4 INSURANCE AGENTS CHARGED BY SEC WITH SECURITIES FRAUD WHICH TARGETED THE ELDERLY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Four Insurance Agents in Securities Fraud Targeting Elderly Investors

09/26/2014 01:21 PM EDT

The Securities and Exchange Commission announced charges against four insurance agents for unlawfully selling securities in what turned out to be a multi-million dollar offering fraud targeting elderly investors.

The SEC previously charged a Colorado man who allegedly orchestrated the scheme and recruited active insurance agents to help him solicit investors in Colorado and several other states.  The scheme raised approximately $4.3 million during a nearly 18-month period.  The SEC’s investigation further found that the four insurance agents charged today solicited funds without registering with the SEC as a broker-dealer as required under the federal securities laws.

“When individuals act as a broker and sell securities to the public, they must comply with registration, supervision, and compliance requirements that exist to protect investors,” said Julie K. Lutz, Director of the SEC’s Denver Regional Office.  “These insurance agents improperly operated outside of that regulatory framework and thereby placed their clients at risk.”

According to the SEC’s order instituting administrative proceedings, the scheme primarily targeted retired annuity holders by using insurance agents to sell interests in a company called Arete LLC, which was controlled by the Colorado man orchestrating the scheme: Gary Snisky.  The insurance agents told investors that their funds would be used by Snisky to purchase government-backed agency bonds at a discount.  However, Snisky did not purchase bonds or conduct any such trading, and he misappropriated approximately $2.8 million of investor funds to pay commissions and make personal mortgage payments.

The SEC’s Enforcement Division alleges that the following three brokers raised approximately $1.5 million for Snisky and received almost $90,000 in commissions:

 Without admitting or denying the findings, Sorrells consented to an order finding that he violated Section 15(a) of the Securities Exchange Act of 1934.  He agreed to be barred from the securities industry, cease and desist from future violations of Section 15(a), and pay disgorgement of $207,213.34.  He also is subject to an additional financial penalty.  The settlement reflects substantial assistance that Sorrells provided in the SEC’s investigation.

The SEC’s Enforcement Division alleges that Meissner, Scott, and Tomich violated Section 15(a) of the Exchange Act, and is seeking disgorgement, penalties, and securities industry bars in the matter, which will be litigated before an administrative law judge.  The SEC’s case against Snisky, filed in November 2013, is still pending in federal court in Colorado.

The SEC’s investigation was conducted by Scott Mascianica, Kerry M. Matticks, and Jay A. Scoggins of the Denver office.  The SEC’s litigation will be led by Polly A. Atkinson and Leslie Hughes.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Colorado, Internal Revenue Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service.

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

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

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

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

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

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

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

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

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

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

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

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

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

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

"TEACH ME TO TRADE" INFOMERCIAL PERSONALITY TO PAY $225,000 TO SETTLE SEC FRAUD CHARGE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Former "Teach Me to Trade" Saleswoman and Infomercial Personality Linda (Knudsen) Woolf Agrees to Settle Securities Fraud Charges and Pay a $225,000 Penalty

The Securities and Exchange Commission announced that on April 16, 2013 the United States District Court for the Eastern District of Virginia entered settled final judgments against Linda (Knudsen) Woolf and Hands On Capital, Inc. Securities and Exchange Commission v. Linda Woolf, Hands On Capital, Inc., et al, Civil Action No. 1:08cv235 (E.D.Va. filed March 11, 2008). The final judgments resolve the Commission’s case against Woolf and Hands On Capital.

Woolf sold securities trading products and services such as classes, mentoring, and software called "Teach Me to Trade" to investors who wanted to learn how to trade securities. The Commission’s complaint alleges that Woolf told investors at Teach Me to Trade workshops that she had purchased mentoring, classes and software to learn to trade and had quickly turned profits by trading securities using Teach Me to Trade methods. The Commission alleges that Woolf’s tales of making money by trading were untrue; she was not a successful securities trader. Woolf sold the products and services pursuant to an independent contractor agreement between Hands On Capital and Teach Me to Trade

Under the terms of the settlement, Woolf (who filed for bankruptcy while this action was pending) agreed to pay a civil penalty of $225,000. Without admitting or denying the Commission’s allegations, Woolf and Hands On Capital also consented to the entry of final judgments permanently enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934. Additionally, the final judgments will permanently enjoin Woolf and Hands On Capital from receiving compensation for participating in the development, presentation, promotion, marketing, or sale of any classes, workshops, or seminars (and from receiving compensation for any sales of connected products or services) given to actual or prospective securities investors concerning securities trading.

SEC CHARGES HEDGE FUND MANAGERS WITH SECURITIES FRAUD

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Connecticut Hedge Fund Managers With Securities Fraud

In February 26, 2013, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Connecticut against Connecticut-based hedge fund managers David Bryson and Bart Gutekunst ("Gutekunst") and their advisory firm, New Stream Capital, LLC, ("New Stream") for lying to investors about the capital structure and financial condition of their hedge fund. New Stream was an unregistered investment adviser based in Ridgefield, Connecticut that managed a $750-plus million hedge fund focused on illiquid investments in asset-based lending. The SEC also charged New Stream Capital (Cayman), Ltd. ("Cayman Adviser"), a Caymanian adviser entity affiliated with New Stream, Richard Pereira ("Pereira"), New Stream’s former CFO, and Tara Bryson, New Stream’s former head of investor relations, for their role in the scheme. Tara Bryson has agreed to a proposed settlement relating to her conduct in this matter.

According to the SEC’s complaint, in March 2008, David Bryson and Gutekunst, New Stream’s lead principals and co-owners, decided to revise the fund’s capital structure to placate their largest investor, Gottex Fund Management Ltd. ("Gottex"), by giving Gottex and certain other preferred offshore investors priority over other investors in the event of a liquidation. Gottex had threatened to redeem its investment in the New Stream hedge fund because a wholesale restructuring of the fund just a few months earlier had created two new feeder funds and -- without Gottex’s knowledge -- granted equal liquidation rights to all investors, thereby eliminating the preferential status previously enjoyed by Gottex. Gottex’s investment totaled nearly $300 million at the time.

