SEC ANNOUNCES PRISON SENTENCE FOR JEREMY FISHER FOR MISAPPROPRIATING INVESTOR FUNDS

U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23139 / November 24, 2014

Securities and Exchange Commission v. Jeremy Fisher, The Good Life Financial Group, Inc., and The Good Life Global, LLC, Civil Action No. 3:13-cv-00683

Jeremy Fisher Sentenced to 30 Months for Offering Fraud

The Securities and Exchange Commission announced today that on October 27, 2014, the Honorable John E. Steele of the United States District Court for the Middle District of Florida sentenced Jeremy S. Fisher to 30 months in prison, followed by 3years of supervised release and ordered him to forfeit $500,000. The Court has scheduled a hearing to set the amount of restitution to be ordered on December 15, 2014. Fisher, 44, of La Crescent, Minnesota, had previously pled guilty to two counts of wire fraud for his role in stealing over $1 million from 18 victims in an investment scam. The U.S. Attorney's Office for the Central District of Florida filed criminal charges against Fisher on January 14, 2014. Fisher was ordered to surrender on December 1, 2014, to begin serving his prison sentence.

The criminal charges arose out of the same facts that were the subject of a settled civil enforcement action that the Commission filed against Fisher on September 30, 2013. The Commission's complaint alleges that from at least August 2009 through December 2012, Fisher raised approximately $1.04 million from approximately 18 investors who invested in unregistered securities offerings conducted by Fisher through his two companies. Fisher offered investors the opportunity to invest their money through a "special trading platform" that supposedly generated significant returns. Fisher told investors that their money would be deposited in an overseas bank account and used as collateral for the purchase and sale of collateralized debt obligations and medium term notes on the trading platform. However, Fisher instead fraudulently misappropriated and converted investors' funds for his personal use to pay previous investors, to purchase a house and car and to pay his daughter's tuition and other personal and business expenses. Fisher also provided quarterly statements to investors which falsely represented that investors were earning money on their investments. The Commission's complaint alleged that Fisher and his companies violated 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. The complaint also alleged Fisher violated Section 15(a) of the Exchange Act.

On October 16, 2013 the Court in the Commission's case entered orders of permanent injunction and disgorgement, plus prejudgment, totaling $936,226 to be paid jointly and severally among Fisher and his companies and ordered Fisher to pay a civil penalty of $150,000. Fisher and his companies consented to the entry of the Court's orders.

ALLEGED FUNDS MISAPPROPRIATION GENERATES A GRAND JURY INDICTMENT

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Jeremy Fisher Indicted for Fraud

The Securities and Exchange Commission announced that on February 5, 2014, a Grand Jury in the United States District Court for the Middle District of Florida returned an Indictment charging Jeremy S. Fisher with four counts of wire fraud. The Indictment also seeks forfeiture of property obtained as a result of the alleged criminal violations.

The Indictment alleges that from at least August 2009 through December 2012, Fisher raised approximately $1.04 million from approximately 18 investors who invested in unregistered securities offerings conducted by Fisher through his companies. Fisher offered investors the opportunity to invest their money through a “special trading platform” that supposedly generated significant returns. Fisher told investors that their money would be deposited in an overseas bank account and used as collateral for the purchase and sale of collateralized debt obligations and medium term notes on the trading platform. However, Fisher instead fraudulently misappropriated and converted investors' funds for his personal use to pay previous investors, to purchase a house and car and to pay his daughter's tuition and other personal and business expenses. Fisher also provided quarterly statements to investors which falsely represented that investors were earning money on their investments.

The Indictment's allegations are based on the same conduct underlying the Commission's September 30, 2013 Complaint against Fisher filed in the United States District Court for the Western District of Wisconsin. The Commission charged Fisher and his two companies with 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. The Complaint also charged Fisher with violations of Section 15(a) of the Exchange Act. The defendants entered into consents with the Commission agreeing to the entry by the Court of the relief requested in the complaint, including orders of permanent injunction and disgorgement, plus prejudgment, totaling $936,226 to be paid jointly and severally among the defendants. Fisher has also agreed to pay a civil penalty of $150,000. On October 16, 2013, the Court entered the Final Judgments against Fisher and his companies.

