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

Monday, June 30, 2014

SEC OBTAINS COURT ORDER HALTER FRAUDULENT BOND OFFERING BY CHICAGO SUBURB

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission obtained an emergency court order against a Chicago suburb and its comptroller to stop a fraudulent bond offering that the city has been marketing to potential investors.

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and Joseph T. Letke alleging that they have been engaging in a scheme for the past several years to divert bond proceeds for improper, undisclosed uses.  The SEC’s complaint alleges that the purported purpose of prior bond offerings was to fund the development and construction of a Holiday Inn hotel in Harvey.  However without informing investors, Harvey officials diverted at least $1.7 million of bond proceeds from these offerings to pay the city’s operational costs such as its payroll, and Letke received approximately $269,000 in undisclosed payments derived from bond proceeds.  While investigating Harvey’s past bond offerings to investors, the SEC learned that the city is intending to issue new limited obligation bonds as early as this week, and draft offering documents make materially misleading statements about the purpose and risks of those bonds while omitting that past bond proceeds have been misused.

In response to the SEC’s request for emergency relief, the Hon. Judge Rebecca Pallmeyer conducted an emergency hearing today and issued a temporary restraining order preventing Harvey from offering or selling any bonds through July 14.  At the hearing, Harvey agreed to this restriction.  Additionally, to prevent dissipation of Letke’s ill-gotten gains, the court order prohibits Letke from incurring any extraordinary expenses beyond reasonable and customary personal and business expenses.  The court scheduled an additional hearing for July 8.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

David Glockner, director of SEC’s Chicago Regional Office, added, “Harvey’s bond investors were misled into believing their money would go toward construction of a Holiday Inn when instead the bulk of it was diverted into Harvey’s general coffers and Letke’s pocket.  Our action has stopped their scheme in its tracks, and we will continue our investigation to determine additional facts surrounding the misconduct.”

According to the SEC’s complaint, instead of general obligations bonds that are repaid from the general coffers of a municipality, Harvey’s bond offerings in 2008, 2009, and 2010 were limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax, or incremental tax from the Tax Increment Financing District that the city created for the development and construction of the Holiday Inn project.  Therefore, it was important to bond investors that the bond offerings were consistent with the stated purpose and the money raised was actually used to fund the hotel development, because the amount of funds available to repay the bonds derived from tax revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were materially misled about the purpose and risks of the bonds they purchased from the city.  As Harvey and Letke perpetrated the scheme to divert bond-related proceeds, the hotel redevelopment project turned into a fiasco for bond investors and city residents. According to news reports, the proposed Holiday Inn hotel and conference center stands as a decrepit shell. The hotel’s façade has many holes in it, and the interior of the hotel appears gutted in places with dangling wires and exposed studs.

The SEC’s complaint alleges that Harvey and Letke violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation, which is continuing, has been conducted by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Eric A. Celauro, Sally J. Hewitt, and Scott Hlavacek.  The litigation will be led by Eric M. Phillips.  The case is being supervised by Peter K.M. Chan.

Sunday, June 29, 2014

SEC ANNOUNCES FRAUD CHARGES IN LOAN FALSE CLASSIFICATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes.  As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions.  Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009.  Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies.  The SEC’s Division of Enforcement will continue to litigate its case against Neely.

“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”

According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting.  NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt.  Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced.  Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status.  By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP.  In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.

The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.

The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time.  The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures.  The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action.  Regions also will pay a $5 million penalty to the Alabama Department of Banking.

The SEC’s investigation was conducted in its Atlanta Regional Office.  The SEC appreciates the assistance of the Federal Reserve.

Saturday, June 28, 2014

FINAL JUDGEMENT ENTERED IN KICKBACK STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
District Court Enters Final Judgment Setting a Civil Penalty in the Amount of $28,000 Against Defendant Health Sciences Group, Inc.

The Commission announced that on March 10, 2014, the United States District Court for the Southern District of Florida entered a Final Judgment setting a civil penalty in the amount of $28,000 against Defendant Health Sciences Group, Inc. ("HESG"), pursuant to Section 20(d) of the Securities Act of 1933 ("Securities Act") and Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act").

The Final Judgment follows a previous order by United States District Judge Robert N. Scola, Jr. in which the Court entered a Judgment of Permanent Injunction and Other Relief against HESG, enjoining the company from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a).

The Commission commenced this action by filing its Complaint on August 14, 2013, against HESG and co-defendant, Thomas Gaffney. The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks. On November 20, 2013, the Court entered a Final Judgment of Permanent Injunction and Other Relief by consent against Gaffney, enjoining him from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a), and permanently barring him from participating in an offering of penny stock, and from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

Friday, June 27, 2014

2 MORE CHARGED BY SEC WITH INSIDER TRADING IN SPSS INC. ACQUISITION BY IBM CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced it has charged two additional brokers with trading on inside information ahead of the $1.2 billion acquisition of SPSS Inc. in 2009 by IBM Corporation.

The SEC alleged that former brokers Benjamin Durant III and Daryl M. Payton illegally traded on a tip about the acquisition from Thomas C. Conradt, a friend and fellow broker in the New York office of a Connecticut-based broker-dealer.  The SEC complaint, filed in federal court in Manhattan, seeks return of alleged ill-gotten trading gains of approximately $300,000, with interest, financial penalties, and permanent injunctions.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Durant and Payton.

The SEC previously charged that Conradt and David J. Weishaus, another fellow broker and tippee, traded on confidential information that Conradt received from his roommate, Trent Martin, a research analyst who misappropriated it from an attorney working on the transaction.  Martin, Conradt, and Weishaus settled with the SEC and pled guilty last year to related criminal charges in the matter.

“Durant and Payton were licensed professionals who knowingly disregarded insider trading laws to enrich themselves at the expense of investors,” said Sharon B. Binger, director of the SEC’s Philadelphia Regional Office.  “The SEC is committed to taking action against those who undermine the public’s confidence in the markets by engaging in insider trading.”