The SEC alleges that, even after revising the capital structure to put Gottex ahead of other fund investors, David Bryson and Gutekunst directed New Stream’s marketing department, led by Tara Bryson, to continue to market the fund as if all investors were on the same footing, fraudulently raising nearly $50 million in new investor funds on the basis of these misrepresentations. The marketing documents failed to disclose the March 2008 revisions to the capital structure to the new investors. In addition, Pereira, New Stream’s CFO, falsified the hedge fund’s operative financial statements to conceal the March 2008 revisions to the capital structure.

As further alleged in the complaint, disclosure of the March 2008 changes to the capital structure would have made it far more difficult to continue to raise money through the new feeder funds and would have spurred further redemptions from existing investors in the new feeder funds. As such, disclosure of the March 2008 changes would have adversely affected the defendants’ own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007. The defendants also misled investors about the increased level of redemptions after Gottex submitted its massive redemption request in March 2008. When asked by prospective investors about redemption levels, New Stream did not include the Gottex redemption and others that followed. For example, Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.

The SEC further alleges that by the end of September 2008, as the U.S. financial crisis worsened, the New Stream hedge fund was facing $545 million in redemption requests, causing it to suspend further redemptions and cease raising new funds. After several attempts at restructuring failed, New Stream and affiliated entities filed Chapter 11 bankruptcy petitions in March 2011. Based on current estimates, the defrauded investors are expected to receive approximately 5 cents on the dollar -- substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive.

The SEC’s complaint charges New Stream, David Bryson and Gutekunst with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8 thereunder. The Cayman Adviser is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC’s complaint charges Pereira and Tara Bryson with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The SEC also contends that David Bryson, Gutekunst and Pereira are each also liable pursuant to Section 20(a) of the Exchange Act as a controlling person for New Stream’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and David Bryson and Gutekunst are each further liable pursuant to Section 20(a) of the Exchange Act as a controlling person for the Cayman Adviser’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Finally, the SEC charges that David Bryson, Gutekunst, Pereira, and Tara Bryson are each also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting each other’s violations, and New Stream and the Cayman Adviser’s violations, of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; David Bryson and Gutekunst are each further liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting each other’s violations, and New Stream’s violations, of Sections 206(1) and 206(2) of the Advisers Act; and, in addition, David Bryson, Gutekunst, Pereira and Tara Bryson are each also liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder by New Stream, the Cayman Adviser, David Bryson and Gutekunst.

The complaint seeks a final judgment permanently enjoining the defendants from committing future violations of these provisions, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and imposing financial penalties.

In offering to settle the SEC’s charges, without admitting or denying the allegations, Tara Bryson consented to the entry of a final judgment that permanently enjoins her from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The settlement is subject to court approval. Tara Bryson also consented to the entry of a Commission order barring her from associating with any investment adviser, broker-dealer, municipal securities dealer, or transfer agent.

COMPANY AND TOP EXECUTIVES CHARGED BY SEC WITH RUNNING A BOILER ROOM OPERATION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Massachusetts-Based Corporation and Senior Officers in $26 Million Fraudulent Securities Offering

On September 10, 2012, the Securities and Exchange Commission filed an enforcement action in federal court in Boston charging Massachusetts-based Bio Defense Corporation and others for their roles in a fraudulent offering of unregistered Bio Defense securities. The defendants are charged with defrauding investors through various misrepresentations and schemes while raising at least $26 million in investor funds.

In addition to Bio Defense, the Commission’s complaint charges Michael Lu of Lexington, Massachusetts, the founder and former CEO and Chairman of Bio Defense; Jonathan Morrone of Newton, Massachusetts, a former Senior Executive Vice President of Bio Defense; Z. Paul Jurberg of Brookline, Massachusetts, a senior officer of Bio Defense and most recently a Senior Vice President of Sales and Marketing; Anthony Orth of Tustin, California, a former Vice President of Marketing for Bio Defense; and Brett Hamburger of Delray Beach, Florida, a consultant to Bio Defense who raised investor funds for the company. The Commission also named May’s International Corporation, an entity controlled by Michael Lu, as a relief defendant based on its receipt of investor funds.

According to the Commission’s complaint, filed in the United States District Court for the District of Massachusetts, Bio Defense, which purports to develop, manufacture and sell a machine for combating the use of dangerous biological agents through the mails, and its principals began engaging in unregistered offers and sales of securities to investors in the United States by at least 2004 and, after attracting the attention of various domestic state regulators in 2008, began utilizing "boiler room" firms to assist in selling shares of Bio Defense securities to overseas investors primarily in the United Kingdom.

The Commission’s complaint alleges that, while making unregistered offers and sales of securities to US investors from at least 2004 through August 2008, Lu, Morrone, and Jurberg made false claims to investors that Bio Defense was not paying financial compensation to its employees and officers. The complaint further alleges that these individuals gave potential investors the false impression that Bio Defense preserved its cash assets by having employees who worked for no, or very little, pay, suggesting that these employees were working solely or primarily for "sweat equity" shares, which might later become valuable when the company became profitable or underwent an initial public offering of stock. In fact, Bio Defense’s largest expense during those years was the money it paid to Lu, Morrone, and Jurberg and other employees from funds raised from investors; in 2004 alone, Bio Defense paid approximately $1 million in compensation to its officers and employees.

The Commission’s complaint further alleges that, as Bio Defense began raising money overseas in August 2008, the defendants transformed the company into a deceptive and fraudulent device designed to enrich its principals while also paying as much as 75% of investor proceeds as commissions to its overseas boiler room fundraisers. From August 2008 through approximately July 2010, Bio Defense’s most substantial source of cash generation and most significant expense was not manufacturing and selling machines, but instead was its securities promotion and sales activities. Bio Defense and its representatives did not tell investors that 75% of funds received from them would be going straight to boiler room operators.

