HONOLULU RESIDENT CHARGED WITH USING SOCIAL MEDIA TO DEFRAUD INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against a Honolulu woman posing as an investment banker and soliciting investors through Twitter, Facebook, and other social media.

An SEC investigation found that Keiko Kawamura engaged in two separate fraudulent schemes to raise money from investors while casting herself as an investment and hedge fund expert when in fact she had virtually no prior trading experience.  In one scheme, she sought investors for her self-described hedge fund and posted on Twitter some screenshots of brokerage account statements suggesting she was personally obtaining incredible investment returns.  However, the account statements were not hers.  And instead of investing the money she raised from investors, she spent it on her own living expenses and luxury trips to Miami and London.  In a later scheme, Kawamura continued to boast phony experience to attract investors to her subscription service for investment advice.  She falsely told subscribers that she had been in the investment banking industry for nearly a decade and had achieved 800 percent returns in her personal brokerage account.

“As alleged in our case, Kawamura used social media to ensnare investors and raise money to support her lifestyle,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “Investors should beware of fraudsters who use social media to hide behind anonymity and reach many investors with little to no cost or effort.”

The SEC’s order instituting administrative proceedings alleges that Kawamura willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 20(4)-8.  The administrative proceedings will determine any remedial action or financial penalties that are appropriate in the public interest against Kawamura.

The SEC’s investigation was conducted by Brent Smyth and Finola H. Manvelian of the Los Angeles Regional Office.  The SEC’s litigation will be led by Donald Searles.

MAN CHARGED BY SEC WITH DEFRAUDING HIS ADVISORY CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges James Y. Lee for Defrauding His Advisory Clients

On February 13, 2014, the Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC's complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee's clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws - Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee's girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.

In a related matter, on February 12, 2014, the SEC settled administrative and cease-and-desist proceedings against Ronald E. Huxtable II, of Palm Coast Florida. (Rel. 33-9547) In those proceedings the SEC found that Huxtable, one of Lee's clients, aided, abetted and caused Lee's violations by helping Lee charge certain clients fees for the month of February 2011 based on false performance and conceal the fact that they had actually incurred net realized losses for that month.

The SEC's investigation was conducted by Jennifer Peltz and Delia Helpingstine and supervised by Paul Montoya. The SEC's litigation will be led by Michael Foster.

SEC-HEDGE FUND SETTLES FRAUDULENT OFFER TO BUY WINNEBAGO INDUSTRIES COMMON STOCK

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Settled Securities Fraud Charges Against Alexander H.G. Mascioli and His Purported Hedge Fund, North Street Capital, LP

The Securities and Exchange Commission today filed settled fraud charges in the United States District Court for the District of Connecticut against Alexander H.G. Mascioli and his alter-ego, purported hedge fund, North Street Capital, LP ("NSC"), alleging that Mascioli and NSC made a fraudulent May 2012 offer to acquire all outstanding shares of Winnebago Industries, Inc.'s ("WGO") common stock.

The Commission alleges that, on May 9, 2012, Mascioli authored on NSC letterhead, signed, and sent to WGO an offer to acquire all outstanding common stock of WGO for approximately $321 million in cash. The May 9 letter represented that NSC's offer was not conditioned on any financing, that NSC was prepared to move forward immediately, and that it could complete the process in approximately two weeks. In truth, Mascioli and NSC had virtually no assets, significant liabilities, and no reasonable prospects of securing any financing to fund the acquisition. Furthermore, at the time they made their offer, Mascioli and NSC had not retained any financial or legal advisers to represent them in the transaction. On May 17, having not received a response to the May 9 offer, Mascioli sent a copy of the May 9 letter that he had modified to look like an NSC press release to Bloomberg, which subsequently posted the offer on its website. After NSC's fraudulent offer was made public on May 17, WGO's stock price and trading volume increased significantly. In pre-market trading on May 18, almost 700,000 WGO shares were traded. By contrast, in the four trading days prior to May 18, WGO had little to no volume in pre-market trading. Moreover, on May 17, WGO's stock closed at $8.51 per share; when trading opened on May 18, however, WGO stock opened at $9.81 per share, an almost 15% increase. In pre-market trading on May 18, after learning of NSC's offer for WGO and viewing a public website Mascioli created for NSC that contained various misrepresentations about NSC's business, a New York hedge fund made the decision to cover the majority of a large short position it held in WGO and incurred losses in doing so.

