SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

SEC finds yet another scheme to defraud investors.  

SEC ANNOUNCING MORE BROKERS CHARGED FOR FRAUD

The following press release comes from the U.S. Securities and Exchange Commission

Press Release

SEC Continues Crackdown on Brokers Defrauding Customers

FOR IMMEDIATE RELEASE

2017-223

Washington D.C., Dec. 6, 2017 —
The Securities and Exchange Commission today continued its crackdown on brokers who defraud customers, charging two New York-based brokers with making unsuitable trades that were costly for customers and lucrative for the brokers.  The case follows similar charges of excessive trading by brokers brought in January, April, and September.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Zachary S. Berkey of Centerreach, New York, and Daniel T. Fischer of Greenwich, Connecticut, conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for themselves.  According to the complaint, 10 customers of Four Points Capital Partners LLC, where Berkey and Fischer previously worked, lost a total of $573,867 while Berkey and Fischer received approximately $106,000 and $175,000, respectively, in commissions.

“We’re intensifying our focus on unscrupulous brokers and their harmful practices,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “As alleged in our complaint, Berkey and Fischer did grave harm to their customers by providing unsuitable recommendations and siphoning money in the form of high commissions and costs.”

According to the SEC’s complaint, since the customers incurred significant costs with every transaction and the securities were held briefly, the price of the securities had to rise significantly for customers to realize even a minimal profit.  The complaint also alleges that Berkey and Fischer churned customer accounts and concealed material information from their customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades.  The complaint further alleges that Fischer engaged in unauthorized trading.

Without admitting or denying the SEC’s allegations, Fischer consented to a final judgment that permanently enjoins him from similar violations in the future and orders him to return his allegedly ill-gotten gains with interest and pay a $160,000 penalty.  The settlement is subject to court approval.  Fischer separately agreed to an SEC order barring him from the securities industry and penny stock trading.  The SEC’s litigation against Berkey will proceed in federal district court in Manhattan.

The SEC’s investigation was conducted by Hane L. Kim, Karen Lee, David Stoelting, and Gerald A. Gross.  The litigation will be led by Mr. Stoelting, Ms. Kim, and Ms. Lee.  The case is being supervised by Mr. Wadhwa.  The SEC examination that led to the investigation was conducted by Rosanne R. Smith, Terrence P. Bohan, William D. Ostrow, and Doreen Piccirillo.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Office of Montana State Auditor, Commissioner of Securities and Insurance.

SEC ANNOUNCES $17 MILLION WHISTLEBLOWER AWARD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington D.C., June 9, 2016 — The Securities and Exchange Commission today announced a whistleblower award of more than $17 million to a former company employee whose detailed tip substantially advanced the agency’s investigation and ultimate enforcement action.

The award is the second-largest issued by the SEC since its whistleblower program began nearly five years ago.  The SEC issued a $30 million award in September 2014 and a $14 million award in October 2013.

“Company insiders are uniquely positioned to protect investors and blow the whistle on a company’s wrongdoing by providing key information to the SEC so we can investigate the full extent of the violations,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “The information and assistance provided by this whistleblower enabled our enforcement staff to conserve time and resources and gather strong evidence supporting our case.”

Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “In the past month, five whistleblowers have received a total of more than $26 million, and we hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

The SEC’s whistleblower program has now awarded more than $85 million to 32 whistleblowers since the program’s inception in 2011.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

ASSISTANT AG SUNG-HEE SUH'S REMARKS REGARDING SECURITIES REGULATION IN EUROPE

FROM:  U.S. JUSTICE DEPARTMENT 

Tuesday, January 20, 2015

Deputy Assistant Attorney General Sung-Hee Suh Speaks at the PLI’s 14th Annual Institute on Securities Regulation in Europe: Implications for U.S. Law on EU Practice

Remarks As Prepared for Delivery

Thank you, Rob, for that kind introduction.  I am honored to be invited to speak on this panel with esteemed colleagues from the SEC, FCA, SFO, and the private sector.

As brief background, I am a Deputy Assistant Attorney General in the Department of Justice’s Criminal Division.  I oversee several sections, but most relevant to my remarks today is the Fraud Section, which has principal responsibility for the prosecution of complex securities and other white-collar matters for the Criminal Division.

I would like to speak briefly this morning about the Criminal Division’s white-collar criminal enforcement priorities now and in the coming year.

We are focused on fighting corruption, cyber crime, and financial fraud, all of which present unique dangers to American citizens, as well as individuals overseas.

We are prioritizing the fight against financial fraud of all stripes—particularly at publicly traded corporations and large financial institutions—and we will follow the evidence of fraud wherever it leads, be that within or outside U.S. borders.  

The prosecution of individuals—including corporate executives—for criminal wrongdoing continues to be a high priority for the department.  That is not to say that we will be looking to charge individuals to the exclusion of corporations.

However, corporations do not act criminally, but for the actions of individuals.  And, the Criminal Division intends to prosecute those individuals, whether they are sitting on a sales desk or in a corporate suite.

It is within this framework that we are also seeking to reshape the conversation about corporate cooperation to some extent.