The Commission alleges that all defendants violated Section 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; that Bio Defense, Lu, Morrone, Jurberg and Orth violated Sections 5(a) and 5(c) of the Securities Act; and that Lu, Morrone, Jurberg, Hamburger and Orth violated Section 15(a)(1) of the Exchange Act. The Commission also alleges, in the alternative, that Lu and Morrone are liable under Section 20(a) of the Exchange Act as control persons of Bio Defense for Bio Defense’s violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and, against Lu, Morrone, Jurberg and Orth, officer and director bars.

The Commission acknowledges the assistance of the Massachusetts Securities Division, the UK Financial Services Authority and the City of London Police in this matter.

LOCATE PLUS HOLDINGS CORPORATION AGREES TO SETTLE SECURITIES FRAUD CHARGES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
July 30, 2012The Securities and Exchange Commission (Commission) announced today that LocatePlus Holdings Corporation (LocatePlus) has agreed to settle charges it engaged in securities fraud from 2005 through 2007 by misleading investors about its funding and revenue in violation of the antifraud and reporting provisions of the federal securities laws. As part of the settlement, LocatePlus consented to an administrative order which prevents it from selling its securities in the public market.

Without admitting or denying the Commission's allegations, LocatePlus consented to the entry of a final judgment enjoining it from further violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a),13(b)(2)(A), 13(b)(2)(B), of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The proposed judgment, which is subject to court approval, will not impose monetary relief against LocatePlus in light of its bankruptcy and financial condition. LocatePlus also consented to an administrative order entered today, in separate previously-instituted administrative proceedings, revoking the registration of its securities pursuant to Section 12(j) of the Exchange Act based upon its filing of certain materially deficient reports and its repeated failure to file other required periodic reports. As a result of that administrative order, LocatePlus' securities will no longer trade in the public markets.

On October 14, 2010, the Commission filed a civil enforcement action in federal district court in Massachusetts alleging that LocatePlus violated the anti-fraud and the books and records provisions of the federal securities laws. LocatePlus is a former Beverly, Massachusetts-based company that sold on-line access to public record databases for investigative searches. On November 10, 2010, the United States Attorney's Office for the District of Massachusetts unsealed an indictment against former LocatePlus chief executive officer Jon Latorella, and former LocatePlus chief financial officer James Fields, charging them with conspiracy to commit securities fraud for their roles in a scheme to fraudulently inflate revenue at LocatePlus, as well as a scheme to manipulate the stock of another company. On the same day, the Commission amended its previously-filed civil injunctive action against LocatePlus, arising out of the same conduct, to add Latorella and Fields as defendants. On June 16, 2011, LocatePlus filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code and the U.S. Bankruptcy Court for the District of Massachusetts thereafter appointed a Trustee. On June 14, 2012, Latorella was sentenced to 60 months' imprisonment in the criminal case, to be followed by three years of supervised release, and the payment of restitution to be determined at a later hearing. The Commission's civil injunctive action against Latorella and Fields is stayed until the conclusion of the criminal case, which remains pending against Fields.

SEC CHARGES EQUITY RESEARCHER WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 26, 2012 — The Securities and Exchange Commission today charged Tai Nguyen, the owner of the California-based equity research firm Insight Research, with insider trading. The charges stem from the SEC’s ongoing investigation of insider trading involving so-called “expert networks” that provide specialized information to investment firms.

The SEC alleges that from 2006 through 2009, Nguyen frequently traded in the securities of Abaxis, Inc. based on inside information he received from a close relative employed at Abaxis. Nguyen repeatedly traded for himself in advance of the company’s quarterly earnings announcements while in possession of key data in those announcements, reaping tens of thousands of dollars in illicit profits. Nguyen also passed that same information to hedge fund clients of Insight Research, who used the inside information to make millions of dollars in profits from trading Abaxis securities.

“Nguyen claimed expertise in researching and analyzing technology companies, but his special edge was his willingness to break the law,” said Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit. “Like many other so-called ‘experts’ who trafficked in inside information, Nguyen now finds himself the subject of an enforcement action.”

The SEC has charged 23 defendants in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms. The insider trading alleged by the SEC has yielded illicit gains of more than $117 million, chiefly in shares of technology companies, including Apple, Dell, Fairchild Semiconductor, and Marvell Technology.

According to the SEC’s complaint, filed in federal court in Manhattan, Nguyen regularly obtained material nonpublic information about Abaxis Inc.’s quarterly earnings — including revenues, gross profit margins and earnings per share — from a relative who worked in Abaxis’s finance department. Nguyen used the information to trade Abaxis securities in his own account and reaped approximately $145,000 in illicit trading profits from 2006 through 2009.

In addition to trading in his own account, the SEC alleges that Nguyen passed the inside information to New York-based Barai Capital Management and Boston-based Sonar Capital Management, both of which were clients of Nguyen’s firm, Insight Research. The two hedge fund managers — who collectively were paying Insight Research tens of thousands of dollars each month — traded Abaxis securities based on the inside information that Nguyen provided and reaped more than $7.2 million in illicit gains for their hedge funds.

The SEC’s complaint charges Nguyen with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him to disgorge his ill-gotten gains, with interest, and pay financial penalties, and permanently barring him from future violations.

The SEC’s investigation is continuing. Daniel Marcus and Joseph Sansone, members of the SEC’s Market Abuse Unit in New York, conducted the investigation, along with Matthew Watkins, Neil Hendelman, Diego Brucculeri, and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.