Without admitting or denying the allegations in the complaint, Mascioli and NSC have consented to entry of a final judgment permanently enjoining each of them from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and ordering them to pay, jointly and severally, a $100,000 civil penalty. Mascioli has also consented to a final judgment that permanently bars him from serving as an officer and/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. The proposed settlement is subject to court approval.

The SEC's investigation was conducted by George Bagnall and George Parizek with assistance from trial attorney Cheryl Crumpton. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority in this matter.

CONVICTED EMBEZZLER CHARGED IN SECURITIES FRAUD CASE

FROM: SECURITIES AND EXCHANGE COMMISSION 
SEC Charges James Y. Lee for Defrauding His Advisory Clients

On February 13, 2014, the Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC's complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee's clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws - Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee's girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.

SEC OBTAINS ASSET FREEZE AGAINST ALLEGED FRAUDSTER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Asset Freeze and Other Relief Against Michael P. Zenger

On January 31, 2014, the Securities and Exchange Commission obtained a temporary restraining order and an emergency asset freeze in an offering fraud orchestrated by Lehi, Utah resident Michael P. Zenger (Zenger).

The complaint alleges that since June 2013, Zenger solicited at least $200,000 from two friends for the purported purpose of trading futures contracts, commodities, and government securities. While Zenger used some investor money as represented, the complaint alleges that Zenger misappropriated approximately $100,000 of the $200,000 he raised to pay personal expenses, including airplane rentals, monthly credit card bills, payments to BMW and Mercedes Benz, purchases at Saks Fifth Avenue, Nordstrom and Costco, and other personal expenses.

The Commission's complaint charges Zenger with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and civil penalties from Zenger.

The SEC's investigation was conducted by Jennifer Moore and Scott Frost; the litigation will be led by Thomas Melton.

INVESTMENT ADVISER AND OWNER RECEIVE PERMANENT INJUNCTIONS FOR ROLES IN ALLEGED FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Order of Permanent Injunctions Against Chicago-Area Investment Adviser and Its Owners for Fraud

The Securities and Exchange Commission (Commission) announced that on December 19, 2013, Judge Charles P. Kocoras of the U.S. District Court for the Northern District of Illinois entered an order of permanent injunctions against Oakbrook, Illinois resident Patrick G. Rooney (Rooney) and his company Solaris Management, LLC (Solaris).

According to the SEC's complaint filed on November 16, 2011, Rooney and Solaris radically changed the investment strategy of the Solaris Opportunity Fund LP (the Fund), contrary to the Fund's offering documents and marketing materials, by becoming wholly invested in Positron Corp. (Positron), a financially troubled microcap company. The SEC alleges that Rooney, who has been Chairman of Positron since 2004 and received salary and stock options from Positron since September 2005, misused the Fund's money by investing more than $3.6 million in Positron through both private transactions and market purchases. Many of the private transactions were undocumented while other investments were interest-free loans to Positron. Rooney and Solaris hid the Positron investments and Rooney's relationship with the company from the Fund's investors for over four years. Although Rooney finally told investors about the Positron investments in a March 2009 newsletter, the SEC's complaint alleges he falsely told them he became Chairman to safeguard the Fund's investments. These investments benefited Positron and Rooney while providing the Fund with a concentrated, undiversified, and illiquid position in a cash-poor company with a lengthy track record of losses.

Without admitting or denying the Commission's allegations, Rooney and Solaris consented to the entry of permanent injunctions which enjoin them from violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-8(a)(1) and (a)(2) thereunder; Section 17(a) of the Securities Act of 1933; and Sections 10(b) and 13(d)(1) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13d-1 thereunder. Rooney and Solaris Management further agreed that the court would determine whether to impose penalties and disgorgement against them and whether Rooney should be prohibited from acting as an officer or director of a public company.

