SEC SAYS FALSE TWEETS SENT TWO STOCKS DROPPING

FROM:  U.S. SECURITIES  AND EXCHANGE COMMISSION 

PRESS RELEASE

SEC Charges: False Tweets Sent Two Stocks Reeling in Market Manipulation

Criminal Charges Also Filed

2015-254

Washington D.C., Nov. 5, 2015 — The Securities and Exchange Commission today filed securities fraud charges against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies and triggered a trading halt in one of them.

According to the SEC’s complaint filed in federal court in the Northern District of California, James Alan Craig of Dunragit, Scotland, tweeted multiple false statements about the two companies on Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms.

The U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Craig.

The SEC’s complaint alleges that Craig’s first false tweets caused one company’s share price to fall 28 percent before Nasdaq temporarily halted trading.  The next day, Craig’s false tweets about a different company caused a 16 percent decline in that company’s share price.  On each occasion, Craig bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings.

The SEC’s investigation also determined that Craig later used aliases to tweet that it would be difficult for the SEC to determine who sent the false tweets because real names weren’t used.

“As alleged in our complaint, Craig’s fraudulent tweets disrupted the markets for two public companies and caused significant financial losses for their investors,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Craig also said in later tweets that the SEC would have a hard time catching the perpetrator.  As today’s enforcement action demonstrates, those tweets turned out to be false as well.”

According to the SEC’s complaint:

On Jan. 29, 2013, Craig used a Twitter account he created to send a series of tweets that falsely said Audience Inc. was under investigation.  Craig purposely made the account look like it belonged to the securities research firm Muddy Waters by using the actual firm’s logo and a similar Twitter handle.  Audience’s share price plunged and trading was halted before the fraud was revealed and the company’s stock price recovered.

On Jan. 30, 2013, Craig used another Twitter account he created to send tweets that falsely said Sarepta Therapeutics Inc. was under investigation.  In this case Craig deliberately made the Twitter account seem like it belonged to the securities research firm Citron Research, again using the real firm’s logo and a similar Twitter handle.  Sarepta’s share price dropped 16 percent before recovering when the fraud was exposed.

The SEC’s complaint charges that Craig committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks a permanent injunction against future violations, disgorgement, and a monetary penalty from Craig.

The SEC has issued an Investor Alert titled Social Media and Investing – Stock Rumors prepared by the Office of Investor Education and Advocacy.  The alert aims to warn investors about fraudsters who may attempt to manipulate share prices by using social media to spread false or misleading information about stocks, and provides tips for checking for red flags of investment fraud.

The SEC’s investigation was conducted by staff in the Market Abuse Unit including Elena Ro, John Rymas, and Steven D. Buchholz.  The case was supervised by Joseph G. Sansone, Co-Chief of the Market Abuse Unit.  The SEC’s litigation will be led by Ms. Ro and John S. Yun of the San Francisco Regional Office.  The SEC appreciates the assistance of the U.S. Department of Justice and the Federal Bureau of Investigation.

SEC CHARGES CANADIAN RESIDENT FOR ROLE IN MARKET MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
01/13/2015 01:15 PM EST

The Securities and Exchange Commission today charged a man living in Ontario, Canada, with orchestrating a lucrative market manipulation scheme that relied on “layering” in which a trader places orders solely to trick others into buying or selling U.S. publicly traded stocks at artificially inflated or depressed prices.

In a complaint filed in federal court in Newark, N.J., the SEC alleges that since at least January 2013, Aleksandr Milrud recruited online traders chiefly based in China and Korea and shared in the profits the traders made from manipulative trading in U.S. securities markets.  Milrud provided the traders with access to trading accounts and technology and instructed them on how to avoid regulatory scrutiny while engaging in layering strategies.  The SEC’s complaint also alleges that to distance himself from certain transactions, Milrud wired funds to an offshore bank account and had the money delivered to him in a suitcase filled with cash.