SEC CHARGES MASSACHUSETTS INVESTMENT ADVISER WITH FRAUD AND OBTAINS ASSET FREEZE

FROM:  SECURITIES AND EXCHANGE COMMISSION
June 20, 2012
The Securities and Exchange Commission announced today that it has charged Gary J. Martel, a resident of Chelsea, Massachusetts, with defrauding investors. The Commission’s complaint, filed in federal district court on June 19, 2012, alleges that, from at least 2006 to the present, Martel, who conducted business under multiple names including Martel Financial Group and MFG Funding, defrauded at least 12 investors in Massachusetts, Vermont and Florida of at least $1.6 million, and likely obtained significantly more from other investors. Today, with Martel’s consent, a federal judge entered an order freezing Martel’s assets and prohibiting him from continuing to violate the antifraud provisions of the federal securities laws.

According to the complaint, Martel told investors, many of whom were retirees looking for a safe investment earning reliable income, that he would place their money in “pass-through bonds” or other purported fixed income or pooled investment products, which he assured investors were safe. The complaint alleges that Martel gave investors purported account statements showing interest earned and sometimes made small distributions of supposed interest, which encouraged investors to give Martel more money to invest. Martel also allegedly offered other fraudulent investments. In March 2012, according to the complaint, Martel solicited investments in a Facebook investment pool, claiming it would allow small investors to “own a piece” of the Facebook IPO. In fact, however, the complaint alleges that the investments Martel offered were fictitious and/or no longer exist, and that he transferred funds out of the bank account where investor funds were deposited to bank accounts he maintained for his businesses.

The Commission’s complaint alleges that Martel violated Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. In its action, the Commission seeks the entry of a permanent injunction against Martel, disgorgement of ill-gotten gains plus pre-judgment interest thereon, and the imposition of civil monetary penalties. In addition to freezing Martel’s assets and prohibiting him from violations of antifraud provisions of the federal securities laws, the order entered by the court today further prohibits Martel from soliciting, accepting, or depositing any money from investors and from altering or destroying any relevant documents and also requires him to provide an accounting of their assets and uses of investor funds.

The Commission appreciates the assistance of Secretary of the Commonwealth of Massachusetts William F. Galvin and the Massachusetts Securities Division, which notified the Commission of Martel’s conduct and investor losses and last week filed an action against Martel based on the same conduct.

SEC CHARGED HAWAII RESIDENT WITH BOILERROOM BUSINESS

FROM:  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 16, 2012 — The Securities and Exchange Commission today charged a Hawaii resident and two firms he used to orchestrate a scheme in which he covertly founded small companies, installed management, and recruited overseas boiler rooms that pressured investors into buying their stock while he pocketed more than $2 million in consulting fees from proceeds of the fraudulent stock sales.

The SEC alleges that Nicholas Louis Geranio worked behind the scenes to create eight U.S.-based companies used to raise money through the sale of Regulation S stock, which is exempt from SEC registration under the securities laws because it is offered solely to investors located outside the United States. Geranio handpicked the management for the companies, primarily Keith Michael Field of Sherman Oaks, Calif., who served as an officer, director, or investor relations representative for each company and also is charged in the SEC’s complaint. Geranio then set up consulting arrangements through his firms — The Good One Inc. and Kaleidoscope Real Estate Inc. — so he could instruct management on how to run the companies and raise money offshore. Geranio extracted consulting fees from the companies, which generally had few or no employees, little or no office space, and no sales or customers.

The SEC alleges that Field drafted misleading business plans, marketing materials, and website information about the companies that were provided to investors as part of fraudulent solicitation efforts by teams of telemarketers operating in boiler rooms that Geranio recruited primarily in Spain. The boiler rooms used high-pressure sales tactics and false statements about the companies to raise more than $35 million from investors. Meanwhile, Geranio instructed Field and others to buy and sell shares in some of the companies to create an illusion of trading activity and manipulate upwards the price of the publicly-traded stock.

“Geranio covertly set up companies and manipulated the market for their stock to profit from aggressive offshore boiler room activity,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement. “Geranio pulled the strings while Field scripted the show for the boiler rooms to bring a payday to everyone but the investors.”

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Geranio was the subject of a previous SEC enforcement action in 2000. In his latest misconduct, he concealed his role from investors and the public at all times by acting through The Good One and Kaleidoscope. The scheme lasted from April 2007 to September 2009. Geranio began by locating and acquiring shell companies to create the issuers used in the scheme: Blu Vu Deep Oil & Gas Exploration Inc., Green Energy Live Inc., Microresearch Corp., Mundus Group Inc., Power Nanotech Inc., Spectrum Acquisition Holdings Inc., United States Oil & Gas Corp., and Wyncrest Group Inc. Geranio then appointed management for these companies, in some cases turning to business associates, friends, or others. For example, the former CEO of Blu Vu was someone Geranio met while kite surfing in Malibu.

According to the SEC’s complaint, Geranio worked behind the scenes to keep the companies’ publicly-traded shares trading at prices conducive to the boiler room sales. He did this by directing Field, personal friends, and others to open accounts and buy or sell shares in at least five of the companies as part of matched orders and manipulative trades that created the false impression of active trading and market value in these stocks. The manipulative trades allowed the boiler rooms to sell the Regulation S shares to overseas investors at higher prices.

The SEC alleges that boiler room representatives recruited by Geranio induced investors by using aggressive techniques consistent with boiler room activity. For instance, they promised immediate and substantial investment returns, convinced investors that they needed to purchase the shares immediately or miss the grand opportunity altogether, and threatened legal action if an investor did not agree to purchase shares that the representatives believed the investor had already agreed to purchase. The boiler rooms also used “advance fee” solicitations, telling investors that only if they purchased shares in one of these companies would the boiler room agree to sell their other shares. Many of the investors were elderly and living in the United Kingdom.

According to the SEC’s complaint, investors were directed to pay for their Regulation S stock by sending money to U.S.-based escrow agents. As arranged by Geranio, the escrow agents paid 60 to 75 percent of the approximately $35 million raised from investors to the boiler rooms as their sales markups, kept 2.5 percent as their own fee, and paid the remaining proceeds back to the companies that Geranio created. The companies (or in some cases the escrow agents) then funneled approximately $2.135 million of the proceeds back to Geranio through The Good One and Kaleidoscope in the form of consulting fees, and paid Field approximately $279,000.

