SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

SEC finds yet another scheme to defraud investors.  

THE WANING OF THE WHIZ

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

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“Stock Trading Whiz Kid” to Pay $1.5 Million to Settle Stock Newsletter Fraud Charges

FOR IMMEDIATE RELEASE

2016-184

Washington D.C., Sept. 13, 2016 — The Securities and Exchange Commission today announced that a self-proclaimed “stock trading whiz kid” and his stock newsletter company in Los Angeles have agreed to pay nearly $1.5 million to settle charges that they defrauded subscribers through false statements and misrepresentations.

According to the SEC’s complaint, Manuel E. Jesus and his newsletter company Wealthpire Inc. used advertising materials and websites touting him as “the untutored prodigy of stock investing” under the alias Manny Backus.  A self-purported “math whiz” who boasted a “skyscraping” IQ and training as a professional chess player, Backus claimed to be actively trading in the stock market with “real money” by age 19.  The SEC’s complaint also states that Wealthpire materials claimed that Backus made millions of dollars before “deciding to help other investors” by starting an alert service that let traders copy his every trading move.

The SEC alleges that from at least January 2012 to September 2014, Backus was not trading in the same stocks recommended by his services as he claimed.  He wasn’t the one making all of the recommendations either.  For instance, the SEC’s complaint alleges that Robert C. Joiner was paid by Wealthpire to make all of the stock picks for one alert service without any guidance from Backus on how to choose them.  Joiner allegedly posed as Backus during chat room sessions by signing in using a password that Backus supplied, and Joiner told investors that he was buying and selling certain recommended stocks when no such transactions were actually taking place.  Joiner also is named in the SEC’s complaint and agreed to settle the case.

The SEC’s complaint alleges a series of other misrepresentations to Wealthpire subscribers as well, including false claims about one particular stock alert service that purportedly made historic trading recommendations that yielded huge past returns higher than 1,400 percent.

“Investors who subscribe to trading alert services are relying on the purported expertise and success of those making the stock recommendations, but Wealthpire and Backus instead circulated repeated lies and falsehoods,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC has warned investors that investment newsletters can be used as tools for fraud, noting in an investor alert for example to beware false performance claims misrepresenting the track record of the newsletter’s investment recommendations and be suspicious if the newsletter does not disclose having received any compensation.

Backus and Wealthpire agreed to pay disgorgement of $1,135,145 plus interest of $112,902, and Backus also must pay a $235,000 penalty.  Without admitting or denying the allegations, Backus, Wealthpire, and Joiner consented to the entry of a final judgment permanently enjoining each of them from future violations of the antifraud provisions of the federal securities laws.

The SEC’s investigation was conducted by Lucee Kirka and supervised by Robert Conrrad of the Los Angeles office.

FORMER HEAD RMBS TRADER AT GOLDMAN SACHS SETTLES FRAUD CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Former Goldman Sachs Trader Settles Fraud Charges

FOR IMMEDIATE RELEASE

2016-163

Washington D.C., Aug. 16, 2016 — The Securities and Exchange Commission today announced that the former head trader in residential mortgage-backed securities (RMBS) at Goldman Sachs has agreed to be barred from the securities industry and pay $400,000 to settle charges that he repeatedly misled customers and caused them to pay higher prices.

An SEC investigation found that Edwin Chin generated extra revenue for Goldman by concealing the prices at which the firm had bought various RMBS, then re-selling them at higher prices to the buying customer with Goldman keeping the difference.  On other occasions, Chin misled purchasers by suggesting he was actively negotiating a transaction between customers when he was merely selling RMBS out of Goldman’s inventory.

“With no public exchange showing the price for each RMBS trade as it occurs, investors purchasing these securities rely on dealers to be honest about the purchase price they paid,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Chin repeatedly abused his fundamental duty to serve as an honest transmitter of market information so he could increase Goldman’s trading profits and, indirectly, his own compensation.”

The SEC’s order finds that Chin’s misconduct began in 2010 and continued until he left Goldman in 2012.  Without admitting or denying the findings, Chin agreed to the entry of the order finding that he violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5.  He agreed to pay $200,000 in disgorgement, $50,000 in prejudgment interest, and a $150,000 penalty.

The SEC’s continuing investigation has been conducted by Andrew Feller, David London, and Heidi Mitza, and the case has been supervised by Celia Moore and Michael Osnato.

ALLEGED FALSE CLAIMS LEADS TO SEC FRAUD CHARGES AGAINST INVESTMENT ADVISER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC: Investment Adviser Boasted Phony Assets and Track Record, Stole From Client

FOR IMMEDIATE RELEASE

2016-161

Washington D.C., Aug. 11, 2016 — The Securities and Exchange Commission today announced fraud charges against a San Francisco man and his investment advisory firm accused of pretending to manage millions of dollars in assets and then stealing money from the first client who invested with them based on their misrepresentations.

The SEC alleges that Nicholas M. Mitsakos and Matrix Capital Markets, which is a state-registered investment adviser in California, solicited investors in a purported hedge fund while falsely marketing themselves as experienced money managers with a highly successful track record.  They claimed assets under management in the millions when in fact they did not manage any client assets at all, and they fabricated a hypothetical portfolio of investments earning 20 to 66 percent annual returns and passed it off to investors as real trading.  When Mitsakos and Matrix Capital Markets were given $2 million in client assets to manage in September 2015, they proceeded to steal approximately $800,000 from that client and used most of it to pay for unauthorized personal and business expenses.

“We allege that Mitsakos and his firm tried to lure prospective investors with a mirage of assets under management and phony performance results, and when they finally won some actual business from a client, they proceeded to steal a large portion of it,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Whenever pitched an investment opportunity with claims of lofty historical performance, it’s important for investors to take the time to verify the information and make sure they’re getting the truth before deciding to invest.”

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

The SEC’s complaint was filed in U.S. District Court for the Southern District of New York and charges Mitsakos and Matrix Capital Markets with violating the antifraud provisions of the federal securities laws.  Mitsakos also is charged with aiding and abetting Matrix Capital’s violations.  The SEC seeks permanent injunctions and disgorgement of ill-gotten gains plus penalties.

The SEC’s continuing investigation is being conducted by Alison R. Levine, Kerri Palen, Alex Janghorbani, and Valerie A. Szczepanik, and the case is supervised by Lara S. Mehraban.  The litigation will be led by Alex Janghorbani and Alison R. Levine.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York.

THREE INDICTED IN ALLEGED $54 MILLION "GREEN ENERGY" FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Thursday, September 3, 2015

Indictment Charges Three People with Running $54 Million “Green Energy” Ponzi Scheme

An indictment was unsealed today charging three people in an investment scheme, involving a Bala Cynwyd, Pennsylvania-based company, that defrauded more than 300 investors from around the country.  Troy Wragg, 34, a former resident of Philadelphia, Pennsylvania, Amanda Knorr, 32, of Hellertown, Pennsylvania, and Wayde McKelvy, 52, of Colorado, are charged with conspiracy to commit wire fraud, conspiracy to commit securities fraud, securities fraud and seven counts of wire fraud, announced U.S. Attorney Zane David Memeger of the Eastern District of Pennsylvania and Special Agent in Charge William F. Sweeney Jr of the FBI’s Philadelphia Division.

