it’s a little long:

We believe your current disclosures are too general in nature and do not provide your investor with a complete picture of your enterprise by segment and as a whole. In this regard, for each period presented and for each of your reportable segments, revise to:

Clearly disclose and quantify each material factor that contributed to the change in revenue and operating income, indicating the impact by geographic area;

Provide insight into the underlying business drivers or conditions that contributed to these changes;

***
Describe any other known trends or uncertainties that have had or you expect may reasonably have a material impact on your operations and if you believe that these trends are indicative of future performance.
This is not a comment a company (or a board) should be happy to see. This comment outlines very basic things that should have been covered by this MD&A, but weren’t — it reflects a play that no one would want to see because the stage has not been properly set.

No MD&A should be merely a recitation of the financial statements. Give investors the when, the where, the why and, perhaps most importantly, the what’s next.

Here’s another comment:

We note that you identify and quantify various factors that impacted the year to year trends of your results of operations and the related financial statement line items … but did not discuss the business developments or external events that underlie these factors. Please expand your MD&A to explain in greater detail what gave rise to the factors that you have identified, and indicate whether or not you expect them to have a continuing impact on your results of operations in the future.

This is another comment no one should be happy to receive. I’m told that sometimes companies will leave out disclosure and wait to see if the SEC staff will issue a comment. If that’s true, and I worry that it is, I must say that that is entirely the wrong approach. The staff is very good at asking the right questions to require better disclosure, but they are not insiders. They do not know your company the way that you do. Frankly, they should not be doing your job for you, nor should we expect them to.

Sometimes finding the right details to give investors is hard. Predicting the impact, either positive or negative, of a future event is even more challenging. It requires significant judgment and thoughtful consideration. But it’s a task that should be undertaken by the very insiders who have the information to make that call, so that investors have the complete story. The focus should always be on the investors.

And that brings me to my second point: know your audience.

Well, that’s easy enough. Your audience is your investors. And in my view, you should address your investors like they are your business partners, and the MD&A should reflect that perspective. You wouldn’t address a business partner with boilerplate. Your investors deserve the same respect.

They also deserve the whole story. As some of you know, I frequently use the example of my fictional Aunt Millie, the archetype of the retail investor. Well, Aunt Millie has been reading, or trying to read, corporate disclosure for years, and I’m not sure she has ever seen an MD&A that reads quite like one of her Agatha Christie novels — where Detective Hercule Poirot solves each and every mystery step by step. To be honest, I fear that my dear Aunt Millie might just leave this Earth without having ever seen the kind of truly informative and complete MD&A that I have dreamed of for years.

Please don’t let this happen to my dear Aunt Millie! Perhaps you’d even be willing to go back and read one of the more well-known Supreme Court cases about disclosure, TSC Industries. That case gives us the famous concept of evaluating disclosure by looking at the “total mix” of information, but it also says that doubts about whether disclosure is required should “be resolved in favor of those the statute is designed to protect.” 4

I listed in a speech from 2010 (I told you I’d been talking about this for a while) some questions that investors probably still want to know the answers to after reading an MD&A.5 I think they are still quite relevant today:

What is the company’s business today?

How did it perform?

Where is the cash?

What are the company’s key business drivers?

What are the risks and uncertainties?

How flexibly can the company respond to change?

What do the company’s future prospects look like?
And of course there may be other questions to answer that are specific to your company. But the MD&A is the place to answer them clearly, thoroughly, and directly.

When I served as the Chairman of the Commission, there was a sign on my office door that read simply “How does it help investors?” It was a reminder that everything the Commission does should be focused on that goal.

Sometimes I think that every board meeting should prominently display a similar sign, one reading “What do investors want to know?” Let it serve as a reminder to everyone in the room that disclosure isn’t driven by what the company wants to disclose but by what the investors want to know. That should be front and center as you review the MD&A.

How the company gets to those answers brings me to my third point today: know your players.

In addition to examining the content of the MD&A, I believe the board should know the people and the processes involved in putting it together. First, what is the attitude of management towards disclosure? If they believe that robust, transparent disclosure is a good thing, then that tone will affect both the employees involved in providing information that is relevant to disclosure and to those designing controls and procedures to ensure that information is evaluated by management in a timely, thoughtful manner.

And I believe directors can influence that tone by being engaged, by reading the disclosure with a critical eye and by holding management’s feet to the fire when they believe there is more to the story that ought to be told. Ask yourself, what do I know about the company’s performance that cannot be reasonably inferred from the financial statements?

You are the investor’s voice and as the company’s stewards, you should also be their advocate as well. You play such a crucial role in ensuring that the company’s true story is told, and that’s the story that investors deserve to hear.

And disclosure has other positive effects. Full disclosure is a hallmark of good corporate governance — which should serve to help create the positive corporate culture that results in effective processes and procedures necessary to reveal the important information that your investors need to know. You can only be successful at good governance if you are also successful at disclosure.

Better disclosure equals better markets. It really can be that simple. I hope, as I conclude today, that you’ll always keep the investor — and of course, especially my dear Aunt Millie — at the forefront of your mind each and every time you embrace your important role in the disclosure process.

Thank you.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the Commission staff.

2 King Lear (I.i.94).

3 As You Like It, (II.vii.139).

4 TSC Industries v. Northway, Inc., 426 U.S. 438, at 448 (1976).

5 Commissioner Elisse B. Walter, Remarks Before WESFACCA (March 5, 2010), available at http://www.sec.gov/news/speech/2010/spch030510ebw.htm.

Wednesday, August 21, 2013

SEVERAL CEO'S AND COMPANIES CHARGED WITH FRAUD IN PENNY STOCK MARKET MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission charged several CEOs and their companies, and five penny stock promoters with securities fraud for their roles in various illicit kickback and market manipulation schemes involving microcap stocks.

The SEC worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation as the separate schemes were uncovered. The U.S. Attorney’s Office today announced criminal charges against the same individuals facing SEC civil charges.

According to complaints the SEC filed in the U.S. District Court for the Southern District of Florida, defendants Thomas Gaffney, Health Sciences Group, Inc., Mark Balbirer, Stephen F. Molinari, and Nationwide Pharmassist Corp. engaged in a scheme involving the payment of an undisclosed kickback to a pension fund manager or hedge fund principal in exchange for the fund’s purchase of restricted shares of stock in a microcap company.