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

“Layering is a deceptive practice to trick others into buying or selling a stock at artificially inflated or depressed prices,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “No matter where they are located, we continue to identify and investigate those whose trading practices threaten to undermine the fair operation of the U.S. securities markets.”

According to the SEC’s complaint, Milrud inserted numerous middlemen into his scheme in an effort to evade detection.  He had his traders use multiple computers, Internet protocol (IP) addresses, and user names.  Traders were provided at least two accounts, one to do what Milrud called “the dirty work” of layering and one to execute what he termed “clean” trades at prices affected by the dirty work of the first account.  Milrud instructed the traders to conduct layering on a wide variety of stocks while limiting the number of trades and the price changes, hoping to minimize attention to the manipulative trading.

“Milrud’s elaborate efforts to disguise this manipulative trading scheme were ultimately unsuccessful,” said Joseph G. Sansone, Co-Deputy Chief of the SEC’s Market Abuse Unit.  “His scheme was uncovered and he must now face the consequences of his actions.”

The SEC’s complaint charges Milrud with violating and aiding and abetting violations of anti-fraud provisions of federal securities laws and the SEC’s antifraud rule, and with liability for the conduct of the traders under his management.  The SEC is seeking a final judgment ordering Milrud to return his allegedly ill-gotten gains with interest plus penalties and permanently barring him from future violations.

The SEC’s investigation, which is continuing, is being conducted by Simona Suh, Barry P. O’Connell, A. Kristina Littman, and Lynn H. O’Connor of the Market Abuse Unit and by Elzbieta Wraga of the New York Regional Office.  The case is being supervised by Mr. Hawke, Mr. Sansone, and Steven D. Buchholz of the Market Abuse Unit.  The SEC’s litigation will be led by Nancy A. Brown, Ms. Suh, and Mr. O’Connell.  The SEC appreciates the assistance of the Newark Field Office of the Federal Bureau of Investigation, U.S. Attorney’s Office for the District of New Jersey, and Financial Industry Regulatory Authority.

SEC CHARGES EQUITY RESEARCH FIRM OWNER WITH MANIPULATING MARKET FOR PUBLICLY TRADED STOCK

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a Phoenix-based equity research firm owner who allegedly manipulated the market for a publicly traded stock he was soliciting investors to purchase.

 The SEC Enforcement Division alleges that after a company hired his firm to assist in two private placement offerings, Paul Pollack repeatedly engaged in wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership of the stock.  According to the order instituting an administrative proceeding, Pollack conducted approximately 100 wash trades where the buy or sell orders came within 90 seconds of each other at prices and quantities that were virtually identical.  The wash trades are alleged to have occurred during a nearly one-year period and created the false and misleading appearance of consistent active trading in the otherwise thinly traded stock.

 The SEC Enforcement Division further alleges that Pollack and his firm Montgomery Street Research LLC violated federal securities laws by acting as brokers on behalf of the company without first registering with the SEC.

 Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock,” said Thomas J. Krysa, Associate Director of Enforcement in the SEC’s Denver Regional Office.  “In this case, we allege that Pollack engaged in this type of trading, and he and his firm acted as unregistered brokers outside the boundaries of the law by effecting transactions in securities and avoiding SEC oversight and examinations that protect the interests of investors.”

The SEC Enforcement Division alleges that Pollack and Montgomery Street Research raised more than $2.5 million from 11 investors after being hired by the company to raise money and make introductions to potential investors in its stock.  Among other things, they identified and solicited potential investors, provided financial information regarding the issuer, fielded investor inquiries, and in some instances received transaction-based compensation.