According to the SEC’s complaint, in a private meeting with Martin, his attorney friend revealed nonpublic information about the acquisition, including the names of the companies and the anticipated transaction price.  The lawyer expected Martin to keep the information in confidence and refrain from trading on it but instead, Martin traded and tipped Conradt, who traded and tipped Durant and Payton, among others.  The SEC further alleges that on the day that IBM’s acquisition of SPSS was publicly announced, Durant, Payton, and others met at a Manhattan hotel room and discussed what to do if law enforcement officials contacted them about their trading in SPSS securities.

The SEC’s continuing investigation is being conducted by Scott A. Thompson, A. Kristina Littman, and John S. Rymas.  G. Jeffrey Boujoukos and Catherine E. Pappas are handling the litigation.  All are with the SEC’s Philadelphia Regional Office.

The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the U.S. Attorney’s Office for the Southern District of New York, and the Federal Bureau of Investigation.

Wednesday, June 25, 2014

SEC CHARGES PALM BEACH HEDGE FUND ADVISORY FIRM AND FOUNDER WITH FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a West Palm Beach, Fla.-based hedge fund advisory firm and its founder with fraudulently shifting money from one investment to another without informing investors.  The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.

The SEC alleges that Weston Capital Asset Management LLC and its founder and president Albert Hallac illegally drained more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc.  The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before.  Weston Capital’s former general counsel Keith Wellner assisted the activities.

The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000 in payments from Swartz IP.  Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.  The court will determine monetary sanctions for Weston Capital and Hallac at a later date.  Wellner and Jeffrey Hallac each agreed to pay $120,000 in disgorgement.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately $230 million.  One of the funds managed by the firm was Wimbledon Fund SPC, which was segregated into five separate classes of investment portfolios.  The Class TT Segregated Portfolio was required to invest all of its investor money in a diversified multi-billion hedge fund called Tewksbury Investment Fund Ltd., that invested in short-term, low risk interest bearing accounts and U.S. Treasury Bills.

The SEC alleges that in violation of its stated investment strategy, Weston Capital and Hallac redeemed TT Portfolio’s entire investment in the Tewksbury hedge fund and transferred the money to Swartz IP.  The transaction was not disclosed to investors and Weston Capital and Hallac solicited and received investments for the TT Portfolio during this time while knowing the funds would not be invested in Tewksbury. As soon as Swartz IP received the money transfers, it disbursed the funds primarily to a special purpose entity created to support and finance varying medically related business ventures.

The SEC’s complaint alleges that Weston and Hallac violated federal anti-fraud laws and rules as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Wellner aided and abetted these violations.  Without admitting or denying the allegations, Weston Capital, Hallac, and Wellner consented to the entry of a judgment enjoining them from future violations of these provisions.  

The SEC’s investigation was conducted by Julie M. Russo and Karaz S. Zaki under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office and was assisted by Victor M. Pedroso III, Jean M. Cabot, and John C. Mattimore of the Miami office examination program.  The SEC’s litigation is being led by Russell Koonin.

Monday, June 23, 2014

FINAL JUDGMENTS ENTERED IN INSIDER TRADING CASE INVOLVING MERGERS, DRUG APPROVAL, EARNINGS REPORTS

FROM:  US. SECURITIES AND EXCHANGE COMMISSION 
Court Enters Final Judgments by Consent Against Michael Pendolino, Lawrence D. Grum, and Michael L. Castelli

The Securities and Exchange Commission announced that on June 12, 2014, in SEC v. Lazorchak et al., Civ. Act. No. 12-07164 KSH-PS, the Honorable Katharine S. Hayden, United States District Court Judge for the District of New Jersey, entered final judgments by consent against Defendants Michael Pendolino (Pendolino), of Nashua, New Hampshire; Lawrence D. Grum (Grum), of Livingston, New Jersey; and Michael L. Castelli (Castelli), of Morris Plains, New Jersey. The judgments permanently enjoin Pendolino, Grum, and Castelli from future violations of antifraud provisions of the federal securities laws and order them to pay disgorgement and prejudgment interest.

The SEC's complaint, filed on November 19, 2012, alleged an insider-trading scheme spanning five years and involving illegal tipping by insiders at three public companies: Celgene Corp. (Celgene), Sanofi-Aventis Corporation (Sanofi); and (3) Stryker Corp. (Stryker), and at least eleven material events, including mergers, a drug approval application, and quarterly earnings information. The SEC further alleged that the insiders tipped material nonpublic information about each of these corporate events to Grum and Castelli who, in turn, traded on the basis of, and tipped that information to others. As alleged, the Celgene insider also tipped material nonpublic information about two of the events to his high school friend, Pendolino, who traded on the basis of, and tipped that information to others.

The judgments permanently enjoin Pendolino, Grum, and Foldy from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and order them to pay combined disgorgement and prejudgment interest as follows: Pendolino, $68,862.12; Grum, $838,758.75; Castelli, $716,208.90.

Pendolino, Grum, and Castelli were criminally charged in a parallel criminal action in federal district court in the District of New Jersey. They have since pled guilty to charges of conspiracy to commit securities fraud and/or securities fraud and have been sentenced: Pendolino to probation of one year, and Grum and Castelli to prison terms of a year and a day, and nine months, respectively. United States v. Pendolino, 2:13-00657-KSH; United States v. Grum, 2:13-00737-KSH; United States v. Castelli, 2:13-00738-KSH.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

Sunday, June 22, 2014

COURT ORDERS $44 MILLION IN SANCTIONS FOR COMMODITY POOL FRAUD AND MISAPPROPRIATION

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Federal Court in Utah Imposes over $44 Million in Sanctions against Robert Andres and His Company, Winsome Investment Trust, and Robert Holloway and His Company, US Ventures, for Commodity Pool Fraud and Misappropriation

The U.S. Attorney’s Office for the District of Utah Filed Parallel Criminal Actions against Andres and Holloway

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court Order requiring Defendants Robert J. Andres of Houston, Texas, his company, Winsome Investment Trust (Winsome), Robert L. Holloway of San Diego, California, and his company US Ventures LC (USV), to pay a civil monetary penalty of $32,370,000 and restitution for defrauded customers totaling $12 million. The court’s Order also imposes permanent trading and registration bans against Andres, Winsome, Holloway, and USV and prohibits them from violating provisions of the Commodity Exchange Act, as charged.

