SEC CHARGES MICHIGAN CITY, FORMER LEADERS WITH FRAUD INVOLVING MUNI BOND OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges today against the City of Allen Park, Mich., and two former city leaders in connection with a municipal bond offering to support a movie studio project within the city.

An SEC investigation found that offering documents provided to investors during the Detroit suburb’s sale of $31 million in general obligation bonds contained false and misleading statements about the scope and viability of the movie studio project as well as Allen Park’s overall financial condition and its ability to service the bond debt.

The city and the two officials – former mayor Gary Burtka and former city administrator Eric Waidelich – have agreed to settle the SEC’s charges.

“Municipal bond disclosures must provide investors with an accurate portrayal of a project’s prospects and the municipality’s ability to repay those who invest,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit.”

The SEC alleges that Burtka was an active champion of the project and in a position to control the actions of the city and Waidelich with respect to the fraudulent bond issuances.  Based on this control, the SEC charged Burtka with liability for violations committed by the city and Waidelich.  This is the first time the SEC has charged a municipal official under a federal statute that provides for “control person” liability.  Burtka has agreed to pay a $10,000 penalty.

“When a municipal official like Burtka controls the activities of others who engage in fraud, we won’t hesitate to use every legal avenue available to us in order to hold those officials accountable,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.

According to the SEC’s administrative order against Allen Park and its complaints against Burtka and Waidelich filed in federal court in Detroit, the city began planning the studio project in late 2008 with the belief it would bring much-needed economic development.  The state of Michigan had just enacted legislation that provided significant tax credits to film studios conducting business in Michigan.  The original plan detailed a $146 million facility with eight sound stages led by a Hollywood executive director, and the city initially planned to repay investors with $1.6 million in revenue from leases at the site.  Allen Park issued bonds on Nov. 12, 2009, and June 16, 2010, to raise funds to help develop the site.

The SEC’s order finds, however, that by the time the bonds were issued, Allen Park’s plans to implement and pay for the studio project had deteriorated into merely building and operating a vocational school on the site.  Yet none of these plan changes were reflected in the bond offering documents or other public statements, which continued to repeat the original plans for the movie studio project.  Investors were left uninformed not only about the deterioration of the project itself, but also the substantial impact it would have on the city’s ability to service the bond debt.  Without the planned revenues from the studio project, the expected annual debt payments on the bonds represented approximately 10 percent of the city’s total budget.  Furthermore, Allen Park used outdated budget information in the bond offering documents that did not reflect the city’s budget deficit of at least $2 million for fiscal year 2010.  The studio project completely collapsed within months after the second set of bonds were issued, and Michigan appointed an emergency manager for Allen Park in October 2010 while citing the failed project as a primary factor in the city’s deteriorating economic condition.

The SEC’s complaints allege that Waidelich as city administrator reviewed and approved the offering documents for the bonds.  Waidelich’s actions violated Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b).  Without admitting or denying the allegations, Waidelich has consented to a final judgment barring him from participating in any municipal bond offerings and enjoining him from future violations.  The SEC alleges that Burtka is liable as a control person under Section 20(a) of the Exchange Act, based on his control of Waidelich and the city.  Without admitting or denying the allegations, Burtka consented to a final judgment requiring him to pay the $10,000 penalty, barring him from participating in any municipal bond offerings, and enjoining him from future violations.

The SEC’s order against Allen Park finds it violated Section 17(a)(2) of the Securities Act and Section 10 (b) of the Securities Exchange Act and Rule 10b-5(b).  The city agreed to cease and desist from future violations of those provisions.  The SEC considered certain remedial measures taken by the city, which settled the enforcement action without admitting or denying the findings.

The SEC’s investigation was conducted by Sally J. Hewitt of the Municipal Securities and Public Pensions Unit with assistance from John E. Birkenheier, John E. Kustusch, and Jean M. Javorski in the SEC’s Chicago Regional Office and Mark R. Zehner, Deputy Chief of the Municipal Securities and Public Pensions Unit.