The SEC alleges that Geranio also assisted in diverting $240,000 in investor funds toward an undisclosed down payment on a property to start a Hawaiian wedding planning company.

The SEC’s complaint alleges that Geranio, Field, The Good One and Kaleidoscope violated Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. The complaint alleges that Field also violated Section 17(a)(2) of the Securities Act and aided and abetted the companies’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Geranio is liable as a control person of The Good One and Kaleidoscope under Exchange Act Section 20(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, penny stock bars, and permanent injunctions against all of the defendants, as well as officer and director bars against Geranio and Field. The complaint seeks disgorgement and prejudgment interest against relief defendant BWRE Hawaii LLC based on its alleged receipt of investor funds.
The SEC's investigation, which is continuing, has been conducted by Ricky Sachar, Carolyn Kurr, and Wendy Kong under the supervision of Josh Felker with assistance from Jim Daly in the Office of International Affairs. Richard Simpson will lead the litigation. The SEC acknowledges the assistance of the City of London Police, Macedonian Securities and Exchange Commission, Macedonian Public Prosecutor, Lithuanian Securities Commission, Australian Securities and Investments Commission, Comision Nacional del Mercado de Valores (Spain), and Financial Market Supervisory Authority (Switzerland).

SEC OBTAINS AN ASSET FREEZE TO STOP ALLEN WEINTRAUB FROM PURPORTEDLY SELLING PRE-IPO FACEBOOK SHARES

FROM:  SEC

April 24, 2012

On April 4, 2012, the U.S. District Court for the Southern District of Florida in Miami issued an Order to Show Cause and Other Emergency Relief (Order) to halt Allen Weintraub’s ongoing fraudulent scheme of selling securities of an investment vehicle that he falsely represented owned pre-IPO shares of Facebook, Inc. The Court’s Order temporarily freezes the assets of Weintraub and certain shell companies through which he apparently operates. The order also directed Weintraub to demonstrate, among other things, why he should not be held in contempt for violating the Court’s Final Judgment in SEC v. Allen E. Weintraub and AWMS Acquisition, Inc., d/b/a Sterling Global Holdings, Case No. 11-21549-CIV-HUCK/BANDSTRA (S.D.Fla.), which was entered on January 10, 2012 (Final Judgment). The Final Judgment enjoined Weintraub from violating, among other things, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The Commission’s motion for an order to show cause alleges that in February 2012, Weintraub, acting through an alias, William Lewis, and through entities named Private Stock Transfer, Inc., PST Investments III, Inc. (PST Investments), and World Financial Solutions, defrauded investors by selling them worthless shares in PST Investments. Weintraub had falsely represented that he would sell the investors pre-IPO shares of Facebook, Inc., and that PST Investments had an ownership interest in Facebook stock. The Commission’s motion also alleges that Weintraub was utilizing the website privatestocktransfer.com to perpetrate his scheme. The Court’s Order directed that this website be deactivated. 

On December 30, 2011, the Court entered an order granting the Commission’s motion for summary judgment against Weintraub and his shell company, Sterling Global. In its Order, the Court found that Weintraub deceived the public by making false and misleading statements regarding Sterling Global’s ability to purchase and operate Eastman Kodak Company and AMR Corporation. The Court’s January 2012 Final Judgment permanently enjoined Weintraub and Sterling Global from future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-8 thereunder, and ordered them to each pay a civil money penalty in the amount of $200,000.

ALLEGEDLY ROBOTS ARE SMARTER THAN PEOPLE WHEN IT COMES TO SECURITIES FRAUD

FROM:  SEC

April 20, 2012

Securities and Exchange Commission v. Thomas Edward Hunter and Alexander John Hunter, Civil Action No. 12-CV-3123 (S.D.N.Y.)

The Securities and Exchange Commission today charged twin brothers from the U.K. with defrauding approximately 75,000 investors through an Internet-based pump-and-dump scheme in which they touted a fake “stock picking robot” that purportedly identified penny stocks set to double in price. Instead, the brothers were merely touting stocks they were being paid separately to promote.

The SEC alleges that Alexander John Hunter and Thomas Edward Hunter were just 16 years old when they set their fraud in motion beginning in 2007. They disseminated e-mail newsletters through a pair of websites they created to tout stocks selected by the robot – which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Their claims were persuasive as the Hunters received at least $1.2 million from investors primarily in the U.S. who paid $47 apiece for annual newsletter subscriptions. Some investors paid an additional fee for the “home version” of the robot software.

The SEC alleges that the brothers separately created a third website where they marketed their newsletter subscriber list to penny stock promoters and boasted, “One email to this list of people rockets a stock price.” The Hunters were in turn paid to send selected penny stock ticker symbols to their subscribers, who were misled to believe that the stock “picks” were the product of the robot. The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors in most cases with shares worth less than they had purchased them for earlier in the day.

According to the SEC’s complaint, the Hunters also offered subscribers a downloadable version of the stock picking robot for an additional fee of $97. Rather than performing the analysis advertised, the software was actually designed to deliver users a stock pick supplied by the brothers.

The Commission’s complaint further alleges that the Defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctions against future violations by the Defendants and disgorgement of all ill-gotten gains, including prejudgment interest and civil penalties.

SEC ALLEGES THREE FORMER "WELLCARE" EXECS IMPROPERLY RETAINED $40 MILLION

The following excerpt is from the SEC website:

“On January 9, 2012, the Securities and Exchange Commission (“Commission”) filed a civil injunctive action against three former executives of WellCare Health Plans, Inc. (“WellCare”), a managed care services company that administers federal government-sponsored health care programs. According to the Commission’s complaint, from 2003 to 2007, Todd Farha, former Chief Executive Officer, Paul Behrens, former Chief Financial Officer, and Thaddeus Bereday, former General Counsel, (collectively, “the Defendants”), devised and carried out a fraudulent scheme that deceived the Florida Agency for Health Care Administration (“AHCA”) and the Florida Healthy Kids Corporation (“Healthy Kids”) by improperly retaining over $40 million in health care premiums the company was statutorily and contractually obligated to spend on certain health care services or reimburse to the state agencies. As a result of the scheme, WellCare recorded the retained amount as revenue, which materially inflated its net income and diluted earnings per share (“EPS”) in its public financial statements.