The default judgment Order stems from a CFTC civil enforcement action filed on January 24, 2011, that charged the Defendants with fraud in the operation of a commodity futures pool (see CFTC Press Release 5976-11). The Order (see Related Link) was entered by the Honorable Bruce S. Jenkins of the U.S. District Court for the District of Utah on June 6, 2014.

Specifically, the Order finds that:

• From at least May 2005 through November 2008, Andres and Winsome fraudulently solicited and accepted at least $50.2 million from at least 243 individuals to invest in a commodity futures pool operated by Holloway and USV.  In their solicitations, Andres and Winsome falsely claimed a successful track record and guaranteed the return of participants’ principal and profits; however, contrary to Andres’s and Winsome’s claims of consistently profitable trading, USV’s and Holloway’s futures trading was not successful, sustaining overall net losses of approximately $10.7 million.

• The Defendants allegedly traded only a portion of Winsome’s pool’s funds and misappropriated the majority of participant funds to pay purported “profits” to pool participants in a manner akin to a Ponzi scheme, to provide money to Andres’ wife, and to invest in various unrelated and undisclosed businesses, including using $4.2 million of participant funds to purchase an aerospace consulting business.

• Holloway used participant funds to pay personal and unrelated business expenses, and to pay for houses, cars, home furnishings, jewelry, lawn and maid services, and credit card bills in the name of his wife.  Holloway also used participant funds to finance his wife’s eBay business, Alcoy Enterprises, LLC.

• Andres and Holloway attempted to conceal the fraud by directing employees to falsify participants’ account records and by providing e-mailed account statements to participants falsely representing that Holloway profitably traded pool funds -– sustaining virtually no losses during the relevant period.

In a parallel criminal actions brought by the U.S. Attorney’s Office for the District of Utah, Andres was indicted on five counts of wire fraud, and Holloway was indicted on four counts of wire fraud and one count of making and filing a false income tax return. Holloway’s trial date is currently set for July 8, 2014. Andres pleaded guilty to one count of wire fraud, and he is scheduled to be sentenced on August 20, 2014.

The CFTC appreciates the assistance of the Comisión Nacional del Mercado de Valores (Spain), the Dubai Financial Services Authority, and the British Virgin Islands Financial Services Commission.

CFTC Division of Enforcement staff members responsible for this case are Alan Edelman, Kevin S. Webb, Michelle S. Bougas, Heather Johnson, Kara Mucha, James H. Holl III, and Gretchen L. Lowe.

Saturday, June 21, 2014

4 CHARGED IN $12 MILLION INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Four California Residents in $12 Million Insider Trading Scheme

The Securities and Exchange Commission today charged four Northern California residents with insider trading in Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.

The SEC alleges that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif. Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results. Besides trading in his own brokerage account, Khan traded in his brother-in-law’s account as well as an account belonging to another acquaintance. Khan also tipped his work colleagues Ranjan Mendonsa and Ammar Akbari so they too could trade in Ross stock options based on the nonpublic information. The insider trading resulted in collective profits of more than $12 million.

The SEC further alleges that at the outset of the scheme, Chaganlal gave $17,000 to Khan for the purpose of insider trading in Ross securities using the brother-in-law’s account. They attempted to disguise the exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of a different surname. Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries. For example, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife. Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly-built home.

According to the SEC’s complaint filed in federal court in San Francisco, Khan separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation ahead of its 2012 acquisition by Oracle Corporation. Khan began purchasing large numbers of options in Taleo six days before the merger announcement based on nonpublic information he received from an insider he knew at Oracle. Khan had never previously traded in Taleo securities.

The SEC alleges that the serial insider trading involving Ross securities began in August 2009 and continued until December 2012, when Chaganlal was terminated by the company. He had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees. Chaganlal regularly communicated the confidential details to Khan so he could trade ahead of impending monthly sales announcements by Ross. Khan generated $5.4 million in profits in his own account, and $6 million in profits in his brother-in-law’s account. Khan’s supervisor Mendonsa made approximately $800,000 in insider trading profits based on the nonpublic information that Khan in turn tipped to him. Akbari made approximately $2,000 by insider trading on Khan’s illegal tips.

The SEC’s complaint names two relief defendants - Khan’s acquaintance Michael Koza and Khan’s brother-in-law Shahid Khan - for the purposes of recovering insider trading profits in their brokerage accounts through trades conducted by Khan. They each have agreed to settle the matter by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.

The SEC’s complaint charges Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties. The complaint also seeks an officer-and-director bar against Chaganlal.

The SEC’s investigation, which is continuing, has been conducted by Victor Hong and Elena Ro. The case has been supervised by Steven Buchholz and Jina L. Choi of the Market Abuse Unit and San Francisco Regional Office as well as Joseph G. Sansone of the Market Abuse Unit. The SEC’s litigation will be led by Aaron Arnzen. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority.


Friday, June 20, 2014

ALZHEIMER PRODUCTS COMPANY AND PRESIDENT ORDERED TO PAY $1.9 MILLION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Court Orders California Company and Its President to Pay Over $1.9 Million in Investment Scheme Involving Purported Alzheimer's Treatment

The Securities and Exchange Commission announced that on June 10, 2014, a California federal court entered final judgments against Your Best Memories International Inc., a promoter of a purported Alzheimer’s treatment, its president, Robert Hurd, and Smokey Canyon Financial Inc., another company controlled by Hurd.  Your Best Memories and Hurd, both of Los Angeles, California, were charged as defendants in a fraud action filed by the Commission in June 2013.  The Commission alleged that they claimed to be in the business of raising money from investors on behalf of a Massachusetts-based company that was in the business of developing products intended to improve memory function in individuals suffering from Alzheimer's disease and other conditions.  The Commission charged Your Best Memories and Hurd with misleading investors about how their funds would be used and making misleading statements that one of the products touted to investors had received approval from the U.S. Food and Drug Administration as a treatment for Alzheimer's disease.  Smokey Canyon Financial, based in Reno, Nevada, was charged by the Commission as a relief defendant because it received investor funds.