U.S. DISTRICT COURT ISSUES FINAL JUDGEMENT AGAINST INVESTMENT ADVISER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Massachusetts-Based Broker and Investment Adviser

The Securities and Exchange Commission announced today that on December 4, 2013, the U.S. District Court for the District of Massachusetts entered final judgments against Arnett L. Waters of Milton, Massachusetts, and two entities that he controlled, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, who are defendants in an enforcement action filed by the Commission in May 2012. The Commission filed its action on an emergency basis in order to halt the defendants' fraudulent sales of fictitious investment-related partnerships. The final judgment, to which the defendants consented, enjoins them from violating the antifraud provisions of the federal securities laws. The Court also found the defendants jointly and severally liable for $839,000 in disgorgement, which has been deemed satisfied by a restitution order of over $9 million in a parallel criminal proceeding.

The Commission's enforcement action filed May 1, 2012 alleged that from at least 2009-2012, Waters, A.L. Waters Capital and Moneta Management engaged in a fraudulent scheme through which they raised at least $780,000 from at least 8 investors, including $500,000 from Waters' church, by promising to use investor funds to purchase a portfolio of securities, when they instead misappropriated the money and spent it on personal and business expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze the defendants' assets, as well as those of two relief defendants, one of whom was Waters' wife, and required them to provide an accounting of all their assets to the Commission.

On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction and asset freeze order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Commission on December 3, 2012 barred Waters from the securities industry based on his guilty plea in the criminal contempt action.

The U.S. Attorney for the District of Massachusetts charged Waters with an array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice arising out of both the conduct that is the subject of the Commission's civil action and a criminal scheme through which Waters defrauded clients of his rare coin business out of as much as $7.8 million. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to obstruction of justice in connection with multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. As a result of his guilty plea to this criminal conduct, Waters was sentenced on April 26, 2013 to 17 years in federal prison and three years of supervised release, and was ordered to pay $9,025,691 in restitution and forfeiture.

The final judgment in the Commission's enforcement action enjoins the defendants from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933, and also enjoins Waters and Moneta Management from violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. On November 18, 2013, the Court entered the parties' stipulation of dismissal against relief defendant Port Huron Partners, LLP, an unregistered entity owned by Waters. The Commission's case remains pending against relief defendant Janet Waters, Arnett Waters' wife.

The Commission acknowledges the assistance of the United States Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation and FINRA in this matter.

FUTURES TRADER TO PAY OVER $3 MILLION IN CFTC ACTION AND PLEADS GUILTY IN CRIMINAL CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
November 26, 2013

Federal Court in Connecticut Orders Feisal Sharif to Pay over $3 Million to Settle Fraud Charges in CFTC Action

In a related criminal action, Sharif pled guilty to criminal violations of the Commodity Exchange Act

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against defendant Feisal Sharif of Branford, Connecticut, requiring him to pay restitution of $2,230,000 to defrauded customers and a $900,000 civil monetary penalty, as well as permanent trading and registration bans against Sharif for violations of the Commodity Exchange Act (CEA).

The Order, entered on November 21, 2013, by the Honorable Stefan R. Underhill of the U.S. District Court for the District of Connecticut, stems from a CFTC Complaint filed on November 26, 2012, charging Sharif with fraudulent solicitation, misappropriation, and registration violations (see CFTC Press Release 6424-12).

The Order finds that, between January 2007 and September 2012, Sharif, by and through the commodity pool First Financial LLC, fraudulently solicited and accepted over $5.4 million from at least 50 members of the general public to trade commodity futures contracts through a pool. The Order further finds that Sharif traded only a portion of the pool participant funds in proprietary accounts and sustained overall and significant losses. Sharif misappropriated the majority of the pool participant funds to make so-called returns to participants in payments that he claimed were the profitable proceeds of their trading, the Order finds. Sharif also misappropriated pool participant funds for personal use, according to the Order.

Sharif concealed his fraud and trading losses from pool participants by issuing false account statements reflecting profits, the Order finds. Sharif also made excuses regarding the safety of pool participants’ investments.

The Order also finds that Sharif failed to register with the CFTC as a Commodity Pool Operator as required by the CEA.

In a related criminal action, Sharif pled guilty to criminal violations of the CEA. Sharif is scheduled to be sentenced in January 2014 (see USA v. Sharif No. 3:13-cr-00172-SRU-1).

The CFTC thanks the Securities and Business Investments Division of the State of Connecticut Department of Banking, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the District of Connecticut for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Amanda Harding, James Deacon, Jessica Harris, Kenneth McCracken, Rick Glaser, and Richard Wagner.