Corporations too often overlook a key consideration that the department has long expressed in our Principles of Federal Prosecution, which guide our prosecutorial decisions:  That is a corporation’s willingness to cooperate in the investigation of its culpable executives.

Of course, corporations—like individuals—are not required to cooperate.  A corporation may make a business or strategic decision not to cooperate.  However, if a corporation does elect to cooperate with the department, it should be mindful of the fact that the department does not view voluntary disclosure as true cooperation, if the company avoids identifying the individuals who are criminally responsible for the corporate misconduct.

Even the identification of culpable individuals is not true cooperation, if the company intentionally fails to locate and provide facts and evidence at their disposal that implicate those individuals.  The Criminal Division will be looking long and hard at corporations who purport to cooperate, but fail to provide timely and full information about the criminal misconduct of their executives.

In the past year, the Criminal Division has demonstrated its continued commitment to the prosecution of individual wrongdoers in the corporate context.  I will highlight a few examples.

On the FCPA front, since 2009, we have convicted 50 individuals in FCPA and FCPA-related cases, and resolved criminal cases against 59 companies with penalties and forfeiture of almost $4 billion.  Within the last two years alone, we have charged, resolved by plea, or unsealed cases against 26 individuals, and 14 corporations have resolved FCPA violations with combined penalties and forfeiture of more than $1.6 billion.

As just one example, the department unsealed charges against the former co-CEOs and general counsel of PetroTiger Ltd., a BVI oil and gas company with offices in New Jersey, for allegedly paying bribes to an official in Colombia in exchange for assistance in securing approval for an oil services contract worth $39 million.

The general counsel and one of the CEOs already pleaded guilty to bribery and fraud charges, and the other former CEO is headed for trial.

This case was brought to the attention of the department through voluntary disclosure by PetroTiger, which cooperated with the department’s investigation.  Notably, no charges of any kind were filed against PetroTiger.

An example on the flip side is the Alstom case, an FCPA investigation stemming from a widespread scheme involving tens of millions of dollars in bribes spanning the globe, including Indonesia, Saudi Arabia, Egypt, and the Bahamas.

When the Criminal Division learned of the misconduct and launched an investigation, Alstom opted not to cooperate at the outset.  What ensued was an extensive multi-tool investigation involving recordings, interviews, subpoenas, MLAT requests, the use of cooperating witnesses, and more.

As of today, four individual Alstom executives have been charged; three of them have pleaded guilty; Alstom’s consortium partner, Marubeni, was charged and pleaded guilty; and Alstom pleaded guilty and agreed to pay a record $772 million fine.  And that only accounts for the charges in the United States.

As I have said, we want corporations to cooperate, and will provide appropriate incentives.  But, we will not rely exclusively upon corporate cooperation to make our cases against the individual wrongdoers.

On the securities and commodities fraud front, protecting the integrity of our global financial markets continues to be a priority for the Criminal Division.  Our investigations into the manipulation of the LIBOR and FX at global financial institutions have received substantial publicity.

So far, five banks have resolved the LIBOR investigation with the department, paying more than $1.2 billion to the department alone.  And 11 individuals have been charged, two of whom have pleaded guilty.  And again, that only accounts for the charges in the United States.  We expect both the LIBOR and FX investigations to continue to develop, both against the financial institutions themselves, as well as culpable individual executives.

To do these complex, international investigations, we are increasingly coordinating with domestic and foreign regulators and law enforcement counterparts, some of whom are on this panel today.

In working with our foreign counterparts, we have developed growing sophistication and experience in a variety of areas, including analyzing foreign data privacy laws and corporations’ claims that overseas documents cannot be provided to investigators in the United States.

We are also building and relying upon on our relationships with our foreign counterparts to gather evidence, locate individuals overseas, conduct parallel investigations of similar conduct, and, when appropriate, coordinate the timing and scope of resolutions.

Yes, just as we are coordinating our investigations, we are likewise willing to coordinate our resolutions, including accounting for the corporate monetary penalties paid in other jurisdictions when appropriate.

This is all to say that you should expect to see these meaningful, multinational investigations and prosecutions of corporations and individuals to continue.

With that, I am looking forward to hearing the remarks of my fellow panelists and discussing these important issues with you in more detail.

SEC ANNOUNCES CHARGES AGAINST 2 OPERATORS IN HIGH-YIELD INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND INVESTMENT COMMISSION 

The Securities and Exchange Commission announced charges against two India-based operators of an alleged high-yield investment scheme seeking to exploit investors through pervasive social media pitches on Facebook, YouTube, and Twitter.

The SEC’s Enforcement Division alleges that Pankaj Srivastava and Nataraj Kavuri offered “guaranteed” daily profits as they anonymously solicited investments for their purported investment management company called Profits Paradise.  They invited investors to deposit funds that supposedly would be pooled with money from other investors and traded on foreign exchanges as well as in stocks and commodities.  They created a Profits Paradise website and related social media sites to describe the profits as “huge,” “lucrative,” and “handsome,” and they characterized the risk as “minimal.”

The SEC’s Enforcement Division alleges that the guaranteed returns were false, and that the investments being offered bore the hallmark of a fraudulent high-yield investment program.  Srivastava and Kavuri attempted to conceal their identities by supplying a fictitious name and contact information when registering Profits Paradise’s website address.  They also communicated under the fake names of “Paul Allen” and “Nathan Jones.”  After the SEC began its investigation into the investment offering, the Profits Paradise website was discontinued.