According to the Commission’s complaint, filed on June 20, 2013, Your Best Memories and Hurd falsely told investors that their funds would largely be used to finance the development and marketing of products intended to improve memory function in individuals suffering from Alzheimer’s disease, dementia or memory loss.  The Commission alleged that, unbeknownst to investors, a mere 17% of the funds raised were used for their intended purpose, while 37% of investor funds were funneled to Hurd or his company, Smokey Canyon Financial.  The Commission also alleged that Your Best Memories and Hurd made Ponzi payments to investors (using investors' principal to make payments purporting to be investment returns to other investors) and falsely stated that they had secured FDA approval to sell coconut oil as a treatment for Alzheimer’s disease, when, in fact, the FDA had never approved such a claim.  The complaint alleged that, in total, Your Best Memories raised approximately $1.2 million from more than 50 investors in an unregistered securities offering.

The final judgments, entered by default by the United States District Court for the Central District of  California, imposed permanent injunctions prohibiting Your Best Memories and Hurd from future violations of Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934.  Your Best Memories, Hurd, and Smokey Canyon Financial also were ordered to pay disgorgement of $963,000 and prejudgment interest of $34,170.  In addition, Your Best Memories and Hurd were ordered jointly and severally to pay a civil penalty of $963,000.

On March 14, 2014, the Court entered a partial final judgment, by consent, against the other Defendant in the action, Kenneth Gross, of Porter Ranch, California, who was charged with selling Your Best Memories stock without being registered as a broker-dealer as required by the federal securities laws.  The judgment permanently enjoined Gross from future violations of Sections 5(a) and (c) of the Securities Act and Section 15(a) of the Exchange Act, with disgorgement, prejudgment interest and civil penalties to be decided by the Court at a later date.   The Commission also instituted a settled follow-on administrative proceeding against Gross on March 6, 2014, permanently barring him from the securities industry.

Wednesday, June 18, 2014

CFTC OBTAINS DEFAULT JUDGEMENT IN COMMODITY POOL FRAUD CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Obtains Default Judgment against New York-based SK Madison Commodities, LLC and its Principals, Michael James Seward and Yan Kaziyev, for Commodity Pool Fraud and Other Violations

Federal Court Orders Defendants to Pay More than $3.5 Million in Restitution and a Monetary Penalty in CFTC Anti-Fraud Action

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York (Manhattan) entered an Order of default judgment and permanent injunction against CFTC Defendants Michael James Seward, Yan Kaziyev, and their company SK Madison Commodities, LLC (SKMC), a Commodity Pool Operator based in New York City. The Order requires the Defendants to pay restitution totaling $1,036,981.01 and a civil monetary penalty of $2,486,865.57. The Order also imposes permanent trading and registration bans against the Defendants and orders that assets controlled by SK Madison, LLC, a successor company named as a Relief Defendant in the action, be released and applied toward payment of Defendants’ restitution obligation.

The court’s Order, entered on June 9, 2014, stems from a CFTC Complaint filed on March 24, 2014 (see CFTC Press Release 6892-14) alleging that Seward and Kaziyev, by and through SKMC, fraudulently solicited more than $1.3 million from members of the public to trade futures in a commodity pool by, among other things, misrepresenting their trading practices and historical trading returns. The Complaint further alleged that the Defendants prepared and distributed to pool participants false account statements and performance reports showing huge profits while at the same time, Defendants were losing money trading futures and diverting large amounts of pool participants’ funds for Defendants’ own use. In addition to fraud, the Complaint charged Defendants with certain registration violations. As a result of the filing of this action, more than $500,000 of pool participant funds controlled by the Defendants and the Relief Defendant were frozen.

The CFTC Division of Enforcement staff members responsible for this case are Daniel Jordan, Michael Loconte, Matthew Elkan, and Rick Glaser.

Monday, June 16, 2014

FINAL "PAY TO PLAY" RETIREMENT FUND DEFENDANT CHARGED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Final Defendant Settles SEC Fraud Charges in "Pay to Play" Case Involving New York State Common Retirement Fund

On May 22, 2014, the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York, entered a final judgment against defendant Saul Meyer in the enforcement action arising from the "pay-to-play" scheme involving the New York State's Common Retirement Fund ("Common Fund"). Starting on March 19, 2009, the Commission filed securities fraud and related charges against several participants in the scheme, including Henry Morris ("Morris"), the top political advisor to former New York State Comptroller Alan Hevesi, and David Loglisci ("Loglisci"), formerly the Deputy Comptroller and the Common Fund's Chief Investment Officer. Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged seventeen defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals. Meyer was the principal of an investment management firm and is alleged to have made unlawful payments to Morris in connection with one of the transactions at issue. The civil action had been stayed until the outcome of the New York Attorney General's Office's parallel criminal action against some of the defendants charged by the Commission, including Meyer.

Meyer previously pled guilty to the parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $1 million. In the SEC's federal court action, Meyers consented to entry of a judgment that permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. In addition to the judgment entered in the federal court action, the Commission issued an administrative order on June 10, 2014 imposing remedial sanctions against Meyer. The Commission's administrative order bars Meyer from associating with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, subject to a right to reapply after seven years.

The Commission's claims in this action are now fully resolved. The Commission acknowledges the assistance and cooperation of the New York Attorney General's Office in this matter.

Sunday, June 15, 2014

SEC CHARGES TIPPER IN FRIENDS INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Tipper in Insider Trading Ring Involving High School Friends

The Securities and Exchange Commission today filed an enforcement action against Michael J. Baron for participating in an insider trading ring that involved a group of high school friends and others trading in the securities of health care companies. The SEC previously charged seven others involved.

The SEC's complaint alleges that Baron, a former senior editor at a financial publication, received material nonpublic information from his high school friend John Lazorchak, a Celgene Corporation insider, about Celgene's acquisition of Pharmion Corp., which was publicly announced on November 19, 2007. The SEC further alleges that Baron received material nonpublic information from a second high school friend Mark D. Foldy, an insider at Stryker Corporation, about Stryker Corp.'s tender offer to acquire Orthovita, Inc., which was publicly announced on May 16, 2011. In each instance, Baron illegally tipped the information to a relative, who traded on the basis of the tipped information.

The complaint charges Baron with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking a final judgment ordering Baron to disgorge the ill-gotten gains of his tippee plus prejudgment interest, and to pay a civil penalty. Subject to approval by the court, Baron has agreed to settle the action by consenting to a final judgment enjoining him from an injunction against future violations and ordering him to pay disgorgement of $6,825 plus prejudgment interest and a penalty of $3,400.

