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.

GEORGIA RESIDENT CHARGED WITH FOREIGN CURRENCY FRAUD AND MISAPPROPRIATION

FROM:  CFTC 
CFTC Charges Georgia Resident Robert A. Christy and His Company Crabapple Capital Group LLC with Foreign Currency Fraud and Misappropriation

Federal court enters emergency order freezing defendants’ assets and protecting books and records
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on April 19, 2012, Judge Richard W. Story of the U.S. District Court for the Northern District of Georgia, entered an emergency order freezing the assets of defendants Robert A. Christy of Milton, Ga., and his companyCrabapple Capital Group LLC (Crabapple) of Alpharetta, Ga. The order also prohibits the defendants from destroying or altering books and records. The judge set a hearing date for May 1, 2012.
The order stems from the filing of a federal court action on April 19, 2012, against the defendants, charging them with foreign currency (forex) fraud, misappropriation, and making false statements to the National Futures Association (NFA).  Both Christy and Crabapple are registered with the CFTC and are NFA members.

The CFTC complaint alleges that from at least October 2008 to the present, Christy and Crabapple have defrauded at least 20 commodity pool participants who invested at least $1,311,000 in a commodity pool that trades forex and is operated by Crabapple.

According to the complaint, the defendants portrayed Crabapple as a reputable and well-established investment firm, claiming that Crabapple traded forex profitably since 2006 and is affiliated with a larger investment firm, which purportedly has over $50 million in assets under management.  The CFTC complaint further alleges that instead of using pool participants’ money to trade forex, defendants used it to pay for, among other things, Christy’s travel, restaurant meals, groceries, and other personal expenses, as well as payments to members of Christy’s family.  In total, defendants allegedly misappropriated at least $800,000.

In their sales solicitations, according to the complaint, the defendants advertise a “conservative” forex investment strategy that targets annual returns of approximately eight percent with a low risk of loss.  Defendants gave prospective customers marketing literature, including a formal disclosure document and monthly bulletins, which showed from 2006 to 2011: (a) average annual returns ranging from 15 percent to 20 percent; (b) 55 profitable months compared to only 10 unprofitable ones; and (c) the highest monthly losses reaching only negative 0.74 percent.  According to the complaint, however, this performance history was a lie, as the defendants’ actual forex trading records show consistent and significant losses from 2006 to 2011.  The complaint alleges that defendants’ claim that Crabapple had $50 million in assets under management was likewise false.

In order to perpetuate their fraud and misappropriation, the defendants allegedly prepared and distributed to pool participants false monthly account statements that showed pool participants earning purported monthly profits on their investments, even in months when defendants were losing money in all of their forex trading accounts, according to the complaint.

Finally, the complaint alleges that defendants attempted to keep their fraud hidden from the NFA.  During a 2011 examination, defendants provided NFA with false accounting records that labeled money received from pool participants as “loans from Christy.”  In two written documents given to the NFA, Christy falsely certified, among other things, that Crabapple did not operate any trading pools and had not received any money from customers to trade forex and that all of the money deposited with Crabapple represented Christy’s own funds.

In January 2012, NFA filed membership actions against Christy and Crabapple barring them from soliciting or accepting any funds from customers and from disbursing or transferring any funds without prior approval from NFA.  Despite this, the defendants continue to deposit money received from pool participants into Crabapple’s checking account and expend funds without NFA’s prior approval, according to the complaint.
In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and preliminary and permanent injunctions against further violations of the federal commodities laws, as charged.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia, the U.S. Marshals Service, Northern District of Georgia, and the NFA.

CFTC Division of Enforcement staff responsible for this case are Jo Mettenburg, Thomas Simek, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

FROM:  SEC 

April 11, 2012

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

The U.S. Securities and Exchange Commission announced that on April 6, 2012, the United States District Court for the Central District of California entered a Final Judgment against David E. Howard II, Flatiron Capital Partners, LLC (FCP), and Flatiron Systems, LLC (FS). Between December 2007 and March 2009, FCP and FS operated as investment companies that purported to trade securities using an automated trading system. Howard, a resident of New York City, was a co-managing member of FCP and the sole managing member of FS. The Commission’s complaint alleged, among other things, that, between December 2007 and January 2009, approximately 192 investors, located in at least 38 states, purchased LLC membership interests in FCP and FS. Investors were persuaded through false and misleading statements made by Howard and others to invest approximately $2.15 million in FCP and FS, and in addition, paid approximately $1.1 million in purported license fees for access to the trading systems. Thereafter, Howard misused and/or misappropriated almost $500,000 of the investor money and he and other principals lost the majority of the remaining funds through unsuccessful trading. Investors lost over $3 million in the scheme.

Howard, FCP and FS did not respond to the SEC’s allegations and the court therefore ordered default judgment against them. Howard, FCP and FS have each been enjoined from committing future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Howard has been enjoined from future violations of Sections 206(1), 206(2), 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and FCP and FS have each been enjoined from future violations of Section 7(1) of the Investment Company Act of 1940. The Judgment also found Howard and FCP jointly and severally liable to pay disgorgement of $487,028 plus prejudgment interest of $79,838.69 on that disgorgement for a total of $566,866.69 and Howard and FS jointly and severally liable to pay disgorgement of $1,124,218.95 plus prejudgment interest of $127,192.86 on that disgorgement for a total of $1,251,411.81. Finally, Howard was ordered to pay a penalty of $390,000.