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.

FIFTH THIRD BANK AND FORMER CFO CHARGED BY SEC WITH IMPROPER ACCOUNTING OF COMMERCIAL REAL ESTATE LOANS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.

Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.

Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.

The SEC’s investigation was conducted by Beth Groves, Paul Harley, Jonathan Jacobs, and Jim Blenko.  The SEC appreciates the assistance of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

ADVISORS AT OPPENHEIMERS & CO. CHARGED WITH MISLEADING INVESTORS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged two investment advisers at Oppenheimer & Co. with misleading investors about the valuation policies and performance of a private equity fund they manage.

An SEC investigation found that Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued "based on the underlying managers’ estimated values." However, the portfolio manager of the Oppenheimer fund actually valued the fund’s largest investment at a significant markup to the underlying manager’s estimated value, a change that made the fund’s performance appear significantly better as measured by its internal rate of return.

Oppenheimer agreed to pay more than $2.8 million to settle the SEC’s charges. The Massachusetts Attorney General’s office today announced a related action and additional financial penalty against Oppenheimer.

"Honest disclosure about how investments are valued and how performance is measured is vital to private equity investors," said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. "This action against Oppenheimer for misleadingly writing up the value of illiquid investments is clear warning that the SEC will not tolerate lax disclosure practices in the marketing of private equity funds."

According to the SEC’s order instituting settled administrative proceedings, the Oppenheimer advisers marketed Oppenheimer Global Resource Private Equity Fund I L.P. (OGR) to investors from around October 2009 to June 2010. OGR is a fund that invests in other private equity funds, and it was marketed primarily to pensions, foundations, and endowments as well as high net worth individuals and families.

According to the SEC’s order, OGR’s largest investment — Cartesian Investors-A LLC — was not valued based on the underlying managers’ estimated values. OGR’s portfolio manager himself valued Cartesian at a significant markup to the underlying manager’s estimated value. OAM’s change in valuation methodology resulted in a material increase in OGR’s performance as measured by its internal rate of return, which is a metric commonly used to compare the profitability of various investments. For the quarter ended June 30, 2009, the portfolio manager’s markup of OGR’s Cartesian investment increased the internal rate of return from approximately 3.8 to 38.3 percent.

"Particularly in the current difficult fundraising environment that can incentivize private equity managers to artificially inflate portfolio valuations, firms must implement policies and procedures to ensure that investors receive performance data derived from the disclosed valuation methodology," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. "Oppenheimer failed to implement such procedures and provided investors with misleading information about its valuation policies and performance numbers."

The SEC’s order found that former OAM employees made the following misrepresentations to potential investors:
The increase in Cartesian’s value was due to an increase in Cartesian’s performance when, in fact, the increase was attributable to the portfolio manager’s new valuation method.
A third-party valuation firm used by Cartesian’s underlying manager wrote up the value of Cartesian, which was untrue.
OGR’s underlying funds were audited by independent third-party auditors when, in fact, Cartesian was unaudited.
The SEC’s order also found that Oppenheimer Asset Management’s written policies and procedures were not reasonably designed to ensure that valuations provided to prospective and existing investors were presented in a manner consistent with written representations to investors and prospective investors.

Oppenheimer Asset Management’s conduct violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8. Without admitting or denying the findings, Oppenheimer agreed to pay a $617,579 penalty and return $2,269,098 to those who invested in OGR during the time period when the misrepresentations were made. Oppenheimer consented to a censure and agreed to cease and desist from committing or causing any future violations of the securities laws. The firm is required to retain an independent consultant to conduct a review of its valuation policies and procedures.

Oppenheimer will pay an additional penalty of $132,421 to the Commonwealth of Massachusetts in the related action taken by the Massachusetts Attorney General.

The SEC’s investigation, which is continuing, was conducted by Panayiota K. Bougiamas and Igor Rozenblit of the Asset Management Unit and Lisa Knoop. It was supervised by Valerie A. Szczepanik. The SEC acknowledges the assistance of the Massachusetts Attorney General’s office.

BANK HOLDING COMPANY CEO AND CFO CHARGED BY SEC WITH MISLEADING INVESTORS

FROM:  SEC
Commission Charges Texas Bank Holding Company’s CEO and CFO with Misleading Investors about Loan Quality and Financial Health during the Financial Crisis
The Commission announced that it charged Franklin Bank Corp.’s former chief executives for their involvement in a fraudulent scheme designed to conceal the deterioration of the bank’s loan portfolio and inflate its reported earnings during the financial crisis.