According to additional complaints also filed in the Southern District of Florida, defendants Jack Freedman, Jeffrey L. Schultz, Redfin Network, Inc., Richard P. Greene, Peter Santamaria, Douglas P. Martin, VHGI Holdings, Inc., and Sheldon R. Simon engaged in various schemes. Some schemes involved undisclosed inducement payments made to individuals to facilitate the manipulation of the stock of several microcap issuers. One scheme involved an undisclosed bribe that was to be paid to a stockbroker who agreed to purchase a microcap company’s stock in the open market for his customers’ discretionary accounts.

The SEC alleges that the defendants in the schemes involving undisclosed kickbacks understood they needed to disguise the kickbacks as payments to phony companies, which they knew would perform no actual work. In the schemes involving the undisclosed inducement payments or bribe, the SEC alleges that the defendants knew their illegal activities were meant to artificially inflate the companies’ stock volume and prices.

The SEC’s complaints allege the defendants violated Section 17(a)(1) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and/or 10b-5(c) thereunder. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and financial penalties against all the defendants; penny stock bars against all the individual defendants; and officer-and-director bars against defendants Schultz, Martin, Gaffney, and Molinari.

The SEC acknowledges the assistance and cooperation of the United States Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation, Miami Division, in these investigations.

Tuesday, August 20, 2013

SEC ISSUED RISK ALERT TO DETECT OPTIONS TRADES THAT CIRCUMVENT SHORT-SALE RULE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Washington D.C., Aug. 9, 2013 — 

The Securities and Exchange Commission issued a Risk Alert to help market participants detect and prevent options trading that circumvents an SEC short-sale rule.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued the alert after its examiners observed options trading strategies that appear to evade certain requirements of the short-sale rule.  The alert describes the strategies used by some customers, broker-dealers and clearing firms, summarizes related enforcement actions, and notes practices that some firms have found to be effective in detecting and preventing trading intended to evade the rule, known as Regulation SHO.

Regulation SHO tightened requirements for short sales, which involve sales of borrowed securities. Short sellers profit from price declines by replacing borrowed securities at a lower price.  Under Regulation SHO, short sellers who fail to deliver securities after the settlement date are required to close out their position immediately, unless they qualify as bona fide market makers for a limited amount of extra time to close-out.  As noted in the alert, the trading strategies observed by the OCIE staff may give the impression of satisfying the Regulation SHO “close-out requirement,” while in effect evading it.  These sham close-outs violate the SEC rule, which aims to ensure that trades settle promptly, thereby reducing settlement failures.

“This Risk Alert encourages awareness of options trading activity used to avoid complying with the close-out requirements under Regulation SHO,” said OCIE Director Andrew Bowden.  “The alert describes these trading activities in detail to help broker-dealers and their correspondent clearing firms avoid the regulatory and reputational risks that are posed by these activities.”

In addition, the Risk Alert describes activities that the staff has observed that may indicate an attempt to circumvent Regulation SHO.  These include:

Trading exclusively or excessively in hard-to-borrow securities or threshold list securities, or in near-term listed options on such securities

Large short positions in hard-to-borrow securities or threshold list securities
Large failure to deliver positions in an account, often in multiple securities
Continuous failure to deliver positions

Using buy-writes, married puts, or both, particularly deep in-the-money buy-writes or married puts, to satisfy the close-out requirement

Using buy-writes with little to no open interest aside from that trader’s activity, resulting in all or nearly all of the call options being assigned

Trading in customizable FLEX options in hard-to-borrow securities or threshold list securities, particularly very short-term FLEX options

Purported market makers trading in hard-to-borrow or threshold list securities claiming the exception from the locate requirement of Regulation SHO; often these traders do not make markets in these securities, but instead make trades only to take advantage of the option mispricing

Multiple large trades with the same trader acting as a contra party in several hard-to-borrow or threshold list securities; often traders assist each other to avoid having to deliver shares

Eric Peterson and Tom Mester of the National Exam Program staff contributed substantially to the preparation of this Risk Alert.  They received valuable input from the Division of Trading and Markets and the Division of Economic and Risk Analysis.


Monday, August 19, 2013

CFTC RULES FOR ALIGNMENT OF DERIVATIVES CLEARING ORGANIZATIONS WITH INTERNATIONAL STANDARDS

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Issues Proposed Rules for Derivatives Clearing Organizations to align with International Standards

Washington, DC — The Commodity Futures Trading Commission (CFTC) proposed rules to establish additional standards for systemically important derivatives clearing organizations (SIDCOs) that are consistent with the Principles for Financial Market Infrastructures (PFMIs) and address all of the remaining gaps between part 39 of the Commission’s regulations and the PFMIs.

These rules, together with the existing derivatives clearing organizations rules, would establish standards that are consistent with the PFMIs and would allow SIDCOs to continue to be Qualifying Central Counterparties (QCCPs) for purposes of international bank capital standards. The proposed rules include substantive requirements relating to governance, financial resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures.

In addition, because of the potential advantages afforded to QCCPs (namely, lower capital charges for banks clearing through a QCCP), the proposed rules include procedures by which derivatives clearing organizations other than SIDCOs may elect to become subject to these additional standards.

Sunday, August 18, 2013

SEC CHARGES TWO FORMER JP MORGAN TRADERS WITH FRAUDULENTLY OVERVALUING INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Securities and Exchange Commission v. Javier Martin-Artajo and Julien G. Grout, Civil Action No. 13-CV-5677 (S.D.N.Y.)

The Securities and Exchange Commission announced today that it charged two former traders at JPMorgan Chase & Co. with fraudulently overvaluing investments in order to hide massive losses in a portfolio they managed.

The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio's investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan's internal accounting policy. But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan's reported first quarter income before income tax expense to be overstated by $660 million.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Martin-Artajo and Grout.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, Martin-Artajo and Grout worked in JPMorgan's chief investment office (CIO), which created the portfolio known as Synthetic Credit Portfolio (SCP) as a hedge against adverse credit events. The portfolio was primarily invested in credit derivative indices and tranches. The market value of SCP's positions began to steadily decline in early 2012 due to improving credit conditions and a recent change in investment strategy. Martin-Artajo and Grout began concealing the losses in March 2012 by providing management with fraudulent valuations of SCP's investments.