The SEC's investigation was conducted by David W. Snyder and John S. Rymas and supervised by Kelly L. Gibson, who are members of the Market Abuse Unit in the Philadelphia Regional Office. Catherine E. Pappas is the trial counsel on the litigation.

Friday, June 13, 2014

GUILTY PLEA COMES IN YEN LIBOR MANIPULATION CASE

FROM:  U.S. JUSTICE DEPARTMENT 
FORMER RABOBANK TRADER PLEADS GUILTY
FOR SCHEME TO MANIPULATE YEN LIBOR

WASHINGTON — A former Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) Japanese Yen derivatives trader pleaded guilty today for his role in a conspiracy to commit wire and bank fraud by manipulating Rabobank’s Yen London InterBank Offered Rate (LIBOR) submissions to benefit his trading positions.

Attorney General Eric H. Holder, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Deputy Assistant Attorney General Brent Snyder of the Justice Department’s Antitrust Division and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office made the announcement.

Today, a criminal information was filed in the Southern District of New York charging Takayuki Yagami, a Japanese national, with one count of conspiracy to commit wire fraud and bank fraud.  Yagami pleaded guilty to the information before United States District Judge Jed S. Rakoff in the Southern District of New York.

“With this guilty plea, we take another significant step to hold accountable those who fraudulently manipulated the world’s cornerstone benchmark interest rate for financial gain,” said Attorney General Eric Holder.  “This conduct distorted transactions and financial products around the world.  Manipulating LIBOR effectively rigs the global financial system, compromising the fairness of world markets.  This plea demonstrates that the Justice Department will never waver, and we will never rest, in our determination to ensure the integrity of the marketplace and protect it from fraud.”

“Today, a former Rabobank trader has pleaded guilty to participating in a scheme to manipulate the global benchmark interest rate LIBOR to benefit Rabobank’s trading positions,” said Assistant Attorney General Caldwell.  “This was the ultimate inside job.  As alleged, traders illegally influenced the very interest rate on which their trades were based, using fraud to gain an unfair advantage.  Takayuki Yagami is the ninth person charged by the Justice Department in connection with the industry-wide LIBOR investigation, and we are determined to pursue other individuals and institutions who engaged in this crime.”

“Today’s guilty plea is a significant step forward in the LIBOR investigation and demonstrates the Department’s firm commitment to individual accountability,” said Deputy Assistant Attorney General Snyder.  “We will continue to pursue aggressively other individuals involved in this or other illegal schemes that undermine free and fair financial markets.”

“Manipulating financial trading markets to create an unfair advantage is against the law,” said Assistant Director in Charge Parlave.  “Today’s guilty plea further underscores the FBI’s ability to investigate complex international financial crimes and bring the perpetrators to justice.  The Washington Field Office has committed significant time and resources including the expertise of Special Agents, forensic accountants and analysts to investigate this case along with our Department of Justice colleagues.  Their efforts send a clear message to anyone contemplating financial crimes: think twice or you will face the consequences.”

According to court documents, LIBOR is an average interest rate, calculated based on submissions from leading banks around the world, reflecting the rates those banks believe they would be charged if borrowing from other banks.  LIBOR serves as the primary benchmark for short-term interest rates globally and is used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer lending products.  The Bank of International Settlements estimated that as of the second half of 2009, outstanding interest rate contracts were valued at approximately $450 trillion.

At the time relevant to the charges, LIBOR was published by the British Bankers’ Association (BBA), a trade association based in London.  LIBOR was calculated for 10 currencies at 15 borrowing periods, known as maturities, ranging from overnight to one year.  The published LIBOR “fix” for Yen LIBOR at a specific maturity is the result of a calculation based upon submissions from a panel of 16 banks, including Rabobank.

Yagami admitted to conspiring with Paul Robson, of the United Kingdom, Paul Thompson, of Australia, and Tetsuya Motomura, of Japan.  Robson, Thompson and Motomura were charged with conspiracy to commit wire fraud and bank fraud as well as substantive counts of wire fraud in a fifteen-count indictment returned by a federal grand jury in the Southern District of New York on April 28, 2014.  All four are former employees of Rabobank.

Rabobank entered into a deferred prosecution agreement with the Department of Justice on Oct. 29, 2013 and agreed to pay a $325 million penalty to resolve violations arising from Rabobank’s LIBOR submissions.

According to allegations in the information and indictment, the four defendants traded in derivative products that referenced Yen LIBOR.  Robson worked as a senior trader at Rabobank’s Money Markets and Short Term Forwards desk in London; Thompson was Rabobank’s head of Money Market and Derivatives Trading Northeast Asia and worked in Singapore; Motomura was a senior trader at Rabobank’s Tokyo desk who supervised money market and derivative traders; and Yagami worked as a senior trader at Rabobank’s Money Market/FX Forwards desks in Tokyo and elsewhere in Asia.  In addition to trading derivative products that referenced Yen LIBOR, Robson also served as Rabobank’s primary submitter of Yen LIBOR to the BBA.

Robson, Thompson, Motomura and Yagami each entered into derivatives contracts containing Yen LIBOR as a price component.  The profit and loss that flowed from those contracts was directly affected by the relevant Yen LIBOR on certain dates.  If the relevant Yen LIBOR moved in the direction favorable to the defendants’ positions, Rabobank and the defendants benefitted at the expense of the counterparties.  When LIBOR moved in the opposite direction, the defendants and Rabobank stood to lose money to their counterparties.

As alleged in court filings, from about May 2006 to at least January 2011, the four defendants and others agreed to make false and fraudulent Yen LIBOR submissions for the benefit of their trading positions.  According to the allegations, sometimes Robson submitted rates at a specific level requested by a co-defendant, including Yagami, and consistent with the co-defendant’s trading positions.  Other times, Robson made a higher or lower Yen LIBOR submission consistent with the direction requested by a co-defendant and consistent with the co-defendant’s trading positions.  On those occasions, Robson’s manipulated Yen LIBOR submissions were to the detriment of, among others, Rabobank’s counterparties to derivative contracts.  Thompson, Motomura and Yagami (described in the indictment as Trader-R) made requests of Robson for Yen LIBOR submissions through electronic chats and email exchanges.  