SEC CHARGES OWNERS OF TWO COMPANIES WITH DEFRAUDING INVESTORS IN OIL AND GAS OFFERINGS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the owner of two Florida-based companies with defrauding investors in five oil and gas offerings by misrepresenting such key facts as the amount of available reserves, the use of investor funds, and his past success in the oil and gas industry.

The SEC alleges that Ronald Walblay of Delray Beach, Fla., perpetrated the fraud through RyHolland Fielder Inc., which has managed a number of oil and gas limited partnerships, and his former brokerage firm Energy Securities Inc., which sold the partnerships’ interests – none of which were registered with the SEC as required under the federal securities laws. Walblay raised at least $12 million from more than 195 U.S. and foreign investors by falsely touting in sales brochures that RyHolland Fielder offered millions of barrels of oil and natural gas reserves. Walblay also falsely touted in offering materials that investors could receive potential returns of up to 2,270 percent. Meanwhile, not a single investor had ever profited from any of the partnerships, and Walblay used a greater percentage of investor funds than was disclosed to pay salaries and marketing expenses for investor conferences.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the unregistered securities offerings by Walblay and his firms were in Basin Oil L.P., Basin Oil HV L.P., Great Plains Oil L.P., Permian Basin Oil L.P., and Texas Permian Oil LLLP. They solicited investors from approximately January 2009 to November 2012.

The SEC alleges that in some offerings Walblay falsely portrayed to investors that RyHolland Fielder offered billions of cubic feet of natural gas reserves in place. Walblay, Energy Securities, and RyHolland lacked any basis to make this statement to investors because no such reserves existed.

The SEC further alleges that the offering materials for the limited partnerships misled investors about the use of proceeds. For example, contrary to the statements made in documents distributed to investors, money raised from investors in the Permian Basin Oil L.P. offering were partly used to pay expenses incurred in the prior oil and gas offerings.

According to the SEC’s complaint, Walblay exaggerated his past success in the industry.  For instance, he told investors that a prior offering he conducted in 1991 featured a well that produced more than 100,000 barrels of oil in less than 45 days.  There was no basis to make this statement.

The SEC’s complaint charges Energy Securities, RyHolland, and Walblay with violating 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 and Rule 10b-5. The complaint also charges Walblay with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5. The SEC seeks financial penalties, disgorgement of ill-gotten gains with prejudgment interest, and permanent injunctions.

SEC CHARGES 2 COMPANIES WITH FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Projaris Management LLC and Victory Partners Financial with Fraud

On September 9, 2013, the Securities and Exchange Commission brought securities fraud charges against Projaris Management, LLC (Projaris), Victory Partners Financial (Victory), Joe G. Lawler, Brandt A. Lawler, Michael S. Lawler, Ryan G. Lawler, Timothy J. Lawler, and Pamela Hass in a connection with an offering fraud that raised approximately $1.4 million from over 23 investors in multiple states from May 2008 through August 2012.

The complaint, filed in the United States District Court for the District of New Mexico, alleges that Projaris and Victory, which operated in Farmington, New Mexico and Phoenix, Arizona, along with the Lawlers of Farmington, New Mexico participated in a scheme that defrauded investors out of more than $835,000. Additionally, the complaint alleges that the primary function of the defendants’ scheme was to convince investors to invest in a fraudulent pooled investment that purportedly invested in metals, commodities, real estate, and a fund that, among other things, invested overseas. The defendants then siphoned off the invested funds for their own purposes and to continue to perpetuate the fraud. According to the complaint, none of the securities offered was covered by a registration statement filed with the Commission, and Hass, Projaris’ National Sales Director of Tomahawk, Wisconsin, solicited investors to invest in Projaris, but was not a registered broker-dealer.

The complaint alleges that Projaris, Victory, and the Lawlers violated 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). The complaint also alleges that Projaris, Victory, Joe Lawler, and Hass violated Section 5 of the Securities Act for the offer and sale of securities in unregistered transactions. Finally, the complaint alleges that Joe Lawler and Hass violated Section 15(a) of the Exchange Act by acting as unregistered broker-dealers. The Commission seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil monetary penalties.

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.

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.

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.