The SEC alleges that Martin-Artajo directed Grout to revise the manner in which he marked SCP's investments. Instead of continuing to price the portfolio's positions based on the mid-market prices contained in dealer quotes the CIO received, SCP's positions were instead marked at the most aggressive end of the dealers' bid-offer spread. On several occasions, Martin-Artajo provided a desired daily loss target that would enable the concealment of the extent of the losses. Grout entered the marks every day into JPMorgan's books and records, and sent daily profit and loss reports to CIO management in which he understated SCP's losses. For a period, Grout maintained a spreadsheet to track the difference between his marks and the mid-market prices previously used to value SCP's positions. By mid-March, this spreadsheet showed that the difference had grown to $432 million.

The SEC alleges that contrary to JPMorgan's accounting policy, Martin-Artajo instructed Grout on March 30 to wait for better prices after the close of trading in London in the hope that activity in the U.S. markets could support better marks for SCP's positions. The concealment of losses continued beyond the first quarter. By late April, trading counterparties raised collateral disputes over SCP positions totaling more than a half-billion dollars. Shortly thereafter, JPMorgan's management stripped the SCP traders of their marking authority and began valuing the book at the consensus mid-market prices.

The SEC's complaint alleges that Martin-Artajo and Grout violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-11 and 13a-13.

The SEC's investigation, which is continuing, has been conducted by Michael Osnato, Steven Rawlings, Peter Altenbach, Joshua Brodsky, Daniel Michael, Kapil Agrawal, Eli Bass, Daniel Nigro, Sharon Bryant, and Christopher Mele of the New York Regional Office. The litigation will be led by Joseph Boryshansky.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, Federal Bureau of Investigation, United Kingdom Financial Conduct Authority, Office of the Comptroller of the Currency, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

Saturday, August 17, 2013

SEC CHARGES FORMER EXECUTIVE OF MASSACHUSETTS-BASED COMPANY WITH INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Former Executive of Massachusetts-Based Company with Insider Trading

The Securities and Exchange Commission charged Joseph M. Tocci, a former executive of Massachusetts-based American Superconductor Corporation, with insider trading ahead of an April 5, 2011 company announcement that caused the company's stock price to tumble 42% and reaped Tocci over $80,000 in profits. Tocci has agreed to settle the charges by, among other things, paying a total of over $170,000 in disgorgement of ill-gotten gains, prejudgment interest, and a civil penalty.

In a Complaint filed on August 12, 2013, in the U.S. District Court for the District of Massachusetts in Boston, the SEC alleges that Tocci, age 59, of Belmont, Massachusetts, used confidential information he obtained as the assistant treasurer of American Superconductor to purchase option contracts through which Tocci essentially bet that the company's stock price would soon decrease on the release of negative news. According to the SEC's Complaint, on or about March 31, 2011, Tocci learned through communications with American Superconductor's chief financial officer ("CFO") that the company's largest customer, Sinovel Wind Group Co. Ltd., had refused to accept shipments scheduled for delivery by the close of the company's fiscal year on March 31, 2011, and had failed to pay past due amounts for earlier shipments. These developments, the CFO said, would likely require a public announcement from American Superconductor within the next few days. The CFO instructed Tocci to keep this information confidential. On April 1, 2011, the Complaint alleges, Tocci improperly used this material, nonpublic information to purchase 100 put option contracts, which increased in value as American Superconductor's stock price decreased. On April 5, 2011, after the close of trading, the company announced that its financial results for its fourth quarter and fiscal year ended March 31, 2011 would be lower than expected due to a deteriorating relationship with Sinovel. The next day, American Superconductor's stock price plummeted 42%. By then selling his 100 put option contracts, Tocci earned illegal profits of approximately $82,439.

Tocci has agreed to settle this case by consenting to a judgment enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay disgorgement of $82,439 (representing his ill-gotten gains) plus prejudgment interest of $6,109 and a civil penalty of $82,439. Tocci also agreed to plead guilty in a parallel criminal case brought by the U.S. Attorney's Office for the District of Massachusetts in connection with the same conduct.

The SEC's investigation was conducted by Asita Obeyesekere, Michael Foster, and Kevin Kelcourse in the SEC's Boston Regional Office. The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the District of Massachusetts and the Federal Bureau of Investigation's Boston Field Office. The Commission also thanks the Options Regulatory Surveillance Authority and the Financial Industry Regulatory Authority for their assistance.

Friday, August 16, 2013

MAN WHO ORCHESTRATED $72 MILLION PONZI SCHEME RECEIVES 15 YEAR PRISON TERM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

15 Year Prison Term for Gregory Mcknight, Orchestrator of $72 Million Ponzi Scheme

The Securities and Exchange Commission announced that on August 6, 2013, the Honorable Mark A. Goldsmith of the United States District Court for the Eastern District of Michigan sentenced Gregory N. McKnight to 188 months (15 years and 8 months) in prison, followed by supervised release of 3 years, and ordered McKnight to pay $48,969,560 in restitution to his victims. McKnight, 53, of Swartz Creek, Michigan, had previously pled guilty to one count of wire fraud for his role in orchestrating a $72 million Ponzi scheme involving at least 3,000 investors. The U.S. Attorney’s Office for the Eastern District of Michigan filed criminal charges against McKnight on February 14, 2012. McKnight was taken into custody immediately after the sentencing hearing.

The criminal charges arose out of the same facts that were the subject of an emergency action that the Commission filed against McKnight and others on May 5, 2008. On that same day, the Court issued orders freezing McKnight’s assets and those of several companies he controlled, and appointed a Receiver. The Commission’s complaint alleged that, from December 2005 through November 2007, McKnight, through his company Legisi Holdings, conducted a fraudulent, unregistered offering of securities in which he raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries. According to the Commission's complaint, McKnight represented that he would invest the offering proceeds in various investment vehicles and pay interest of as much as 15 percent per month from the resulting profits. The complaint charged that McKnight invested less than half of the offering proceeds and that these investments resulted in millions of dollars in losses. The Commission's complaint further charged that McKnight used investor funds to make Ponzi payments to investors and for his own use. The Commission’s complaint charged McKnight with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

On July 6, 2011, the Court entered a final judgment against McKnight in the Commission’s action, and ordered McKnight to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties totaling approximately $6.5 million. The court also issued orders permanently enjoining McKnight from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. On July 9, 2013, McKnight's associate Matthew J. Gagnon was sentenced to five years in prison for his role in promoting Legisi.