“Srivastava and Kavuri used excessive secrecy in their effort to swindle investors through social media outreach and a website that attracted as many as 4,000 visitors per day,” said Stephen Cohen, Associate Director of the SEC’s Division of Enforcement.  “Our investigation stopped the constant solicitations once the website disappeared, and successfully tracked down the identities of the perpetrators behind those fraudulent solicitations.”

According to the SEC’s order instituting administrative proceedings, Srivastava and Kavuri used the Profits Paradise website and YouTube videos to detail three investment plans with terms of 120 business days.  The first plan purportedly yielded daily interest of 1.5 percent on investments of $10 to $749.  The second plan purportedly yielded 1.75 percent on investments of $750 to $3,499.  And the third plan purportedly yielded 2 percent on investments of $3,500 and above.  Postings on Profit Paradise’s Facebook page promised investors they could “Enjoy Hassle Free Income” and advertised a “5% Referral Commission.”  The scheme also utilized a Profits Paradise Twitter account to steer potential investors to the Profits Paradise website, and Srivastava and Kavuri created a Google Plus page to promote the investment opportunity.

The SEC’s Enforcement Division alleges that Srivastava and Kavuri violated Sections 17(a)(1) and (3) of the Securities Act of 1933, and will litigate the matter before an administrative law judge.

The SEC’s investigation was conducted by Carolyn Kurr and Daniel Rubenstein, and the case was supervised by C. Joshua Felker.  The SEC’s litigation will be led by Kenneth Donnelly.  The SEC appreciates the assistance of the Securities and Exchange Board of India as well as the Autorité des Marchés Financiers in Quebec, the Ontario Securities Commission, and the Securities and Futures Commission in Hong Kong.

The SEC today updated an investor alert educating investors about how social media may be used to promote so-called high-yield investment programs and other fraudulent investment schemes.

“We urge investors to exercise extreme caution if they are approached to invest in a website promising incredible returns with minimal or no risk.  So-called high-yield investment programs are often frauds,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.

SEC, FINRA ISSUE ALERT TO INVESTORS REGARDING SHELL COMPANIES BEING SOLD AS PENNY STOCKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) issued an alert warning investors that some penny stocks being aggressively promoted as great investment opportunities may in fact be stocks of dormant shell companies with little to no business operations.

The investor alert provides tips to avoid pump-and-dump schemes in which fraudsters deliberately buy shares of very low-priced, thinly traded stocks and then spread false or misleading information to pump up the price.  The fraudsters then dump their shares, causing the prices to drop and leaving investors with worthless or nearly worthless shares of stock.

“Fraudsters continue to try to use dormant shell company scams to manipulate stock prices to the detriment of everyday investors,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Before investing in any company, investors should always remember to check out the company thoroughly.”

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, “Investors should be on the lookout for press releases, tweets or posts aggressively promoting companies poised for explosive growth because of their ‘hot’ new product.  In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet.”

The investor alert highlights five tips to help investors avoid scams involving dormant shell companies:

Research whether the company has been dormant – and brought back to life.  You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports.
Know where the stock trades.  Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges.
Be wary of frequent changes to a company's name or business focus.  Name changes and the potential for manipulation often go hand in hand.
Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.
Know that "Q" is for caution.  A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy.

ASSET-BACKED SECURITIES REFORM RULES ADOPTED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Adopts Asset-Backed Securities Reform Rules

08/27/2014 02:30 PM EDT

The Securities and Exchange Commission today adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.

The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans.  The rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as “shelf offerings,” and make important revisions to reporting requirements.

“These are strong reforms to protect America’s investors by enhancing the disclosure requirements for asset-backed securities and by making it easier for investors to review and access the information they need to make informed investment decisions,” said SEC Chair Mary Jo White.  “Unlike during the financial crisis, investors will now be able to independently conduct due diligence to better assess the credit risk of asset-backed securities.”

ABS are created by buying and bundling loans, such as residential and commercial mortgage loans, and auto loans and leases, and creating securities backed by those assets for sale to investors.  A bundle of loans is often divided into separate securities with varying levels of risk and returns.  Payments made by the borrowers on the underlying loans are passed on to investors in the ABS.

ABS holders suffered significant loss

es during the 2008 financial crisis.  The crisis revealed that many investors in the securitization market were not fully aware of the risks underlying the securitized assets and over-relied on ratings assigned by credit rating agencies, which in many cases did not appropriately evaluate the credit risk of the securities.  The crisis also exposed a lack of transparency and oversight by the principal officers in the securitization transactions.  The revised rules are designed to address these problems and to enhance investor protection.

The revised rules become effective 60 days after publication in the Federal Register.  Issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register.  Offerings of ABS backed by residential and commercial mortgages, auto loans, auto leases, and debt securities (including resecuritizations) must comply with the asset-level disclosure requirements no later than two years after the rules are published in the Federal Register.

