ALLEGED PERPETRATOR OF COLLAPSED PONZI SCHEME CHARGED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23240 / April 13, 2015

Securities and Exchange Commission v. James A. Evans, Jr., d/b/a Cashflowbot.com, d/b/a DollarMonster, Civil Action No. 1:15-cv-01118-RWS (Northern District of Georgia)

SEC Charges Georgia Resident with Engaging in a Ponzi Scheme

The Securities and Exchange Commission filed charges against the perpetrator of a Ponzi scheme that raised money from more than 3,000 investors between January 2012 and April 2014.

According to the SEC's complaint filed in federal court in the Northern District of Georgia, James A. Evans, Jr., who lives in Villa Rica, Georgia, operating a website at the domain name "Cashflowbot.com," and using the business name "DollarMonster", falsely promoted DollarMonster as a "private fund" where investors could make "big profits." Among other things, Evans misrepresented to investors that DollarMonster: (a) paid out investment returns that exceeded the amount of money investors had contributed to the fund; (b) was a "financial advisor" with more than 120 management teams and $38 million in assets under management; (c) managed a hedge fund that purchased stocks on behalf of investors in the fund; (d) was a "private Holding Company" that invested in assets such as gold, silver, real estate, stocks and bonds, and (e) had used investor funds to profitably invest in stocks with a market value of $3.2 million.

The complaint alleges that Evans raised approximately $1.15 million from investors. He redistributed approximately $1.06 million to investors as purported investment returns, and withdrew approximately $30,405 for his own personal use. Ultimately, Evans' scheme collapsed.

The SEC's complaint alleges that Evans violated the registration and antifraud provisions of the federal securities laws: Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 206(4) of the Investment Advisers Act of 1934. The complaint seeks a permanent injunction, disgorgement with prejudgment interest and civil monetary penalties pursuant to Sections 21(d)(3) of the Exchange Act and Section 209(e) of the Advisers Act.

SEC INVESTOR BULLETIN ON ENFORCEMENT DIVISION INVESTIGATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with a general overview of how the SEC’s Division of Enforcement conducts investigations.

The SEC’s Division of Enforcement (Enforcement) works on hundreds of investigations each year.  Many investigations originate from complaints or tips that the SEC receives from the public.  The purpose of an SEC investigation is to determine whether any persons or entities violated the federal securities laws.  Common violations include misrepresenting important information about potential investments, manipulating the market prices of securities, stealing customers’ funds or securities, insider trading, and selling unregistered securities.

SEC investigations are generally conducted on a confidential basis to maximize their effectiveness and protect the privacy of those involved.  Because SEC investigations are generally nonpublic, Enforcement will not confirm or deny the existence of an investigation unless the SEC brings charges against a person or entity involved.  Enforcement also will not provide updates on the status of any pending SEC investigation.

SEC investigations are civil, not criminal.  The SEC can charge individuals and entities for violating the federal securities laws and seek remedies such as monetary penalties, disgorgement of ill-gotten gains, injunctions, and restrictions on an individual’s ability to work in the securities industry or to serve as an officer or director of a public company, but the SEC cannot put people in jail.  Enforcement may refer potential criminal cases to criminal law enforcement authorities for investigation or coordinate SEC investigations with criminal investigations involving the same conduct.  If a person is convicted of a criminal violation of the securities laws, a court may sentence that person to serve time in jail.

Enforcement decides whether to initiate an investigation based on many factors, including the magnitude and nature of the possible violations, the number of victims affected by the misconduct, the amount of potential or actual harm to investors from the misconduct, and whether misstated or omitted facts would have impacted investors’ investment decisions.  Enforcement also considers whether the conduct is ongoing or whether it occurred too long ago to pursue the full range of available remedies.  Enforcement may be more likely to initiate an investigation if the matter:

Requires immediate action to protect investors;
Relates to conduct that may threaten the fairness or liquidity of the securities markets;
Involves individuals with a history of misconduct;
Involves a subject matter the SEC or Enforcement has designated as a priority;
Fulfills a programmatic goal of the SEC and Enforcement; or
Concerns an industry practice that may be widespread and should be addressed.
Enforcement receives information about possible violations from many sources, including market surveillance activities, investor tips and complaints, whistleblower submissions, other divisions and offices of the SEC, self-regulatory organizations and other securities industry sources, and media reports.  If Enforcement opens an investigation, it may request documents and interview witnesses on a voluntary basis.  If authorized with a formal order of investigation, Enforcement can issue subpoenas requiring the production of documents and witness testimony.  Enforcement develops the facts in an SEC investigation primarily through interviewing witnesses under oath and analyzing documents and data (e.g., emails, brokerage records, and trading data).