Thursday, August 15, 2013

SEC.gov | Opening Statement

SEC.gov | Opening Statement

STOCK PROMOTERS CHARGED BY SEC IN MARKET MANIPULATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Stock Promoters with Market Manipulation

The Securities and Exchange Commission announced that it filed a civil injunctive action against Cort Poyner ("Poyner") and Mohammad Dolah ("Dolah"), alleging that they engaged in a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Resource Group International, Inc. ("Resource Group") and Gold Rock Resources Inc. ("Gold Rock").

The complaint, filed on July 31, 2013 in federal court in Brooklyn, New York, alleges that Poyner, a recidivist securities violator, and Dolah engaged in an undisclosed kickback arrangement with an individual ("Individual A") whom they believed represented a group of registered representatives that solicited customer purchases of stock in exchange for undisclosed kickbacks. Poyner and Dolah promised to pay between 25% - 35% in kickbacks to Individual A and the registered representatives he represented in exchange for the purchase of up to $2 million of Resource Group stock and $1 million in Gold Rock stock through the customers' accounts.

The complaint further alleges that between December 11, 2008 and May 11, 2009, Poyner and Dolah instructed Individual A to purchase 800,000 shares of Resource Group stock for a total of $50,000, and Dolah instructed Individual A to purchase 20,000 shares of Gold Rock stock for a total of $20,400. Thereafter, Poyner and Dolah paid Individual A cash bribes totaling $14,000 for those purchases.

The complaint charges Poyner and Dolah with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, and civil penalties from Poyner and Dolah, a judgment prohibiting Dolah from participating in any offering of penny stock, and an order prohibiting Poyner from acquiring, disposing or promoting any penny stock.

Tuesday, August 13, 2013

SEC OBTAINS EMERGENCY COURT ORDER TO STOP HEDGE FUND FROM DEFRAUDING MILITARY PERSONNEL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
Washington D.C., Aug. 6, 2013 

The Securities and Exchange Commission obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs.  He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.  In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent.

“Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn’t have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”

According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.

The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

The SEC’s investigation was conducted by John J. Sikora, Jr. and Jason A. Howard, and the litigation will be led by Jonathan S. Polish.

Monday, August 12, 2013

SEC CAUTIONS EXCHANGES TO MONITOR FOR COMPLIANCE COMPOSITION OF INDICES USED IN OFFERING FINANCIAL INSTRUMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
FOR IMMEDIATE RELEASE
2013-150
Washington D.C., Aug. 8, 2013 —

The Securities and Exchange Commission today issued a report cautioning exchanges and investment professionals to monitor the composition of indices used in offering financial instruments to determine if they are security futures products and ensure they are complying with the federal securities laws.

The SEC’s report of investigation stems from an inquiry into a foreign derivatives exchange that was offering and selling futures to U.S. customers on what was initially a broad-based index not subject to the registration requirements of the federal securities laws.  The index later transitioned to a narrow-based security index, leaving it without a valid exemption from the securities laws.  The SEC’s report reminds exchanges and investment professionals to establish policies and procedures to consistently monitor the composition of indices on which futures are based to establish whether or not they are offering security futures products.

“As the compositions of exchange indices fluctuate, it is critically important for exchanges to have policies and procedures in place to effectively monitor the composition of their indices and  ensure that they are appropriately offering securities based on those indices to U.S. investors,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “It is equally important for investment professionals to be mindful of the highly analogous situation involving security-based swaps, and the failure to appropriately monitor the characteristics of such financial instruments risks violating the federal securities laws.”

The SEC’s investigation into Eurex Deutschland revealed that the exchange began offering and selling futures on its Euro STOXX Banks Index to U.S. customers more than 10 years ago pursuant to a Commodity Futures Trading Commission (CFTC) no-action letter obtained in part through Eurex’s representation that it was a broad-based index subject to the CFTC’s exclusive jurisdiction.  In October 2011, Eurex reviewed the index for the first time in response to a request by the CFTC to confirm it was still broad-based.  During the review, Eurex discovered and self-reported to the SEC and CFTC that the index had transitioned in April 2010 from a broad-based to a narrow-based security index as defined by Section 3(a)(55)(B) of the Securites Exchange Act of 1934.   From April 2010 to October 2011, Eurex sold 6 million contracts on the index through approximately 79 foreign-based broker-dealers, some of which offered direct market access to the index through trading terminals in the U.S.  Other orders were facilitated through omnibus customer accounts carried by foreign-based intermediaries on behalf U.S. investors.

According to the SEC’s report, Eurex did not comply with Section 6(h)(1) of the Exchange Act by effecting transactions in security futures that were not listed on a national securities exchange or national securities association for U.S. investors.  Eurex also failed to comply with Section 5 of the Exchange Act by not registering as a national securities exchange, and by offering and selling security futures in the U.S without registering the transactions or having a valid exemption from registration.  The Commission has decided to issue this report and forego an enforcement action against Eurex in part because of its substantial and timely cooperation with the investigation and its prompt remediation efforts.  After self-reporting the findings of its review, Eurex extensively cooperated with the SEC staff and voluntarily provided updates and documents.  Eurex has since implemented comprehensive policies and procedures that now require monthly, and in some instances daily, compliance monitoring of indices on which it offers futures contracts in the U.S.

The SEC’s report notes that in analogous situations involving security-based swaps, investment professionals who engage in swap transactions are responsible for ascertaining the swap’s characteristics.  When the swaps are securities-based, they must ensure that they are following the registration requirements of the federal securities laws and appropriately offering these financial instruments to U.S. investors.

The SEC’s investigation was conducted by Kay B. Lee of the Enforcement Division’s Market Abuse Unit in Philadelphia, and was supervised by Mr. Hawke.

SEC ANNOUNCES FINAL JUDGEMENT AGAINST DEFENDANT IN "U TURN" PRICING INFORMATION SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Edward O'connor

The Securities and Exchange Commission announced today that on July 30, 2013, the Honorable George B. Daniels of the United States District Court for the Southern District of New York entered a final judgment against defendant Edward O'Connor. The final judgment permanently bars O'Connor from service as an officer or director of a public company, orders him to pay disgorgement of $550,000 and a civil penalty of $150,000, and imposes permanent injunctions against future violations of the antifraud, corporate reporting, books and records, and internal accounting controls provisions of the federal securities laws cited in the Commission's complaint.