*   *   *

FACT SHEET

Asset-backed securities are created by buying and bundling loans – such as residential mortgage loans, commercial mortgage loans or auto loans and leases – and creating securities backed by those assets that are then sold to investors.

Often a bundle of loans is divided into separate securities with different levels of risk and returns.  Payments on the loans are distributed to the holders of the lower-risk, lower-interest securities first, and then to the holders of the higher-risk securities.  Most public offerings of ABS are conducted through expedited SEC procedures known as “shelf offerings.”

During the financial crisis, ABS holders suffered significant losses and areas of the securitization market–particularly the non-governmental mortgage-backed securities market–have been relatively dormant ever since.  The crisis revealed that many investors were not fully aware of the risk in the underlying mortgages within the pools of securitized assets and unduly relied on credit ratings assigned by rating agencies, and in many cases rating agencies failed to accurately evaluate and rate the securitization structures.  Additionally, the crisis brought to light a lack of transparency in the securitized pools, a lack of oversight by senior management of the issuers, insufficient enforcement mechanisms related to representations and warranties made in the underlying contracts, and inadequate time for investors to make informed investment decisions.

SEC Proposals

In April 2010, the SEC proposed rules to revise the offering process, disclosure and reporting requirements for ABS.  Subsequent to that proposal, the Dodd-Frank Act was signed into law and addressed some of the same ABS concerns.  In light of the Dodd-Frank Act and comments received from the public in response to the 2010 proposal, the SEC re-proposed some of the April 2010 proposals in July 2011.  In February 2014, the Commission re-opened the comment period on the proposals to permit interested persons to comment on an approach for the dissemination of loan-level data.  The proposals sought to address the concerns highlighted by the financial crisis by, among other things, requiring additional disclosure, including the filing of tagged computer-readable, standardized loan-level information; revising the ABS shelf-eligibility criteria by replacing the investment grade ratings requirement with alternative criteria; and making other revisions to the offering and reporting requirements for ABS. 

The Final Rules:

Requiring Certain Asset Classes to Provide Asset-Level Information in a Standardized, Tagged Data Format

To provide increased transparency about the underlying assets of a securitization and to implement Section 942(b) of the Dodd-Frank Act, the final rules require issuers to provide standardized asset-level information for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities (including resecuritizations).  The rules require that the asset-level information be provided in a standardized, tagged data format called eXtensible Mark-up Language (XML), which allows investors to more easily analyze the data.  The rules also standardize the disclosure of the information by defining each data point and delineating the scope of the information required.  Although specific data requirements vary by asset class, the new asset-level disclosures generally will include information about:

• Credit quality of obligors.
• Collateral related to each asset.
• Cash flows related to a particular asset, such as the terms, expected payment amounts, and whether and how payment terms change over time.

Asset-level information will be required in the offering prospectus and in ongoing reports.  Providing investors with access to standardized, comprehensive asset-level information that offers a more complete picture of the composition and characteristics of the pool assets and their performance allows investors to better understand, analyze and track the performance of ABS.  The Commission continues to consider the best approach for requiring information about underlying assets for the remaining asset classes covered by the 2010 proposal.

Providing Investors With More Time to Consider Transaction-Specific Information

The final rules require ABS issuers using a shelf registration statement to file a preliminary prospectus containing transaction-specific information at least three business days in advance of the first sale of securities in the offering.  This requirement gives investors additional time to analyze the specific structure, assets, and contractual rights for an ABS transaction.

Removing Investment Grade Ratings for ABS Shelf Eligibility

The final rules revise the eligibility criteria for shelf offerings of ABS.  The new proposed transaction requirements for ABS shelf eligibility replace the prior investment grade requirement and require:

• The chief executive officer of the depositor to provide a certification at the time of each offering from a shelf registration statement about the disclosure contained in the prospectus and the structure of the securitization.
• A provision in the transaction agreement for the review of the assets for compliance with the representations and warranties upon the occurrence of certain trigger events.
• A dispute resolution provision in the underlying transaction documents.
• Disclosure of investors’ requests to communicate with other investors.

The final rules also require other changes to the procedures and forms related to shelf offerings, including:

• Permitting a pay-as-you-go registration fee alternative, allowing ABS issuers to pay registration fees at the time of filing the preliminary prospectus, as opposed to paying all registration fees upfront at the time of filing the registration statement.
• Creating new Forms SF-1 and SF-3 for ABS issuers to replace current Forms S-1 and S-3 in order to distinguish ABS filers from corporate filers and tailor requirements for ABS offerings.
• Revising the current practice of providing a base prospectus and prospectus supplement for ABS issuers and instead requiring that a single prospectus be filed for each takedown (however, it is permissible to highlight material changes from the preliminary prospectus in a separate supplement to the preliminary prospectus 48 hours prior to first sale).

Amendments to Prospectus Disclosure Requirements

The Commission approved amendments to the prospectus disclosure requirements for ABS, which include:

• Expanded disclosure about transaction parties, including disclosure about a sponsor’s retained economic interest in an ABS transaction and financial information about parties obligated to repurchase assets.
• A description of the provisions in the transaction agreements about modification of the terms of the underlying assets.
• Filing of the transaction documents by the date of the final prospectus, which is a clarification of the current rules.