The SEC Enforcement Division alleges that Pollack and Montgomery Street willfully violated Section 15(a)(1) of the Securities and Exchange Act of 1934 and that Pollack willfully violated Section 9(a)(1) and Section 10(b) of the Exchange Act of 1934, and Rules 10b-5(a) and 10b-5(c).  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 Enforcement Division’s investigation was conducted by Kurt L. Gottschall and Marc D. Ricchiute in the Denver Regional Office with assistance from staff in the Enforcement Division’s Center for Risk and Quantitative Analytics.  The Enforcement Division’s litigation will be led by Mr. Ricchiute and Gregory A. Kasper.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

3 CORPORATE OFFICERS, STOCK PROMOTER GET SENTENCES FOR ROLES IN KICKBACK MARKET MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Three Corporate Officers and Stock Promoter Sentenced for Fraudulent Kickback and Market Manipulation Scheme

The Securities and Exchange Commission announced that three corporate officers and a stock promoter were sentenced recently by the United States District Court for the District of Massachusetts in cases filed on December 1, 2011 alleging they used kickbacks and other schemes to trigger investments in various thinly-traded stocks. Those sentenced were: stock promoter Edward Henderson of Lincoln, Rhode Island; and corporate officers Paul Desjourdy of Medfield, Massachusetts (President of Symbollon Pharmaceuticals, Inc.); James Wheeler of Camas, Washington (Chief Executive Officer of MicroHoldings US, Inc.); and Michael Lee of Hingham, Massachusetts (President and Chief Executive Officer of ZipGlobal Holdings, Inc.). The Commission filed related civil charges against these and other parties on December 1, 2011, and those charges remain pending.

Henderson, Desjourdy, Wheeler, and Lee were among 13 defendants who were alleged to have engaged in criminal activity in the midst of an undercover FBI operation. According to the charges filed in U.S. District Court, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the insiders and promoters did not know was that the purported investment fund representative was actually an undercover agent.

On November 25, 2013, Henderson was sentenced to one year of probation and was ordered to forfeit $12,650 after pleading guilty on January 20, 2012 to one count of wire fraud. On January 16, 2014, Desjourdy was sentenced to 18 months of probation and was ordered to forfeit $54,000 after pleading guilty on January 11, 2012 to one count of mail fraud and one count of conspiracy. On January 16, 2014, Wheeler was sentenced to 18 months of probation and was ordered to forfeit $24,000 after pleading guilty on January 18, 2012 to one count of mail fraud and one count of conspiracy. On March 6, 2014, Lee was sentenced to three years of probation (the first nine months to be served in home confinement with electronic monitoring) and ordered to forfeit $105,603 after pleading guilty on January 11, 2012 to one count of mail fraud and one count of conspiracy.

On December 1, 2011, the Commission filed civil charges of securities fraud against Henderson, Desjourdy, Wheeler, Lee, ZipGlobal Holdings, Inc., and MicroHoldings US, Inc., alleging that they used kickbacks to engage in fraudulent financing transactions involving microcap stocks. Those cases are pending.

STOCK PROMOTERS CHARGED BY SEC IN MARKET MANIPULATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Stock Promoters with Market Manipulation

The Securities and Exchange Commission announced that it filed a civil injunctive action against Cort Poyner ("Poyner") and Mohammad Dolah ("Dolah"), alleging that they engaged in a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Resource Group International, Inc. ("Resource Group") and Gold Rock Resources Inc. ("Gold Rock").

The complaint, filed on July 31, 2013 in federal court in Brooklyn, New York, alleges that Poyner, a recidivist securities violator, and Dolah engaged in an undisclosed kickback arrangement with an individual ("Individual A") whom they believed represented a group of registered representatives that solicited customer purchases of stock in exchange for undisclosed kickbacks. Poyner and Dolah promised to pay between 25% - 35% in kickbacks to Individual A and the registered representatives he represented in exchange for the purchase of up to $2 million of Resource Group stock and $1 million in Gold Rock stock through the customers' accounts.

The complaint further alleges that between December 11, 2008 and May 11, 2009, Poyner and Dolah instructed Individual A to purchase 800,000 shares of Resource Group stock for a total of $50,000, and Dolah instructed Individual A to purchase 20,000 shares of Gold Rock stock for a total of $20,400. Thereafter, Poyner and Dolah paid Individual A cash bribes totaling $14,000 for those purchases.