In its Complaint, as amended, the Commission alleged that O'Connor, a former director and executive officer of publicly traded commodities brokerage firm Optionable, Inc., took part in a scheme to "u turn" pricing information from defendant David Lee, a natural gas options trader at Bank of Montreal ("BMO"), back to reviewers at BMO as if the information had been independently verified. As a result of this scheme, the Commission alleged, BMO's financial results for the fiscal year ended October 31, 2006 and for the first quarter of fiscal year 2007 were materially overstated. The Commission also alleged that O'Connor and another defendant made misrepresentations in Optionable's periodic reports about the firm's valuation services, among other things, and deceived the operator of the New York Mercantile Exchange (NYMEX) through misrepresentations, in a stock purchase agreement, about the truthfulness of Optionable's SEC filings and its compliance with law. O'Connor consented to the entry of the final judgment without admitting or denying the Commission's allegations.

The litigation was handled by Joe Boryshansky, Jess Velona, and Daniel Walfish.

Sunday, August 11, 2013

TWO FORMER OFFICERS OF DEFUNCT COMPANY CHARGED FOR PARTICIPATING IN FRAUDULENT PENNY STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Former Officers and Investor in Houston Company in Fraudulent Penny Stock Scheme

The Securities and Exchange Commission today charged two former officers of now-defunct PGI Energy, Inc., as well as an investor in the company, for their roles in a fraudulent penny stock scheme to issue purportedly unrestricted PGI Energy shares in the public markets.

The SEC's complaint, filed in U.S. District Court for the Southern District of Texas, alleges that starting in 2011, PGI Energy's former Chief Investment Officer Robert Gandy and former CEO and Chairman Marcellous McZeal engaged in a scheme that included creating false promissory notes, signing misleading certifications, and altering the company's balance sheet to cause its transfer agent to issue millions of PGI Energy common stock shares without restrictive legends. The SEC also charged investor Alvin Ausbon for his role in the scheme, which included signing false promissory notes and diverting proceeds from the sale of PGI Energy stock back to the company and Gandy.

Gandy is also the CEO of Houston-based Pythagoras Group, which purports to be an "investment banking firm." McZeal is an attorney licensed in Texas. The complaint alleges that Gandy and McZeal made material misstatements and provided false documents to attorneys and a transfer agent who relied on them to conclude that PGI Energy shares could be issued without restrictive legends. The SEC alleges that Gandy and McZeal backdated promissory notes that purported to memorialize debt supposedly owed by PGI Energy and a prior business venture. They also are alleged to have added false debt to PGI Energy's balance sheet, and signed bogus "gift" letters and certifications of non-shell status, all in an effort to get unrestricted, free-trading PGI Energy shares unlawfully released into the market. Ausbon is charged with furthering the scheme by signing bogus promissory notes and remitting proceeds from the sale of PGI Energy shares back to the company and Gandy.

According to the complaint, the scheme collapsed in February 2012 when the SEC ordered a temporary suspension of trading in PGI Energy's securities, due to questions regarding the accuracy and adequacy of the company's representations in press releases and other public statements.

The SEC's complaint charges all defendants with violating Sections 5 and 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint seeks permanent injunctions, disgorgement plus prejudgment interest, a financial penalty, and penny stock bars against all three defendants and officer and director bars against Gandy and McZeal.

Without admitting or denying the allegations in the SEC's complaint, McZeal has consented to the entry of a final judgment enjoining him from future violations of Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. He has also agreed to pay disgorgement plus prejudgment interest thereon of $19,919.37 and a civil penalty of $70,000. In addition, McZeal has agreed to permanent officer and director and penny stock bars. This settlement is subject to court approval. Subject to final settlement of the district court proceeding, McZeal has also agreed to the institution of a settled administrative proceeding pursuant to Rule 102(e) of the SEC's Rules of Practice, pursuant to which he would be barred from appearing before the SEC as an attorney.

Saturday, August 10, 2013

LABOR, SEC RENEW MEMORANDUM OF UNDERSTANDING REGARDING SHARED INFORMATION ON RETIREMENT AND INVESTMENTS

FROM:   U.S. DEPARTMENT OF LABOR

US Labor Department renews its memorandum of understanding with Securities and Exchange Commission

WASHINGTON — The U.S. Department of Labor announced that it has renewed a memorandum of understanding with the U.S. Securities and Exchange Commission on sharing information on retirement and investment matters. The memorandum was signed by Secretary of Labor Tom Perez and SEC Chair Mary Jo White.

"The department views our work with the SEC on shared interests in recent years as a tremendous success. By renewing this memorandum of understanding, we will continue to better serve all of America's workers who depend on private-sector retirement plans," said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. "Our experience with the SEC helps to boost the department's enforcement program and ensure that our regulatory and other programs work in tandem with the SEC's initiatives to provide meaningful protections for workers' retirement savings."

The memorandum sets forth a process for the department's Employee Benefits Security Administration and SEC staffs to share information and meet regularly to discuss topics of mutual interest. The memorandum also will facilitate the sharing of non-public information regarding subjects of mutual interest between the two agencies. Additionally, both agencies will cross-train staff with the goal of enhancing each agency's understanding of the other's mission and investigative jurisdiction.

As more and more investors turn to the markets to help secure their futures, pay for homes and send children to college, the shared investor protection mission of the SEC and the Department of Labor is more vital for America's workers than ever before. The renewed memorandum reinforces the agencies' historical commitment to share information and work together on a variety of regulatory, enforcement, public outreach, research and information technology matters.
EBSA's mission is to assure the retirement, health and other workplace-related benefits of America's workers, retirees and their families. In the retirement area, EBSA has authority over private-sector retirement plans including 401(k) plans and IRAs, plan fiduciaries, and service providers.

Friday, August 9, 2013

SETTLED FRAUD AND SECURITIES CHARGES FILED AGAINST OWNER OF CONESTOGA LOG CABIN LEASING, INC.

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Settled Charges Against John M. Sensenig, Founder and Owner of Conestoga Log Cabin Leasing, Inc. for Fraud and Unregistered Sales of Securities Violations

On July 29, 2013, the Securities and Exchange Commission ("Commission") filed a complaint against John M. Sensenig ("Sensenig"), in the United States District Court for the Eastern District of Pennsylvania alleging that Sensenig, a member of the Mennonite community and the founder and owner of Conestoga Log Cabin Leasing, Inc. and other affiliated companies, violated the antifraud and securities registration provisions of the federal securities laws.