As the founders of the Mantria Corporation, Wragg and Knorr allegedly promised investors huge returns for investments in supposedly profitable business ventures in real estate and “green energy.”  According to the indictment, Mantria was a Ponzi scheme in which new investor money was used to pay “earnings” to prior investors since the businesses actually generated meager revenues and no profits.  To induce investors to invest funds, it is alleged that Wragg and Knorr repeatedly made false representations and material omissions about the economic state of their businesses.

Between 2005 and 2009, Wragg, Knorr and McKelvy, through Mantria, intended to raise over $100 million from investors through Private Placement Memorandums (PPMs).  In actuality, they raised $54.5 million.  Wragg and Knorr were allegedly able to raise such a large sum of money through the efforts of McKelvy.  McKelvy operated what he called “Speed of Wealth” clubs which advertised on television, radio and the internet, held seminars for prospective investors and promised to make them rich.  According to the indictment, McKelvy taught investors to liquidate all their assets such as mutual funds and 401k plans, to take out as many loans out as possible, such as home mortgages and credit card debt and invest all those funds in Mantria.  During those seminars and other programs, Wragg, Knorr and McKelvy allegedly lied to prospective investors to dupe them into investing in Mantria and promised investment returns as high as 484 percent.

It is further alleged that Wragg, Knorr and McKelvy spent a considerable amount of the investor money on projects to give investors the impression that they were operating wildly profitable businesses.  Wragg, Knorr and McKelvy allegedly used the remainder of the funds raised for their own personal enrichment.  Wragg, Knorr and McKelvy allegedly continued to defraud investors until November 2009 when the SEC initiated civil securities fraud proceedings against Mantria in Colorado, shut down the company, and obtained an injunction to prevent them from raising any new funds.  A receiver was appointed by the court to liquidate what few assets Mantria owned.

In order to lure prospective investors, it is alleged that Wragg, Knorr and McKelvy lied and omitted material facts to mislead investors as to the true financial status of Mantria, including grossly overstating the financial success of Mantria and promising excessive returns.

“The scheme alleged in this indictment offered investors the best of both worlds – investing in sustainable and clean energy products while also making a profit,” said U.S. Attorney Memeger.  “Unfortunately for the investors, it was all a hoax and they lost precious savings.  These defendants preyed on the emotions of their victims and sold them a scam.  This office will continue to make every effort to deter criminals from engaging in these incredibly damaging financial crimes.”

“As alleged, these defendants lied about their intentions regarding investors’ money, pocketing a substantial portion for personal use,” said Special Agent in Charge Sweeney Jr.  “So long as there are people with money to invest, there will likely be investment swindlers eager to take their money under false pretenses.  The FBI will continue to work with its law enforcement and private sector partners to investigate those whose greed-based schemes rob individuals of their hard-earned money.”

If convicted of all charges, the defendants each face possible prison terms, fines, up to five years of supervised release and a $1,000 special assessment.

The criminal case was investigated by the FBI and is being prosecuted by Assistant U.S. Attorney Robert J. Livermore.  The SEC in Colorado investigated and litigated the civil securities fraud charges which formed the basis of the criminal prosecution.      

An indictment is an accusation.  A defendant is presumed innocent unless and until proven guilty.

SEC CHARGES COMPANY FOUNDER WITH SELLING UNREGISTERED SECURITIES IN AN ALLEGED FRAUD SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23321 / August 17, 2015

Securities and Exchange Commission v. EnviraTrends, Inc., et al., Civil Action No. 8:15CV1903T27TGW (M.D. Fla., August 17, 2015)

SEC Charges Development Stage Company and Founder in Unregistered Offering Fraud Scheme

On August 17, 2015, the Securities and Exchange Commission filed a settled civil injunctive action against Russell Haraburda, the founder and Chief Executive Officer of EnviraTrends, Inc., a Sarasota, Florida-based development stage company purportedly in the business of selling pet memorial products. The Commission's action also charged EnviraTrends. The Commission's complaint alleges that Haraburda and EnviraTrends engaged in a fraudulent scheme to sell EnviraTrends securities to the public in unregistered offerings based on false and misleading statements regarding the company's activities and financial condition, and the purposes for which investors' funds would be used, while Haraburda misappropriated most of the money raised from investors for his own personal use. The Commission charges Haraburda and EnviraTrends with violating the antifraud, registration, and other provisions of the federal securities laws.

The Commission's complaint, filed in federal court in the Middle District of Florida, also alleges:

From mid-2009 until at least February 2014, Haraburda and EnviraTrends raised over $2.3 million through the sale of EnviraTrends stock to over 100 investors in thirteen states.

In soliciting these funds, Haraburda and EnviraTrends made numerous oral and written misrepresentations, including in filings with the SEC, regarding EnviraTrends' activities, operations, and finances. Haraburda and EnviraTrends repeatedly assured investors that their money would be used to build the company's business, including arranging for EnviraTrends' shares to be listed on a stock exchange or quoted on the OTC Bulletin Board. Contrary to these representations, Haraburda misappropriated $1.8 million, or 78% of the funds obtained from investors, spending it on personal expenses, including his mortgage payments, car and motorcycle payments, alimony, shopping sprees, and personal travel. EnviraTrends never developed or sold a product or service, never generated revenue, and a public market for EnviraTrends shares was never created.

In annual and quarterly reports and other filings EnviraTrends made with the Commission, Haraburda and EnviraTrends falsely stated that Haraburda had loaned funds to the company. But Haraburda did not make any loans to the Company. While there were occasional transfers of small sums from Haraburda's personal bank account to the company's bank accounts, the funds transferred were investor funds that Haraburda had previously misappropriated.

Haraburda further concealed his misappropriations by falsely stating to auditors that the company owed him hundreds of thousands of dollars, thus creating a pretext for his personal use of investor funds.

After the Commission's investigation of this matter began, Haraburda in 2014 created sham promissory notes purporting to show that he intended to repay the amounts he had misappropriated.

Haraburda and EnviraTrends, without admitting or denying the allegations in the complaint, have agreed to the entry of a final judgment providing permanent injunctive relief, barring Haraburda from serving as an officer or director of a public company, barring Haraburda from being associated with any offering of penny stock, and ordering Haraburda and EnviraTrends to disgorge their ill-gotten gains. The final judgment would provide permanent injunctive relief against Haraburda and EnviraTrends under the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The final judgment would enjoin Haraburda from violating the registration provisions of Sections 5(a) and (c) of the Securities Act; the certification requirements of Exchange Act Rules 13a-14 and 15d-14; and the prohibition against misrepresentations to auditors in Exchange Act Rule 13b2-2; and from aiding and abetting violations of the reporting provisions of Section 13(a) and 15(d)(1) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 13a-13, and 15d-1. The final judgment would further enjoin EnviraTrends from violating Sections 5(a) and (c) of the Securities Act; and Section 13(a) and 15(d)(1) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, and 15d-1. The final judgment also would order Haraburda and EnviraTrends to jointly pay more than $2.3 million in disgorgement and prejudgment interest, but would waive these payments, except for $150,000, based their financial condition. The proposed settlement is subject to the approval of the District Court.