The SEC alleges that former Franklin CEO Anthony J. Nocella and CFO J. Russell McCann used aggressive loan modification programs during the third and fourth quarters of 2007 to hide the true amount of Franklin’s non-performing loans and artificially boost its net income and earnings.  The Houston-based bank holding company declared bankruptcy in 2008.

“Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “Franklin’s analysts and investors monitored the quality of the bank’s loan portfolio as a key indicator of its financial health.  But Nocella and McCann intentionally concealed the fact that the quality of the bank’s loan portfolio was rapidly deteriorating.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Texas late Thursday, as Franklin’s holdings of delinquent and non-performing loans rose significantly in the summer of 2007, Nocella and McCann instituted three loan modification schemes that caused Franklin to classify such loans as performing.  By the end of September 2007, Nocella and McCann had used the loan modification programs to conceal more than $11 million in non-performing single family residential loans and $13.5 million in non-performing residential construction loans.

As a result of the loan modifications, Franklin overstated its third-quarter 2007 net income and earnings by 317% and 77% respectively, and reported that it earned $0.30 per share, of which $0.23 per share was directly attributable to the loan modifications.  On May 2, 2008, in a Form 8-K report filed with the SEC, Franklin acknowledged that the accounting for the loan modifications should be revised and that investors should no longer rely upon Franklin’s Form 10-Q for the quarter ended September 30, 2007.
The SEC’s complaint seeks financial penalties, officer-and-director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws.  The complaint also seeks repayment of bonuses received by Nocella and McCann under Section 304 of the Sarbanes Oxley Act of 2002, which allows for “clawbacks” of bonuses received by executives if the company later must restate its earnings.

PRIVATE INVESTMENT FUND MANAGERS CHARGED BY SEC WITH MISLEADING INVESTORS

The following excerpt is from the SEC website:
SEC Announces Charges from Investigation of Secondary Market Trading of Private Company Shares
Washington, D.C., March 14, 2012 — The Securities and Exchange Commission today charged two managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms with misleading investors and pocketing undisclosed fees and commissions. The SEC alleges that the fund managers collectively raised more than $70 million from investors.

Separately, the SEC charged SharesPost, an online service that matches buyers and sellers of pre-IPO stock, with engaging in securities transactions without registering as a broker-dealer.
The charges stem from the SEC’s yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market.

“While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation,” said Robert Khuzami, Director of the SEC's Division of Enforcement.

“Fund managers must fully disclose their compensation and material conflicts of interest. Investors deserve better than the kind of undisclosed self-dealing present in these cases,” said Robert Kaplan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

SEC v. Frank Mazzola, Felix Investments LLC, and Facie Libre Management Associates LLC
The SEC alleges that Mazzola, who lives in Upper Saddle River, N.J., and his firms created two funds to buy securities of Facebook and other high profile technology companies. However, Mazzola and his firms engaged in improper self-dealing — earning secret commissions above the 5 percent disclosed in offering materials on the funds’ acquisition of Facebook stock and on re-sales of fund interests to new investors. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares.

According to the SEC’s complaint filed in federal court in San Francisco, Mazzola and his firms also made false statements to investors in other funds they created to invest in various pre-IPO companies. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. They also made false representations about Twitter’s revenue to attract investors to their Twitter fund.

The SEC’s lawsuit against Mazzola, Felix Investments, and Facie Libre seeks court orders prohibiting them from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.

In the Matter of EB Financial Group LLC and Laurence Albukerk
According to the SEC’s administrative proceeding against Laurence Albukerk, who lives in San Francisco, he and his firm hid from investors significant compensation earned in connection with two Facebook funds they managed. In written offering materials for the funds, Albukerk told investors he charged only a 5 percent fee for an initial investment and a 5 percent fee when the shares were distributed to fund investors upon a Facebook IPO. However, Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Funds while charging investors a mark-up. Albukerk also earned a brokerage fee on the acquisition of Facebook shares from the original stockholders. As a result of the fee and mark-up, investors in Albukerk’s two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials.