The Commission's complaint alleges that from at least 1997 until 2009, Sensenig raised millions of dollars from more than 1,500 fellow members of the Amish and Mennonite communities through the offer and sale of Promissory Notes. Sensenig used the proceeds to finance a collection of start-up companies he founded and controlled, the largest of which was Conestoga Log Cabin Leasing, Inc. More than half of the funds raised by Sensenig were returned to investors. The complaint further alleges that Sensenig made material misrepresentations and omissions to investors including failing to disclose the use of proceeds, the risks associated with the investment, and remedial sanctions placed on him by a state securities regulator. The Commission further alleges that Sensenig failed to register the offering of the Promissory Notes although no exemption from registration applies. The complaint alleges that this conduct violated Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act").

Without admitting or denying the allegations in the complaint, Sensenig consented to the entry of a final judgment, subject to the court's approval, in which he is: (i) permanently enjoined from further violations of Sections 5 and 17(a) of the Securities Act, (ii) permanently enjoined from direct or indirect participation in any unregistered offerings of securities; (iii) ordered to pay a civil penalty in the amount of $131,500; and (iv) ordered to surrender for cancellation all shares of stock he owns in two privately held companies formerly affiliated with Conestoga Log Cabin Leasing, Inc. The Commission is not seeking the imposition of a higher penalty in light of Sensenig's financial condition.

Thursday, August 8, 2013

ALLEGED TIPPER CHARGED IN S.A.C. CAPITAL PORTFOLIO MANAGER INSIDER TRADING CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Tipper of Confidential Information to S.A.C. Capital Portfolio Manager

On July 30, 2013, the Securities and Exchange Commission charged the tipper of confidential information to a S.A.C. Capital portfolio manager who has been charged with insider trading.

The SEC amended its complaint against Richard Lee, who was charged last week, to additionally charge Sandeep Aggarwal, a sell-side analyst who tipped Lee in advance of a July 2009 public announcement about an Internet search engine partnership between Microsoft and Yahoo. Lee purchased large amounts of Yahoo stock in the S.A.C. Capital hedge fund that he managed as well as in his personal trading account on the basis of the inside information.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Aggarwal, who lives in India but recently returned to the U.S.

The SEC alleges that Aggarwal learned confidential details about the significant progress of the Microsoft-Yahoo negotiations from his close friend at Microsoft on July 9, 2009, and he tipped Lee with the information during a telephone call the following day. When the information was reported in the media almost a week later, Yahoo's stock price rose approximately 4 percent. S.A.C. Capital and Lee reaped substantial profits from the Yahoo shares that he purchased after speaking to Aggarwal.

According to the SEC's amended complaint filed in federal court in Manhattan, Aggarwal covered both Microsoft and Yahoo for his research firm and regularly received periodic updates from his inside source at Microsoft. Upon learning that Microsoft and Yahoo were potentially within two weeks of finalizing a deal, Aggarwal shared very specific details with Lee. Aggarwal assured him that the information came from a close friend at Microsoft who was reliable and accurate.

The SEC's amended complaint charges Aggarwal and Lee with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The amended complaint seeks a final judgment ordering Aggarwal and Lee to pay disgorgement of ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

Wednesday, August 7, 2013

CFTC CHARGES FIRM AND OWNERS WITH MARKETING ILLEGAL, OFF-EXCHANGE FINANCED COMMODITY TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Florida-Based AmeriFirst Management LLC and Its Owners, John P. D’Onofrio, George E. Sarafianos, and Scott D. Piccininni, in Multi-Million Dollar Fraudulent Precious Metals Scheme

CFTC alleges that the Defendants engaged in illegal, off-exchange commodity transactions and deceived retail customers regarding financed precious metals transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against AmeriFirst Management LLC (AML) of Fort Lauderdale, Florida, and its owners, John P. D’Onofrio of Fort Lauderdale, George E. Sarafianos of Lighthouse Point, Florida, and Scott D. Piccininni of Fort Lauderdale.  The CFTC Complaint charges the Defendants with operating a precious metals scheme where the Defendants marketed illegal, off-exchange financed commodity transactions and fraudulently misrepresented the nature of those transactions.

According to the Complaint, filed on July 29, 2013, AML held itself out as a precious metals wholesaler and clearing firm, operating through a network of more than 30 precious metals dealers. As alleged, these dealers solicited retail customers to invest in financed precious metals transactions, where a customer gave a percentage deposit of the total value of the metal, typically 20%, and the dealer supposedly made a loan to the customer for the remaining 80%, supposedly sold the customer the total metal amount, and supposedly allocated the total metal amount at a depository to be held for the customer.

The Complaint alleges that AML created customer documents that represented that the dealer had in fact made such a loan and sold and allocated the total metal amount to the customer. However, these documents were false because the dealer never made a loan to the customer, nor did the dealer sell or allocate any metal to the customer, according to the Complaint. Further, the Complaint alleges that although there was no loan and no metal was allocated to the customer, AML charged the customer finance and storage fees.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the CFTC’s jurisdiction over transactions like these and requires that such transactions be executed on or subject to the rules of a board of trade, exchange, or commodity market, according to the Complaint. This new requirement took effect on July 16, 2011. The Complaint alleges that all of the Defendants’ financed commodity transactions took place after this date and were illegal. The Complaint also alleges that the Defendants defrauded customers in these financed commodity transactions.

In its continuing litigation, the CFTC seeks a permanent injunction from future violations of federal commodities laws, permanent registration and trading bans, restitution to defrauded customers, disgorgement of ill-gotten gains, and civil monetary penalties.