SEC CHARGES MERRILL LYNCH IN CASE INVOLVING CDO BOOKS AND RECORDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.

Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.

The SEC’s order instituting settled administrative proceedings finds that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans I CDO Ltd. and Norma CDO I Ltd.  Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.

“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”

According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio ... and in return [Magnetar] retain[s] the equity class and we distribute the debt.”  The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

According to the SEC’s order, Magnetar had a contractual right to object to the inclusion of collateral in the Octans I CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that precedes the closing of a CDO.  Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding.  The SEC has charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.

The SEC’s order finds that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC.  NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO.  The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR.  Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.”  The SEC also today announced charges against two managing partners of NIR.

According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates.  As it did in the Octans I and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.”  To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades.  Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.

“Keeping adequate books and records is not an elective requirement of the federal securities laws, and broker-dealers who fail to properly record transactions will be held accountable for their violations,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2).  The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.  Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.

The SEC’s investigation was conducted by staff in the New York Regional Office and the Complex Financial Instruments Unit, including Steven Rawlings, Gerald Gross, Tony Frouge, Elisabeth Goot, Brenda Chang, John Murray, Sharon Bryant, Kapil Agrawal, Douglas Smith, Howard Fischer, Daniel Walfish, and Joshua Pater.  Several examiners in the New York office assisted, including Edward Moy, Luis Casais, Thomas Shupe, William Delmage, George DeAngelis, Syed Husain, and James Sawicki.

SEC CHARGES N.J.-BASED FIRM AND OWNER WITH MISLEADING INVESTORS IN A CDO

FROM:  THE U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced charges against a Morristown, N.J.-based investment advisory firm and its owner for misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties.

The SEC’s Enforcement Division alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors.  Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO.  These rights, which were not disclosed to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments.  The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.

“A collateral manager’s independent selection of assets is an important selling point to potential CDO investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.”

According to the SEC’s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO.  Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006.  Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO.  Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs.  Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar’s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.

The SEC’s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process.  Harding’s own credit analysis of many of the selected assets was disregarded, and Magnetar’s influence over the portfolio was omitted from materials used to solicit investors for the CDO.  Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.

The SEC’s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers.  As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored.  In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, “I never forget my true friends.”

The SEC’s Division of Enforcement alleges that by engaging in the conduct described in the SEC’s order, Harding and Chau violated Section 17(a) of the Securities Act of 1933 and Section 206 of the Investment Advisers Act of 1940.  Chau also is charged with aiding and abetting and causing Harding’s violations. The proceedings before an administrative law judge will determine what relief against Harding and Chau is in the public interest.

The SEC’s investigation, which is continuing, has been conducted by staff in the Complex Financial Instruments Unit and the New York Regional Office, including Steven Rawlings, Brenda Chang, Elisabeth Goot, Sharon Bryant, Kapil Agrawal, Howard Fischer, Daniel Walfish, and Douglas Smith.  The case was supervised by Reid Muoio, and the litigation will be led by Mr. Fischer, Mr. Walfish, Ms. Goot, and Ms. Chang.

COMPANY CHARGED WITH USING DUMMY ASSETS

FROM: U.S. SECURITES AND EXCHANGE COMMISSION
Firm to Pay $127.5 Million to Settle ChargesWashington, D.C., July 18, 2012
— The Securities and Exchange Commission today charged the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) by using "dummy assets" to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.

According to the SEC’s complaint against Mizuho Securities USA Inc., the firm made approximately $10 million in structuring and marketing fees in the deal. Mizuho agreed to pay $127.5 million to settle the SEC’s charges, and the others charged also agreed to settle the SEC’s actions against them.

The SEC alleges that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO that was backed by subprime bonds at a time when the housing market was showing signs of severe distress. The deal was contingent upon Mizuho obtaining credit ratings it used to market the notes to investors. When its employees realized that Delphinus could not meet one rating agency’s newly announced criteria intended to protect CDO investors from the uncertainty of ratings downgrades, they submitted to the rating firm a portfolio containing millions of dollars in dummy assets that inaccurately reflected the collateral held by Delphinus. Once the firm rated the inaccurate portfolio, Mizuho closed the transaction and sold the notes to investors using the misleading ratings. Delphinus defaulted in 2008 and eventually was liquidated in 2010. Mizuho sustained substantial losses from Delphinus.