The complaint charges Poyner and Dolah with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, and civil penalties from Poyner and Dolah, a judgment prohibiting Dolah from participating in any offering of penny stock, and an order prohibiting Poyner from acquiring, disposing or promoting any penny stock.

CANADIAN COURT ENFORCES U.S. JUDGEMENT IN OTC MARKET MANIPULATION CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Canadian Court Enforces U.S. Judgment Award in Market Manipulation Case Against William Todd Peever and Phillip James Curtis


The Securities and Exchange Commission today announced that on June 20, 2013, the Honorable Justice Peter J. Rogers of the Supreme Court of British Columbia, Canada granted summary judgment in favor of the Commission to recognize and enforce judgments previously entered in U.S. District Court for the Southern District of New York against William Todd Peever ("Peever") and Phillip James Curtis ("Curtis"), both of whom are Canadian citizens residing in British Columbia. Those U.S. judgments held Peever and Curtis jointly and severally liable for $2,894,537.48 in disgorgement and $1,611,998.18 in prejudgment interest for their respective roles in a fraudulent scheme to manipulate the stock price of SHEP Technologies, Inc. ("SHEP") f/k/a Inside Holdings Inc. ("IHI"), whose shares traded on the Over-the-Counter Bulletin Board.


The Commission’s complaint in SEC v. Brian N. Lines, et al., 1:07-CV-11387 (DLC) (S.D.N.Y. Dec. 19, 2007), filed in U.S. federal court, had alleged, in pertinent part, that during 2002 and 2003, defendants Peever and Curtis, together with certain co-defendants, engaged in a scheme to secretly obtain control of the publicly traded shell company IHI, through use of nominees. The scheme involved merging IHI with a private company to form SHEP, secretly paying touters to promote the IHI/SHEP stock, and then selling SHEP stock into the ensuing demand. During the first half of 2003, Peever, Curtis, and certain other defendants sold over 3 million SHEP shares into this artificially-stimulated demand, generating about $4.3 million in illegal proceeds. As part of the scheme, Peever and Curtis failed to file required reports with the Commission regarding their beneficial ownership of IHI and SHEP stock to conceal that they, among others, owned substantial positions in, and had been selling, SHEP stock.

Curtis and Peever challenged the Commission’s attempt to enforce the U.S. court judgments in Canada by contending: (1) the judgments had been procured by fraud; and (2) that the disgorgement award was penal in nature and, therefore, could not be recognized under Canadian law. The Canadian court rejected both of the Defendants’ arguments, and held that there was no basis to bar enforcement of the judgments against the Defendants in Canada.




 

MAN SETTLES CHARGES OF MARKET MANIPULATION WITH SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Defendant Matthew Brown Settles Penny Stock Manipulation ChargesThe Securities and Exchange Commission announced today that Chief Judge Gregory M. Sleet of the United States District Court for the District of Delaware entered a final judgment against Defendant Matthew W. Brown on July 2, 2012 in SEC v. Dynkowski, et al., Civil Action No. 1:09-361, a stock manipulation case the SEC filed on May 20, 2009, and amended on March 25, 2010 and December 22, 2011, to charge additional individuals. The SEC’s complaint alleges that Brown participated in market manipulation schemes involving the stock of GH3 International, Inc. and Asia Global Holdings, Inc.

As alleged in the complaint, the schemes generally followed the same pattern: Defendant Pawel P. Dynkowski and his accomplices agreed to sell large blocks of shares for penny stock companies in exchange for a portion of the proceeds. The shares were put in nominee accounts that Dynkowski and his accomplices controlled. The defendants artificially inflated the market price of the stocks through wash sales, matched orders and other manipulative trading, often timed to coincide with false or misleading press releases, and then sold shares obtained from the issuers and divided the illicit proceeds.