For example, according to court filings, on Sept. 21, 2007, Yagami asked Robson by email, “wehre do you think today’s libors are?  If you can I would like 1mth higher today.”  Robson responded, “bookies reckon .85,” to which Yagami replied, “I have some fixings in 1mth so would appreciate if you can put it higher mate.”  Robson answered, “no prob mate let me know your level.”  After Yagami asked for “0.90% for 1mth,” Robson confirmed, “sure no prob[ ] I’ll probably get a few phone calls but no worries mate… there’s bigger crooks in the market than us guys!”

The indictment alleges that Robson accommodated the requests of his co-defendants.  For example, on Sept. 21, 2007, after Robson allegedly received a request from Yagami for a high 1-month Yen LIBOR, Rabobank submitted a 1-month Yen LIBOR rate of 0.90, which was 7 basis points higher than the previous day and 5 basis points above where Robson said that “bookies” predicted it, and which moved Rabobank’s submission from the middle to the highest of the panel.

According to court documents, the defendants were also aware that they were making false or fraudulent Yen LIBOR submissions.  For example, on May 10, 2006, Robson admitted in an email to Yagami that “it must be pretty embarrasing to set such a low libor.  I was very embarrased to set my 6 mth – but wanted to help thomo [Thompson].  Tomorrow it will be more like 33 from me.”  At times, Robson referred to the submissions that he submitted on behalf of his co-defendants as “ridiculously high” and “obscenely high,” and acknowledged that his submissions would be so out of line with the other Yen LIBOR panel banks that he might receive a phone call about them from the BBA or Thomson Reuters.

The charges in the indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

The investigation is being conducted by special agents, forensic accountants, and intelligence analysts in the FBI’s Washington Field Office.  The prosecution is being handled by Senior Litigation Counsel Carol L. Sipperly and Trial Attorney Brian R. Young of the Criminal Division’s Fraud Section, and Trial Attorney Michael T. Koenig of the Antitrust Division.  The Criminal Division’s Office of International Affairs has provided assistance in this matter.

The Justice Department expresses its appreciation for the assistance provided by various enforcement agencies in the United States and abroad.  The Commodity Futures Trading Commission’s Division of Enforcement referred this matter to the department and, along with the U.K. Financial Conduct Authority, has played a major role in the LIBOR investigation.  The Securities and Exchange Commission also has played a significant role in the LIBOR series of investigations, and the department expresses its appreciation to the United Kingdom’s Serious Fraud Office for its assistance and ongoing cooperation.   The department has worked closely with the Dutch Public Prosecution Service and the Dutch Central Bank in the investigation of Rabobank.  Various agencies and enforcement authorities from other nations are also participating in different aspects of the broader investigation relating to LIBOR and other benchmark rates, and the department is grateful for their cooperation and assistance.

This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets and recover proceeds for victims of financial crimes.

Monday, June 9, 2014

SEC AWARDS $875,000 IN WHISTLEBLOWER MONEY TO BE SPLIT BETWEEN TWO TIPSTERS

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 

The Securities and Exchange Commission today announced a whistleblower award of more than $875,000 to be split evenly between two individuals who provided tips and assistance to help the agency bring an enforcement action.

The SEC’s whistleblower program authorized by the Dodd-Frank Act rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million.  Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.

By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

“These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower.  “Whistleblowers who report their concerns to the SEC perform a great service to investors and help us combat fraud.”

A total of eight whistleblowers have been awarded through the SEC’s whistleblower program since it began in late 2011.

Sunday, June 8, 2014

SEC CHARGES WEB-BUSH SECURITIES INC., WITH VIOLATING AGENCY'S MARKET ACCESS RULE

FROM:  U.S. SECURITIES EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a Los Angeles-based market access provider and two officials accused of violating the agency’s market access rule that requires firms to have adequate risk controls in place before providing customers with access to the market.

The SEC’s Enforcement Division alleges that Wedbush Securities Inc., which has consistently ranked as one of the five largest firms by trading volume on NASDAQ, failed to maintain direct and exclusive control over settings in trading platforms used by its customers to send orders to the markets.  Wedbush did not have the required pre-trade controls, failed to restrict trading access to people whom the firm preapproved and authorized, and did not conduct an adequate annual review of its market access risk management controls.  The Enforcement Division alleges that the firm’s violations of the market access rule were caused by Jeffrey Bell, the former executive vice president in charge of Wedbush’s market access business, and Christina Fillhart, a senior vice president in the market access division.

“Wedbush provided market access to overseas traders without preapproval and without ensuring that they complied with U.S. law,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The market access rule was adopted out of concerns that some broker-dealers did not have effective controls in place for their market access.  This enforcement action against Wedbush is a cornerstone of our ongoing efforts to hold accountable any broker-dealers who fail to effectively implement market access controls and procedures.”

According to the SEC’s order instituting administrative proceedings, the violations began in July 2011 and continued into 2013.  Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues by using trading platforms over which Wedbush did not have direct and exclusive control.  Bell was aware of the requirements of the market access rule and should have known that the firm’s risk management controls and supervisory procedures related to market access did not comply with the market access rule.  Fillhart also had responsibility for overseeing Wedbush’s market access business and received inquiries by exchanges about potential violations by Wedbush and its customers.  Despite these red flags, Fillhart did not take adequate steps to prompt the firm to adopt reasonably designed risk management controls.

According to the SEC’s order, in addition to violating the market access rule (Securities Exchange Act Rule 15c3-5), Wedbush violated other regulatory requirements as a result of trading by its market access customers.  These violations include Rule 203(b)(1) of Regulation SHO relating to short sales, Rule 611(c) of Regulation NMS related to intermarket sweep orders, Rule 17a-8 concerning anti-money laundering requirements, and Rule 17a-4(b)(4) concerning the preservation of records.

The proceeding before an administrative law judge will determine whether Wedbush willfully violated these provisions of the federal securities laws, and whether Bell and Fillhart were causes of the firm’s violations of the market access rule.  The judge also will decide what sanctions, if any, are appropriate.