Without admitting or denying the SEC’s findings, Albukerk and EB Financial consented to entry of a SEC order finding that they violated Section 17(a)(2) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

In the Matter of SharesPost Inc. and Greg Brogger
According to the SEC’s administrative proceeding against SharesPost and its CEO Greg Brogger of Park City, Utah, the online platform facilitated securities transactions without registering with the SEC as a broker-dealer. SharesPost engaged in a series of activities that constituted the business of effecting securities transactions and thus were required to register as a broker-dealer. SharesPost held itself out to the public as an online service to help match buyers and sellers of pre-IPO stock and allowed registered representatives of other broker-dealers to hold themselves out as SharesPost employees and earn commissions on transactions they facilitated through the SharesPost platform. SharesPost and affiliated broker-dealers also created a commission pool that was distributed by an executive to employees who were representatives of these broker-dealers. The company also collected and published on its website third-party information concerning issuers’ financial metrics, SharesPost-funded research reports, and a SharesPost-created valuation index. Additionally, the SharesPost platform was used to create an auction process for interests in funds managed by a SharesPost affiliate and designed to buy stock in pre-IPO companies.

“The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Broker-dealer registration helps ensure those who effect securities transactions can be relied upon to understand and faithfully execute their obligations to customers and the markets. SharesPost skirted these important provisions.”

SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. Subsequent to the SEC’s investigation, SharesPost acquired a broker-dealer and its membership agreement was approved by the Financial Industry Regulatory Authority (FINRA).

These cases were investigated by Michael E. Liftik, Erin E. Schneider and Robert S. Leach of the San Francisco Regional Office. Ms. Schneider and Mr. Leach are members of the SEC’s Asset Management Unit. Fred Jolivet of the San Francisco Regional Office’s broker-dealer program conducted an examination relating to the SharesPost matter. The SEC’s litigation effort will be led by Robert L. Mitchell and Robert L. Tashjian of the San Francisco Regional Office.

The SEC thanks FINRA for its assistance in this matter.

JUDGEMENT ANNOUNCED AGAINST PERMAPAVE ENTITIES

The following excerpt is from the SEC website:

January 23, 2012
“The Securities and Exchange Commission today announced that, on January 19, 2012, the Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York entered a default judgment that imposes a permanent injunction against future violations of the registration and antifraud provisions of the federal securities laws against PermaPave Industries, LLC, PermaPave USA Corp., PermaPave Distributions, Inc., and Verigreen, LLC (the PermaPave Entities) and that also imposes a permanent injunction against future violations of the reporting and antifraud provisions of the federal securities laws against Interlink-US-Network, Ltd.

As to monetary relief, the judgment orders the PermaPave Entities to pay disgorgement, prejudgment interest, and civil penalties and orders Interlink to pay civil penalties. The judgment also orders relief defendants DASH Development, LLC, Aron Holdings, Inc., PermaPave Construction Corp., Dymoncrete Industries, LLC, Dymon Rock LI, LLC, and Lumi-Coat, Inc. to disgorge the ill-gotten gains they received from defendants.

This judgment resolves the Commission’s claims and grants all relief sought against the PermaPave Entities, Interlink, DASH, Aron Holdings, PermaPave Construction, Dymoncrete Industries, Dymon Rock, and Lumi-Coat in a civil action filed on October 6, 2011.

The Commission’s Complaint alleged that, from 2006 to 2010, the PermaPave Entities raised more than $26 million from the sale of promissory notes and “use of funds” agreements to over 140 investors. Their management told investors that there was a tremendous demand for the product that the PermaPave Entities ostensibly sold – permeable paving stones – and that investors would be repaid by the profits generated by the guaranteed sales of this product. In reality, however, there was little demand for the product, and defendants used investor proceeds to make “interest” and “profit” payments to earlier investors and to fund management’s lavish lifestyles. The management of the PermaPave Entities also caused Interlink to issue a Form 8-K stating that a company that had never heard of Interlink had agreed to invest $6 million in Interlink.

The judgment (i) permanently enjoins the PermaPave Entities from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, (ii) permanently enjoins Interlink from future violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, and 13a-11, (iii) orders the PermaPave Entities to pay $7,734,983 in disgorgement, $281,268 in prejudgment interest, and $7.7 million in civil penalties, (iv) orders Interlink to pay $375,000 in civil penalties, and (v) orders relief defendants DASH, Aron Holdings, PermaPave Construction, Dymoncrete Industries, Dymon Rock, and Lumi-Coat to disgorge ill-gotten gains received from defendants totaling $4,236,252 and prejudgment interest totaling $214,233.

The Commission’s civil action continues against Defendants Eric Aronson, Vincent Buonauro, Robert Kondratick, Fredric Aaron, and Permeable Solutions, Inc. and Relief Defendants Caroline Aronson and Deborah Buonauro.”