The SEC's investigation was conducted by Natalie Shioji, Ranah Esmaili, Donato Furlano, and Lisa Deitch, and assisted by Trial Attorney Michael Semler.

The SEC appreciates the assistance of the Florida Office of Financial Regulation.

TWO CITIGROUP AFFILIATES WILL PAY 180 MILLION TO SETTLE FRAUD CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Citigroup Affiliates to Pay $180 Million to Settle Hedge Fund Fraud Charges

08/17/2015 10:35 AM EDT

The Securities and Exchange Commission today announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors.  The funds later crumbled and eventually collapsed during the financial crisis.

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) agreed to bear all costs of distributing the $180 million in settlement funds to harmed investors.

An SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing.  In talking with investors, they did not disclose the very real risks of the funds.  Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity.  Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

According to the SEC’s order instituting a settled administrative proceeding:

The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or LIBOR swap to hedge interest rate risks.
The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities.
The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI.  Both funds were managed by CAI.

Investors in these funds effectively paid advisory fees for two tiers of investment advice: first from the financial advisers of CGMI and secondly from the fund manager, CAI.

Neither Falcon nor ASTA/MAT was a low-risk investment akin to a bond alternative as investors were repeatedly told.

CGMI and CAI failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.
CAI failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.

CGMI and CAI consented to the SEC order without admitting or denying the findings that both firms willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, GCMI willfully violated Section 206(2) of the Investment Advisers Act of 1940, and CAI willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8.  Both firms agreed to be censured and must cease and desist from committing future violations of these provisions.

The SEC’s investigation has been conducted by Olivia Zach, Kerri Palen, David Stoelting, and Celeste Chase of the New York Regional Office, and supervised by Sanjay Wadhwa.

SEC ANNOUNCES SETTLEMENT OF FRAUD CHARGES WITH OWNERS OF RESIDENTIAL, COMMERCIAL REAL ESTATE COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/13/2015 11:30 AM EDT

The Securities and Exchange Commission today announced that three Maryland men have agreed to settle charges that they defrauded investors in a company that owns and operates residential and commercial real estate.  Boston-based Signator Investors Inc. and one of its supervisors agreed to settle separate charges that they failed to supervise two of the men who worked in Signator’s Maryland office.

The SEC alleges that James R. Glover orchestrated the fraud by enticing family, friends, and fellow church members to become his clients at Signator and invest in Colonial Tidewater Realty Income Partners, which he co-managed.  Most of Glover’s clients were financially unsophisticated and relied on him for investment guidance.  Some even described him as “another dad” or “part of the family.”

“Glover lied to unsuspecting members of his close-knit religious community and preyed upon the trust they placed in him as their registered representative,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.

According to the SEC’s complaint filed in federal court in Baltimore against Colonial Tidewater, Glover, and Colonial Tidewater’s co-manager Sherman T. Hill:
Glover steered approximately 125 clients to purchase partnership units in Colonial Tidewater.

Glover and Hill provided false and misleading written statements about Colonial Tidewater’s value and financial condition.

Glover lied to investors about the liquidity of Colonial Tidewater’s investments and the expected returns.

Glover and Cory D. Williams, his business partner in Signator’s Maryland office, did not inform clients that they received undisclosed commissions from Colonial Tidewater when clients invested in the company, thus failing to disclose conflicts of interest.

Glover misappropriated hundreds of thousands of dollars of investor funds.
According to an SEC order instituting a settled administrative proceeding against Signator and Gregory J. Mitchell, who was a supervisor in Signator’s Maryland office:

Signator and Mitchell failed to identify and prevent the alleged fraud conducted by Glover and Williams.

Signator failed to have reasonable policies and procedures governing consolidated reports, which could be used to combine all of a client’s financial holdings in a single report.  

Glover, without Signator’s knowledge, inserted clients’ Colonial Tidewater holdings into the consolidated reports to create the false impression that Colonial Tidewater was a Signator-approved investment when it was never authorized for sale by Signator representatives.

Rather than following Signator’s policies and procedures, Mitchell routinely allowed Glover and Williams to select client files for his review or he provided them a pre-selected list of names of client files to be reviewed, enabling them to remove all references to Colonial Tidewater investments before Mitchell reviewed the records.

“Signator and Mitchell failed to conduct the thorough reviews necessary to catch Glover and Williams in the act of defrauding investors,” said Ms. Binger.

Colonial Tidewater, Glover, and Hill agreed to settle the SEC’s charges without admitting or denying the allegations, and consented to the appointment of a receiver to take control of Colonial Tidewater.  Under settlements that are subject to court approval, Colonial Tidewater would be required to pay $527,844 in disgorgement, $66,542 in prejudgment interest, and a $725,000 penalty.  Glover agreed to be barred from the securities industry and pay $839,128 in disgorgement, $64,977 in prejudgment interest, and a $450,000 penalty.  Hill agreed to pay a $75,000 penalty.

In a separate SEC order, Williams agreed to settle charges that he violated provisions of the Investment Advisers Act.  Without admitting or denying the SEC’s findings, he agreed to be barred from the securities industry and pay $94,191 in disgorgement, $9,854 in prejudgment interest, and a $94,191 penalty.

Signator and Mitchell agreed to pay penalties of $450,000 and $15,000 respectively without admitting or denying the SEC’s findings.  Signator agreed to be censured and Mitchell agreed to be suspended from acting in a supervisory capacity for one year.

Funds collected from all the parties will go into a Fair Fund for injured investors.

The SEC’s investigation was conducted by Suzanne C. Abt, Assunta Vivolo, Scott A. Thompson, and Kelly L. Gibson in the Philadelphia Regional Office and supervised by G. Jeffrey Boujoukos.  The litigation will be handled by Christopher R. Kelly and David L. Axelrod.  The investigation followed an examination conducted by James O’Leary and Aidan Busch of the Philadelphia office under the supervision of Frank A. Thomas.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

TWO CORPORATE OFFICERS CHARGED WITH INFLATING VALUES OF ENERGY PROPERTIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/06/2015 10:00 AM EDT

The Securities and Exchange Commission today announced charges alleging that Miller Energy Resources Inc., its former chief financial officer, and its current chief operating officer inflated values of oil and gas properties, resulting in fraudulent financial reports for the Tennessee-based company.  The audit team leader at the company’s former independent auditor also was charged in the matter.

In an order instituting administrative proceedings, the SEC’s Division of Enforcement alleges that after acquiring oil and gas properties in Alaska in late 2009, Miller Energy overstated their value by more than $400 million, boosting the company’s net income and total assets.  The allegedly inflated valuation had a significant impact, turning a penny-stock company into one that eventually listed on the New York Stock Exchange, where its stock reached a 2013 high of nearly $9 per share.