SEC FILES ACTION AGAINST IMPRISONED FORMER STOCK PROMOTER

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Files Action Against Former Stock Promoter Now in Prison for Lying to SEC Investigators

On April 23, 2014, the Securities and Exchange Commission filed suit in United States District Court for the Southern District of Florida against defendants Robert J. Vitale ("Vitale") and Realty Acquisitions & Trust, Inc. ("RATI"), and relief defendant Coral Springs Investment Group, Inc. ("CSIG"). The Commission's complaint alleges that between 2004 and 2010, Vitale and RATI fraudulently raised at least $8.7 million from investors through four real estate securities offerings. According to the complaint, Vitale and RATI made numerous materially false and misleading statements and omissions concerning, among other things, the credentials and experience of Vitale and other purported RATI officers, Vitale's supposed reputation for honesty in the investment world, the safety of investing in RATI, and the ownership of the properties purchased with RATI investor proceeds. The complaint further alleges that Vitale also effected transactions in securities for the account of others without being registered as a broker in connection with his RATI activities, and, by so doing, violated both the unregistered-broker statute and a 2006 Commission Order that barred him from association with any broker or dealer. The complaint further alleges that no registration statement was on file with the Commission or in effect with respect to any of the RATI offerings or sales.

The Commission charges Vitale and RATI with violating Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Commission also charges Vitale with violating Sections 15(a) and 15(b)(6)(B) of the Exchange Act. The Commission seeks disgorgement of the ill-gotten gains related to these violations with prejudgment interest from Vitale, RATI, and relief defendant CSIG, and civil money penalties against Vitale and RATI.

Vitale is currently an inmate at the Federal Detention Center in Miami. He was sentenced in September 2013 to two years in prison after being convicted of obstruction of justice and providing false testimony in the investigation that led to the SEC case filed today.

The Commission acknowledges the assistance of the United States Attorney's Office, the Federal Bureau of Investigation, and the Florida Office of the Attorney General in this matter.

ATTORNEY SETTLES CLAIMS HE MADE FALSE AND MISLEADING STATEMENTS TO INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Claims Against Attorney Retained by Funds Involved in Fraudulent Investment Scheme

The United States District Court for the District of Oregon has entered final judgment against Oregon attorney Robert Custis pursuant to a settlement resolving claims brought by the Securities and Exchange Commission.  The Commission’s complaint alleged that Mr. Custis was retained to perform work for investment funds run by Yusaf Jawed and that he made false and misleading statements to the funds’ investors.

The Commission’s previously-filed complaint alleged that Mr. Jawed and two entities he controlled, Grifphon Asset Management, LLC and Grifphon Holdings, LLC, defrauded more than 100 investors in the Pacific Northwest and across the country as part of a long-running Ponzi scheme that raised more than $37 million.  The complaint alleged that Mr. Custis was retained in 2009 and began sending updates to Mr. Jawed’s investors regarding the status of a purported purchase of the funds’ assets that would allow investors to redeem their shares of the funds for a profit.  The complaint alleges that the statements regarding the asset purchase were false and that the investors were never paid.

Mr. Custis agreed to settle the Commission’s charges without admitting or denying the allegations.  The District Court entered final judgment on February 13, 2014, permanently enjoining Mr. Custis from violating Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(4) and Rule 206(4)-8 of the Investment Advisers Act of 1940.    

On February 27, 2014, pursuant to an offer of settlement submitted by Mr. Custis, the Commission issued an order prohibiting Mr. Custis from appearing or practicing before the Commission as an attorney under Rule 102(e) of the Commission’s Rules of Practice.

COMMODITY POOL OPERATOR GETS RESTRAINING ORDER FOR ALLEGEDLY MISAPPROPRIATING POOL FUNDS

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Obtains Restraining Order against Commodity Pool Operator and Commodity Trading Advisor, AlphaMetrix, LLC, Alleging Misappropriation of Pool Funds and Sending False or Misleading Statements

CFTC Complaint Also Names AlphaMetrix’s Parent Company, AlphaMetrix Group, LLC, as Relief Defendant

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that it filed a Complaint in the U.S. District Court for the Northern District of Illinois on November 4, 2013, against AlphaMetrix, LLC (AlphaMetrix), a Chicago-based Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA). The Complaint alleges that AlphaMetrix misappropriated funds belonging to commodity pools it operated and sent false or misleading account statements to at least some of the pool participants. On November 5, 2013, Federal District Judge Joan H. Lefkow issued a consent restraining Order that freezes AlphaMetrix’s assets, protects books and records, and appoints a corporate monitor to oversee the distribution of pool funds to participants.