Revisions to Regulation AB

The Commission also approved other revisions to Regulation AB, including:

• Standardization of certain static pool disclosure.
• Revisions to the Regulation AB definition of an “asset-backed security.”
• Specifying, in addition to the asset-level requirements, the disclosure that must be provided on an aggregate basis relating to the type and amount of assets that do not meet the underwriting criteria that is described in the prospectus.
• Several changes to Forms 10-D, 10-K, and 8-K, including requiring explanatory disclosure in the Form 10-K about identified material instances of noncompliance with existing Regulation AB servicing criteria.
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COURT ENTERS JUDGEMENT AGAINST BROKER FOR SELLING UNREGISTERED STOCK IN ALZHEIMER'S TREATMENT COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Court Enters Judgment Against Unregistered Broker for Role in Investment Scheme Involving Purported Alzheimer's Treatment

The Securities and Exchange Commission announced that on July 31, 2014, a California federal court entered a final judgment against Kenneth Gross, of Porter Ranch, California, who was named as a defendant in an action filed by the Commission in June 2013. The Commission charged Gross with selling unregistered stock in Your Best Memories International Inc. without being registered as a broker-dealer as required by the federal securities laws. Your Best Memories was a California company purportedly raising money for a Massachusetts-based company in the business of developing products intended to improve memory function in individuals suffering from Alzheimer's disease and other conditions. Gross consented to the entry of this judgment.

The final judgment entered by the United States District Court for the Central District of California holds Gross liable for disgorgement of $269,000, representing money he was paid for the sale of unregistered securities, plus prejudgment interest of $10,897.81, but waives payment of the disgorgement and interest and does not impose a civil penalty based on Gross's financial condition. Previously, the court entered a partial judgment on March 14, 2014, based on Gross's consent, which enjoined him from violating Sections 5(a) and (c) of the Securities Act of 1933 (the securities registration provisions of the Securities Act) and Section 15(a) of the Securities Exchange Act of 1934 (the broker-dealer registration provisions of the Exchange Act). The Commission also issued an Order against Gross on June 6, 2014, permanently barring him from the securities industry.

On June 10, 2014, the Court entered final judgments by default against the other Defendants in the action, Your Best Memories, its president, Robert Hurd, and Smokey Canyon Financial Inc., another company controlled by Hurd. The Commission charged Your Best Memories and Hurd with misleading investors about how their funds would be used and making misleading statements that one of the products touted to investors had received approval from the U.S. Food and Drug Administration as a treatment for Alzheimer's disease. The final judgments imposed permanent injunctions prohibiting Your Best Memories and Hurd from future violations of the antifraud and registration provisions of the federal securities laws, ordered Your Best Memories, Hurd, and Smokey Canyon to pay $963,000 in disgorgement plus prejudgment interest of $34,170, and ordered Your Best Memories and Hurd to pay a civil penalty of $963,000.

FINAL "PAY TO PLAY" RETIREMENT FUND DEFENDANT CHARGED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Final Defendant Settles SEC Fraud Charges in "Pay to Play" Case Involving New York State Common Retirement Fund

On May 22, 2014, the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York, entered a final judgment against defendant Saul Meyer in the enforcement action arising from the "pay-to-play" scheme involving the New York State's Common Retirement Fund ("Common Fund"). Starting on March 19, 2009, the Commission filed securities fraud and related charges against several participants in the scheme, including Henry Morris ("Morris"), the top political advisor to former New York State Comptroller Alan Hevesi, and David Loglisci ("Loglisci"), formerly the Deputy Comptroller and the Common Fund's Chief Investment Officer. Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged seventeen defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals. Meyer was the principal of an investment management firm and is alleged to have made unlawful payments to Morris in connection with one of the transactions at issue. The civil action had been stayed until the outcome of the New York Attorney General's Office's parallel criminal action against some of the defendants charged by the Commission, including Meyer.

Meyer previously pled guilty to the parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $1 million. In the SEC's federal court action, Meyers consented to entry of a judgment that permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. In addition to the judgment entered in the federal court action, the Commission issued an administrative order on June 10, 2014 imposing remedial sanctions against Meyer. The Commission's administrative order bars Meyer from associating with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, subject to a right to reapply after seven years.

The Commission's claims in this action are now fully resolved. The Commission acknowledges the assistance and cooperation of the New York Attorney General's Office in this matter.

SEC AWARDS $875,000 IN WHISTLEBLOWER MONEY TO BE SPLIT BETWEEN TWO TIPSTERS

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 

The Securities and Exchange Commission today announced a whistleblower award of more than $875,000 to be split evenly between two individuals who provided tips and assistance to help the agency bring an enforcement action.

The SEC’s whistleblower program authorized by the Dodd-Frank Act rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million.  Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.

By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

“These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower.  “Whistleblowers who report their concerns to the SEC perform a great service to investors and help us combat fraud.”

A total of eight whistleblowers have been awarded through the SEC’s whistleblower program since it began in late 2011.

COMPANY DIRECTOR CHARGED BY SEC WITH INSIDER TRADING AHEAD OF SALE TO PRIVATE EQUITY FIRM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

On May 22, 2014, the Securities and Exchange Commission charged a former director of a Long Island-based vitamin company and others in his family circle with insider trading ahead of the company’s sale to a private equity firm.