“Financial statement information is the cornerstone of investment decisions.  We’ve charged that Miller Energy falsified financial statement information and grossly overstated the value of its Alaska assets and that the company’s independent auditor failed to conduct an audit that complied with professional standards,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta office.  “The SEC will aggressively prosecute such conduct.”    

Knoxville-based Miller Energy paid $2.25 million and assumed certain liabilities to purchase the Alaska properties.  It later reported them at a value of $480 million, according to the SEC’s Division of Enforcement.  While accounting standards required the company to record the properties at “fair value,” then-CFO Paul W. Boyd allegedly relied on a reserve report that did not reflect fair value for the assets, and he also is alleged to have double-counted $110 million of fixed assets already included in the reserve report.  The report by a petroleum engineering firm allegedly contained expense numbers that were knowingly understated by David M. Hall, the CEO of Miller Energy’s Alaska subsidiary and Miller Energy’s chief operating officer since July 2013.  Hall, of Anchorage, Alaska, also is alleged to have altered a second report to make it appear as though it reflected an outside party’s estimate of value.

The Division of Enforcement alleges that the fiscal 2010 audit of Miller Energy’s financial statements was deficient due to the failure of Carlton W. Vogt III, the partner in charge of the audit.  Vogt, of Warwick, New York, was then at Sherb & Co LLP, a now defunct firm that was suspended by the SEC in 2013 for conduct unrelated to its work for Miller Energy.  Vogt issued an unqualified opinion of Miller Energy’s 2010 annual report and is alleged to have falsely stated that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board and that Miller Energy’s financial statements were presented fairly and conformed with U.S. generally accepted accounting principles.

As a result of their conduct, Miller Energy, Boyd, and Hall are alleged to have violated anti-fraud provisions of U.S. securities laws and a related SEC anti-fraud rule.  The company also is alleged to have violated books and recordkeeping and internal controls requirements, with Boyd and Hall in some cases causing or aiding and abetting those alleged violations.  The SEC’s Division of Enforcement is seeking to obtain cease-and-desist orders, civil monetary penalties, and return of allegedly ill-gotten gains from the company, Boyd, and Hall.  It also is seeking to bar Boyd and Hall from serving as public company officers or directors and to bar Boyd and Vogt from public company accounting.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted in its Atlanta Regional Office by William Uptegrove and John Nemeth under the supervision of Assistant Regional Director Peter Diskin.  The Enforcement Division’s litigation will be led by Robert Schroeder, Edward Sullivan, William Uptegrove, and M. Graham Loomis of the Atlanta Regional Office.

SEC CHARGES THREE ALLEGED MICROCAP STOCK SCAMMERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/21/2015 02:30 PM EDT

The Securities and Exchange Commission charged a trio of alleged microcap stock scammers with defrauding investors by disseminating promotional e-mails exhorting readers to immediately buy purportedly hot stocks so they could secretly sell their own holdings at a substantial profit.

The SEC alleges that the three men, who live in Israel, obtained shares in several penny stock companies and pumped the prices as high as 1,800 percent before dumping the shares for at least $2.8 million in illicit proceeds.  In one extravagantly positive promotional e-mail about a particular stock, they stated that a $5,000 investment could be worth more than $250,000 in two years.  The men used numerous corporate identities and developed at least 20 different stock promotion websites to con investors into buying the stocks and causing the spikes in trading volume and share price that spurred their schemes.

The SEC’s complaint filed in federal court in Manhattan names Joshua Samuel Aaron (aka Mike Shields), Gery Shalon (aka Phillipe Mousset and Christopher Engeham), and Zvi Orenstein (aka Aviv Stein and John Avery).  Aaron and Shalon allegedly wrote and designed the e-mails, Shalon allegedly disseminated them, and Orenstein allegedly provided essential operational support by handling brokerage accounts using numerous aliases.

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

“These men allegedly manipulated the microcap market to make quick profits at the expense of unsuspecting investors, and they have been caught by law enforcement despite using aliases and other ploys in an attempt to cover their tracks,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint charges Aaron, Sharon, and Orenstein with violating or aiding and abetting violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.  The SEC is seeking to bar them from the penny stock business and obtain their ill-gotten gains plus interest and financial penalties.

The SEC’s investigation has been conducted by Kristine Zaleskas, Tim Nealon, Leslie Kazon, and Michael Paley of the Microcap Fraud Task Force along with Judith Weinstock of the New York office.  The litigation will be conducted by Paul Gizzi, Ms. Zaleskas, and Ms. Weinstock.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC SAYS TWO DEFENDANTS ADMIT TO TARGETING ASIAN-AMERICAN COMMUNITY IN CKB PYRAMID SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23306 / July 17, 2015

Securities and Exchange Commission v. CKB168 Holdings Ltd., et al., Civil Action No. 13-5584 (E.D.N.Y., filed October 9, 2013)

In the Matter of Chih Hsuan "Kiki" Lin; Administrative Proceeding File No. 3-16694

Two Defendants Admit Liability in CKB Pyramid Scheme Targeting Asian-American Community

The Securities and Exchange Commission (the "SEC") today announced that the United States District Court for the Eastern District of New York entered settled judgments against defendants Rayla Melchor Santos and Chih Hsuan "Kiki" Lin. In 2013, the SEC charged 16 defendants, including Santos and Lin, with perpetrating a worldwide pyramid scheme.

In settling the SEC's charges against her, Santos admitted that CKB was a pyramid scheme and that she was one of its three primary founders. Santos also admitted that she travelled to the United States and worked with other CKB founders and promoters to convince investors to join CKB by falsely telling them that CKB was a legitimate multi-level marketing company that sold online education courses for children when, in fact, Santos knew that CKB sold its products only to investors and had no significant retail sales.

In settling the SEC's charges against her, Kiki Lin admitted that CKB was an unlawful scheme and that she worked with CKB's founders and others to promote CKB to investors across the United States. Kiki Lin also admitted that she made false and misleading statements to investors and potential investors in order to induce them to join CKB. For instance, Kiki Lin admitted that she falsely told CKB investors and potential investors that they would receive profit reward points ("Prpts") with a value in U.S. dollars that would increase exponentially over time when, in fact, she knew that Prpts could not be converted to actual money.

Defendants Santos and Kiki Lin consented to the entry of Judgments, which: (i) permanently enjoin each of them from violating the unregistered offering provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), and the anti-fraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5(a) and (c) thereunder. Kiki Lin also consented to the entry of the Judgment against her which permanently enjoins her from violating the antifraud provisions of the Section 17(a)(2) of the Securities Act and Rule 10b-5(b) under the Exchange Act and the unregistered broker-dealer provisions of Section 15(a) of the Exchange Act. Santos and Kiki Lin also agreed to conduct-based injunctions that prohibit each of them from participating in an illegal pyramid scheme disguised as a multi-level marketing program. Santos and Kiki Lin have agreed to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties in amounts to be determined at a later date by the court upon motion of the Commission. Kiki Lin has also agreed that her wholly-controlled Relief Defendant, USA Trade Group, Inc. will pay disgorgement of ill-gotten gains and prejudgment interest in amounts to be determined at a later date by the court upon motion of the Commission.

