FINAL JUDGEMENT ENTERED IN SEC CASE INVOLVING ALLEGED SECURITIES AND ACCOUNTING FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Court Enters Final Judgment by Consent Against Defendant Ronald Baldwin, Jr.

The Commission announced today that a Massachusetts federal court entered a final judgment by consent on October 16, 2013 against Ronald Baldwin, Jr. ("Baldwin"), the only remaining defendant in a fraud action filed by the Commission in 2012. The Commission alleged in its complaint that JBI, Inc. ("JBI"), its CEO, John Bordynuik ("Bordynuik"), and its former CFO, Baldwin, engaged in a scheme to commit securities and accounting fraud in 2009. In the consent judgment, the Court ordered Baldwin to pay $25,000 in civil monetary penalties. The final judgment against Baldwin successfully concludes this litigation, as the Court has previously entered final judgments against JBI and Bordynuik.

The Commission filed its action on January 4, 2012, alleging that during two reporting periods in 2009 and in contravention of Generally Accepted Accounting Principles ("GAAP"), JBI stated materially false and inaccurate financial information on its financial statements. The Complaint alleged that the defendants misrepresented and overstated the actual value of certain assets, known as media credits, by almost 1,000%, in an effort to bolster JBI's balance sheet. JBI then used the overvalued financial statements in two private capital raising efforts (Private Investment in Public Equity or PIPES) that raised over $8.4 million from unwitting investors just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of the media credits and other assets on the balance sheet. According to the Complaint, despite being aware of the issues regarding the valuation of the media credits, and of the significance of the value of the media credits for JBI's balance sheets and other financials, Baldwin failed to conduct any reasonable due diligence on the appropriate accounting for the media credits when he certified the financial statements contained in JBI's Form 10-K for the year ended 2009. In addition, the Complaint alleged that Baldwin misrepresented JBI's financial position during a presentation to shareholders after JBI filed the Form 10-K.

Without admitting or denying the allegations in the Commission's complaint, Baldwin consented to a final judgment entered by the Court. The final judgment permanently enjoins Baldwin from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and orders Baldwin to pay a civil penalty of $25,000. Baldwin is also barred for five years from acting as an officer or director of a public company.

The Commission considered Baldwin's financial condition as part of its agreement to accept a $25,000 civil penalty.

The Court previously entered final judgments by consent against JBI (on March 20, 2013) and Bordynuik (on June 26, 2013). JBI was ordered to pay a civil monetary penalty of $150,000 and Bordynuik was ordered to pay a penalty of $110,000. Bordynuik was also barred for five years from acting as an officer or director of a public company.

SEC CHARGES TWO FORMER JP MORGAN TRADERS WITH FRAUDULENTLY OVERVALUING INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Securities and Exchange Commission v. Javier Martin-Artajo and Julien G. Grout, Civil Action No. 13-CV-5677 (S.D.N.Y.)

The Securities and Exchange Commission announced today that it charged two former traders at JPMorgan Chase & Co. with fraudulently overvaluing investments in order to hide massive losses in a portfolio they managed.

The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio's investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan's internal accounting policy. But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan's reported first quarter income before income tax expense to be overstated by $660 million.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Martin-Artajo and Grout.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, Martin-Artajo and Grout worked in JPMorgan's chief investment office (CIO), which created the portfolio known as Synthetic Credit Portfolio (SCP) as a hedge against adverse credit events. The portfolio was primarily invested in credit derivative indices and tranches. The market value of SCP's positions began to steadily decline in early 2012 due to improving credit conditions and a recent change in investment strategy. Martin-Artajo and Grout began concealing the losses in March 2012 by providing management with fraudulent valuations of SCP's investments.