As alleged in the complaint, WellCare received premiums from AHCA and Healthy Kids that WellCare was required, by contract and by statute, to spend on certain eligible health care services for low-income plan participants. If WellCare spent less than a certain percentage of the premiums on eligible health care services, it was required to refund some or all of the difference to the State of Florida. According to the complaint, the Defendants devised a scheme to evade the state’s regulatory framework and fraudulently retain the premiums by, among other methods, funneling the premiums through an internal subsidiary and by applying administrative and other non-allowable expenses in their calculation of money spent on health care services. In total, through their fraudulent conduct, the complaint alleges that WellCare reduced the refunds it paid to AHCA by approximately $35 million and to Healthy Kids by approximately $6 million.

The excess premiums retained by the Defendants went straight to WellCare’s bottom line. WellCare materially misstated its net income and EPS in filings with the Commission and in quarterly and annual earnings releases from 2004-2006 and the first two quarters of 2007. On January 26, 2009, WellCare filed its Form 10-K for 2007 and restated its financial results for those time periods. The Restatement reduced WellCare’s reported net income and EPS by approximately 14% for fiscal year (“FY”) 2004, 9% for FY 2005, 13% for FY 2006, and 9% for the first quarter of FY 2007.

The Commission’s complaint also alleges that, after setting their fraudulent scheme in motion, the Defendants sold approximately 1.6 million WellCare shares into the public market for gross proceeds of approximately $91 million. The Commission alleges that the Defendants sold these shares on the basis of the material, nonpublic information that they were conducting a fraudulent scheme that impacted WellCare’s financial results, caused false and misleading statements, and imperiled the Company’s business relationship with the State of Florida. According to the complaint, the Defendants sold the shares pursuant to 10b5-1 trading plans that were created and amended in bad faith, and through three public stock offerings conducted while the scheme was ongoing.

Based on the conduct alleged in the complaint, the Commission charges that each of the Defendants violated antifraud provisions Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rule 10b-5, and also violated Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1. All of the Defendants are also charged with aiding and abetting WellCare’s violations of reporting, books and records, and internal controls provisions, namely, Sections (13)(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13. Bereday is charged with aiding and abetting Farha’s and Behrens’ violations of antifraud provisions Section 10(b) and Rule 10b-5(b) of the Exchange Act. Finally, Farha and Behrens are charged with violating Exchange Act Rules 13b2-2 and 13a-14, and Section 304(a) of Sarbanes-Oxley, which requires that the CEO or CFO of a company that restates its financial results to reimburse the company any incentive-based or equity-based compensation received and any profits realized from the sale of the company’s stock during the 12-month period following initial issuance of the misleading financial statements.

As to each Defendant, the Commission is seeking a judgment permanently enjoining them from violating the provisions of the securities laws specified above, civil penalties, disgorgement of ill-gotten gains with prejudgment interest, and officer and director bars. As to Farha and Behrens, the Commission seeks reimbursement of incentive-based and equity-based compensation pursuant to Section 304(a) of Sarbanes-Oxley.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the Middle District of Florida, the Office of Inspector General for the Department of Health and Human Services and the Federal Bureau of Investigation.”

SEC CHARGES FORMER EXECUTIVES AT FANNIE MAE AND FREDDIE MAC WITH SECUITIES FRAUD

The following excerpt is from the Securities and Exchange Commission website:

“Washington, D.C., Dec. 16, 2011 — The Securities and Exchange Commission today charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission's litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies' current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.

Three former Fannie Mae executives - former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae's Single Family Mortgage business, Thomas A. Lund - were named in the SEC's complaint filed in U.S. District Court for the Southern District of New York.
The SEC also charged three former Freddie Mac executives — former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius — in a separate complaint filed in the same court.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division. "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors."

The SEC is seeking financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars against Mudd, Dallavecchia, Lund, Syron, Cook, and Bisenius. Both lawsuits allege that the former executives caused the federal mortgage firms to materially misstate their holdings of subprime mortgage loans in periodic and other filings with the Commission, public statements, investor calls, and media interviews. The suit involving the Fannie Mae executives also includes similar allegations regarding Alt-A mortgage loans. The suit against the former Fannie Mae executives alleges they made misleading statements — or aided and abetted others — between December 2006 and August 2008. The former Freddie Mac executives are alleged to have made misleading statements — or aided and abetted others - between March 2007 and August 2008.

The SEC's complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those "made to borrowers with weaker credit histories," and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company's reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or "EA" loans.
Fannie Mae's executives also knew and approved of the decision to underreport Fannie Mae's Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae's Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.

The misleading disclosures were made as Fannie Mae's executives were seeking to increase the Company's market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae's exposure to high-risk loans, the SEC alleged.

In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had "basically no subprime exposure." Unbeknown to investors, as of December 31, 2006, Freddie Mac's Single Family business was exposed to approximately $141 billion of loans internally referred to as "subprime" or "subprime like," accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

The SEC's complaint alleges that Mudd violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5(b) and 13(a)14(a) thereunder, and Section 17(a)(2) of the Securities Act of 1933 (the "Securities Act"); and that Mudd aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. The SEC complaint also alleges that Dallavecchia violated Section 17(a)(2) of the Securities Act and aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. Finally, the SEC complaint alleges that Lund aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder.
The SEC's complaint alleges that Syron and Cook violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder and Securities Act Section 17(a)(2); that Syron violated Exchange Act Rule 13a-14; and that Syron, Cook and Bisenius aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 12b-20 and 13a-13 thereunder.
The SEC's investigation of Fannie Mae was conducted by Senior Attorneys Natasha S. Guinan, Christina M. Marshall, Liban Jama, Mona L. Benach, and Associate Chief Accountant, Peter Rosario, under the supervision of Assistant Director Charles E. Cain, and Associate Director Stephen L. Cohen. Sarah Levine and James Kidney will lead the SEC's litigation efforts.”