The CFTC Division of Enforcement staff responsible for this action are David Chu, Mary Beth Spear, Eugene Smith, Patricia Gomersall, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

Tuesday, August 6, 2013

CFTC ORDERS MAN AND COMPANIES TO PAY RESTITUTION AND PENALTY IN FRAUDULENT TRANSACTIONS IN PRECIOUS METALS

FROM:  COMMODITY FUTURES TRADING COMMISSION

CFTC Orders William J. Hionas and his Florida Firms, Pan American Metals of Miami and Pan American Metals of Miami Beach, to Pay Approximately $4.7 Million in Restitution and a Monetary Penalty for Fraudulent Off-Exchange Transactions in Precious Metals

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against two Miami, Florida, companies, Pan American Metals of Miami, LLC and Pan American Metals of Miami Beach, Inc. (together, the Pan American Companies), and their owner and principal, William J. Hionas, for engaging in illegal, fraudulent off-exchange financed transactions in precious metals with retail customers.  The Pan American Companies are based in Miami Beach, Florida, and Hionas resides in Sunny Isles, Florida. Neither has ever been registered with the CFTC.

The CFTC Order, filed on July 29, 2013, requires Hionas and the Pan American Companies jointly to pay restitution of approximately $3.2 million to defrauded customers and a $1.5 million civil monetary penalty. The Order also imposes permanent trading and registration bans against Hionas and the Pan American Companies and permanently prohibits them from further violations of federal commodities law, as charged.

The Order finds that, from July 2011 to at least April 2012, the Pan American Companies fraudulently solicited and accepted more than $4.7 million from retail public customers throughout the United States and Canada to engage in illegal off-exchange financed transactions in gold, silver, platinum, and palladium, in which a retail customer purportedly purchases physical commodities and pays just a portion of the purchase price.

Specifically, the Order finds that the Pan American Companies falsely claimed to (1) sell and transfer ownership of physical metals to customers, (2) provide loans to customers to purchase the physical metals, and (3) arrange for storage and store customers’ physical metals in independent depositories. In fact, the Order finds that in their retail financed transactions, the Pan American Companies did not sell or transfer ownership of any physical metals, did not disburse any funds as loans, and did not store physical metals in any depositories for or on behalf of customers.

The Order also finds that the Pan American Companies defrauded customers and potential customers by misrepresenting and failing to disclose material facts relating to (1) their experience and expertise dealing in retail financed transactions, (2) actual trading results other customers had achieved, and (3) the profit potential and risks associated with engaging in off-exchange metals transactions on a financed basis, among other things.

The Order finds that 180 of the 189 Pan American Companies’ customers lost money, with much of the approximate $3.2 million they lost going to pay commissions and fees to the Pan American Companies, which totaled over $1.68 million – equivalent to approximately 35 percent of the more than $4.7 million accepted from customers.

The Order further finds that Pan American Metals of Miami (PAMOM) provided customers a risk disclosure document stating that “[f]inancing precious metal trading is not an appropriate investment for retirement funds”; however, PAMOM solicited at least 46 individuals over 65 years of age, four over 90 years old, and one was solicited while in hospice care.

The CFTC Order states that such financed off-exchange transactions with retail customers have been illegal since July 16, 2011, when certain amendments of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Dodd-Frank Act) became effective.  As explained in the Order, financed transactions in commodities with retail customers like those engaged in by the Pan American Companies must be executed on, or subject to, the rules of an exchange approved by the CFTC.  Since the Pan American Companies’ transactions were done off-exchange with retail customers, they were illegal.

Furthermore, the CFTC Order states that when the Pan American Companies engaged in these illegal transactions they were acting for Hunter Wise Commodities, LLC, which the CFTC charged with fraud and other violations in federal court in Florida on December 5, 2012 (see CFTC Press Release 6447-12).

CFTC’s Precious Metals Fraud Advisory

In January 2012, the CFTC issued a Precious Metals Consumer Fraud Advisory to alert customers to precious metals fraud. The Advisory stated that the CFTC had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Advisory specifically warns that frequently companies do not purchase any physical metals for the customer, but instead simply keep the customer’s funds. The Advisory further cautions consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.

CFTC Division of Enforcement staff members responsible for this case are Robert Howell, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

Monday, August 5, 2013

SEC CHARGES INVESTOR RELATIONS EXECUTIVE WITH INSIDER TRADING IN CLIENT STOCKS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Houston-Based Investor Relations Executive with Insider Trading in Stocks of Clients

The Securities and Exchange Commission today charged the former CEO of a Houston-based investor relations firm with insider trading in the securities of multiple firm clients.

The SEC alleges that Stephen B. Gray obtained confidential information about the companies while the firm assisted them with drafting and publishing press releases to announce quarterly and annual earnings, mergers and acquisitions, and other major events. Gray then traded on the basis of that material, non-public information for profits and avoided losses of more than $313,000 during a 13-month period. Gray disregarded the firm's standard agreements with clients to protect confidential information and use it solely for business purposes, and he also flouted the firm's "statement of policy regarding securities trades" that prohibited trading by firm personnel when in possession of non-public information about clients. Gray was fired last October after the firm learned about the SEC's investigation.

According to the SEC's complaint filed in federal court in Houston, Gray illegally traded in the securities of at least six firm clients. Employees often asked Gray for advice on press releases based on his status as the firm's CEO as well as his experience as a former CEO of a public company. Gray also asked employees about forthcoming material transactions or announcements before they became public, and he sometimes met directly with clients to discuss confidential information with them. Gray also helped maintain the firm's shared computer network drive, which included drafts and final versions of all relevant press releases.

According to the SEC's complaint, Gray opened his only trading account in September 2009 and borrowed funds from his life insurance policy to fund his trading activity. Despite the firm's policies, the overwhelming majority of Gray's trades involved securities of the firm clients, and he did not disclose his trades or his intention to trade to the firm or clients. At first, Gray primarily traded in the common stock of firm clients, sometimes holding the securities for months at a time but on other occasions compiling shares immediately before a major announcement. For example, on May 5, 2011, The Men's Wearhouse issued a press release announcing higher than expected earnings per share for its quarter ending April 30. Its stock price increased 16 percent upon this news. While in possession of material non-public information about Men's Warehouse about the impending announcement, Gray made an electronic calendar appointment for himself on April 29 with the subject: "Buy MW stock ahead of early June earnings release." On April 30, Gray created another appointment with the subject: "Buy MW stock??" On May 3 and 4, he purchased 4,323 shares of Men's Warehouse stock. Gray sold his shares on May 5 after the announcement for an illegal profit of $17,397.