SEC FILES INJUCTION AGAINST ILLINOIS MAN AND HIS COMPANY

The following excerpt is from the SEC website: November 22, 2011 “The Securities and Exchange Commission today announced that on November 18, it filed a civil injunctive action against Patrick G. Rooney (“Rooney”), a resident of Oakbrook, Illinois, and his company, Solaris Management, LLC (“Solaris Management”), the investment adviser to the Solaris Opportunity Fund, LP (“Solaris Fund”) for the fraudulent misuse of the Solaris Fund’s assets and other illegal conduct. According to the SEC’s complaint, the Solaris Fund is purportedly a non-directional hedge fund with approximately 30 investors and reported assets of $16,277,780 as of December 2008. Contrary to the Solaris Fund’s offering documents and marketing materials, Rooney and Solaris Management allegedly made a radical change in the Solaris Fund’s investment strategy by becoming wholly invested in Positron Corp. (“Positron”), a financially troubled microcap company of which Rooney has been Chairman since 2004. Rooney, who has received compensation from Positron since September 2005, allegedly misused the Solaris Fund’s money by investing over $3.6 million in Positron through both private transactions and market purchases. Many of the private transactions were undocumented while other investments were loans to Positron at 0% interest. The complaint alleges that Rooney and Solaris Management hid the Positron investments and Rooney’s relationship with the company from the Solaris Fund’s investors for over four years. Although Rooney finally told investors about the Positron investments in a March 2009 newsletter, he allegedly lied by telling them he became Chairman to safeguard the Solaris Funds’ investment. The complaint further alleges that these investments benefited Positron and Rooney while providing the Solaris Fund with a concentrated, undiversified, and illiquid position in a cash-poor company with a lengthy track record of losses. The SEC’s complaint, filed in the United States District Court for the Northern District of Illinois, charges Rooney and Solaris Management with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8(a)(1) and (a)(2) thereunder. The complaint also charges Rooney with aiding and abetting Solaris Management’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8(a)(1) thereunder, and Rooney and Solaris Management with aiding and abetting the Solaris Fund’s violation of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder. The SEC is seeking permanent injunctions, disgorgement of any ill-gotten gains plus prejudgment interest and civil monetary penalties against Rooney and Solaris Management, and an officer and director bar against Rooney.”

EXECUTIVE AT LARGE DISCOUNT BROKER SETTLES WITH SEC

The following excerpt is from the SEC website: November 21, 2011 “The Securities and Exchange Commission today announced that Randall Merk consented to the entry of a permanent injunction, payment of a civil penalty, and a suspension in order to settle a Commission action related to the Schwab YieldPlus Fund. Merk was an Executive Vice President at Charles Schwab & Co., Inc., President of Charles Schwab Investment Management, and a Trustee of the Schwab YieldPlus Fund and other Schwab funds. In January 2011, the Commission filed a complaint alleging that Merk and another official committed securities law violations in connection with the offer, sale, and management of the YieldPlus Fund. YieldPlus is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts, making it the largest ultra-short bond fund at the time. The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets fall from $13.5 billion to $1.8 billion during an eight-month period. According to the complaint, Merk misled or failed to inform investors adequately about the risks of investing in YieldPlus. The complaint also alleged that Merk approved other Schwab funds’ redemptions of their investments in YieldPlus at a time when he knew or was reckless in not knowing that a portfolio manager for those funds had received material, nonpublic information about YieldPlus without the authorization of the YieldPlus Fund’s board of trustees. On November 21, 2011, the SEC filed a consent signed by Merk and a proposed final judgment against him. Without admitting or denying the Commission’s allegations, Merk consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of, or otherwise violating, Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The proposed final judgment also would enjoin Merk from future violations of Section 34(b) of the Investment Company Act of 1940, which prohibits the making of untrue statements of material fact, or material omissions, in documents filed with the Commission. Merk also agreed to pay a $150,000 civil penalty, which the Commission is seeking to have included in an existing Fair Fund for distribution to injured YieldPlus investors. The proposed judgment is subject to the Court’s approval. If the Court enters the injunction, Merk also has agreed to settlement of a yet-to-be instituted administrative proceeding in which the Commission would suspend Merk for 12 months from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any penny stock offering. The Commission previously entered into a $118 million settlement with three Schwab entities regarding the YieldPlus Fund and another bond fund. See Press Release 2011-7 and Litigation Release No. 21806 (Jan. 11, 2011). Litigation continues against Kimon Daifotis, the former lead portfolio manager for the YieldPlus Fund and former Chief Investment Officer for Fixed Income for Charles Schwab Investment Management. See Litigation Release No. 21805 (Jan. 11, 2011).”