The securities laws are complex and SEC investigations often last months or even years.  At any point during an investigation, Enforcement may decide to close the investigation without recommending any enforcement action.

If Enforcement makes a preliminary determination to recommend enforcement action, it may elect to provide individuals or entities who would be charged in the action with a Wells notice explaining the proposed charges against them and informing them that they can make a voluntary submission setting forth their interests and position.  If Enforcement believes (based on the evidence it has compiled and after considering a Wells submission or deciding not to issue a Wells notice) that enforcement action should be taken, Enforcement seeks authorization from the Commission for the SEC to file a civil lawsuit, to commence an administrative proceeding, or, in certain circumstances, to issue a report of investigation.  Any enforcement action that the SEC initiates is based on Commission authorization.

In some situations, Enforcement may continue to investigate other involved parties or related conduct even after the SEC files an enforcement action.  Information about filed enforcement actions is provided in litigation releases and administrative orders posted on the SEC’s website.

PROSECUTORS CHARGE ALLEGED PONZI SCHEMER WITH VIOLATING SEC OBTAINED COURT ORDERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Federal Prosecutors Charge Massachusetts Resident with Criminal Contempt Based On Violations of Court Orders Obtained by the SEC

The Securities and Exchange Commission announced today that, on April 10, 2014, the United States Attorney's Office for the District of Massachusetts charged Steven Palladino with 25 counts of criminal contempt based on his repeated violations of Court orders obtained by the Commission in its civil action against Palladino and his Massachusetts-based company, Viking Financial Group, Inc. (collectively, "Defendants"). The Commission's action charged that Defendants were operating a fraudulent Ponzi scheme. The charging document filed by the United States Attorney's Office alleges that Palladino "knowingly and wilfully disobey[ed]" Court orders in the Commission's action that froze all of Defendants' assets, required that Defendants deposit all funds in their possession into a court-ordered escrow account, and required Palladino to purge himself of a prior order of civil contempt. If convicted, Palladino, who is currently serving a prison sentence based on convictions in state court for the same Ponzi scheme activity, could face additional incarceration.

On April 30, 2013, the Commission filed an emergency action against Defendants in federal district court in Massachusetts. In its complaint, the Commission alleged that, since April 2011, Defendants misrepresented to at least 33 investors that their funds would be used to conduct the business of Viking - which was purportedly to make short-term, high interest loans to those unable to obtain traditional financing. The Commission also alleged that Palladino misrepresented to investors that the loans made by Viking would be secured by first interest liens on non-primary residence properties and that investors would be repaid their principal, plus monthly interest at rates generally ranging from 7-15%, from payments that borrowers made on the loans. The complaint alleged that Defendants actually made very few real loans to borrowers, and instead used investors' funds largely to pay earlier investors and to fund the Palladino family's lavish lifestyle.

When the Commission first filed its action, it moved the Court for a temporary restraining order, asset freeze, and other emergency relief. On April 30, 2013, the Court issued a temporary restraining order, which included the asset freeze, and set the matter for further hearing on May 3, 2013. On May 3, 2013, the Court issued a revised restraining order, which included the same asset freeze. On May 15, 2013, the Court issued the order that Defendants deposit all funds in their possession into an escrow account. The asset freeze and escrow order have remained in effect at all times since April 30, 2013 and May 15, 2013, respectively.

Since September 2013, the Commission has filed four motions for civil contempt against Palladino. The Commission's first motion for contempt, filed on September 4, 2013, alleged that Palladino violated the asset freeze by transferring three vehicles that he owned (solely or jointly with his wife) into his wife's name and using the vehicles as collateral for new loans - effectively cashing out the equity in these vehicles. The motion also alleged that Palladino violated the escrow order by failing to deposit the funds he received from this cashing-out process into the escrow account. On November 15, 2013, the Court held Palladino in contempt and ordered that he restore ownership of the vehicles that he had transferred into his wife's name. Subsequently, Palladino reported to the Court that he had repaid all the new loans and restored ownership of two of the vehicles (but had failed to restore ownership of one vehicle). The Commission alleges that, in truth, the checks used to repay the new loans on the vehicles were all returned for insufficient funds. According to the Commission's allegations, to date, Palladino has not purged the civil contempt order against him. The Commission also filed three other contempt motions against Palladino charging that (i) he obtained a loan for $6,750 from a Viking investor and failed to deposit this amount into the escrow account; (ii) he sold a truck owned by him for $9,500 and failed to deposit this amount into the escrow account; and (iii) he opened new credit cards and ran up charges for cash advances, gold coins, luxury merchandise and fine dining and failed to deposit the cash and other assets obtained into the escrow account - all in violation of the asset freeze and escrow order. These three motions remain outstanding. The United States Attorney's Office's criminal charges arise from these same violations, as well as Palladino's alleged refusal to comply with the civil contempt order.

