THREE INDICTED IN ALLEGED $54 MILLION "GREEN ENERGY" FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Thursday, September 3, 2015

Indictment Charges Three People with Running $54 Million “Green Energy” Ponzi Scheme

An indictment was unsealed today charging three people in an investment scheme, involving a Bala Cynwyd, Pennsylvania-based company, that defrauded more than 300 investors from around the country.  Troy Wragg, 34, a former resident of Philadelphia, Pennsylvania, Amanda Knorr, 32, of Hellertown, Pennsylvania, and Wayde McKelvy, 52, of Colorado, are charged with conspiracy to commit wire fraud, conspiracy to commit securities fraud, securities fraud and seven counts of wire fraud, announced U.S. Attorney Zane David Memeger of the Eastern District of Pennsylvania and Special Agent in Charge William F. Sweeney Jr of the FBI’s Philadelphia Division.

As the founders of the Mantria Corporation, Wragg and Knorr allegedly promised investors huge returns for investments in supposedly profitable business ventures in real estate and “green energy.”  According to the indictment, Mantria was a Ponzi scheme in which new investor money was used to pay “earnings” to prior investors since the businesses actually generated meager revenues and no profits.  To induce investors to invest funds, it is alleged that Wragg and Knorr repeatedly made false representations and material omissions about the economic state of their businesses.

Between 2005 and 2009, Wragg, Knorr and McKelvy, through Mantria, intended to raise over $100 million from investors through Private Placement Memorandums (PPMs).  In actuality, they raised $54.5 million.  Wragg and Knorr were allegedly able to raise such a large sum of money through the efforts of McKelvy.  McKelvy operated what he called “Speed of Wealth” clubs which advertised on television, radio and the internet, held seminars for prospective investors and promised to make them rich.  According to the indictment, McKelvy taught investors to liquidate all their assets such as mutual funds and 401k plans, to take out as many loans out as possible, such as home mortgages and credit card debt and invest all those funds in Mantria.  During those seminars and other programs, Wragg, Knorr and McKelvy allegedly lied to prospective investors to dupe them into investing in Mantria and promised investment returns as high as 484 percent.

It is further alleged that Wragg, Knorr and McKelvy spent a considerable amount of the investor money on projects to give investors the impression that they were operating wildly profitable businesses.  Wragg, Knorr and McKelvy allegedly used the remainder of the funds raised for their own personal enrichment.  Wragg, Knorr and McKelvy allegedly continued to defraud investors until November 2009 when the SEC initiated civil securities fraud proceedings against Mantria in Colorado, shut down the company, and obtained an injunction to prevent them from raising any new funds.  A receiver was appointed by the court to liquidate what few assets Mantria owned.

In order to lure prospective investors, it is alleged that Wragg, Knorr and McKelvy lied and omitted material facts to mislead investors as to the true financial status of Mantria, including grossly overstating the financial success of Mantria and promising excessive returns.

“The scheme alleged in this indictment offered investors the best of both worlds – investing in sustainable and clean energy products while also making a profit,” said U.S. Attorney Memeger.  “Unfortunately for the investors, it was all a hoax and they lost precious savings.  These defendants preyed on the emotions of their victims and sold them a scam.  This office will continue to make every effort to deter criminals from engaging in these incredibly damaging financial crimes.”

“As alleged, these defendants lied about their intentions regarding investors’ money, pocketing a substantial portion for personal use,” said Special Agent in Charge Sweeney Jr.  “So long as there are people with money to invest, there will likely be investment swindlers eager to take their money under false pretenses.  The FBI will continue to work with its law enforcement and private sector partners to investigate those whose greed-based schemes rob individuals of their hard-earned money.”

If convicted of all charges, the defendants each face possible prison terms, fines, up to five years of supervised release and a $1,000 special assessment.

The criminal case was investigated by the FBI and is being prosecuted by Assistant U.S. Attorney Robert J. Livermore.  The SEC in Colorado investigated and litigated the civil securities fraud charges which formed the basis of the criminal prosecution.      

An indictment is an accusation.  A defendant is presumed innocent unless and until proven guilty.