According to the SEC's complaint, later that same year Gray began engaging in more risky and lucrative short-term options trades in which profits were facilitated by his knowledge of inside information. In several instances, Gray purchased very short-term call and put options contracts. For instance, Gray's firm worked with Powell Industries on drafting a press release in late 2011 to announce that its financial statements for the second and third quarters would be restated. Based on this material, non-public information, Gray purchased 15,000 Powell put options between October 18 and November 3. All of these options had the shortest term available. After Powell issued the press release on November 8, its stock price declined by 22 percent. Gray immediately sold his options for a profit of $82,570.

The SEC's complaint charges Gray with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering him to disgorge all of his ill-gotten gains with prejudgment interest and pay financial penalties. The complaint also seeks permanent injunctive relief.

Sunday, August 4, 2013

PRELIMINARY INJUNCTION OBTAINED IN BINARY OPTIONS CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Preliminary Injunction in Binary Options Case

The U.S. Securities and Exchange Commission announced that on July 30, 2013, the U.S. District Court for the District of Nevada issued an order granting a preliminary injunction and other relief against Banc de Binary Ltd., a Cyprus-based company that operates an online binary options trading platform.

The Commission's complaint, filed on June 5, 2013, alleges that Banc de Binary has been offering and selling binary options to investors across the U.S. without first registering the securities as required under the federal securities laws. The company has broadly solicited U.S customers by advertising through YouTube videos, spam e-mails, and other Internet-based advertising; and Banc de Binary representatives have communicated with investors directly by phone, e-mail, and instant messenger chats. Banc de Binary also has allegedly been acting as a broker when offering and selling these securities, but failed to register with the SEC as a broker as required under U.S. law.

At the SEC’s request, the Court issued an Order preliminarily enjoining Banc de Binary from offering or selling unregistered securities in violation of Section 5 of the Securities Act of 1933 and acting as an unregistered broker-dealer in violation of Section 15(b) of the Securities Exchange Act of 1934. In its Order, the Court concluded that binary options are “securities” subject to regulation by the Commission.

SEC CHARGES FORMER PORTFOLIO MANAGER WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Former Portfolio Manager At S.A.C. Capital with Insider Trading

On July 25, 2013, the Securities and Exchange Commission charged a former portfolio manager at S.A.C. Capital Advisors with insider trading ahead of major announcements by technology companies.

The SEC alleges that Richard Lee's illegal trading based on nonpublic information he received from sources with connections to insiders at the technology companies enabled the S.A.C. Capital hedge fund that he managed to generate more than $1.5 million in illegal profits. Lee also made trades in his personal account. The insider trading occurred ahead of public announcements about a Microsoft-Yahoo partnership and the acquisition of 3Com Corporation by Hewlett-Packard.

In a separate action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Lee, who lives in Chicago.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Lee received inside information in July 2009 from a sell-side analyst familiar with nonpublic negotiations between Microsoft and Yahoo to enter into an Internet search engine partnership. Lee learned that the negotiations, previously the subject of market rumors, were moving forward and a deal could be finalized in the next two weeks. The analyst told Lee that the confidential information came from a close personal friend who worked at Microsoft. Lee thanked the analyst for the "very specific information" and promptly purchased hundreds of thousands of shares of Yahoo stock in a portfolio that he managed on behalf of S.A.C. Capital. Lee also purchased shares of Yahoo stock in his personal trading account. When the imminent deal was reported in the press almost a week later, Yahoo's stock price rose approximately four percent on the news and S.A.C. Capital and Lee reaped substantial profits.

The SEC further alleges that Lee received highly confidential information about 3Com from a Beijing-based consultant who he knew had close personal ties with executives at the company. When his source tipped him on Nov. 11, 2009, that 3Com was on the verge of being acquired by Hewlett-Packard, Lee quickly purchased several hundred thousand shares of 3Com stock for the S.A.C. Capital hedge fund. On the basis of the nonpublic information, Lee amassed the sizeable 3Com position just minutes before Hewlett-Packard announced it agreed to acquire 3Com for $2.7 billion. The price of 3Com stock jumped more than 30 percent the next day, and the S.A.C. Capital hedge fund reaped substantial illicit profits as a result of Lee's illegal trades.

The SEC's complaint charges Lee with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering Lee to pay disgorgement of his ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining him from future violations of these provisions of the federal securities laws.

Saturday, August 3, 2013

INVESTMENT FRAUDSTER GETS 20 YEARS IN PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Minneapolis-Based Fraudster Patrick Joseph Kiley Sentenced to 20 Years in Priso
The Securities and Exchange Commission announced that on July 15, 2013, the Honorable Chief Judge Michael J. Davis of the United States District Court for the District of Minnesota sentenced Patrick J. Kiley to 20 years in prison and ordered him to pay $155 million in restitution.  The sentence was based on Kiley’s conviction on 15 criminal counts including mail and wire fraud, conspiracy to commit mail and wire fraud, and money laundering for his role in a $194 million foreign currency trading scheme that defrauded approximately 1,000 investors.  Kiley was charged on July 19, 2011, and a jury found him guilty on June 12, 2012.

Kiley is one of the defendants in a pending civil injunctive action filed by the Commission on November 23, 2009 in the United States District Court for the District of Minnesota.  The Commission’s action against Kiley arose out of the same facts that are the subject of the criminal case against him.

The Commission’s complaint alleges that from at least July 2006 through at least July 2009, Kiley and co-defendant Trevor G. Cook of Minneapolis, Minnesota, raised at least $190 million (later determined to be $194 million) from 1,000 investors through the unregistered offer and sale of investments in a purported foreign currency trading venture.  According to the Commission’s complaint, Cook and Kiley pooled investors’ funds in bank and trading accounts in the names of entities they controlled.  The Commission’s complaint alleges that the foreign currency trading they conducted resulted in millions of dollars in losses, and they misused approximately one half of the investor funds to make Ponzi-like payments to earlier investors and pay for, among other things, Cook's gambling losses and the purchase of the historic Van Dusen Mansion in Minneapolis.

The Commission’s complaint charges Cook and Kiley with violating Sections 5 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.  On November 23, 2009, the Court entered a preliminary injunction order against Cook and Kiley and froze all of their assets.  On March 7, 2011, the Commission also filed a civil complaint in the U.S. District Court in Minneapolis against Jason Bo-Alan Beckman and his registered investment advisory firm Oxford Private Client Group, LLC, for their roles in this scheme.  On August 27, 2010, the Court entered an order of permanent injunction against Cook.  The Court also appointed a receiver to marshal and preserve all of the Defendants’ assets
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