CITIGROUP TO PAY $185 MILLION TO SETTLE CHARGES

The following excerpt is from the SEC website: “Washington, D.C., Oct. 19, 2011 – The Securities and Exchange Commission today charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits. The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select. Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors. The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir H. Bhatt. “The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.” Kenneth R. Lench, Chief of the Structured and New Products Unit in the SEC Division of Enforcement, added, “As the collateral manager, Credit Suisse also was responsible for the disclosure failures and breached its fiduciary duty to investors when it allowed Citigroup to significantly influence the portfolio selection process.” According to the SEC’s complaints filed in U.S. District Court for the Southern District of New York, personnel from Citigroup’s CDO trading and structuring desks had discussions around October 2006 about the possibility of establishing a short position in a specific group of assets by using credit default swaps (CDS) to buy protection on those assets from a CDO that Citigroup would structure and market. After discussions began with Credit Suisse Alternative Capital (CSAC) about acting as the collateral manager for a proposed CDO transaction, Stoker sent an e-mail to his supervisor. He wrote that he hoped the transaction would go forward and described it as the Citigroup trading desk head’s “prop trade (don’t tell CSAC). CSAC agreed to terms even though they don’t get to pick the assets.” The SEC alleges that during the time when the transaction was being structured, CSAC allowed Citigroup to exercise significant influence over the selection of assets included in the Class V III portfolio. The transaction was marketed primarily through a pitch book and an offering circular for which Stoker was chiefly responsible. The pitch book and the offering circular were materially misleading because they failed to disclose that Citigroup had played a substantial role in selecting the assets and had taken a $500 million short position that was comprised of names it had been allowed to select. Citigroup did not short names that it had no role in selecting. Nothing in the disclosures put investors on notice that Citigroup had interests that were adverse to the interests of CDO investors. According to the SEC’s complaints, the Class V III transaction closed on Feb. 28, 2007. One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.” On Nov. 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on Nov. 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost virtually their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position. The SEC alleges that Citigroup and Stoker each violated Sections 17(a)(2) and (3) of the Securities Act of 1933. While the SEC’s litigation continues against Stoker, Citigroup has consented to settle the SEC’s charges without admitting or denying the SEC’s allegations. The settlement is subject to court approval. Citigroup consented to the entry of a final judgment that enjoins it from violating these provisions. The settlement requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty for a total of $285 million that will be returned to investors through a Fair Fund distribution. The settlement also requires remedial action by Citigroup in its review and approval of offerings of certain mortgage-related securities. The SEC instituted related administrative proceedings against CSAC, its successor in interest Credit Suisse Asset Management (CSAM), and Bhatt. The SEC found that as a result of the roles that they played in the asset selection process and the preparation of the pitch book and the offering circular for the Class V III transaction, CSAM and CSAC violated Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 17(a)(2) of the Securities Act and that Bhatt violated Section 17(a)(2) of the Securities Act and caused the violations of Section 206(2) of the Advisers Act by CSAC. Without admitting or denying the SEC’s findings, CSAM and CSAC consented to the issuance of an order directing each of them to cease and desist from committing or causing any violations, or future violations, of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and requiring them to pay disgorgement of $1 million in fees that it received from the Class V III transaction plus $250,000 in prejudgment interest, and requiring them to pay a penalty of $1.25 million. Without admitting or denying the SEC’s findings, Bhatt consented to the issuance of an order directing him to cease and desist from committing or causing any violations or future violations of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and suspending him from association with any investment adviser for a period of six months.”