As part of the settlement, Kiki Lin also agreed to the issuance of a Commission Order Instituting Administrative Proceedings Pursuant to Section 15(b)(6) of the Exchange Act Making Findings, and Imposition Remedial Sanctions ("Order"), which was issued today. This Order permanently bars Kiki Lin from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization, and from participating in any offering of a penny stock.

The Commission's litigation in this matter continues against the remaining Defendants Hung Wai ("Howard") Shern, Rui Ling ("Florence") Leung, Daliang ("David") Guo, Yao Lin, Wen Chen Hwang (aka "Wen Chen Lee" and "Wendy Lee"), Joan Congyi Ma (aka "JC Ma"), Toni Tong Chen, Cheongwha ("Heywood") Chang, Heidi Mao Liu (aka "Heidi Mao"), CKB168 Holdings Ltd., WIN168 Biz Solutions Ltd., CKB168 Ltd., CKB168 Biz Solution, Inc., and Cyber Kids Best Education Ltd.

SEC CHARGES TEXAS-BASED OIL COMPANY AND CEO WITH DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
06/18/2015 03:00 PM EDT

The Securities and Exchange Commission today charged a Texas-based oil company and its CEO with defrauding investors about reserve estimates and drilling plans, and charged the author of a stock-picking newsletter for his role in a fraudulent promotional campaign encouraging readers to buy the oil company’s penny stock shares.

The SEC alleges that shortly after becoming Norstra Energy’s CEO in March 2013, Glen Landry began making false and misleading claims about business prospects on Norstra’s website as well as in press releases and SEC filings.  Landry and Norstra Energy misled investors about the location of the company’s property in order to make the wells appear more promising and twice disclosed an inaccurate date to begin drilling operations to make the potential for oil riches appear imminent.

The SEC’s complaint filed in federal court in Manhattan alleges that promotional materials issued by Eric Dany falsely proclaimed that “Norstra Energy could be sitting on top of as much as 8.5 billion barrels of oil!” and said the planned wells had a 99 percent chance of profitability.  After the exaggerated statements about its property and prospects caused Norstra Energy’s stock price to increase nearly 600 percent in a three-month period, the SEC suspended trading in June 2013.

“When microcap companies appear to be misleading the investing public, the SEC investigates those promoting the stock as well as the culpability of company officers,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “We allege that as a longtime geologist, Landry was well aware that Norstra Energy did not have the oil reserves or drilling plans being touted to investors.  And as a self-proclaimed expert in oil-and-gas stocks, Dany knew that claims made about the company were false but touted the stock anyway in a spam e-mail campaign and a hard-copy mailer he was paid to endorse.”

The SEC’s complaint charges Norstra Energy, Landry, and Dany with fraud and seeks final judgments ordering permanent injunctions, return of allegedly ill-gotten gains with interest, and financial penalties.  The SEC also seeks to bar Landry from serving as an officer or director of a public company or participating in a penny stock offering.

The SEC’s investigation has been conducted by Yitzchok Klug and Michael Paley of the Microcap Fraud Task Force along with Christopher Castano and Nancy Brown in the New York Regional Office.  The SEC’s litigation will be led by Ms. Brown, and the case is being supervised by Sanjay Wadhwa.

FORMER BOA EXEC SENTENCED TO SERVE 26 MONTHS IN PRISON FOR CONSPIRACY AND FRAUD

FROM:  U.S. JUSTICE DEPARTMENT

FORMER BANK OF AMERICA EXECUTIVE SENTENCED TO SERVE

26 MONTHS IN PRISON FOR ROLE IN CONSPIRACY AND FRAUD INVOLVING INVESTMENT CONTRACTS FOR MUNICIPAL BOND PROCEEDS

WASHINGTON — A former Bank of America executive was sentenced today for his participation in a conspiracy and scheme to defraud related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced today.                                                                    

Phillip D. Murphy, the former managing director of Bank of America’s municipal derivatives group from 1998 to 2002, was sentenced to serve 26 months in prison by U.S. District Judge Max O. Cogburn Jr. of the U.S. District Court of the Western District of North Carolina.

On Feb. 10, 2014, Murphy pleaded guilty to participating in multiple fraud conspiracies and schemes with various financial institutions and brokers from as early as 1998 until 2006.  Bank of America and other financial institutions, acting as “providers,” offered a certain type of contract – known as an investment agreement – to state, county and local governments and agencies, and not-for-profit entities, throughout the United States.  These public entities sought to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.  Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

“Individual accountability is the cornerstone of protecting the integrity of our financial markets,” said Deputy Assistant Attorney General Brent Snyder of the Antitrust Division’s Criminal Enforcement Program.  “This sentence is a result of our continued resolve to vigorously prosecute bank executives whose greed and illegal schemes undermine our free and fair financial markets.”

According to court documents, Murphy conspired with employees of Rubin/Chambers Dunhill Insurance Services Inc., also known as CDR Financial Products, a broker of municipal contracts, and others.  Murphy also pleaded guilty to conspiring with others to make false entries in the reports and statements originating from his desk, which were sent to bank management.  Murphy conspired with CDR and others to increase the number and profitability of investment agreements and other municipal finance contracts awarded to Bank of America.  Murphy won investment agreements through CDR’s manipulation of the bidding process in obtaining losing bids from other providers, which is explicitly prohibited by U.S. Treasury regulations.  As a result, various providers won investment agreements and other municipal finance contracts at artificially determined prices.  Murphy also submitted intentionally losing bids for certain investment agreements and other contracts when requested, and, on occasion, agreed to pay or arranged for kickbacks to be paid to CDR and other co-conspirator brokers.

In conjunction with the bid rigging, Murphy and his co-conspirators submitted numerous intentionally false certifications that were relied upon by both municipalities and the Internal Revenue Service (IRS).  These false certifications misrepresented that the bidding process had been conducted in a competitive manner that was in conformance with U.S. Treasury regulations.  These false certifications caused municipalities to award contracts to Bank of America and other providers based on false and misleading information.  The false certifications also impeded and obstructed the ability of the IRS to collect revenue owed to the U.S. Treasury.

“We trust those in positions of leadership and power to do the right thing when it comes to taking care of our money,” said Chief Richard Weber of the IRS’s Criminal Investigation.  “When that trust is broken through these types of criminal activities, than those individuals need to be held accountable.  Today's sentencing reflects our commitment to ensuring fairness for those engaged in these types of investments.”

“By knowingly exploiting vulnerabilities in the bidding process, Murphy ignored policies put in place to allow for the ethical distribution of municipal bond proceeds,” said Assistant Director in Charge Diego Rodriguez of the FBI’s New York Field Office.  “In the end, he brokered a deal that served his own best interests.  Today’s sentence is proof of our continued determination to root out those whose business practices contribute to the deterioration of healthy competition in the municipal bidding process.”