The SEC alleges that board member Glenn Cohen learned that NBTY Inc. was negotiating a sale to The Carlyle Group and tipped his three brothers and a brother’s girlfriend with the confidential information. Craig Cohen, Marc Cohen, Steven Cohen, and Laurie Topal all traded on the inside information that Glenn Cohen provided and reaped illicit profits totaling $175,000.

The four Cohens and Topal agreed to settle the SEC’s charges by paying a total of more than $500,000.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Glenn Cohen first learned in May 2010 that NBTY management was negotiating to sell the company. He shared the nonpublic information with his three brothers and Topal, who is the girlfriend of Marc Cohen. All four purchased NBTY shares as a result. The next month, Glenn Cohen attended additional board meetings as negotiations between NBTY and Carlyle progressed. As more information became available to the board, Steven and Craig Cohen purchased additional NBTY shares. On July 15, Carlyle announced its acquisition of NBTY at a per-share price that was 47 percent above the prior day’s closing price, enabling the Cohens and Topal to profit significantly when they all sold their NBTY shares that same day.

The SEC’s complaint charges the Cohens and Topal with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In a settlement that would permanently enjoin them from violations of Section 10(b) and Rule 10b-5, they agreed to the following sanctions:

Glenn Cohen: penalty of $153,613.25 and barred from serving as an officer or director of a public company.
Craig Cohen: disgorgement of $71,932, prejudgment interest of $9,606, and a penalty of $71,932.
Marc Cohen: disgorgement of $21,454, prejudgment interest of $2,865, and a penalty of $21,454
Steven Cohen: disgorgement of $60,226, prejudgment interest of $8,042, and a penalty of $60,226.
Laurie Topal: disgorgement of $21,780, prejudgment interest of $2,908, and a penalty of $21,780.


The Cohens and Topal neither admitted nor denied the charges in the settlement, which is subject to court approval.

SEC BRINGS FRAUD CHARGES AGAINST INVESTMENT ADVISORY FIRM, EXECUTIVES FOR FALSIFYING PERFORMANCE RESULTS

FROM:  U.S SECURITIES AND EXCHANGE COMMISSION 

May 8, 2014

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a New York-based investment advisory firm and two executives for distributing falsified performance results to prospective investors in two hedge funds they managed.

The SEC alleges that Aphelion Fund Management’s chief investment officer Vineet Kalucha fraudulently altered an outside audit firm’s report reviewing the performance of an investment account he managed.  Aphelion’s chief financial officer George Palathinkal allegedly learned about Kalucha’s falsifications, which essentially changed an investment loss into a major investment gain in the account.  Nevertheless, the falsified report showing the phony gain instead of the actual loss was distributed to prospective investors.  Furthermore, investors were separately provided false information about Aphelion’s assets under management and Kolucha’s litigation history.

Kalucha, who is majority owner and managing partner of the firm in addition to chief investment officer, also is charged with siphoning investor proceeds for his luxury car payments and settlements of legal actions against him personally that are unrelated to Aphelion.

“We allege that on multiple occasions, Aphelion, Kalucha, and Palathinkal intentionally overstated the success of their investment strategy,” said Robert J. Burson, associate director of the SEC’s Chicago Regional Office.  “Kalucha also has been using investor money as his own, and emergency action was necessary to protect the interests of investors.”

In response to the SEC’s request for emergency relief for investors, U.S. District Court Judge Jed S. Rakoff issued a temporary restraining order, imposed an asset freeze to protect client assets, and temporarily prohibited the defendants from soliciting new investors or additional investments from existing investors.  A hearing on the SEC’s motion for a preliminary injunction has been scheduled for May 15 before Judge Richard M. Berman.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Aphelion serves as the investment adviser and general partner for two unregistered hedge funds: Aphelion US Fund LP and Aphelion Offshore Fund Ltd.  Kalucha has been managing investor funds since 2009 using a proprietary investment model that he developed.  The outside auditor’s report showed an investment loss of more than 3 percent during a 15-month period in an account that Kalucha managed.  However, the fraudulent report distributed to investors showed a phony investment gain of 30 percent during an 18-month period.  In addition to distributing the altered report, Aphelion, Kalucha, and Palathinkal also misled investors about Aphelion’s assets under management.  While Kalucha and Palathinkal told investors at various times during 2013 that Aphielion had $15 million or more in assets under management, the firm never had more than $5 million in assets under management at any point during that year.

The SEC’s complaint further alleges that the defendants misrepresented Kalucha’s litigation history to investors.  Under the legal proceedings section in a due diligence questionnaire included in Aphelion’s marketing materials, Kalucha answered “None” and added a lengthy, materially misleading explanation of a civil proceeding in which he was involved.  The proceeding, which he did not identify by name, was a case against him by the U.S. Department of Labor for breaching fiduciary duties.  By virtue of a consent judgment in the case, Kalucha and Aphelion are prohibited from acting as investment advisers to many types of common retirement plans, which often invest in hedge funds.  Investors were deprived of this information in the due diligence questionnaire.