On July 15, 2013, the Court held that Defendants' conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. On November 18, 2013, the Court entered orders that enjoined Defendants from further violations of the antifraud provisions of the securities laws and ordered them to pay disgorgement of $9,701,738, plus prejudgment interest of $122,370. On January 14, 2014, Palladino pled guilty in Suffolk Superior Court to various state criminal charges based on the same conduct alleged by the Commission in its case. Palladino is currently serving a 10-12 year prison sentence for his state court convictions.

The Commission acknowledges the continued assistance of Suffolk County (Massachusetts) District Attorney Daniel F. Conley's Office, whose office referred Palladino's and Viking's conduct to the Commission.

SEC CHARGES JEFFERIES LLC WITH FAILING TO SUPERVISE EMPLOYEES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged global investment bank and brokerage firm Jefferies LLC with failing to supervise employees on its mortgage-backed securities desk who were lying to customers about pricing.

An SEC investigation found that Jefferies representatives including Jesse Litvak, who the SEC charged with securities fraud last year, lied to customers about the prices that the firm paid for certain mortgage-backed securities, thus misleading them about the true amount of profits being earned by the firm in its trading.  Jefferies’ policy required supervisors to review the electronic communications of traders and salespeople in order to flag any untrue or misleading information provided customers.  However, the policy was not implemented in a way to detect misrepresentations about price.

Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action announced today by the U.S. Attorney's Office for the District of Connecticut.  In a related criminal trial, Litvak was convicted last week of multiple counts of securities fraud and other charges.

“Had Jefferies better targeted its supervision to the risks faced by its mortgage-backed securities desk, many of the misstatements made by its employees could have been caught,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Other firms trading instruments like mortgage-backed securities should take note of the consequences of failing to do so, and should take this opportunity to tailor their own supervision.”

Paul Levenson, director of the SEC’s Boston Regional Office, added, “Reviewing employees’ communications is a critical part of a brokerage firm’s supervisory responsibilities. This is particularly true when it concerns complex products like mortgage-backed securities in which customers have limited visibility into prices.”

According to the SEC’s order instituting settled administrative proceedings, the supervisory failures occurred on numerous occasions from 2009 to 2011.  Jefferies failed to provide direction or tools to supervisors on the mortgage-backed securities desk to meaningfully review communications to customers by Litvak and others about the price that Jefferies paid for mortgage-backed securities.  Jefferies supervisors failed to check traders’ communications against actual pricing information, making it difficult to detect misrepresentations to customers.  Supervisors on the mortgage-backed securities desk also did not review communications with customers that took place in Bloomberg group chats, where Jefferies traders and salespeople lied about pricing.

The SEC’s order finds that Jefferies failed to reasonably supervise Litvak and other representatives on its mortgage-backed securities desk as required by Section 15(b)(4)(E) of the Securities and Exchange Act of 1934.  Jefferies agreed to settle the charges by making payments to customers totaling more than $11 million, which represents not just the ill-gotten gains of $4.2 million but the full amount of profits earned by the firm on these trades.  Jefferies also agreed to pay a $4.2 million penalty to the SEC and an additional $9.8 million as part of a non-prosecution agreement with the U.S. Attorney’s office.  The firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.

The SEC’s investigation, which is continuing, has been conducted by Kerry Dakin of the Enforcement Division’s Complex Financial Instruments Unit as well as James Goldman, Rachel Hershfang, Rua Kelly, Kathleen Shields, and Kevin Kelcourse of the Boston Regional Office.    The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

MORTGAGE BROKER, 3 REAL ESTATE AGENTS SENTENCED FOR ROLES IN MORTGAGE FRAUD SCHEME

FROM:   U.S. DEPARTMENT OF JUSTICE
Friday, November 15, 2013
Former Miami Mortgage Broker and Real Estate Agent Sentenced for Role in Multimillion-Dollar Mortgage Fraud Scheme

A former Florida-licensed real estate associate and mortgage broker was sentenced to serve 135 months in prison for his role in a $2.4 million mortgage fraud scheme.

Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division made the announcement.

Jose Armando Alvarado, 64, of Miami, was found guilty on Sept. 9, 2013, of eight counts of wire fraud and six counts of bank fraud and was sentenced on Nov. 14, 2013, by U.S. District Judge William J. Zloch of the Southern District of Florida.  In addition to his prison term, Alvarado was ordered to serve three years of supervised release.

Two of Alvarado’s co-conspirators previously convicted at the same trial of various counts of wire and bank fraud were also sentenced on Nov. 14, 2013.  Alberto Morejon, 27, of Miami, a former loan closer and title agent, was sentenced to serve 36 months in prison.  Alvarado’s sister, Reyna Orts, 58, of Miami, a former mortgage broker and the mother of Morejon, was sentenced to serve 50 months in prison.

According to court documents and evidence presented at trial, Alvarado, along with his co-conspirators, operated a mortgage fraud scheme by controlling and operating three real estate entities in the Miami area: South Florida Realty; American Mortgage Lending, a mortgage broker; and Royal Atlantic Title, a title insurance agency.  From February 2004 through November 2009, Alvarado and his co-conspirators used their control over these three companies to falsify and misrepresent important facts provided to financial institutions in order to fraudulently secure loans totaling more than $2.4 million.  The loans were often obtained through submitting falsified supporting documentation, such as false tax returns, W2 forms, bank statements and employment verifications.

Evidence at trial showed that Alvarado and his co-conspirators subsequently enriched themselves by diverting loan proceeds, collecting brokerage fees and inflating real-estate commissions generated by the sales of the properties.  Alvarado and his co-conspirators obtained control of multiple properties during the real estate market boom with the intent to flip and sell them for a profit or control them as rental properties.  The defendants used their knowledge and experience in the real estate industry to conceal the scheme by executing quit-claim deeds and failing to record, and falsely recording, mortgage deeds and other documentation with the State of Florida.

The case was investigated by the FBI’s Miami Field Office and the Miami-Dade Police Department.  The case was prosecuted by Trial Attorney Nathan Dimock of the Criminal Division’s Fraud Section.

SEC ANNOUNCES JURY VERDICT AGAINST ALL DEFENDANTS IN OFFERING FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Jury Verdict in Its Favor Against All Defendants On All Counts

The Securities and Exchange Commission announced today that, on October 10, 2013, a jury in the Eastern District of Tennessee, Knoxville Division, returned a verdict against AIC, Inc., Community Bankers Securities, LLC, and Nicholas D. Skaltsounis on all counts.  Defendant AIC was a financial services holding company for three broker-dealers and an investment adviser based in Richmond, Virginia.  Defendant Community Bankers Securities was one of the subsidiary broker-dealers.  Defendant Skaltsounis was the founder, President, and Chief Executive Officer of AIC and Community Bankers Securities.  The Commission’s complaint, which was filed in April 2011, alleged that Skaltsounis devised and orchestrated an offering fraud by offering and selling millions of dollars of AIC promissory notes and stock.

The complaint alleged that, from at least January 2006 through November 2009, Skaltsounis, directly and through registered representatives associated with Community Bankers Securities, offered and sold AIC promissory notes and stock to numerous investors across multiple states, many of whom were elderly, unsophisticated brokerage customers of CB Securities.  The Defendants misrepresented and omitted material information to investors relating to, among other things, the safety and risk associated with the investments, the rates of return on the investments, and how AIC would use the proceeds of the investments.  AIC and its subsidiaries were never profitable.  AIC earned de minimis revenue, and its subsidiaries did not earn sufficient revenue to meet their expenses.  The Defendants used money raised from new investors to pay back principal and returns to existing investors.  

Prior to trial, the United States District Court for the Eastern District of Tennessee granted the Commission’s motion for partial summary judgment and found in favor of the Commission on its claims against AIC, Community Bankers Securities, and Skaltsounis under Sections 5(a) and 5(c) of the Securities Act of 1933.  The court also found in favor of the Commission on its claims against three relief defendants, Allied Beacon Partners, Inc. (f/k/a Waterford Investor Services, Inc.), Advent Securities, Inc., and Allied Beacon Wealth Management, LLC (f/k/a CBS Advisors, LLC), all of which were subsidiaries of AIC and all of which received proceeds from the Defendants’ illegal and fraudulent conduct.  In addition, prior to trial, two co-defendants, John B. Guyette, of Greeley, Colorado, and John R. Graves, formerly of Pensacola, Florida, and now incarcerated at the Federal Detention Center at Oakdale, Louisiana, both of whom were participants in the scheme, entered into settlement agreements with the Commission.  A final judgment ordering injunctive relief, disgorgement of ill-gotten gains, and civil penalties was entered against Guyette, and a final judgment ordering injunctive relief and civil penalties was entered against Graves.