Including Murphy, 17 individuals and one corporation have been convicted or pleaded guilty as a result of the Antitrust Division’s municipal bonds investigation.

The sentence announced today resulted from an investigation conducted by the Antitrust Division’s New York Office, the FBI and IRS-CI.  The division also coordinated its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.  The U.S. Attorney’s Office of the Western District of North Carolina provided valuable assistance in this matter.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,900 mortgage fraud defendants.

SEC FILES FRAUD CHARGES AGAINST FORMER OFFICRS OF WILMINGTON TRUST

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23254 / May 7, 2015
Securities and Exchange Commission v. David R. Gibson, et al., Civil Action No. 15-cv-00363 (D. Del., May 6, 2015)
SEC Charges Four Former Officers of Delaware Bank Holding Company with Disclosure Fraud

On May 6, 2015, the Securities and Exchange Commission filed fraud charges against four former officers of Wilmington Trust for intentionally understating past due bank loans during the financial crisis.  The former Delaware-based bank holding company was acquired by M&T Bank in May 2011 and paid $18.5 million in September 2014 to settle related SEC charges of improper accounting and disclosure fraud.

The SEC’s complaint, filed in federal district court in Wilmington, Delaware, alleges the four took part in a scheme to mask the impact of real estate market declines on the bank’s portfolio of commercial real estate loans.  According to the SEC’s complaint, the former officials improperly excluded hundreds of millions of dollars of past due real estate loans from financial reports filed by Wilmington Trust in 2009 and 2010, violating a requirement to fully disclose the amount of loans 90 or more days past due.

The complaint names the bank’s former Chief Financial Officer David R. Gibson, former Chief Operating Officer and President Robert V.A. Harra, former Controller Kevyn N. Rakowski, and former Chief Credit Officer William B. North.  The complaint alleges that Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from Wilmington Trust’s disclosures in the third quarter of 2009, so that the bank disclosed only $38.7 million of such loans.  The four former officials allegedly omitted approximately $330.2 million of these loans in the fourth quarter of 2009, so that the bank’s annual report disclosed just $30.6 million in matured loans 90 days or more past due.

In addition, the complaint alleges that Gibson, Rakowski and North schemed to materially misreport this category of past due loans in the first half of 2010.  Gibson also is alleged to have materially understated the amount of non-accruing loans in Wilmington Trust’s portfolio in the third quarter of 2009 and the bank’s loan loss provision and allowance for loan losses in the fourth quarter of 2009.  Gibson, Harra, Rakowski and North are each charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws.  Each also is charged with aiding and abetting violations of the reporting, recordkeeping, and internal controls provision of the federal securities laws.  The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors.

In a related action, the U.S. Attorney’s Office for the District of Delaware today announced criminal charges against Rakowski and North.

The SEC’s investigation has been conducted by Margaret Spillane, James Addison, and Thomas P. Smith, Jr. of the New York Regional Office.  Jack Kaufman and Ms. Spillane will lead the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

CFTC CHARGES ALLEGED FLORIDA PONZI SCHEME OPERATOR WITH FRAUD AND REGISTRATION VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
April 20, 2015

CFTC Charges Florida Resident Dorian A. Garcia and his Companies, DG Wealth Management, Macroquantum Capital LLC, and UKUSA Currency Fund LP with Fraud and Registration Violations

Garcia Allegedly Operated a Ponzi Scheme in Connection with Forex and Options Pools and Stole Approximately $2.5 Million Invested by Customers

Federal Court Enters Emergency Order Freezing Defendants’ Assets and Protecting Books and Records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that Judge Sheri Polster Chappell of the U.S. District Court for the Middle District of Florida entered an emergency restraining Order freezing assets and prohibiting the destruction or concealment of books and records of Defendants Dorian A. Garcia, and his companies, DG Wealth Management (DG Wealth), Macroquantum Capital LLC, and UKUSA Currency Fund LP, all of Naples, Florida. The judge set a hearing date for April 29, 2015.

The Court’s Order arises from a CFTC Complaint filed under seal on April 14, 2015, charging the Defendants with fraud in connection with their solicitation of customers for their foreign currency (forex) and options trading pools, misappropriation of customer funds, and their issuance of false statements and registration violations, in violation of the Commodity Exchange Act and CFTC Regulations.

According to the CFTC Complaint, the Defendants fraudulently solicited approximately $4.7 million from at least 80 customers to invest in forex and options pools beginning as early as May 2010. The Complaint alleges that Garcia made a number of misrepresentations to those he solicited, including: (1) falsely promising them that their principal was protected with a large collateral account; (2) misrepresenting the total amount of funds he had under management; (3) falsely reporting large profits in existing trading accounts; and (4) failing to disclose that he misappropriated investor funds. Many of Garcia’s misrepresentations were contained within bank and trading firm account statements that he emailed to investors that were falsified to reflect exaggerated account balances.

The CFTC Complaint alleges that Garcia returned nearly $2.1 million to investors in a manner akin to a Ponzi scheme and misappropriated approximately $2.5 million of investor funds. Garcia used the misappropriated funds for his personal and business expenses such as art, domestic help, jewelry, and cash transfers to his personal bank accounts, according to the Complaint.

The Complaint also alleges that Garcia and DG Wealth acted in capacities requiring them to register with the Commission, but were not registered with the CFTC, as required.

In its continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, trading and registration bans, and a permanent injunction against further violations of federal commodities laws, as charged.

The CFTC appreciates the assistance of the Florida Office of Financial Regulation, Bureau of Financial Investigations, Miami, Florida.

CFTC Division of Enforcement staff members responsible for this case are Susan Padove, Ashley Burden, Mary Elizabeth Spear, Ava M. Gould, Scott R. Williamson, and Rosemary Hollinger.

SEC BRINGS FRAUD CHARGES AGAINST COMPANY CONTROLLER IN RECORDS MANIPULATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against the former controller of a suburban Chicago company’s Japanese subsidiary who cost his company millions of dollars in trading losses and manipulated accounting records to avoid detection.

The SEC alleges that Katsuichi Fusamae, who was a senior accounting officer at Molex Japan Co. Ltd., engaged in unauthorized equity trading in the company’s brokerage accounts that resulted in losses of more than $110 million.  He concealed the massive trading losses by taking out unauthorized and undisclosed company loans with Japanese banks and brokerage firms, and he used loan proceeds to replenish account balances and engage in additional trading.  When Fusamae’s long-running scheme came to light and the parent company Molex Incorporated restated its financial statements in 2010, it recognized $201.9 million in cumulative net losses, which included both trading losses and borrowing costs from the unauthorized loans.

Fusamae agreed to settle the SEC’s charges by admitting wrongdoing and accepting a permanent bar from serving as an officer or director of a publicly traded company.  Possible monetary sanctions will be determined by the court at a later date.