SEC SETTLES MISREPRESENTATION CHARGES AGAINST AN ENERGY BUSINESS FOUNDER

The following excerpt is from the SEC website: “On October 18, 2011, the Securities and Exchange Commission charged Thomas L. Kivisto of Tulsa, Oklahoma with misleading investors in SemGroup Energy Partners, L.P. (“SGLP”) about risks they faced from energy trading he was conducting at SGLP’s parent and largest customer, SemGroup, L.P. (“SemGroup”). Kivisto has agreed to settle these charges by consenting to injunctive relief, paying a $225,000 civil penalty and forfeiting rights to SGLP limited partnership units recently valued at approximately $1.1 million. The Commission’s complaint, filed in United States District Court in Tulsa, alleges that Kivisto should have known that certain SGLP public filings he signed misled investors about the reliability of SGLP’s revenue stream and the risks SGLP faced from Kivisto’s energy trading. According to the complaint, SemGroup provided up to 89% of SGLP’s revenues and thus was critical to SGLP’s profitability. The SEC alleges that SGLP’s filings assured investors that this revenue stream was “stable and predictable” and protected from volatility in oil prices. The SEC contends, however, that Kivisto’s energy trading increasingly drained SemGroup’s credit facilities and other liquidity sources, jeopardizing its ability to fulfill its commitments to SGLP. Investors were never warned of these risks, according to the SEC. The SEC alleges that these risks came to a head in July 2008, when SemGroup’s lenders cancelled the credit facility and SemGroup filed bankruptcy. After these events, the price of SGLP’s publicly traded limited partnership units declined more than 60%. Privately held SemGroup, based in Tulsa, bought, transported and sold petroleum products. It also traded crude oil and related commodities and derivatives. Kivisto, who helped found the company and served as its CEO and president until its bankruptcy, managed SemGroup’s crude oil trading activities. SGLP (now known as Blueknight Energy Partners, L.P.) went public in July 2007. SGLP primarily owned midstream oil and gas assets such as pipelines and storage facilities. Kivisto served as a director of SGLP’s general partner from its initial public offering until he resigned in July 2008. The Commission alleges that Kivisto signed certain misleading filings SGLP made with the SEC, including registration statements SGLP filed in July 2007 and February 2008 and its annual report on Form 10-K filed in March 2008. Without admitting or denying the Commission’s allegations, Kivisto offered to settle by consenting to entry of a final judgment permanently enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act of 1933, ordering him to pay a $225,000 civil penalty, and requiring him to forfeit all claims to 150,000 SGLP units awarded under the company’s long term incentive plan.”

SEC CHARGES FORMER ENERGY COMPANY CEO WITH MISLEADING INVESTORS

The following excerpt is from the SEC website: “Washington, D.C., Oct. 18, 2011 – The Securities and Exchange Commission today charged the co-founder of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading. According to the SEC’s complaint filed in federal court in Tulsa, Thomas L. Kivisto was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. Kivisto managed these trading activities. Meanwhile, Kivisto also was a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and Kivisto signed certain corporate filings that SGLP made with the SEC, including registration statements and its annual report. The SEC alleges that SGLP’s filings assured investors that its revenue stream from SemGroup, which was its largest customer, was “stable and predictable” and protected from volatility in oil prices. However, unbeknownst to investors, Kivisto’s energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders cancelled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent. “Investors have a right to know the risks that could imperil their investment,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Kivisto should have known that the SGLP filings he signed did not warn investors about the risks created by his energy trading, and investors were blindsided when those risks came to fruition.” The SEC alleges that Kivisto should have known that certain SGLP public filings that he signed were misleading investors about the reliability of SGLP’s revenue stream and the risks that SGLP faced from Kivisto’s energy trading. SemGroup provided up to 89 percent of SGLP’s revenues and thus was critical to SGLP’s profitability. SGLP is now known as Blueknight Energy Partners L.P. Kivisto agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million that were awarded to him under SGLP’s long-term incentive plan. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.”