"This case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs’ strategy will be identified, charged, and punished," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "This is a constant theme throughout the many SEC enforcement actions arising out of the financial crisis, and is one that everyone involved in securities transactions and our financial markets would be well-advised to respect."

Kenneth Lench, Chief of the SEC’s Enforcement Division’s Structured and New Products Unit, added, "Mizuho and its employees undermined the integrity of the rating process by furnishing inaccurate information about the Delphinus portfolio. Investors expect and are entitled to receive legitimate ratings in order to help them assess their investments."

According to the SEC’s settled administrative proceedings against the three former Mizuho employees responsible for the Delphinus deal, Alexander Rekeda headed the group that structured the $1.6 billion CDO, Xavier Capdepon modeled the transaction for the rating agencies, and Gwen Snorteland was the transaction manager responsible for structuring and closing Delphinus. Delaware Asset Advisers (DAA) served as Delphinus’s collateral manager and the DAA portfolio manager was Wei (Alex) Wei.

According to the SEC’s complaint against Mizuho filed in federal court in Manhattan, all of the collateral assets for Delphinus had been purchased by July 17, 2007, and the transaction was scheduled to close on July 19. However, around noon on July 18, Standard & Poor’s (S&P) issued a press release announcing changes to its CDO rating criteria requiring certain categories of subprime residential mortgage-backed securities (RMBS) to be adjusted downward for purposes of calculating their default probability. The Mizuho employees knew that Delphinus’s actual portfolio contained a substantial amount of RMBS that were subject to the downward ratings, and that Delphinus, as constructed, could not meet its rating targets under these tougher standards. To enable Delphinus to close anyway, the Mizuho employees e-mailed multiple alternative portfolios to S&P that contained dummy assets that were superior in credit quality to the assets that had been actually acquired for the CDO. Once the necessary ratings were secured by the use of dummy assets, the Delphinus transaction closed by mid-afternoon on July 19 and securities were sold based upon these higher ratings. Investors were thus misled to believe that the Delphinus notes had achieved the advertised ratings that the actual closing portfolio would not support.

According to the SEC’s complaint, in connection with Delphinus’s subsequent request for a required rating confirmation from S&P, Mizuho employees provided and arranged for others to provide further inaccurate information about the composition of Delphinus’s assets. Primarily, they misrepresented that Delphinus’s effective date was August 6 rather than July 19. S&P then provided Delphinus with the ratings confirmation using the improper effective date of August 6.

Everyone charged by the SEC agreed to settlements without admitting or denying the charges. Mizuho consented to the entry of a final judgment requiring payment of $10 million in disgorgement, $2.5 million in prejudgment interest, and a $115 million penalty. The settlement, which requires court approval, also permanently enjoins Mizuho from violating Sections 17(a)(2) and (3) of the Securities Act.

In the related administrative proceedings against Rekeda, Capdepon, and Snorteland, the SEC found that Rekeda violated Sections 17(a)(2) and (3) of the Securities Act, and Capdepon and Snorteland violated Section 17(a). Rekeda and Capdepon each agreed to pay a $125,000 penalty while the decision on whether there will be a penalty for Snorteland will be decided at a later date. Rekeda agreed to be suspended from the securities industry for 12 months, Capdepon and Snorteland each agreed to be barred from the securities industry for one year, and all three agreed to cease and desist from further violations of the respective sections of the Securities Act they violated.

The SEC instituted settled administrative proceedings against DAA and Wei based on their post-closing conduct. DAA consented to the entry of an order requiring the firm to pay disgorgement of $2,228,372, prejudgment interest of $357,776, and a penalty of $2,228,372. Wei consented to the entry of an order requiring him to pay a $50,000 penalty and suspending him from associating with any investment adviser for six months. Both DAA and Wei consented to cease and desist from violating Section 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Advisers Act.

The SEC investigation into the Delphinus transaction, which is continuing, was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Robert Leidenheimer, Lawrence Renbaum, and James Murtha, and the trial attorneys were Jan Folena, Suzanne Romajas, and Alan Lieberman.