At the conclusion of the almost three-week trial, the jury returned a verdict for the Commission and against Defendants AIC, Community Bankers Securities, and Skaltsounis on all of the remaining claims.  In particular, the jury found in favor of the Commission on its claims under Section 17(a) of the Securities Act and under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  In addition, the jury found in favor of the Commission on its claims against Defendants AIC and Community Bankers Securities under Section 20(a) of the Exchange Act and against Skaltsounis under Section 20(e) of the Exchange Act.

The trial team from the Commission’s Philadelphia Regional Office consisted of trial attorneys Michael J. Rinaldi, John V. Donnelly III, G. Jeffrey Boujoukos, and Scott A. Thompson and trial paralegal Nichelle Pridgen.

SEC CHARGES CHICAGO-BASED INVESTMENT ADVISER WITH DEFRAUDING INVESTORS IN FAILING PRIVATE EQUITY FUND

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

 
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Northern District of Illinois against Joseph J. Hennessy and his firm, investment adviser Resources Planning Group ("RPG"), for defrauding clients and others who were promised returns that would "beat the market" for investing in a private equity fund they managed. What investors didn't know was the fund was failing and they were being used to raise money to repay promissory notes to earlier investors.

The SEC alleges that Hennessy and RPG raised more than $1.3 million by misrepresenting the Midwest Opportunity Fund (MOF) as a viable private equity fund that could offer high returns. Hennessy failed to tell investors about the fund's poor financial condition or that their money was being used to repay MOF promissory notes that he had personally guaranteed. He therefore misappropriated client funds to make payments on the notes and prop up the fund.

According to the SEC's complaint, Hennessy financed MOF's acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65 million in promissory notes, all of which he personally guaranteed. When MOF's portfolio companies were unable to pay management fees later that year, MOF lacked sufficient funds to repay the notes. From September 2007 to March 2010, Hennessy raised $1.36 million from RPG clients and other investors to make payments on the notes. Hennessy falsely told investors that MOF was viable and offered high returns.

The SEC further alleges that Hennessy misappropriated money from RPG clients. In November 2007, he raised $750,000 from three RPG clients purportedly to invest in MOF. But then Hennessy used that money to redeem another client's investment in the fund. Twice in mid-2009, Hennessy forged letters of authorization from a widowed RPG client to transfer $100,000 from her account to MOF in exchange for promissory notes that have yet to be repaid.

FINAL JUDGEMENTS ENTERED AGAINST INOFIN EXECUTIVES IN $110 MILLION UNREGISTERED NOTES CASE

FROM: SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced today that final judgments were entered on July 23 and 24, 2012, respectively in its civil injunctive action against Kevin Mann, Sr., and Michael J. Cuomo, filed in the United States District Court of Massachusetts.
The Commission’s complaint alleged that Inofin and its executives, Cuomo, of Plymouth, Massachusetts, Mann of Marshfield, Massachusetts, and Melissa George of Duxbury, Massachusetts, illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. According to the SEC’s complaint, Inofin, along with Cuomo, Mann and George, materially misrepresented how the Company was using investor money and the Company’s financial performance. The SEC also charged two sales agents – David Affeldt and Thomas K. (Kevin) Keough – alleging that they promoted the offering and sale of Inofin’s unregistered securities. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
Without admitting or denying the allegations in the complaint, Cuomo and Mann consented to entry of a permanent injunction against violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, and Sections 5 and 17(a) of the Securities Act of 1933 (the "Securities Act").
The final judgment as to Cuomo orders him pay disgorgement of $1,272, 914.57, representing profits he gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $440,181.42 for a total of $1,713,095.90, plus a civil penalty in the amount of $150,000.
The final judgment as to Mann orders him to pay disgorgement of $733,944, representing profits he gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $170,762 for a total of $904,706, plus a civil penalty in the amount of $150,000.
The SEC’s action remains pending against Inofin, George, Affeldt and the Keoughs.