As alleged in the complaint, Dynkowski orchestrated the manipulation scheme involving GH3 International, Inc. stock in 2006 with Brown, who operated a penny stock website called InvestorsHub.com. The complaint alleges that in this scheme Dynkowski and Brown engaged in manipulative trading and that Brown helped coordinate this manipulative trading with issuance of false press releases. The complaint alleges that this scheme generated approximately $747,609 in illicit profits.

The complaint further alleges that in 2006, Brown planned the manipulation scheme involving the stock of Asia Global Holdings, Inc., with two defendants who were registered representatives at a small broker-dealer in California. As alleged in the complaint, Dynkowski and another defendant manipulated the price of Asia Global stock using wash sales, matched orders, and other manipulative trading, coordinated with false press releases. After manipulating the price of the stock, the complaint alleges, Dynkowski, Brown, and others in this scheme sold 54 million shares that had been improperly registered on SEC Form S-8 and held in nominee accounts, generating over $4 million in illicit profits.

To settle the SEC’s charges, Brown consented to a final judgment that permanently enjoins him from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 13(d) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1 and 13d-2 thereunder; orders disgorgement of $86,745 and prejudgment interest of $24,081; and bars Brown from participating in any offering of a penny stock. In a related criminal case, Brown previously pled guilty to conspiracy to commit securities fraud and conspiracy to engage in money laundering. He was sentenced to four years in prison and ordered to pay criminal forfeiture of $4,798,138. U.S. v. Brown, Criminal Action No. 09-46-SLR (D. Del.).

The SEC thanks the following agencies for their cooperation and assistance in connection with this matter: the U.S. Attorney’s Office for the District of Delaware; the Delaware State Police; United States Immigration and Customs Enforcement, Department of Homeland Security, Homeland Security Investigations; and the Department of the Treasury, Internal Revenue Service, Criminal Investigation.

FORMER CEO CHARGED WITH MARKET MANIPULATION

"The Securities and Exchange Commission charged Giuseppe Pino Baldassarre, the former CEO of Dolphin Digital Media, Inc. (“Dolphin”), Robert Mouallem, a registered representative, and Malcolm Stockdale, a Dolphin shareholder, with engaging in a fraudulent broker bribery scheme designed to manipulate the market for Dolphin’s common stock. Baldassarre, age 53 and a resident of Indialantic, Florida, was Dolphin’s President from May 15, 2007 until March 20, 2009, and Dolphin’s CEO from May 15, 2007 until June 25, 2008. Mouallem, age 56 and a resident of Boca Raton, Florida, is a registered representative at Garden State Securities, Inc., a registered broker-dealer. Stockdale, age 66 and a resident of Prince Edward Island, Canada, is the owner of Winterman Group Ltd., a Canadian limited liability company. The complaint, filed today in federal court in Brooklyn, New York, alleges that from at least October 2009 until April 2010, Baldassarre, Stockdale, and Mouallem engaged in a fraudulent scheme to manipulate the market for Dolphin stock through matched trades and by bribing registered representatives to purchase Dolphin stock. The complaint also alleged that Baldassarre and Stockdale entered into a kickback arrangement with an individual (“Individual A”) who claimed to represent a group of registered representatives with trading discretion over the accounts of wealthy customers. Baldassarre and Stockdale promised to pay a 30% kickback to Individual A and the registered representatives he represented in exchange for the purchase of up to seven million shares of Dolphin stock for at least $3 million. The complaint further alleges that between March 31 and April 6, 2010, and in accordance with the illicit arrangement, Mouallem, who was responsible for handling the sales, instructed Individual A to purchase approximately 105,000 shares of Baldassarre and Stockdale’s Dolphin stock for a total of approximately $38,100. Mouallem gave Individual A detailed instructions concerning the size, price and timing of the orders. In this way, Mouallem was able to insure that almost all of Individual A’s purchase orders were matched with Mouallem’s sell orders at prices Mouallem predetermined. Thereafter, Baldassarre paid Individual A bribes of approximately $11,440 for those purchases. The complaint charges Baldassarre, Mouallem, and Stockdale with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief from the Defendants, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, civil penalties, penny stock bars, and a judgment prohibiting Baldassarre from serving as an officer or director of a public company. The Commission acknowledges assistance provided by the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter." "