Molex Incorporated, which is based in Lisle, Ill., and designs, manufactures, and sells electronic components, agreed to a cease-and-desist order finding that the company filed inaccurate financial statements as a result of Fusamae’s fraud.  Molex also failed to maintain accurate books and records and sufficient internal accounting controls.

“Fusamae took advantage of internal control weaknesses at Molex to falsify records, monopolize the flow of information from banks and broker-dealers, and circumvent external and internal audit processes.  His actions left Molex shareholders in the dark about the company’s true financial condition,” said Timothy L. Warren, Associate Director of the SEC’s Chicago Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Illinois, Fusamae’s scheme began in the late 1980s when he began investing Molex Japan’s excess cash in riskier securities, including substantial trading of equities on margin. No one at Molex or Molex Japan authorized Fusamae to engage in the riskier trading, nor were they aware of his trading activities.  Shortly after Fusamae started his unauthorized trading, Molex Japan began suffering substantial losses on Fusamae’s investments.  Fusamae falsified Molex accounting records and general ledger entries and intentionally utilized dormant general ledger accounts to conceal the unauthorized and undisclosed trading as well as the concealed borrowing.  At the peak of his scheme, Molex Japan had accumulated approximately $222 million in unauthorized loan obligations as a result of Fusamae’s misconduct.  Molex consequently filed financial statements that failed to account for the trading losses and unauthorized loans.

The SEC’s complaint charges Fusamae with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1.  Fusamae also is charged with aiding and abetting Molex’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.  In addition to the officer-or-director bar, the settlement permanently enjoins Fusamae from future violations and provides the court with the authority to determine whether he obtained any ill-gotten gains and whether disgorgement is appropriate.  The settlement is subject to court approval.

The SEC’s order against Molex finds that the company violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.  Molex neither admits nor denies the findings.

The SEC’s investigation was conducted by Jeffrey A. Shank and Kevin A. Wisniewski in the Chicago Regional Office.  The SEC’s litigation related to disgorgement will be led by Daniel J. Hayes.

SEC CHARGES 23 COMPANIES, 6 INDIVIDUALS FOR ROLES IN CELLULAR LICENSING FRAUD SCHEME

U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23236 / April 9, 2015

Securities and Exchange Commission v. Janus Spectrum LLC et al., Civil Action No. 2:15-cv-00609-DGC

SEC Charges Firms and Individuals for Defrauding Investors in Cellular Licensing Scheme

On April 6, 2015, the Securities and Exchange Commission charged 12 companies and six individuals with defrauding investors in a scheme involving applications to the Federal Communications Commission (FCC) for cellular spectrum licenses.

According to the SEC's complaint filed in federal district court in Arizona, David Alcorn and Kent Maerki orchestrated the offering fraud through Janus Spectrum LLC, a Glendale, Ariz.-based company they founded and managed. Janus Spectrum held itself out as a service provider that prepares cellular spectrum license applications on behalf of third parties. The complaint alleges that although Alcorn and Maerki had third parties offer and sell securities based on the licenses to investors, they were personally involved in presentations to investors and Maerki appeared in misleading videos, including one called "Money from Thin Air."

The SEC alleges that investors in the scheme were promised potentially lucrative returns based on Janus Spectrum obtaining FCC licenses in the Expansion Band and Guard Band portions of the 800 megahertz (MHz) band. Janus Spectrum and the fundraising entities claimed that investors could profit because Sprint and other major wireless carriers needed licenses in this spectrum. In fact, the value of the licenses was small because this spectrum cannot support cellular systems and is generally used for "push-to-talk" services for local law enforcement or businesses like pizza delivery companies that require less bandwidth.

The SEC's complaint alleges that the scheme raised more than $12.4 million from investors from May 2012 to October 2014. The fundraising entities funneled a significant percentage of the investors' funds to Janus Spectrum, which used only a small portion to prepare applications for FCC licenses. The complaint alleges that instead, all of the individuals in the scheme kept a significant portion of investor funds for personal use.
he SEC's complaint alleges that all of the defendants violated 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. In addition, the SEC's complaint alleges that Janus Spectrum, Alcorn, Maerki, Bank, Jones, Johnson, and Chadwick violated Section 15(a) of the Exchange Act. The SEC also seeks permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against all defendants.

The SEC's investigation was conducted by Sana Muttalib and Lorraine Pearson and supervised by Victoria A. Levin of the Los Angeles office. The litigation will be handled by Sam Puathasnanon. The SEC appreciates the assistance of the Texas State Securities Board and the Federal Communications Commission.

CFTC CHARGES COMPANY AND PRINCIPALS WITH POOL FRAUD

FROM:  COMMODITY FUTURES TRADING COMMISSION 

March 31, 2015

CFTC Charges Maverick International, Inc. and its Principals Wesley Allen Brown and Edward Rubin with Pool Fraud and Other Violations

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action in the U.S. District Court for the Middle District of Florida, charging Defendants Maverick International, Inc. and its principals, Wesley Allen Brown and Edward Rubin, with operating a fraudulent commodity pool and other violations of federal commodity laws. Maverick International, Inc. purportedly maintains offices in Wilmington, Delaware; however, its address is actually the address of a mail forwarding service. Brown currently resides in North Myrtle Beach, South Carolina, and Rubin resides in Winnabow, North Carolina.

The CFTC Complaint was filed under seal on March 23, 2015, and on March 26, 2015, U.S. District Court Judge Brian J. Davis issued an emergency Order freezing and preserving assets under Defendants’ control and prohibiting them from destroying documents or denying CFTC staff access to their books and records.  The Court scheduled a hearing for April 8, 2015, on the CFTC’s motion for a preliminary injunction.

The CFTC Complaint charges that, as early as June 18, 2008, Defendants solicited and accepted more than $2 million from members of the public to trade commodity futures contracts in a commodity pool. As alleged, the Defendants misappropriated all of the $2 million to pay their personal and business expenses, including rent, meals, and more than $200,000 in cash withdrawals.

The Complaint alleges that Brown used his position as an associate pastor at a Flagler Beach, Florida, church to solicit congregants to participate in the fraudulent scheme. Through in-person solicitations and the Defendants’ website (wealthnavigator.org), Brown represented to actual and potential participants that the Defendants profitably traded commodity futures and precious metals on behalf of participants. These representations were false, because Defendants misappropriated all of the participants’ funds, and no trading on behalf of participants took place, according to the Complaint.

In its continuing litigation, the CFTC seeks full restitution to defrauded pool participants, disgorgement of any ill-gotten gains, a civil monetary penalty, permanent registration and trading bans, and a permanent injunction against future violations of federal commodities laws, as charged.

The CFTC appreciates the assistance of the Office of the State Attorney for the Seventh Judicial District of Florida; the Florida Office of Financial Regulation; the Office of the U.S. Attorney for the Middle District of Florida; the North Carolina Department of the Secretary of State, Securities Division; the Sherriff’s Department, Brunswick County, North Carolina; and the City of Myrtle North Myrtle Beach, Department of Public Safety.