The SEC alleges that Martin-Artajo directed Grout to revise the manner in which he marked SCP's investments. Instead of continuing to price the portfolio's positions based on the mid-market prices contained in dealer quotes the CIO received, SCP's positions were instead marked at the most aggressive end of the dealers' bid-offer spread. On several occasions, Martin-Artajo provided a desired daily loss target that would enable the concealment of the extent of the losses. Grout entered the marks every day into JPMorgan's books and records, and sent daily profit and loss reports to CIO management in which he understated SCP's losses. For a period, Grout maintained a spreadsheet to track the difference between his marks and the mid-market prices previously used to value SCP's positions. By mid-March, this spreadsheet showed that the difference had grown to $432 million.

The SEC alleges that contrary to JPMorgan's accounting policy, Martin-Artajo instructed Grout on March 30 to wait for better prices after the close of trading in London in the hope that activity in the U.S. markets could support better marks for SCP's positions. The concealment of losses continued beyond the first quarter. By late April, trading counterparties raised collateral disputes over SCP positions totaling more than a half-billion dollars. Shortly thereafter, JPMorgan's management stripped the SCP traders of their marking authority and began valuing the book at the consensus mid-market prices.

The SEC's complaint alleges that Martin-Artajo and Grout violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-11 and 13a-13.

The SEC's investigation, which is continuing, has been conducted by Michael Osnato, Steven Rawlings, Peter Altenbach, Joshua Brodsky, Daniel Michael, Kapil Agrawal, Eli Bass, Daniel Nigro, Sharon Bryant, and Christopher Mele of the New York Regional Office. The litigation will be led by Joseph Boryshansky.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, Federal Bureau of Investigation, United Kingdom Financial Conduct Authority, Office of the Comptroller of the Currency, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

SEC ANNOUNCES JBI INC., CONSENTS TO FINAL COURT JUDGEMENT

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced today that a Massachusetts federal court entered final judgments by consent on June 26, 2013 and March 20, 2013, respectively, against John W. Bordynuik ("Bordynuik") and JBI, Inc. ("JBI"), two defendants in a fraud action filed by the Commission in 2012. The Commission alleged in its complaint that JBI, its then CEO, John Bordynuik, and its former CFO, Ronald Baldwin, Jr. ("Baldwin"), engaged in a scheme to commit securities and accounting fraud in 2009. In the consent judgments, the Court ordered JBI to pay $150,000 and Bordynuik to pay $110,000 in civil monetary penalties.

The Commission filed its action on January 4, 2012, alleging that during two reporting periods in 2009 and in contravention of Generally Accepted Accounting Principles ("GAAP"), JBI stated materially false and inaccurate financial information on its financial statements. The Complaint alleged that the defendants misrepresented and overstated the actual value of certain assets, known as media credits, by almost 1,000%, in an effort to bolster its balance sheet. JBI then used the overvalued financial statements in two private capital raising efforts (Private Investment in Public Equity or PIPES) that raised over $8.4 million from unwitting investors in these PIPES just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of the media credits and other assets on the balance sheet. According to the complaint, Bordynuik was aware of, or was reckless in not being aware of, GAAP concerns surrounding the reported value of the media credits in advance of the company’s periodic reports that included the financial statements filed with the Commission, yet falsely certified that the company’s financial statements for those reporting periods were filed in conformity with GAAP.

Without admitting or denying the allegations in the Commission’s complaint, JBI and Bordynuik consented to final judgments entered by the Court. The final judgment against JBI permanently enjoined the company from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and ordered JBI to pay a civil monetary penalty of $150,000. The final judgment against Bordynuik permanently enjoined him from violating Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-11, and ordered him to pay a civil penalty of $110,000. Bordynuik also was barred for five years (from March 18, 2013) from acting as an officer or director of a public company. The case against the remaining defendant (Baldwin) remains pending.