SEC ALLEGES BIOPHARMA COMPANY AND OTHERS OF MISLEADING INVESTORS

The following is an excerpt from the SEC website: “Washington, D.C., Aug. 2, 2011 — The Securities and Exchange Commission has charged a California-based biopharmaceutical company, three shareholder companies, and four senior executives for fraudulently misleading investors about the regulatory status of the company’s sole product. Three of the executives were additionally charged with insider trading. The SEC alleges that Immunosyn Corporation misleadingly stated in various public filings from 2006 to 2010 that its controlling shareholder – Argyll Biotechnologies LLC – either planned to commence or had commenced the U.S. regulatory approval process for human clinical trials for SF-1019, a drug derived from goat blood that was intended to treat a variety of ailments. The public filings failed to disclose that the U.S. Food and Drug Administration (FDA) had already twice issued clinical holds on drug applications for SF-1019, prohibiting clinical trials from occurring. The SEC alleges that Immunosyn also misleadingly stated that the regulatory approval process in Europe for human clinical trials for SF-1019 was imminent or underway, when in fact Argyll never submitted an application in Europe to conduct human clinical trials. According to the SEC’s complaint filed in federal court in Chicago on August 1, Immunosyn’s CFO Douglas McClain Jr., Argyll’s Chief Scientific Officer Douglas McClain Sr., and Argyll’s CEO James Miceli engaged in insider trading by raising approximately $20 million from their sale of Immunosyn shares while knowing that misrepresentations were being made about the regulatory status of SF-1019. They sold most of these shares through Argyll and two other shareholders named in the SEC’s enforcement action: Argyll Equities, which McClain Jr. and Miceli jointly owned, and an offshore entity Padmore Holdings Ltd., which McClain Jr., McClain Sr., and Miceli jointly owned. Immunosyn’s CEO Stephen D. Ferrone also is charged by the SEC in the securities fraud scheme. “These executives routinely authorized public filings that told investors a story about the status of the company’s prized drug that was far different from the behind-the-scenes reality,” said Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office. “Three of these executives went one step further to illegally profit from their tall tales by selling their company stock and reaping more than $20 million while repeatedly misleading investors about the drug.” For example, according to the SEC’s complaint, McClain Sr. made misstatements about the regulatory approval status of SF-1019 in a video on Immunosyn’s website and in a 2008 presentation in which he sold Immunosyn stock he owned through Padmore to patients at a Texas holistic clinic, some of whom were terminally ill. The SEC alleges that McClain Sr. raised approximately $300,000 from these patients, but never gave them the shares they bought. The SEC’s complaint seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws, ordering each defendant to disgorge all ill-gotten gains plus prejudgment interest and pay financial penalties, and barring Ferrone, McClain Jr., McClain Sr. and Miceli from serving as an officer or director of a public company. Tracy Lo, Eric Phillips and John Kustusch of the SEC’s Chicago Regional Office conducted the SEC’s investigation. The SEC’s litigation will be handled by Ms. Lo and Mr. Phillips. The SEC acknowledges the assistance of the U.S. Food and Drug Administration.”

J.P. MORGAN SECURITIES LLC WILL PAY $153.6 MILLION IN SETTLEMENT

The SEC has settled its case against J.P. Morgan for misleading investors. It looks like good news for harmed investors. The following is an excerpt from the SEC website:

"Washington, D.C., June 21, 2011 – The Securities and Exchange Commission today announced that J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.
In settling the SEC’s fraud charges against the firm, J.P. Morgan also agreed to improve the way it reviews and approves mortgage securities transactions.
The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.
The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.

“J.P Morgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” said Robert Khuzami, Director of the Division of Enforcement. “What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”
According to the SEC’s complaint against J.P. Morgan filed in U.S. District Court for the Southern District of New York, the CDO known as Squared CDO 2007-1 was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market. Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp. (GSC) – which had experience analyzing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted.
The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
The SEC alleges that in March and April 2007, J.P. Morgan knew it faced growing financial losses from the Squared deal as the housing market was showing signs of distress. The firm then launched a frantic global sales effort in March and April 2007 that went beyond its traditional customer base for mortgage securities. The J.P. Morgan employee in charge of Squared’s global distribution said in a March 22, 2007, e-mail that “we are so pregnant with this deal…Let’s schedule the cesarian (sic), please!” By 10 months later, the securities had lost most or all of their value.
According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment. These investors included:
Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty. Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury. The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.
In a separate complaint filed against Steffelin, who headed the team at GSC responsible for the Squared CDO, the SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process. In addition, unknown to investors, Steffelin was seeking employment with Magnetar while working on the transaction.
The SEC’s complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest, and penalties against Steffelin.
Separately, GSC’s bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder. GSC is in bankruptcy, and its settlement is subject to approval by the bankruptcy court.
The SEC’s investigation was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The SEC investigative attorneys were Carolyn Kurr, Jason Anthony, Jeffrey Leasure, and Brent Mitchell. The SEC trial attorneys that will handle the litigation against Steffelin are Matt Martens, Jan Folena, and Robert Dodge.”