DEFENDANT IN INSIDER TRADING CASE INVOLVING AMATEUR GOLFERS PLEADS GUILTY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23264 / May 18, 2015

Securities and Exchange Commission v. Eric McPhail, et al., Civil Action No. 1:14-cv-12958 (District of Massachusetts, Complaint filed July 11, 2014)

United States v. Eric McPhail and Douglas Parigian, 1:14-cr-10201-DJC (District of Massachusetts filed July 9, 2014).

Defendant in SEC Insider Trading Case Involving Group of Amateur Golfers Pleads Guilty to Criminal Charges

The Securities and Exchange Commission announced that, on May 13, 2015, Douglas Parigian pleaded guilty to criminal charges of conspiracy and securities fraud for his role in an insider trading ring involving trading in the stock of Massachusetts-based American Superconductor Corporation. The criminal charges against Parigian arose out of the same fraudulent conduct alleged by the Commission in a civil securities fraud action filed against Parigian and others in July 2014.

On July 9, 2014, the U.S. Attorney's Office for the District of Massachusetts indicted Parigian and another defendant, Eric McPhail, for conspiracy and securities fraud and, for Parigian only, lying to FBI agents. The U.S. Attorney charged that McPhail had a history, pattern and practice of sharing confidences with a senior executive at American Superconductor. Between 2009 and 2011, the senior executive provided McPhail with material, nonpublic information concerning the company's quarterly earnings and other business activities (the "Inside Information") with the understanding that it would be kept confidential. Instead, McPhail used email and other means to provide the Inside Information to his friends, including Parigian, with the intent that they profit by buying and selling American Superconductor stock and options. Parigian used the Inside Information to profit on the purchase and sale of American Superconductor stock and options.

On July 11, 2014, the Commission filed a civil injunctive against Eric McPhail and six of his golfing buddies, including Parigian, alleging that McPhail repeatedly provided them with material nonpublic information about American Superconductor. According to the Commission's Complaint, McPhail's source of the information was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. The Complaint further alleged that, from July 2009 through April 2011, the executive told McPhail about American Superconductor's expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential. McPhail instead misappropriated the information and tipped his friends, who improperly traded on the information. Without admitting or denying the allegations, four defendants settled the SEC's charges by consenting to the entry of judgments permanently enjoining them from violating the antifraud provisions of the Securities Exchange Act of 1934, paying disgorgement and civil penalties. The SEC's case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing.

SEC ANNOUNCES COURT IMPOSED JUDGEMENT OF $55 MILLION AGAINST INVESTMENT ADVISER CEO

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23228 / April 2, 2015

Securities and Exchange Commission v. Charles R. Kokesh, Civil Action No. 6:09-cv-1021

Federal Court Imposes $55 Million Final Judgment Against Investment Adviser CEO

On March 30, 2015, the United States District Court for the District of New Mexico entered a final judgment against Charles R. Kokesh, permanently enjoining him from violating federal securities laws and ordering him to pay a civil penalty of $2,354,593 as well as disgorgement and prejudgment interest totaling $53,004,432. The final judgment follows a five-day trial in November 2014, in which the jury found that Kokesh had committed securities fraud by misappropriating and misusing tens of millions of dollars at two registered investment advisers he controlled.

From at least 1995 through July 2007, Kokesh controlled two registered investment-adviser firms, though which he controlled and provided investment advice to four business-development companies ("BDCs"). Together, the BDCs had approximately 21,000 investors located throughout the United States. Through his control over the investment advisers, Kokesh was able to misappropriate investor funds by causing the BDCs to pay illegal distributions, performance fees, bonuses, and expense reimbursements to the investment advisers, which Kokesh then used for his own benefit. Kokesh tried to hide his scheme by directing the investment advisers to distribute misleading proxy statements to investors, and to have the BDCs file false reports with the Commission.

After short deliberations, the jury found that Kokesh had violated Section 37 of the Investment Company Act of 1940. The jury also found that Kokesh had aided and abetted violations of Sections 205, 206(1), and 206(2) of the Investment Advisers Act of 1940, and Sections 13(a) and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder.