The SEC’s investigation was conducted by Steven Buchholz of the Market Abuse Unit and San Francisco Regional Office as well as Jina Choi, who formerly worked in the Market Abuse Unit and is now director of the San Francisco office.  The case was supervised by Mr. Hawke and Robert Cohen, co-deputy chief of the Market Abuse Unit.  The Enforcement Division’s litigation will be led by Lloyd Farnham and John Yun of the San Francisco office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

Remarks at SEC Historical Society 2014 Annual Meeting: On the 80th Anniversary of the SEC

Remarks at SEC Historical Society 2014 Annual Meeting: On the 80th Anniversary of the SEC

SEC CHARGES MAN FOR AIDING AND ABETTING FRAUDULENT FOREX TRADING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Accomplice in Forex Trading Scheme

The Securities and Exchange Commission  filed charges against Steven M. McCraw for aiding and abetting a fraudulent foreign currency exchange (“forex”) trading scheme. The SEC’s case was filed in the U.S. District Court for the Eastern District of Texas.

The SEC alleges that McCraw knowingly or recklessly provided substantial assistance to Kevin G. White and his company, KGW Capital Management, LLC, in perpetrating a fraudulent scheme that raised approximately $7.4 million between September 2011 and July 2013. The SEC’s complaint alleges that White and KGW Capital raised investor funds through Revelation Forex, a purportedly successful “highly specialized hedge fund” that claimed to employ a sophisticated, low-risk, high-return forex trading strategy. McCraw helped White attract potential investors to Revelation Forex by calculating alleged trading returns that were used in various marketing materials and on Revelation Forex’s website. McCraw also took the lead in creating an ostensibly “independent” website that ranked Revelation Forex as one of the best performing forex funds in the world. McCraw also met with potential investors and solicited investments for Revelation Forex.

According to the SEC, Revelation Forex’s actual trading did not generate the positive returns that were represented to investors, but instead lost more than $2 million. Moreover, White used investor funds for various personal expenses and to fund other unrelated and undisclosed investments and businesses, including a propane gas company operated by McCraw. The SEC previously halted White’s fraudulent scheme in SEC v. Kevin G. White, et al., Civil Action No. 4:13-cv-0383 (E.D. Tex. July 9, 2013).

McCraw is charged with violating or aiding and abetting violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. He has agreed to settle the SEC’s charges by consenting to injunctions against future violations of these provisions, injunctions against engaging in certain specific conduct, disgorgement of ill-gotten gains (with prejudgment interest), and civil penalties to be determined by the district court.

Saturday, June 7, 2014

NEW CFTC CHAIRMAN SWORN IN

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Timothy Massad Sworn In as Chairman of the U.S. Commodity Futures Trading Commission

Washington, DC — Timothy Massad was officially sworn in today, after being confirmed by the U.S. Senate on June 3, to serve as the Chairman of the U.S. Commodity Futures Trading Commission (CFTC), the federal agency that oversees the commodity futures, options and swaps industry. Mr. Massad will assume his responsibilities immediately.

Mr. Massad joined the agency after serving as the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury. In that capacity, Mr. Massad oversaw the Troubled Asset Relief Program (TARP), the principal U.S. governmental response to the 2008 financial crisis designed to help stabilize the economy and provide help to homeowners. Prior to joining Treasury, Mr. Massad served as a legal advisor to the Congressional Oversight Panel for the Troubled Asset Relief Program, under the leadership of now Sen. Elizabeth Warren. He was also a partner in the law firm Cravath, Swaine & Moore in New York.

Mr. Massad has a B.A. from Harvard College and J.D. from Harvard Law School. He and his wife, Charlotte Hart, live in Washington with their two children.

Friday, June 6, 2014

4TH INSIDER TRADING ACTION FILED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Brings Fourth Insider Trading Action Relating to Mercer Insurance Group

On May 27, 2014, the Securities and Exchange Commission filed an action in the U.S. District Court for the Eastern District of North Carolina charging Ronald L. Drewery with insider trading in the stock of a publicly-traded insurance company shortly before the announcement of that company's acquisition.

The SEC alleges that Defendant Drewery misappropriated material nonpublic information regarding the impending acquisition of Mercer Insurance Group, Inc. ("Mercer"), an insurance company formerly traded on the NASDAQ, from a longtime friend who was then a member of Mercer's board of directors. On the basis of the information regarding the impending acquisition, and in disregard of his duty of trust and confidence owed to the board member, Drewery purchased 3,500 shares of Mercer between October 13, 2010 and November 19, 2010 at a weighted average cost of $17.95. Following the November 30, 2010 announcement of Mercer's acquisition, Mercer's share price rose sharply closing at $27.89 per share, approximately 48% over its November 30, 2010 closing share price. Drewery subsequently sold the 3,500 shares he controlled at prices between $28.05 and $28.25 per share, realizing illicit profits of at least $35,730.

The SEC's complaint alleges that Drewery violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In settling the SEC's charges, Drewery agreed to fully disgorge ill-gotten gains of $35,730, plus pay prejudgment interest of $3,646.50, as well as pay a penalty of $35,730. Drewery neither admits nor denies the allegations, and his settlement is subject to court approval. This is the third action that the SEC has brought in the U.S. District Court for the Eastern District of North Carolina, and the fourth total action brought, relating to this matter.

The SEC's investigation was conducted in its Atlanta Regional Office by Assistant Regional Director Aaron W. Lipson, and the litigation has been led by Senior Trial Counsel Paul Kim. The SEC thanks the U.S. Attorney's Office of the Eastern District of North Carolina and the Financial Industry Regulatory Authority (FINRA) for their assistance in this matter.

Wednesday, June 4, 2014

Statement on 2nd Circuit Decision

Statement on 2nd Circuit Decision

ALLEGED INVENTORY OVER-STATER GETS CHARGED WITH ACCOUNTING FRAUD BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Former CFO of Dallas-Based Jewelry and Collectibles Company with Accounting Fraud

The Securities and Exchange Commission today filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles. Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold. Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data. The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores. As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance. The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars. Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE. Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE. Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings. Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 10(b), 13(a), and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2(a) thereunder, 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-13 thereunder. DGSE is charged with violating Section 17(a)(2) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. DGSE and Benson each consented to injunctions against future violations of these provisions. DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

The SEC’s investigation was conducted by Chris Davis, Keith Hunter, and Joann Harris of the Fort Worth Regional Office.