HEDGE FUND ADVISOR PAYS TO SETTLE SEC CHARGES OF MARKET MANIPULATION

Making money can be very difficult if you work within our system of extremely volatile securities and commodities prices. One way to easily make money in such a system is to rig the system so that no matter what happens you will get someone else’s money out of their pocket and into yours.

It is common knowledge that many large investment firms will try to manipulate the prices of stocks sometimes on the upside but, usually it is toward the downside because when a stock price plunges small investors fear being wiped out and may also have margin calls to cover. (A margin call is when an investor is forced to sell stock because the value of his securities falls below the required total asset value to borrow money to buy on margin.) By instilling fear in the market for a stock the institutional short seller can get a stock price to tumble a lot without putting up a lot of money. It is legitimate to try to drive the price of a stock unless you have insider knowledge that diminishes or eliminates your own risk.

The following excerpt from the SEC web page is an illustration of a company that allegedly drove stock prices lower just prior to a public offering and then bought the stocks up very cheap:

“Washington, D.C., Sept. 23, 2010 — The Securities and Exchange Commission today charged Dallas-based hedge fund adviser Carlson Capital, L.P. with improperly participating in four public stock offerings after selling short those same stocks.

Carlson agreed to pay more than $2.6 million to settle the SEC's charges.
The SEC's Rule 105 of Regulation M helps prevent short selling that can reduce proceeds received by companies and shareholders by artificially depressing the market price shortly before the company prices its public offering. Rule 105 ensures that offering prices are set by natural forces of supply and demand rather than manipulative activity by prohibiting the short sale of an equity security during a restricted period — generally five business days before a public offering — and the purchase of that same security through the offering. The rule applies regardless of the trader's intent in selling short the stock.

According to the SEC's order, Carlson violated Rule 105 on four occasions and had policies and procedures that were insufficient to prevent the firm from participating in the relevant offerings. For one of those occasions, the SEC found a Rule 105 violation even though the portfolio manager who sold short the stock and the portfolio manager who bought the offering shares were different.

"Investment advisers must recognize that combined trading by different portfolio managers can still constitute a clear violation of Rule 105 when short selling takes place during a restricted period," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "This is true even when the portfolio managers have different investment approaches and generally make their own trading decisions."

In its order, the SEC found that the "separate accounts" exception to Rule 105 did not apply to Carlson's participation in that offering. If certain conditions are met, this exception allows the purchase of an offered security in an account that is "separate" from the account through which the same security was sold short. The Commission found that the combined activities of Carlson's portfolio managers violated Rule 105 and did not qualify for the separate accounts exception because the firm's portfolio managers:

Could access each others' trading positions and trade reports, and could consult with each other about companies of interest.
Reported to a single chief investment officer who supervised the firm's portfolios and had authority over the firm's positions.
Were not prohibited from coordinating with each other with respect to trading.

The SEC further found that the portfolio manager who sold short the particular stock during the restricted period received information — before the short sales were made — that indicated the other portfolio manager intended to buy offering shares.

Without admitting or denying the SEC's findings, Carlson agreed to pay a total of $2,653,234, which includes $2,256,386 in disgorgement of improper gains or avoided losses, a $260,000 penalty, and pre-judgment interest of $136,848. Carlson also consented to an order that imposes a censure and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 105. During the SEC's investigation, the adviser took remedial measures including implementation of an automated system that helps review the firm's prior short sales before it participates in offerings.”