According to the CFTC Complaint, AlphaMetrix operates approximately 90 pools that had approximately $700 million in assets under management as of August 31, 2013. The Complaint alleges that AlphaMetrix had agreements with some participants in which AlphaMetrix agreed to rebate certain fees by reinvesting the funds in the pools for the participants. However, as alleged, between at least January 1 and October 31, 2013, AlphaMetrix failed to reinvest at least $2.8 million of the rebates owed to participants and instead transferred the funds to its parent company, AlphaMetrix Group, LLC, which had no legitimate claim to those funds and is named as a Relief Defendant in the Complaint. The Complaint states that AlphaMetrix nevertheless sent the participants account statements, which included the funds that were supposed to have been invested in calculating the net asset value of their interests, and, as a result, misstated to participants the true value of their investments.

In its continuing litigation, the CFTC seeks preliminary and permanent injunctions against AlphaMetrix, enjoining AlphaMetrix from committing further violations of the Commodity Exchange Act, as charged, and ordering it to pay restitution, disgorgement, and a civil monetary penalty, among other appropriate relief. The CFTC also seeks an Order requiring AlphaMetrix Group, LLC, to disgorge funds it received as a result of AlphaMetrix’s unlawful conduct.

CFTC Division of Enforcement staff members responsible for this case are Stephanie Reinhart, David Terrell, Joseph Patrick, Scott Williamson, and Rosemary Hollinger. The Division thanks the CFTC’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

ATLANTA-AREA DEFENDANTS CHARGED BY SEC WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Atlanta-Area Defendants with Securities Fraud

On September 23, 2013, the Securities and Exchange Commission filed an action in federal court in the Northern District of Georgia, charging Stephen L. Kirkland (Kirkland), a Marietta, Georgia resident, and his company The Kirkland Organization, Inc. (TKO), a Georgia corporation, with violations of the federal securities laws for making false and misleading statements to investors in the United States and in Great Britain.  The Commission’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against the defendants.

The Commission’s complaint alleges that between late 2008 and late 2010, Kirkland and TKO repeatedly made false and misleading statements to investors and potential investors including but not limited to: (a) if they invested with the defendants through a managed account at Westover Energy Trading Partners, LLC (Westover), there would be no risk of losing their principal; (b) they would earn 2% to 3% per month; (c) a specified New York real estate developer/owner was a manager of Westover; and (d) the New York real estate developer/owner’s substantial wealth would be used to indemnify investors against loss.  Investors in the United States and Great Britain have invested at least $800,000 with the defendants based upon those false representations.

The complaint alleges that Kirkland and TKO violated the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder.  It further alleges that while acting as investment advisors, the Defendants violated Sections 206 (1) and Section 206 (2) of the Investment Advisers Act of 1940 (“Advisers Act”), the antifraud provisions of the Advisers Act.  With respect to Kirkland, the complaint also alleges that he, while acting as a control person, induced violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

SEC SETTLES FINANCIAL CRISIS FRAUD CHARGES WITH COO OF UCBH HOLDINGS, INC.

FROM:  SECURITIES EXCHANGE COMMISSION 
SEC Settles Claims Against Ebrahim Shabudin Arising from Understated Bank Losses During Financial Crisis

On August 8, 2013, the United States District Court for the Northern District of California approved a settlement of the Securities and Exchange Commission’s claims against Ebrahim Shabudin, the former Chief Operating Officer of UCBH Holdings, Inc.  The case against Mr. Shabudin and two other defendants involves fraudulent financial reporting for UCBH Holdings, Inc., the publicly-traded holding company for San Francisco-based United Commercial Bank.  The Commission alleges Mr. Shabudin and other defendants concealed losses on loans and other assets from the bank’s auditors and delayed the proper reporting of those losses.  The Commission’s complaint alleges Mr. Shabudin committed securities fraud by making false and misleading statements in connection with the 2008 annual report and misleading the bank’s independent auditors, among other allegations.