SEC FILES FRAUD CHARGES AGAINST CHINA INTELLIGENT LIGHTING AND OTHERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Files Fraud Charges Against China Intelligent Lighting and Electronics, Inc.; NIVS Intellimedia Technology Group, Inc.; and Their Sibling CEOs

The Securities and Exchange Commission today announced that the Commission filed fraud and other related charges against China Intelligent Lighting and Electronics, Inc. (CIL); NIVS IntelliMedia Technology Group, Inc. (NIV); and their respective CEOs, Xuemei Li and, her brother, Tianfu Li. CIL reports that it is a lighting company, and NIV reports that it is a consumer electronic company. Both are located in China.

The Commission alleges that CIL, NIV, and their CEOs engaged in fraudulent schemes to raise and divert offering proceeds, and then attempted to hide the diversions by lying to auditors and making false and materially misleading filings with the Commission. CIL and NIV are U.S. issuers that raised approximately $7.7 million and $21.5 million, respectively, in public registered offerings in the U.S. capital markets in 2010. Thereafter, Xuemei Li, and Tianfu Li diverted those offering proceeds from CIL and NIV contrary to the stated uses of proceeds set forth in the offering documents. Specifically, on June 24, 2010, $7.7 million in offering proceeds was deposited into CIL’s Hong Kong bank account. The next day, Xuemei Li transferred approximately $6.8 million, or almost 90%, to a company that has no disclosed relation to CIL, but continued to tell CIL’s auditor that the funds remained in the account. Similarly, on April 26, 2010, $21.5 million in offering proceeds was deposited in NIV’s Hong Kong bank account. Even though almost all of the money was transferred out of the Hong Kong bank account by May 5, 2010, NIV and Tianfu Li told the company’s auditor that the funds continued to be held in the account.

In addition to lying to auditors to mask the diversions, CIL, NIV, and their respective CEOs also falsified bank and accounting records to reflect inflated cash balances, and filed false and misleading quarterly reports on Forms 10-Q with the SEC that contained inflated cash balances. In addition, the defendants filed registration statements signed by the Lis that misled investors about how the offering proceeds would be used.

In its complaint, the Commission alleges that the Defendants violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges that Xuemei Li and Tianfu Li lied to the auditors and aided and abetted the companies’ violations of the reporting, recordkeeping, and internal controls provisions of the securities laws, including Sections 13(a), 13(b)(2)(A), 13(b)(2) (B), and 13(b)(5) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2. The Commission seeks permanent injunctive relief to prevent future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, officer and director bars, and any other appropriate relief.

The Commission also announced today the entry of an order instituting administrative proceedings to determine whether the registration of each class of securities of CIL and NIV should be revoked for failure to make required periodic filings with the Commission.

LATEST CROSS-BORDER WORKING GROUP CASE FOR SEC

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 
SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million.

According to the SEC’s complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

According to the SEC’s complaint, China MediaExpress’ external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company’s audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress’ banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm’s team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress’ bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress’ reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to “assist with the investigation.”  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances.

The SEC’s complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media’s violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

CRIMINAL CHARGES FILED AGAINST MASSACHUSETTS INVESTMENT ADVISER

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Criminal Charges Filed Against Massachusetts Investment Adviser For Defrauding Investors


The Securities and Exchange Commission announced that, on July 1, 2013, the United States Attorney’s Office for the District of Massachusetts filed a criminal Information against Jeffrey A. Liskov (Liskov) of Plymouth, Massachusetts. The one-count criminal Information charged Liskov with willfully violating Section 206 of the Investment Advisers Act of 1940 (Advisers Act). The Commission previously filed a civil action against Liskov and his advisory firm, EagleEye Asset Management, LLC (EagleEye), for defrauding advisory clients in connection with foreign currency exchange (forex) investments. The factual allegations in the criminal Information are substantially similar to those in the Commission’s complaint in the civil case.


The Commission’s complaint in the civil case, filed on September 8, 2011, alleged that, between at least November 2008 and August 2010, Liskov made material misrepresentations to several advisory clients to induce them to liquidate investments in securities and instead invest in forex. The forex investments resulted in client losses totaling nearly $4 million, while EagleEye and Liskov came away with over $300,000 in performance fees, in addition to other management fees they collected from clients. The Commission alleged that Liskov’s strategy was to generate temporary profits on client forex investments to enable him to collect performance fees, after which client forex investments invariably quickly declined in value.