The case was tried by David Reece, Jennifer Brandt, and Timothy McCole of the Commission's Fort Worth Regional Office. An examination by Kyle Holmberg of the Fort Worth Regional Office and Curtis Kolinek of the San Francisco Regional Office uncovered the misconduct.

SEC OBTAINS JUDGEMENT AGAINST DEFENDANTS IN SECURITIES FRAUD CASE

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23114 / October 15, 2014

Securities and Exchange Commission v. Stephen D. Ferrone, et al., Civil Action No. 1:11-cv-05223, USDC, N.D.Ill.

SEC Obtains Summary Judgment Against Defendants in Securities Fraud Involving Biopharmaceutical Company

The Securities and Exchange Commission announced that on October 10, 2014, the Honorable Elaine E. Bucklo of the United States District Court for the Northern District of Illinois granted the SEC's motion for summary judgment and for partial summary judgment, respectively, against Defendants Douglas McClain, Sr. ("McClain Sr."), of Fair Oaks, Texas, and Douglas McClain Jr. ("McClain Jr."), formerly of Savannah, Georgia. The Court found that McClain Sr. violated the antifraud provisions of the federal securities laws by making misrepresentations and omissions and that McClain Sr. and McClain Jr. engaged in insider trading.

The SEC filed this action against the defendants in August 2011, alleging that McClain Sr., McClain Jr., Immunosyn Corporation ("Immunosyn") Argyll Biotechnologies, LLC ("Argyll"), Stephen D. Ferrone, and James T. Miceli ("Miceli") committed securities fraud in connection with materially misleading statements during 2006-2010 regarding the status of regulatory approvals for Immunosyn's sole product, a drug derived from goat blood referred to as "SF-1019." The SEC also charged Argyll, McClain, Jr., McClain, Sr., Miceli, Argyll Equities, LLC ("Argyll Equities"), and Padmore Holdings, Ltd. with insider trading.

The SEC's complaint, filed in federal court in Chicago, alleged, among other things, that the defendants misleadingly stated in public filings with the SEC and in oral presentations that Argyll, Immunosyn's controlling shareholder, planned to commence the regulatory approval process for human clinical trials for SF-1019 in the U.S. or that regulatory approval was underway. The complaint alleges that these statements misled investors because the statements omitted to disclose that the U.S. Food and Drug Administration ("FDA") had already twice issued clinical holds on drug applications for SF-1019, which prohibited clinical trials involving SF-1019 from occurring.

After completion of discovery, the SEC moved for summary judgment, and for partial summary judgment, respectively, against McClain Sr. and McClain Jr. In granting the SEC's motion for summary judgment, the Court found that McClain Sr. committed securities fraud by taking money from investors and failing to deliver Immunosyn shares and by telling investors that Immunosyn would secure approval for SF-1019 from the FDA in about a year and that the U.S. Department of Defense had purchased SF-1019. The Court also found that McClain Sr. and McClain Jr. engaged in insider trading by selling their Immunosyn stock based on the material, non-public information that the FDA had issued clinical holds on drug applications for SF-1019. The Court found that McClain Sr. and McClain Jr. violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

The Court will determine the appropriate remedies against McClain Sr. and McClain Jr. at a later date.

SEC ANNOUNCES JURY FINDS FORMER CHAIRMAN FAILED START-UP, LIABLE FOR SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23112 / October 15, 2014

Securities and Exchange Commission v. iShopNoMarkup.com, Inc., et al., Civil Action No. 04-CV-4057 (E.D.N.Y.)

Jury Finds Anthony M. Knight, Former Chairman of a Failed Internet Startup, Liable for Securities Fraud and Illegal Sale of Unregistered Securities

On Tuesday, October 14, 2014, a jury in federal court in Central Islip, New York returned a verdict in favor of the U.S. Securities and Exchange Commission. The jury found the former Chairman of failed Long Island-based internet startup, iShopNoMarkup.com, Inc., liable for securities fraud and illegally selling unregistered securities. The defendant, Anthony M. Knight co-founded iShop, and was formerly the Chairman of iShop's Board of Directors. He also served at various times as iShop's Secretary and Chief Executive Officer. The Commission had charged that from the fall of 1999 until the summer of 2000, iShop, Knight and others conducted a fraudulent securities offering scheme that defrauded over 350 investors who invested approximately $2.3 million. iShop also failed to file any registration statement with the Commission as to the securities sold.