SEC CHARGES MAN AND FIRMS WITH MISAPPROPRIATING $8.7 MILLION DOLLARS

The following is an excerpt from the SEC website:

July 12, 2011
The Securities and Exchange Commission today charged Sam Otto Folin (Folin), his Philadelphia-based registered investment adviser, Benchmark Asset Managers LLC (Benchmark) and its parent company, Harvest Managers LLC (Harvest) with misappropriating approximately $8.7 million from advisory clients, friends and family through material misrepresentations and omissions.
According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, from approximately 2002 through October 2010, Folin, Benchmark and Harvest offered and sold securities in Harvest, Benchmark, and Safe Haven Portfolios LLC (Safe Haven), a pooled investment vehicle, promising investors that their funds would be invested in public and private companies with “socially responsible” goals and purposes. Instead, the complaint alleges that Folin, Benchmark and Harvest diverted a portion of the invested funds to pay previous investors as well as to sustain Benchmark’s and Harvest’s expenses which included paying Folin’s salary.
More specifically, the complaint alleges that Benchmark and Harvest issued various “notes” to advisory clients, friends and family promising guaranteed above-market interest rates. Folin, Benchmark and Harvest assured investors that such notes were conservative and safe. According to the complaint, Folin, Benchmark and Harvest failed to disclose the true uses of those funds and continually misrepresented the value of the notes on quarterly statements.
In addition, the complaint alleges that in August 2004 Folin and Benchmark formed Safe Haven which purported to offer investments in several different portfolios, including the Private Fixed Income Portfolio, the Hedged Equity Portfolio, the Green Real Estate Portfolio and the Sustainable Enhanced Cash Portfolio. The complaint also alleges that Folin and Benchmark caused Benchmark’s advisory clients to invest in Safe Haven and that Folin and Benchmark also acted as investment advisers to Safe Haven. From 2006 through 2009, the complaint alleges that Folin and Benchmark caused Safe Haven to pay over $1.7 million to Benchmark and Harvest under the guise of “development costs.” The complaint alleges that these “development costs” did not relate to any actual expenses incurred by Harvest or Benchmark in connection with the formation or offering of Safe Haven securities. Rather, the complaint alleges, the payments coincided with Harvest’s and Benchmark’s need for funds to pay previous investors, expenses and Folin’s salary. Moreover, the complaint alleges that Folin and Benchmark improperly amortized the development costs rather than expensing them as incurred in accordance with Generally Accepted Accounting Principles (GAAP) thereby causing the reported net asset values of the Safe Haven portfolio to be overstated on statements provided to advisory clients and investors.
The complaint also alleges that Folin and Benchmark caused Safe Haven to make loans to Harvest and Benchmark in excess of $3.9 million. The complaint further alleges that Folin and Benchmark did not disclose these loans. Moreover, the complaint alleges that these loans violated several provisions of Safe Haven’s investment criteria including, among other things, that: (1) they were not supported by adequate collateral, (2) they violated the 5% net exposure requirement, and (3) they caused the portfolios to violate the “no leverage” provision. In addition, the complaint alleges that the financial statements provided by Folin and Benchmark to investors did not comply with GAAP. More specifically, the complaint alleges that the financial statements improperly valued the Safe Haven loans to Harvest and Benchmark at face value, rather than fair value or net realizable value. Finally, the complaint alleges that Folin and Benchmark failed to disclose to their advisory clients Benchmark’s dire financial situation and inability to sustain itself but for the monies it received under the guise of “development costs” and the loans from Safe Haven.
Without admitting or denying the allegations in the SEC’s complaint, Folin and Benchmark have consented to the entry of a final judgment enjoining them from future violations of Sections 17 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Harvest has consented to the entry of a final judgment enjoining it from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Folin, Benchmark and Harvest have also consented to pay, jointly and severally, disgorgement of $8,706,620 plus prejudgment interest of $1,454,177. In addition, Folin has consented to pay a civil penalty of $150,000 and Harvest and Benchmark have consented to pay civil penalties of $750,000 each. The settlements are subject to court approval.
Without admitting or denying the Commission's findings, Folin also consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which bars him from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor, or nationally recognized statistical ratings organization based upon the entry of the final judgment. Similarly, without admitting or denying the Commission’s findings, Benchmark consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which revokes its investment adviser registration based upon the entry of the final judgment.”