According to the Commission’s complaint, Liskov made material misrepresentations or failed to disclose material information to clients concerning the nature of forex investments, the risks involved in forex, and Liskov’s poor track record in forex trading for himself and other clients. The Commission’s complaint further alleged that, as to two clients, without their knowledge or consent, Liskov liquidated securities in their brokerage accounts and transferred the proceeds to their forex trading accounts where he lost nearly all their funds, but not before first collecting performance fees on temporary profits in these clients’ forex accounts. The complaint alleged that Liskov accomplished the unauthorized transfers by using "white out" correction fluid to change dates, amounts, and other data on asset transfer documentation. Liskov also opened multiple forex trading accounts in the name of one client, without obtaining the client’s consent, thereby maximizing his ability to earn performance fees on the client’s forex investments.

As result of the foregoing conduct, the Commission alleged that EagleEye and Liskov violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. The Commission also alleged that EagleEye failed to maintain certain books and records required of investment advisers in violation of Section 204 of the Advisers Act and Rule 204-2 thereunder, and that Liskov aided and abetted EagleEye’s violations of these recordkeeping provisions.

On November 26, 2012, after an eight-day trial in the Commission’s civil action, a jury found that EagleEye and Liskov violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(1) of the Advisers Act. After a further hearing, U.S. District Court Judge William G. Young found violations by EagleEye and Liskov of Section 204 of the Advisers Act and Rule 204-2 thereunder, concerning their recordkeeping obligations relating to EagleEye’s advisory business. On December 12, 2012, the court entered a final judgment against EagleEye and Liskov in the Commission’s civil action, ordering that they be permanently enjoined from future violations of the foregoing provisions of the securities laws. The court further ordered EagleEye and Liskov, jointly and severally, to pay disgorgement of their ill-gotten gains in the amount of $301,502.26, plus pre-judgment interest on that amount of $29,603.59, and the court also ordered EagleEye and Liskov each to pay a civil penalty of $725,000.

On December 27, 2012, the Commission instituted public administrative proceedings against each of EagleEye and Liskov to determine what sanctions against them, if any, may be appropriate and in the public interest.







 

SEC CHARGED CITY OF SOUTH MIAMI, FLA., WITH DEFRAUDING BOND INVESTORS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., May 22, 2013 — The Securities and Exchange Commission today charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.

An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

"South Miami's fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments," said Elaine C. Greenberg, Chief of the SEC Enforcement Division's Municipal Securities and Public Pensions Unit. "The tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption."

Eric I. Bustillo, Director of the SEC's Miami Regional Office, added, "Municipalities in South Florida and elsewhere cannot rely on a lack of internal procedures or experience in debt offerings to excuse fraudulent disclosures made to investors."

According to the SEC's order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer's limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.

According to the SEC's order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city's lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city's then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.

However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering's proceeds and the altered terms of the parking garage lease.

According to the SEC's order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds' tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city's settlement and payments, bondholders were not financially harmed and they're not required to include any interest from the bonds in their gross incomes.

The SEC's order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city's policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant's determinations and implement all recommendations. South Miami neither admitted nor denied the SEC's findings. A full description of the undertakings can be found in the SEC's order.

This SEC's investigation was conducted in the Miami Regional Office by Senior Counsel Sean M. O'Neill under the supervision of Assistant Regional Director Jason R. Berkowitz, both members of the Municipal Securities and Public Pensions Unit.

CITY, UNDERWRITER AND OTHERS CHARGED WITH FRAUD IN MUNICIPAL BOND SALES CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
　

SEC Charges City of Victorvile, Underwriter, and Others with Defrauding Municipal Bond Investors

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

"Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. "Public officials have the same obligation as corporate officials to tell the truth to their investors."

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said, "Investors are entitled to full disclosure of material financial arrangements entered into by related parties. Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable."

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to "manage" the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

The SEC’s investigation was conducted by Robert H. Conrrad and Theresa M. Melson in the Municipal Securities and Public Pensions Unit, and Lorraine B. Echavarria, Todd S. Brilliant, and Dora M. Zaldivar of the Los Angeles Regional Office. Sam S. Puathasnanon will lead the SEC’s litigation.