According to the SEC’s complaint, Aphelion, Kalucha, and Palathinkal raised $1.5 million in investments for Aphelion from 2013 to March 2014 by representing to investors that the funds would be used for Aphelion’s operating expenses.  Kalucha actually used more than 40 percent of the funds raised in 2013 for his personal benefit.  He has withdrawn investor proceeds for such things as settlement of a foreclosure action involving his personal residence, settlement of a breach of contract action filed against him in his personal capacity, down payment of a luxury BMW sedan, and payment for tax and accounting services for his personal finances.  Palathinkal approved all of Kalucha’s withdrawals.

The SEC’s complaint alleges that Aphelion, Kalucha, and Palathinkal violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  In addition, the complaint alleges that Kalucha and Aphelion Fund Management violated, and Palathinkal aided and abetted violations of, the antifraud provisions of the Investment Advisers Act of 1940.

The SEC’s investigation and litigation have been conducted by David Benson, Paul Montoya, Eric Phillips, Delia Helpingstine, Kristine Rodriguez, and Joan Price-McLaughlin of the Chicago Regional Office.

"MAKE A LOT OF MONEY" COMPANY OWNER CHARGED BY SEC FOR PRIME BANK SCHEMES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Las Vegas Resident and His Company with Securities and Broker-Dealer Registration Violations in Connection with Multi-Million Dollar Prime Bank Schemes

On April 23, 2014, the Securities and Exchange Commission filed charges against Las Vegas resident James Lee Erwin and his company, Las Vegas-based Joint Venture Solutions, Inc., for violating the securities offering and broker-dealer registration provisions of the federal securities laws. Erwin and Joint Venture Solutions, Inc. promoted investments in Malom Group AG of Switzerland, a company named with an acronym for "Make A Lot Of Money," that is behind a pair of advance fee schemes guaranteeing astronomical returns to investors in purported prime bank transactions and overseas debt instruments.

The SEC's complaint, filed in the U.S. District Court for the District of Nevada, alleges that between 2009 and 2011 Erwin, through Joint Venture Solutions, promoted investments in Malom, offered Malom's securities to prospective investors, and acted as an intermediary between investors and Malom. The defendants' efforts induced at least five investors to pay Malom over $2.5 million to enter into agreements with Malom. The SEC alleges that while the defendants received commissions based upon a percentage of the amount of investor funds raised, the investors they recruited lost all of their invested funds.

The SEC's complaint alleges that Erwin and Joint Venture Solutions, Inc. violated the securities registration provisions of the federal securities laws, specifically, Section 5 of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil penalties against each defendant.

The SEC's investigation was conducted by Stephen Simpson and Angela Sierra, and the SEC's litigation will be led by Mr. Simpson. The SEC appreciates the assistance of the Department of Justice, Federal Bureau of Investigation, and State Attorney's Office for the Canton of Zurich, Switzerland.

SEC FILES INSIDER TRADING CHARGES AGAINST FORMER NVIDIA CORP. ACCOUNTING MANAGER

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission filed insider trading charges against a former accounting manager at Nvidia Corp. who tipped a friend with confidential company information that set in motion a chain of tipping and illegal trading among a network of hedge fund traders who reaped millions of dollars in illicit gains.

The SEC alleges that Chris Choi of San Jose, Calif., tipped his friend Hyung Lim with nonpublic information about Nvidia’s financial performance in advance of the technology company’s quarterly earnings announcements in 2009 and 2010.  Lim relayed Choi’s information to a fellow poker player Danny Kuo, who was a hedge fund manager at Whittier Trust Company.  Kuo illegally traded on the inside information for his firm and passed it along to analysts at such other firms as Diamondback Capital Management, Level Global Investors LP, and Sigma Capital Management, which is an affiliate of S.A.C. Capital Advisors LP.  The analysts relayed Choi’s information to their portfolio managers who caused funds to conduct insider trading in Nvidia securities.

Choi, who agreed to settle the SEC’s charges, is the 45th defendant charged by the SEC in its ongoing investigation into the activities of expert networks.  The investigation has exposed widespread insider trading by investment professionals, hedge funds, and corporate insiders for illicit profits of approximately $430 million.  The SEC previously charged Choi’s tippees, including Lim as well as Kuo, Diamondback, and Level Global and Sigma Capital.  The expert networks investigation arose out of the SEC’s inquiry into Galleon Management and Raj Rajaratnam – a case in which the SEC has charged an additional 35 defendants whose insider trading generated illicit profits of more than $96 million.

“Insiders at public companies who are entrusted with confidential information are duty bound to protect it,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “Choi violated that sacred duty by regularly tipping his friend with nonpublic financial data that hedge fund traders exploited for millions of dollars in illegal profits.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Choi’s illegal tips enabled hedge funds to reap approximately $16.5 million in illicit profits and avoided losses.  Choi routinely provided Lim with nonpublic information about Nvidia’s highly confidential calculations of its revenues, gross profit margins, and other financial metrics ahead of its quarterly earnings announcements.

The SEC’s complaint charges Choi with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  Choi has agreed to pay a $30,000 penalty and be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the allegations, Choi agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by Stephen Larson and Daniel Marcus of the Enforcement Division’s Market Abuse Unit in New York along with Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa and Joseph G. Sansone, deputy chief of the Enforcement Division’s Market Abuse Unit.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

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 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.