SPEECH BY MARY SCHAPIRO AT OCTOBER 12, 2011 OPEN MEETING OF THE SEC

The following excerpt is from the SEC website: SEC Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. October 12, 2011 "Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on October 12, 2011. The Commission today will consider two proposals stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act. First, we will consider whether to propose a rule to implement Section 619 of the Dodd-Frank Act — or what we commonly refer to as the Volcker Rule. Second, we will consider whether to propose new rules that would set out the registration process for security-based swap dealers and major security-based swap participants. I would like to thank the U.K. Financial Services Authority and its technical staff as well as the Commission’s technical staff for making it possible for me to participate in this open meeting from London. Although I do not know if this is a first for the Commission, it certainly is a first for me, and I appreciate the effort that has gone into facilitating this transatlantic open meeting to propose these important Dodd-Frank Act rulemakings. * * * We begin with the proposal to implement the Volcker Rule, which generally prohibits certain banking entities from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. The statute is intended to curb the proprietary interests of commercial banks and their affiliates in order to protect taxpayers and consumers by prohibiting insured depository institutions from engaging in risky proprietary trading. Section 619 is a key component of the Dodd-Frank legislation. Its implementation would be a step forward in reducing conflicts of interests between the self-interests of banking entities and the interests of their customers. The statute is aimed at constraining banking entities’ proprietary trading, protecting the provision of essential financial services and promoting the stability of the U.S. financial system. In drafting this proposal, the Commission worked with our fellow regulators to ensure the rule will be applied consistently across institutions. Indeed, today’s rule is being proposed jointly with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and eventually the CFTC. This has been an extensive undertaking. Throughout the process of formulating this proposal, the SEC staff worked actively and continuously with the staffs of our fellow regulators in this collaborative effort, marked by more than a year of weekly, if not more frequent, interagency staff conference calls, interagency meetings, and shared drafting. The dedication and collective efforts of this interagency team deserve our thanks. Under the proposed rule, certain banking entities generally would be prohibited from engaging in proprietary trading. This includes banks, bank holding companies and their affiliates — as well as the U.S. operations of foreign banks and bank holding companies and their affiliates, including affiliated broker-dealers and investment advisers. In addition, the proposed rule prevents these entities from circumventing this proprietary trading prohibition in that it restricts these entities from sponsoring or investing in hedge funds or private equity funds. At the same time, the proposed rule — as required by the Dodd-Frank Act — permits certain activities necessary for capital raising and the healthy functioning of our securities markets. These include such things as market-making related activities, risk-mitigating hedging, and underwriting. These otherwise permitted activities are not permitted, however, if they involve material conflicts of interest, high-risk assets or trading strategies, or if they threaten the safety and soundness of banking institutions or U.S. financial stability. Although the proposed rule broadly captures all securities and security-based swap dealer accounts, the proposal seeks to strike an appropriate balance between prohibiting proprietary trading and continuing to permit activities that are consistent with normal course market making, risk-mitigating hedging and underwriting. In addition, the proposed rule implements the Dodd-Frank Act’s prohibition on, as principal, directly or indirectly acquiring and retaining an ownership interest in, or having certain relationships with, a hedge fund or private equity fund. In developing this proposal, we have considered comments received in response to the Financial Stability Oversight Council’s (FSOC) January 2011 study formalizing the FSOC’s findings and recommendations for implementing Section 619, as well as additional comments we have received. That said, we believe it is important to gain additional information, including empirical data, about the potential impacts the proposed rule will have. We ask a number of questions about such impacts in the proposal, and we look forward to receiving comments. Before I turn to David Blass of the Division of Trading and Markets to provide a detailed discussion about the staff’s recommendation, I would like to thank Gregg Berman, David Blass, Catherine McGuire, Josephine Tao, Liz Sandoe, David Bloom, Anthony Kelly, Angela Moudy, Daniel Staroselsky, and Nathaniel Stankard from the Division of Trading and Markets for their incredibly hard work on this. In addition, I would like to thank Robert Plaze, Daniel Kahl, Tram Nguyen, Michael Spratt, and Parisa Haghshenas from the Division of Investment Management for their long hours and hard work devoted to preparing the recommendation before us. I also would like to thank their colleagues in the Division of Corporation Finance: Paula Dubberly, Amy Starr, Katherine Hsu, John Harrington, and David Beaning. In the Division of Enforcement: Charlotte Buford and Jason Anthony. In the Office of the General Counsel: Meridith Mitchell, Lori Price, Paula Jenson, Sara Cortes, and Jill Felker. And in the Division of Risk, Strategy, and Financial Innovation: Jennifer Marrietta-Westberg, Adam Yonce, Chuck Dale, and Rick Bookstaber. In addition, I would like to thank our colleagues at the Board, the CFTC, the FDIC, the OCC, and the Department of the Treasury for their collegiality and thoughtful input in working with our staff to develop the proposal before us. And finally, of course, I would like to thank my colleagues on the Commission and their counsels for their work and comments on the proposal. I will now ask David to provide us with additional details about the staff’s recommendations.”

FIRM AND TOP MANAGEMENT CHARGED BY SEC FOR VIOLATING ANTI-FRAUD PROVISIONS OF THE SECURITIES LAWS

The following is an excerpt from the SEC website: “On October 4, 2011, the Securities and Exchange Commission (SEC) filed a complaint in United States District Court for the Northern District of New York charging StratoComm Corporation, its CEO Roger D. Shearer, and its former Director of Investor Relations, Craig Danzig, with violating the antifraud provisions of the securities laws and with illegally selling securities in unregistered transactions. On October 3, 2011, the SEC filed a complaint in United States District Court for the Southern District of Florida alleging that attorney Stewart A. Merkin, StratoComm’s outside counsel, also committed securities fraud. The SEC’s complaint filed in Albany, New York alleges that StratoComm, acting at Shearer’s direction and with Danzig’s assistance, issued and distributed public statements falsely portraying the company as actively engaged in the manufacture and sale of telecommunications systems for use in underdeveloped countries, particularly Africa. In reality, the company had no product and no revenue. The SEC’s complaint also alleges that StratoComm, Shearer and Danzig sold investors approximately $3 million worth of StratoComm stock in unregistered transactions. Shearer used much of that money for his own purposes, including paying a substantial part of the restitution he owed in connection with his guilty plea in a prior criminal proceeding. The SEC’s complaint charges StratoComm with 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. It charges Shearer with violating Sections 5(a) and 5(c) of the Securities Act, aiding and abetting StratoComm’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and with being liable as a control person for StratoComm’s violations. The SEC’s complaint charges Danzig with violating Sections 5(a), 5(c), and 17(a) of the Securities Act, with violating Section 15(a) of the Exchange Act, and with aiding and abetting StratoComm’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks permanent injunctions, disgorgement of unlawful proceeds plus prejudgment interest, and a financial penalty from all defendants. It also seeks an order prohibiting Shearer from serving as an officer or director of a public company and prohibiting Shearer and Danzig from participating in the offering of a penny stock. The SEC’s complaint filed in Miami, Florida alleges that Merkin wrote four attorney representation letters for posting on the website of Pink Sheets LLC and its successor, Pink OTC Markets, Inc. In those letters Merkin disclaimed knowledge of any investigation into possible violations of the securities laws by StratoComm or any of its officers or directors. However, the SEC’s complaint also alleges that Merkin was representing StratoComm and several individuals in connection with the SEC’s investigation at the time. Nevertheless, in order that StratoComm’s shares would continue to be quoted, the SEC’s complaint alleges that Merkin falsely stated that to his knowledge StatoComm was not under investigation. The SEC’s complaint charges Merkin with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. It seeks a permanent injunction, disgorgement of unlawful proceeds plus prejudgment interest, a financial penalty, and an order prohibiting Merkin from participating in the offering of a penny stock.”