In the above case there were two separate individuals involved that worked for the same firm. One sold the stock short while the other went long on the stock. The SEC suspected that there was collusion between the two individuals and the investment fund advisor agreed to pay back what it earned on the transaction and an additional penalty. The investment firm admitted to no wrongdoing.

It would be nice if the FBI would investigate the illegal acts of large corporations but,in truth FBI stands for For Big Institutions. In other words the FBI will investigate corparate fraud just like the SS would investigate the mental illness of Adolph Hitler.

MAKER OF ATM AND VOTING MACHINES CHARGED WITH FRAUD

The security firm Diebold, Inc., of Canton Ohio, has been charged along with three former executives with fraudulent accounting. Diebold is listed on Wikipedia as one of the largest ATM manufacturing companies in the United States. The executives at Diebold Inc., tried to get their earnings numbers to correspond to the estimates given by Wall Street analysts. Companies who miss estimates often have their market value slide lower and can even have more difficulty in obtaining credit. Most importantly to many executives is the fact their bonus might not be as lucrative if the stock price takes a nose dive because the management did not meet the expectations of market analysts. The following is an excerpt of the post the SEC has put up:

“Washington, D.C., June 2, 2010 — The Securities and Exchange Commission today charged Diebold, Inc. and three former financial executives for engaging in a fraudulent accounting scheme to inflate the company's earnings. The SEC separately filed an enforcement action against Diebold's former CEO seeking reimbursement of certain financial benefits that he received while Diebold was committing accounting fraud.

The SEC alleges that Diebold's financial management received "flash reports" — sometimes on a daily basis — comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.

Diebold — an Ohio-based company that manufactures and sells ATMs, bank security systems and electronic voting machines — agreed to pay a $25 million penalty to settle the SEC's charges. Diebold's former CEO Walden O'Dell agreed to reimburse cash bonuses, stock, and stock options under the "clawback" provision of the Sarbanes-Oxley Act.

The SEC's case against Diebold's former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller is ongoing.

“Financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, Director of the SEC's Division of Enforcement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases."
Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

Improper use of "bill and hold" accounting.
Recognition of revenue on a lease agreement subject to a side buy-back agreement.

Manipulating reserves and accruals.
Improperly delaying and capitalizing expenses.
Writing up the value of used inventory.

Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

The SEC charged Geswein, Krakora, and Miller, in a complaint filed in U.S. District Court for the Northern District of Ohio, with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b 5 and 13b2-1; and aiding and abetting Diebold's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. In addition, the SEC charged Geswein and Krakora with violating Exchange Act Rules 13a-14 and 13b2-2 and Section 304 of the Sarbanes-Oxley Act. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks officer-and-director bars against Geswein and Krakora as well as their reimbursement of bonuses and other incentive and equity compensation.”

Most people should feel just a bit uneasy to know that the company responsible for the security of their bank and many other financial transactions has just been found guilty of accounting fraud. Diebold Inc. seems to have a lot of issues in regards to honesty and integrity. The following is from Wikapedia and helps to outline some of the company’s ongoing problems.

“In August 2003, Walden O'Dell, then the chief executive of Diebold, announced that he had been a top fund-raiser for President George W. Bush and had sent a get-out-the-funds letter to 100 wealthy and politically inclined friends in the Republican Party, to be held at his home in a suburb of Columbus, Ohio.

In December 2005, O'Dell resigned following reports that the company was facing securities fraud litigation surrounding charges of insider trading.
In March 2007, it was reported by the Associated Press that Diebold was considering divesting itself of its voting machine subsidiary because it was "widely seen as tarnishing the company's reputation".
In August 2007, Wikipedia Scanner found that edits via the company's IP addresses occurred to Diebold's Wikipedia article, removing criticisms of the company's products, references to its CEO's fund-raising for President Bush and other negative criticism from the Wikipedia page about the company in November 2005.”