SEC ENCOURAGES ISSUERS, UNDERWRITERS OF MUNICIPAL SECURITIES TO SELF-REPORT VIOLATIONS OF SECURITIES LAWS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative.  Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”

Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.

“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”

The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement.  For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.

EMERGENCY ASSET FREEZE ACTION FILED AGAINST MICROCAP STOCK SCALPING PROMOTER

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Emergency Action Against Promoter Behind Microcap Stock Scalping Scheme, Obtains Asset Freeze

The Securities and Exchange Commission yesterday filed an emergency action ex parte against John Babikian, a promoter behind a platform of affiliated microcap stock promotion websites. The Complaint alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively "APS," to commit a brand of securities fraud known as "scalping." The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West's share price and trading volume, which Babikian exploited by unloading shares of America West's stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.

According to documents filed simultaneously with the SEC's complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC's emergency request to preserve these assets by issuing an asset freeze order.

According to the Commission's complaint, America West's stock was both low-priced and thinly traded prior to Babikian's mass dissemination of the APS e-mails promoting it. America West's trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian's e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West's share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.

The court's order, among other things, freezes Babikian's assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the Commission has taken immediate action to freeze Babikian's U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers, the Financial Industry Regulatory Authority, and OTC Markets Group Inc.

The Commission's investigation of this matter is continuing.

SEC CHARGES FORMER ANALYST OF INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.

The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts.  They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.  Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses.

Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.

“Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His actions have cost him the privilege of working in the hedge fund industry ever again.”

According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital.  Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm.  The SEC charged Teeple and two others last year for insider trading in Foundry stock.

The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009.  Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider.  Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock.  Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.”  Dennis responded “you da man!!! I owe you.”

The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company.  Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.

The SEC’s complaint charges Dennis with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.  He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.

The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC ANNOUNCES ACTIONS AGAINST BROKERS, FIRM AND OTHERS INVOLVED IN VARIABLE ANNUITIES SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.

Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement.  Common features are a death benefit paid to the annuity’s beneficiary (typically a spouse or child) if the annuitant dies, and a bonus credit that the annuity issuer adds to the contract value based on a specified percentage of purchase payments.  The SEC Enforcement Division alleges that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit these benefits.  He recruited others to help him obtain personal health and identifying information of terminally ill patients in southern California and Chicago.  Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout.  Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.  When the annuitants died, the investors collected death benefit payouts.

The SEC Enforcement Division alleges that Horowitz enlisted another broker Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews.  As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold.  Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.

Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme.  Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme.  A combined total of more than $4.5 million will be paid in the settlements.  The SEC’s litigation continues against Horowitz and Cohen.

“This was a calculated fraud exploiting terminally ill patients,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Michael Horowitz and others stole their most private information for personal monetary gain.”

According to the SEC’s orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008.  Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem “Mark” Berger of Chicago for identifying terminally ill patients to be used as annuitants.  Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly.  Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz.

According to the SEC’s orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme.  Searching for a large source of financing, he began pitching his scheme to institutional investors.  A pooled investment vehicle and its adviser BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees.  Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal.  Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme.  Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years.  Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts.  BDL Group received more than $1.5 million in proceeds from its investment in the annuities.

The order against Horowitz and Cohen alleges that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act’s books-and-records provisions.  Horowitz also acted as an unregistered broker.

Ten, Berger, Flowers, Feder, and BDL Manager consented to SEC orders finding that they willfully violated Section 10(b) of the Exchange Act and Rule 10b-5.  They neither admitted nor denied the findings and agreed to cease and desist from future violations.  The individuals agreed to securities industry or penny stock bars as well as the following monetary sanctions:

Ten agreed to pay disgorgement of $181,147.64, prejudgment interest of $20,858.80, and a penalty of $90,000.
Berger agreed to pay disgorgement of $119,000, prejudgment interest of $11,579.61, and a penalty of $100,000.
Feder agreed to pay a penalty of $130,000.
BDL Manager agreed to pay disgorgement of $1,550,565.55, prejudgment interest of $196,608.97, and a penalty of $1,550,565.55.
The SEC’s order against Richard Horowitz and Marc Firestone finds that they negligently allowed point-of-sale forms for 12 annuities in the scheme to be submitted to their firm with inaccurately overstated answers to the form’s question asking how soon the customer intended to access his or her investment.  These inaccurate answers led to each annuity’s issuance, and Horowitz and Firestone were each paid commissions.

Richard Horowitz and Firestone consented to the order finding that they caused their firm to violate Section 17(a) of the Exchange Act and Rule 17a-3.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing future violations of those provisions as well as the following monetary sanctions:

Horowitz agreed to pay disgorgement of $292,767.89, prejudgment interest of $36,512.20, and a penalty of $40,800.
Firestone agreed to pay disgorgement of $127,853.20, prejudgment interest of $17,140.89, and a penalty of $40,800.
The SEC’s investigation was conducted by Marilyn Ampolsk, Peter Haggerty, Jeremiah Williams, and Anthony Kelly of the Enforcement Division’s Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation will be led by Dean M. Conway.