Without admitting or denying the allegations, Mr. Shabudin agreed to pay a civil money penalty of $175,000, with the penalty partially reduced by the amount paid as a civil penalty in a related administrative action brought against him by the Federal Deposit Insurance Corporation.

Mr. Shabudin also consented to the entry of a final judgment that permanently enjoins him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, 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 thereunder.  The judgment also bars Mr. Shabudin from acting as an officer or director of a public company under the Exchange Act.

SEC CHARGES CITY OF MIAMI WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged the City of Miami and its former Budget Director with securities fraud in connection with several municipal bond offerings and other disclosures made to the bond investing public. The SEC's action also charges the City with violating a 2003 SEC Cease-and-Desist Order which was entered against the City based on similar misconduct. This case is the SEC's first ever injunctive action against a municipality already under an existing SEC cease-and-desist order.

The SEC alleges in its complaint that beginning in 2008, the City and Michael Boudreaux made materially false and misleading statements and omissions concerning certain interfund transfers in three 2009 bond offerings totaling $153.5 million, as well as in the City's fiscal year 2007 and 2008 Comprehensive Annual Financial Reports ("CAFRs") distributed to broad segments of the investing public, including investors in previously issued City debt. The interfund transfers moved monies from the City's Capital Improvement Fund to its General Fund. Boudreaux orchestrated the transfers in order to mask the increasing deficits in the City's General Fund, its primary operating fund, viewed by investors and bond rating agencies as a key indicator of financial health, at a time when the City was actively marketing bonds to the investing public.

The SEC's complaint, which was filed in the United States District Court for the Southern District of Florida, alleges that the City, through Boudreaux, transferred a total of approximately $37.5 million from its Capital Improvement Fund and a Special Revenue Fund to the General Fund in 2007 and 2008 in order to mask increasing deficits in the General Fund. The SEC also alleges that the City and Boudreaux omitted to disclose to bondholders that the transferred funds included legally restricted dollars which, under City Code, may not be commingled with any other funds or revenues of the City. They also failed to disclose that the funds transferred were allocated to specific capital projects which still needed those funds as of the fiscal year end or, in some instances, already spent that money. The transfers enabled the City to meet or come close to meeting its own requirements relating to General Fund reserve levels. In the wake of the transfers, the City's bond offerings were all rated favorably by credit rating agencies.

After reversing most of the transfers following a report by its Office of Independent Auditor General (OIAG), the City had to declare a state of fiscal urgency once it failed to meet statutorily mandated fund levels in its General Fund, and bond rating agencies downgraded their ratings on the City's debt.

The SEC's complaint charges the City with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. It also charges the City with violating the SEC's 2003 Cease-and-Desist Order. The complaint charges Boudreaux with violations of Section 17(a) of the Securities Act and violations and aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC's complaint seeks injunctive relief and financial penalties against the City and Boudreaux, and an order commanding the City to comply with the SEC's 2003 Order.

COURT ORDERS $22.8 MILLION IN SANCTIONS AND RESTITTION IN INVESTMENT FRAUD CASE

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Florida Imposes over $22.8 Million in a Monetary Sanction and Restitution against Floridian David Merrick and His Company, Trader’s International Return Network

In a parallel criminal action, Merrick was convicted on fraud charges and sentenced to 97 months imprisonment

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Charlene Edwards Honeywell of the U.S. District Court for the Middle District of Florida entered an order requiring defendants David Merrick, previously of Apopka, Fla., and his company, Trader’s International Return Network (TIRN), to jointly pay a civil monetary penalty of over $11.4 million for fraud in connection with a foreign currency trading program that victimized more than 700 customers. The order also requires TIRN, a Panamanian corporation, to pay restitution of $11,437,573 to defrauded customers.