CFTC Division of Enforcement staff members responsible for this action are Timothy J. Mulreany, George Malas, and Paul Hayeck.

SEC CHARGES INVESTMENT ADVISER OF HIDING POOR PERFORMANCE OF LOAN ASSETS IN CLO FUNDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

03/30/2015 09:45 AM EDT

The Securities and Exchange Commission announced fraud charges against an investment adviser and her New York-based firms accused of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage.

The SEC’s Enforcement Division alleges that Lynn Tilton and her Patriarch Partners firms have breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for the CLO funds, which have portfolios comprised of loans to distressed companies.  Instead, nearly all valuations of loan assets have been reported to investors as unchanged from the time they were acquired despite many of the companies making partial or no interest payments to the funds for several years.  Investors have not only been misled to believe that objective valuation analyses were being performed, but Tilton and her firms allegedly have avoided significantly reduced management fees because the valuation methodology described in fund documents would have given investors greater fund management control and earlier principal repayments if collateral loans weren’t performing to a particular standard.  Tilton and her firms also consequently have misled investors about asset valuations in fund financial statements.

“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them.”

According to the SEC’s order instituting an administrative proceeding, CLO funds raise capital by issuing secured notes and using proceeds to purchase a portfolio of collateral typically comprised of commercial loans.  Investors are paid based on cash flows and other proceeds from the collateral.  The three CLO funds managed by Tilton and the Patriarch Partners firms are collectively known as the Zohar funds, and more than $2.5 billion has been raised from investors.  Tilton’s investment strategy for the Zohar funds has been to improve the operations of the distressed portfolio companies so they can pay off their debt, increase in value, and eventually be sold for a profit.

The SEC’s Enforcement Division alleges that under the contractual terms of the deals, Tilton and her firms are required to categorize the value of each loan asset in monthly reports by using a specific method set forth in deal documents.  To be assigned the highest category, a loan has to be current in its interest payments to the Zohar funds.  The category of each asset impacts the calculation of a fund’s “overcollateralization” ratio, which reflects the likelihood that investors will receive a return on their principal.  If the overcollateralization ratio falls below a specific threshold, Tilton and her firms are not entitled to receive certain management fees and may be required to cede more control of fund management to investors.

The SEC’s Enforcement Division alleges that rather than following the required methodology for valuing these loan assets, Tilton and her firms have maintained their control over the funds and preserved their management fees by not lowering an asset’s category until she decides to cease financial support of the distressed company.  Thus the valuation of an asset simply reflects Tilton’s subjective assessment of the company’s future.  Absent an actual overcollateralization ratio test, investors aren’t getting a true assessment of the actual values of their investments, which in reality have declined substantially.

The SEC’s Enforcement Division further alleges that Tilton and her firms were responsible for misstatements in the quarterly financial statements of the Zohar funds.  When preparing these financial statements, they failed to conduct a required impairment analysis on the assets of the Zohar funds despite disclosures stating that such analysis had occurred.  They also falsely stated that assets of the Zohar funds were reported at fair value.  Tilton repeatedly and falsely certified that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP).

The SEC’s Enforcement Division alleges that Tilton, Patriarch Partners LLC, Patriarch Partners VIII LLC, Patriarch Partners XIV LLC, and Patriarch Partners XV LLC violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).  Patriarch Partners LLC also is charged with aiding and abetting violations by the others.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation has been conducted by Amy Sumner, Amanda de Roo, and John Smith with assistance from Judy Bizu.  Also contributing to the investigation were Allison Lee, Creola Kelly, and Brent Mitchell.  The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato.  The Enforcement Division’s litigation will be led by Dugan Bliss, Nicholas Heinke, and Ms. Sumner.

SEC BRINGS CHARGES IN CASE INVOLVING ALLEGED MISAPPROPRIATION OF MONEY FROM AN INVESTMENT FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

Litigation Release No. 23207 / February 26, 2015

Securities and Exchange Commission v. Daniel Thibeault et al., Civil Action No. 1:15-cv-10050 (D. MA)

CEO of Massachusetts-Based Investment Advisory Companies Indicted On Charges of Fraud, Obstruction of Justice

The Securities and Exchange Commission announced that on February 25, 2015, Daniel Thibeault, the CEO of a group of Massachusetts-based investment advisory companies, was criminally charged by a grand jury in the United States District Court for the District of Massachusetts in connection with the alleged misappropriation of more than $15 million from an investment fund. The SEC previously filed a civil enforcement action against Thibeault and others in January 2015. The criminal indictment charges Thibeault with securities fraud, wire fraud, and aggravated identity theft. The indictment also charges Thibeault with obstruction of justice, alleging that Thibeault sought to obstruct the SEC's prior investigation by intentionally misleading SEC examiners.

The allegations in the criminal indictment stem from the same misconduct underlying the SEC's pending civil enforcement action against Thibeault and the associated entities concerning the alleged misappropriation of money from an investment fund. In a complaint filed in federal court on January 9, 2015, the SEC named Thibeault as a defendant, along with the following entities, all believed to be controlled by Thibeault: Graduate Leverage, LLC; GL Capital Partners, LLC; GL Investment Services, LLC; and Taft Financial Services, LLC. The SEC also charged two other parties as relief defendants based on their alleged receipt of investor funds: GL Advisor Solutions, Inc., a corporation based in the Philippines that is controlled by Graduate Leverage, LLC and Thibeault; and Shawnet Thibeault, who is Daniel Thibeault's wife.

The SEC's complaint alleges that GL Capital Partners, LLC and its principal, Daniel Thibeault, were the investment advisers to a fund called the GL Beyond Income Fund, and that they misappropriated money that belonged to this fund. The GL Beyond Income Fund's assets consisted primarily of individual variable rate consumer loans. The SEC alleges that beginning in 2013 or earlier, Thibeault and the other defendants engaged in a scheme to divert investor money from the GL Beyond Income Fund by creating fake loans and reporting those fake loans as assets of the GL Beyond Income Fund, using the names and personal information of individuals who were unaware that loans were being originated. The complaint further alleges that the GL Beyond Income Fund disbursed millions of dollars to fund these fictitious loans, but the borrowed money did not go to the purported borrowers whose names appeared on the documentation; instead, the SEC alleges, it was transferred to Thibeault and the other defendants who used the money for personal expenses and to run businesses other than the GL Beyond Income Fund, and used it to conceal and perpetuate the scheme by making "interest payments" on fake loans.

Thibeault was originally charged by a criminal complaint and was arrested on December 11, 2014. The SEC's action against Thibeault and the other defendants, which is pending, seeks disgorgement of ill-gotten gains plus pre-judgment interest and penalties and permanent injunctions against further violations of the securities laws. On January 21, 2015, the United States District Court for the District of Massachusetts imposed an asset freeze against Thibeault and the other defendants and relief defendants and ordered certain other preliminary relief.

For further information, see Litigation Release No. 23171 (January 9, 2015) [Civil Complaint]; Litigation Release No. 23178 (January 22, 2015).