Tuesday, June 3, 2014

FORMER ARTHROCARE CORPORATION CEO, CFO CONVICTED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 
Monday, June 2, 2014
Former CEO and CFO of Arthrocare Corporation Convicted for Orchestrating $400 Million Securities Fraud Scheme

A federal jury convicted the former chief executive officer and the former chief financial officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for orchestrating a fraud scheme that resulted in shareholder losses of over $400 million.

Principal Deputy Assistant Attorney General Marshall L. Miller and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field Office made the announcement.

“These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million,” said Principal Deputy Assistant Attorney General Miller.   “Today’s convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain.”

“This case demonstrates the FBI’s commitment to unraveling elaborate and complex fraud schemes leaving no financial stone unturned,” said FBI SAC Combs. “Those who abuse their position of trust to illegally enrich themselves, at the expense of shareholders and members of the investing public, will be held accountable for their actions.”

After a four-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 55, guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.   Michael Gluk, 56, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.   Baker and Gluk were charged in a superseding indictment returned on April 1, 2014.

Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009.   Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.   Baker, Gluk and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.   ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.   Evidence at trial showed that, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

Baker, Gluk and others lied to investors and analysts about ArthroCare's relationships with its distributors, including DiscoCare.   Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.

Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about the DiscoCare relationship.

Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.   The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Following today’s verdict, U.S. District Judge Sam Sparks remanded Baker into custody.    A sentencing date for Baker and Gluk has not yet been scheduled.

This case was investigated by the FBI’s San Antonio Field Office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section.   The Department appreciates the substantial assistance of the U.S. Securities and Exchange Commission.

Monday, June 2, 2014

3 CORPORATE OFFICERS, STOCK PROMOTER GET SENTENCES FOR ROLES IN KICKBACK MARKET MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Three Corporate Officers and Stock Promoter Sentenced for Fraudulent Kickback and Market Manipulation Scheme

The Securities and Exchange Commission announced that three corporate officers and a stock promoter were sentenced recently by the United States District Court for the District of Massachusetts in cases filed on December 1, 2011 alleging they used kickbacks and other schemes to trigger investments in various thinly-traded stocks. Those sentenced were: stock promoter Edward Henderson of Lincoln, Rhode Island; and corporate officers Paul Desjourdy of Medfield, Massachusetts (President of Symbollon Pharmaceuticals, Inc.); James Wheeler of Camas, Washington (Chief Executive Officer of MicroHoldings US, Inc.); and Michael Lee of Hingham, Massachusetts (President and Chief Executive Officer of ZipGlobal Holdings, Inc.). The Commission filed related civil charges against these and other parties on December 1, 2011, and those charges remain pending.

Henderson, Desjourdy, Wheeler, and Lee were among 13 defendants who were alleged to have engaged in criminal activity in the midst of an undercover FBI operation. According to the charges filed in U.S. District Court, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the insiders and promoters did not know was that the purported investment fund representative was actually an undercover agent.

On November 25, 2013, Henderson was sentenced to one year of probation and was ordered to forfeit $12,650 after pleading guilty on January 20, 2012 to one count of wire fraud. On January 16, 2014, Desjourdy was sentenced to 18 months of probation and was ordered to forfeit $54,000 after pleading guilty on January 11, 2012 to one count of mail fraud and one count of conspiracy. On January 16, 2014, Wheeler was sentenced to 18 months of probation and was ordered to forfeit $24,000 after pleading guilty on January 18, 2012 to one count of mail fraud and one count of conspiracy. On March 6, 2014, Lee was sentenced to three years of probation (the first nine months to be served in home confinement with electronic monitoring) and ordered to forfeit $105,603 after pleading guilty on January 11, 2012 to one count of mail fraud and one count of conspiracy.

On December 1, 2011, the Commission filed civil charges of securities fraud against Henderson, Desjourdy, Wheeler, Lee, ZipGlobal Holdings, Inc., and MicroHoldings US, Inc., alleging that they used kickbacks to engage in fraudulent financing transactions involving microcap stocks. Those cases are pending.

Presentation to the PCAOB Forum on Auditing Smaller Broker-Dealers

Presentation to the PCAOB Forum on Auditing Smaller Broker-Dealers

Sunday, June 1, 2014

COMPANY DIRECTOR CHARGED BY SEC WITH INSIDER TRADING AHEAD OF SALE TO PRIVATE EQUITY FIRM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

On May 22, 2014, the Securities and Exchange Commission charged a former director of a Long Island-based vitamin company and others in his family circle with insider trading ahead of the company’s sale to a private equity firm.

The SEC alleges that board member Glenn Cohen learned that NBTY Inc. was negotiating a sale to The Carlyle Group and tipped his three brothers and a brother’s girlfriend with the confidential information. Craig Cohen, Marc Cohen, Steven Cohen, and Laurie Topal all traded on the inside information that Glenn Cohen provided and reaped illicit profits totaling $175,000.

The four Cohens and Topal agreed to settle the SEC’s charges by paying a total of more than $500,000.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Glenn Cohen first learned in May 2010 that NBTY management was negotiating to sell the company. He shared the nonpublic information with his three brothers and Topal, who is the girlfriend of Marc Cohen. All four purchased NBTY shares as a result. The next month, Glenn Cohen attended additional board meetings as negotiations between NBTY and Carlyle progressed. As more information became available to the board, Steven and Craig Cohen purchased additional NBTY shares. On July 15, Carlyle announced its acquisition of NBTY at a per-share price that was 47 percent above the prior day’s closing price, enabling the Cohens and Topal to profit significantly when they all sold their NBTY shares that same day.

The SEC’s complaint charges the Cohens and Topal with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In a settlement that would permanently enjoin them from violations of Section 10(b) and Rule 10b-5, they agreed to the following sanctions:

Glenn Cohen: penalty of $153,613.25 and barred from serving as an officer or director of a public company.
Craig Cohen: disgorgement of $71,932, prejudgment interest of $9,606, and a penalty of $71,932.
Marc Cohen: disgorgement of $21,454, prejudgment interest of $2,865, and a penalty of $21,454
Steven Cohen: disgorgement of $60,226, prejudgment interest of $8,042, and a penalty of $60,226.
Laurie Topal: disgorgement of $21,780, prejudgment interest of $2,908, and a penalty of $21,780.


The Cohens and Topal neither admitted nor denied the charges in the settlement, which is subject to court approval.

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