MASSACHUSETTS RESIDENT SENTENCED FOR DEFRAUDING RARE COIN INVESTMENT CUSTOMERS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Defendant in SEC Action Sentenced On Related Criminal Charges, Receives 17 Year Sentence

The Securities and Exchange Commission announced today that on April 26, 2013, Arnett L. Waters of Milton, Massachusetts, a principal of a broker-dealer and investment adviser who is a defendant in a securities fraud action filed by the Commission in May 2012, was sentenced to 17 years in federal prison in a separate criminal action for orchestrating a securities fraud and for defrauding rare coin investment customers. Waters was also sentenced to three years of supervised release and $9,025,691 in restitution and forfeiture. The criminal charges were brought by the U.S. Attorney for the District of Massachusetts. Waters' guilty plea to securities fraud and other charges occurred on November 29, 2012, and followed an earlier guilty plea by Waters in October 2012 to criminal contempt charges for violating a preliminary injunction order obtained by the Commission in its case. The Commission's Order barring Waters from the securities industry was issued on December 3, 2012.

The Commission filed an emergency enforcement action against Waters on May 1, 2012, alleging that he and two companies under his control, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, defrauded investors from at least 2009-2012 by, among other things, misappropriating investor funds and spending it on personal expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze Waters' assets and required him to provide an accounting of all his assets to the Commission. On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Court ordered him detained pending sentencing.

On December 3, 2012, the Commission barred Waters from the securities industry, based on his October 2, 2012 guilty plea to criminal contempt. The Order bars Waters from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

The U.S. Attorney for the District of Massachusetts charged Waters with an array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice. The counts of the criminal information to which Waters pleaded guilty alleged that, from at least 2007 through 2012, he used fictitious investment-related partnerships to draw in investors, misappropriate their investment money, and spend the vast majority of it on personal and business expenses and debts. Waters raised at least $839,000 from at least thirteen investors, including $500,000 from his church in March 2012. Waters also pleaded guilty to engaging in a criminal scheme to defraud clients of his rare coin business. Under this scheme, Waters defrauded coin customers out of as much as $7.8 million by selling coins at prices inflated, on average, by 600% and by inducing coin purchasers to return coins to him, on the false representation that he would sell those coins on the customers' behalf, when, in fact, he sold most or all of the coins and kept the proceeds for himself. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to allegations that he made multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. Waters was charged with obstruction of justice related to this conduct.

The Commission acknowledges the assistance of the United States Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation and FINRA in this matter.

COURT ORDERS PAYMENT OF $4.8 MILLION IN COMMODITY POOL FRAUD SCHEME

FROM: COMMODITY FUTURES TRADING COMMISSION

Federal Court Orders Illinois Resident Brant L. Rushton and his Company, Summit Trading & Capital LLC, to Pay over $4.8 Million for Fraud and other Violations in Commodity Pool Scheme

B. Rushton pled guilty to criminal charges in a parallel federal criminal action and was sentenced to eight years in prison

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that it obtained a federal court Order requiring Defendants Brant L. Rushton (B. Rushton) and Summit Trading & Capital LLC (Summit) of Champaign, Illinois, to jointly pay approximately $1.6 million in restitution to defrauded pool participants and a civil monetary penalty of approximately $3.2 million. The court’s grant of summary judgment also imposes permanent trading and registration bans against the Defendants and prohibits them from violating the anti-fraud and other provisions of the Commodity Exchange Act and Commission Regulations, as charged.

The Order, entered April 3, 2013, by Judge James E. Shadid of the U.S. District Court for the Central District of Illinois, stems from a CFTC enforcement action filed November 29, 2011 against Summit, B. Rushton and his wife Melissa C. Rushton (M. Rushton), charging them with fraudulent operation of a commodity pool.

The Order finds that B. Rushton and Summit fraudulently solicited and accepted almost $2 million from multiple pool participants for investment in one or more commodity pools that traded futures contracts. The Order specifically finds that in soliciting participants, B. Rushton falsely represented that he was a successful futures trader who generated consistent profits, when, in fact, B. Rushton’s trading resulted in consistent losses that were concealed from pool participants by issuance of false account statements. According to the Order, almost $1.2 million of participant funds was misappropriated by B. Rushton and Summit.

On July 12, 2012, B. Rushton pled guilty to criminal charges in a parallel federal criminal action stemming from the same conduct and will begin serving an eight-year prison sentence later this year. The CFTC’s action is still pending against M. Rushton, the sole remaining Defendant.

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