TWO SHORT SELLERS FOUND TO HAVE VIOLATED THE RULES

The SEC has caught two more individuals that were illegally shorting stocks. This is the first enforcement actions brought under rule 105. Rule 105 is meant to help stop the malicious market manipulations which has caused harm to the markets and has driven many retail (individual) investors away. Short selling when used as a hedge against sharp losses is a good thing. Short selling as a method of gambling is a dangerous thing to do for the short seller. The only time it is not dangerous is if the short seller has taken his own risk from the gamble via manipulating the market so that the stock will go down. It is like playing with a loaded deck of cards and that is perhaps a greater threat to capitalism than communism, fascism or any other ism.

The following is an excerpt from the SEC internet site. The SEC is at least finding some of the miscreants. It is too bad The Department of Justice does not take a keener interest in what may be the greatest threat to our national survival since WWII.

“Washington, D.C., May 11, 2010 — The Securities and Exchange Commission today charged two Boca Raton, Fla., residents for engaging in illegal short selling of securities in advance of participating in numerous secondary offerings to make illicit profits.

These mark the first enforcement actions brought by the SEC under Rule 105 of Regulation M against individuals with no securities industry background. Rule 105 helps prevent abusive short selling and market manipulation by ensuring that offering prices are set by natural forces of supply and demand for the securities in a secondary offering rather than by manipulative activity.

In separate orders issued by the Commission, Peter G. Grabler was charged with repeatedly violating Rule 105 over a period of more than two years for gains of $636,123. Leonard Adams was charged with similarly violating Rule 105 for gains of $331,387. According to the orders, Grabler and Adams engaged in a strategy of participating in numerous secondary offerings of stock in public companies in order to improve their access to initial public offerings underwritten by the same broker-dealers through which they participated in the secondary offerings.

Grabler and Adams, who both lived in Massachusetts during the period of the wrongdoing, agreed to pay a combined total of more than $1.5 million to settle the SEC's charges.

"Rule 105 applies just as much to individuals trading in their own accounts as it does to investment advisers and their related funds, which have been the subject of prior SEC enforcement actions," said David P. Bergers, Director of the SEC's Boston Regional Office. "Grabler and Adams engaged in a trading strategy that by its very nature violates the SEC's rules."

Short selling ahead of offerings can reduce the proceeds received by public companies and their shareholders by artificially depressing the market price shortly before the company prices its offering. The SEC amended Rule 105 effective October 2007 to prevent this trading practice known as "shorting into the deal." The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.
According to the SEC's orders, Grabler engaged in transactions prohibited by Rule 105 on at least 119 occasions between February 2006 and November 2008, involving secondary offerings by at least 102 issuers. Adams engaged in illegal transactions on at least 94 occasions between March 2006 and November 2008, involving secondary offerings by at least 86 issuers. The SEC found that Grabler opened or controlled at least 52 brokerage accounts at more than a dozen broker-dealers and that Adams opened or controlled at least 32 brokerages accounts also at more than a dozen broker-dealers.
In settling the SEC's charges without admitting or denying the SEC's findings, Grabler and Adams separately consented to cease and desist from violating Rule 105. Grabler will pay more than $988,000 to settle the SEC's charges, and Adams will pay more than $514,000”

Well, the SEC has caught and fined more crooks. As a long time investor in securities and commodities I have seen a lot of market manipulation. In this case the criminals were stealing a relative small amount of money but, they did get a just fine and perhaps they should get some criminal charges brought against them but unfortunately, the SEC cannot try people and put them away.

One thing that should be noted in this case is how much trouble a couple of guys can cause through illegal short sales. It would be good if the SEC would look into a lot of the shenanigans that went on in the 2007-2008 melt down. Several major brokerages have been rumored to have made a tremendous fortune shorting stocks so far down that the underlying businesses could not get loans to stay in business. Some of these short sellers may have been such large institutions that they created the short selling market for these stocks which wiped a lot of retail investors out and forced good companies to lay off employees. The aforesaid happens if the collapsing price of a stock of a business causes that business to have problems getting loans to fund day to day operations.