The CFTC order, entered on January 22, 2013, stems from a complaint filed by the CFTC in 2009, charging the defendants with solicitation fraud and misappropriation of customer funds involving at least $22.5 million. The complaint alleged that the defendants provided customers and prospective customers with written and/or electronic documents that contained materially false and misleading statements and omissions regarding the actual investment of customer funds, the risks of trading, and profits achieved (see CFTC Press Release 5733-09, October 15, 2009).

The court previously entered consent orders of permanent injunction against Merrick on April 22, 2010 and TIRN on September 8, 2010, finding that they violated the anti-fraud provisions of the Commodity Exchange Act, as charged. Both orders reserved the issue of monetary sanctions for future order.

In a related criminal case, United States v. David Merrick, No. 10-cr-00109-MSS-DAB (M.D. Fla.), on January 19, 2012, Merrick was found guilty of one count of conspiracy to commit wire fraud, money laundering, and securities fraud and one count of money laundering. He was sentenced to 97 months imprisonment and ordered to pay $11,437,573.15 in restitution to 735 customer-victims.

The CFTC thanks the U.S. Attorney’s Office for the Middle District of Florida, the Federal Bureau of Investigation, and the Securities and Exchange Commission for their assistance in this matter.

CFTC staff members are responsible for the action are William P. Janulis, Barry R. Blankfield, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

SEC CHARGES GOLD STANDARD MINING CORP. AND OTHERS FOR FALSE AND MISLEADING STATEMENTS

FROM:  U.S. SECURITES AND EXCHANGE COMMISSION
July 3, 2012
On June 29, 2012, the Securities and Exchange Commission filed a civil action in the United States District Court for the Central District of California against Gold Standard Mining Corp. (“Gold Standard”), its Chief Executive Officer/Chief Financial Officer Panteleimon Zachos, attorney Kenneth G. Eade, auditor E. Randall Gruber and his firm Gruber & Company LLC.

In its complaint, the Commission alleges that, between May 2009 and April 2011, Gold Standard filed numerous reports about its purported Russian gold mining operations that were materially false and misleading in various respects. According to the complaint, Gold Standard represented that it had acquired a Russian gold mining company known as Ross Zoloto Co., Ltd. (“Ross Zoloto”), but did not inform investors that it had agreed to allow the prior owner of Ross Zoloto to keep profits from existing operations or of issues surrounding Russian government registration or approval of the business combination. The complaint also alleges that Gold Standard filed false or misleading financial statements.

The complaint alleges that Gold Standard and Zachos were responsible for these misstatements, and that Eade, Gruber and Gruber & Co. substantially assisted Gold Standard in making these false and misleading statements. The complaint further alleges that Gruber & Co., through its sole member Edward Randall Gruber, misrepresented in an audit opinion that it had audited the company’s 2007, 2008 and 2009 consolidated financial statements in accordance with standards of the Public Company Accounting Oversight Board.

Without admitting or denying the allegations in the Commission’s complaint, Gold Standard and Zachos consented to final judgments pursuant to which Gold Standard will be enjoined from violating Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-11 and 13a-13 thereunder, and Zachos will be enjoined from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13a-14 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-11 and 13a-13 thereunder. Zachos will also be barred from serving as an officer or director of a public company. The judgments are subject to court approval.

The complaint alleges that Eade and Gruber aided and abetted Gold Standard’s violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 12b-20, 13a-11, and 13a-13 thereunder; Gruber & Co. violated Sections 10(b) and 10A(a) of the Exchange Act and Rule 10b-5(b) thereunder, and aided and abetted the violations of Gold Standard of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 12b-20, 13a-11, and 13a-13 thereunder; and Gruber violated Section 10A(a) of the Exchange Act and aided and abetted the violations of Gruber & Co. of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder or, in the alternative, in liable as a control person of Gruber & Co. LLC with respect to those violations pursuant to Section 20(a) of the Exchange Act. The Commission seeks permanent injunctions, disgorgement, prejudgment interest and civil penalties against Eade, Gruber and Gruber & Co. and seeks to bar Eade from serving as an officer or director of a public company.