United States District Judge Denis R. Hurley, who presided over the trial, will determine the remedies and sanctions to be imposed against the defendant. The Commission is seeking a judgment requiring the defendant to pay disgorgement of ill-gotten gains plus prejudgment interest, as well as civil monetary penalties, an injunction, and an officer and director bar.

Anthony Knight, age 48, was at the time of the conduct a resident of Great Neck, New York, and is currently a resident of San Diego, California.

The Commission charged that from the fall of 1999 until the summer of 2000, iShop conducted a fraudulent and unregistered securities offering. iShop distributed offering memoranda and other documents to investors that misrepresented, and failed to disclose, material information concerning iShop's business operations. Knight and others also made oral misrepresentations to investors to persuade them to invest in iShop stock. Knight also supervised Scott W. Brockop, iShop's former Vice President of Sales and Marketing, who oversaw an operation at iShop through which employees cold-called potential investors, and made material misrepresentations to induce them to purchase iShop stock. Through the offering, iShop sold nearly 6.75 million shares of stock to over 350 investors, and obtained proceeds of approximately $2.3 million. iShop did not file a registration statement for the sale of these securities, and there was no registration statement otherwise in effect.

The Commission also charged iShop, Brockop, and Moussa Yeroushalmi a/k/a Mike Yeroush, iShop's former President. On October 26, 2006, the District Court entered a final judgment by default against Brockop, and on February 15, 2007, a Commission administrative law judge entered an order by default against Brockop barring him from association with any broker or dealer. On January 21, 2011, the District Court entered a final judgment by consent against Yeroush. On April 30, 2014, the District Court entered a final judgment by consent against iShop, leaving Knight as the sole remaining defendant in the litigation.

The jury found that defendant Knight violated 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 thereunder. Judge Hurley will make the determination as to the final relief that should be imposed against the defendant. The Commission seeks an order permanently enjoining the defendant from violations of the above provisions of the federal securities laws, requiring disgorgement of ill-gotten gains, plus prejudgment interest thereon, and imposing civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. The Commission also seeks an order barring the defendant from acting as an officer or director of a public company under Section 21(d)(2) of the Exchange Act.

SEC ANNOUNCES THAT PENNY STOCK PROMOTER TO PAY $700,000 IN FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23107 / October 8, 2014

Securities and Exchange Commission v. Geoffrey J. Eiten and National Financial Communications Corp., Civil Action No. 1:11-CV-12185 (District of Massachusetts, December 12, 2011)

Massachusetts-based Penny Stock Promoter Ordered to Pay Over $700,000 in SEC Fraud Case

The Securities and Exchange Commission announced that on October 7, 2014, the U.S. District Court for the District of Massachusetts entered a final judgment against stock promoter Geoffrey J. Eiten, a Massachusetts resident.  Eiten is a defendant in an action filed by the Commission in December 2011, alleging that Eiten and his company, National Financial Communications, Inc. (“NFC”), made material misrepresentations and omissions in penny stock publications they issued.  Among other things, the judgment orders Eiten to pay a total of $727,029.

The Commission’s complaint, file on December 12, 20122, alleged that Eiten and NFC issued a penny stock promotional publication called the “OTC Special Situations Reports.”  According to the complaint, the defendants promoted penny stocks in this publication on behalf of clients in order to increase the price per share and/or volume of trading in the market for the securities of penny stock companies.  The complaint alleged that Eiten and NFC made misrepresentations in these reports about the penny stock companies they promoted.  The Commission’s complaint alleged that in four reports, Eiten and NFC made material misrepresentations and omissions, concerning, among other things, the companies’ financial condition, future revenue projections, intellectual property rights, and Eiten’s interaction with company management as a basis for his statements.  According to the complaint, Eiten and NFC were hired to issue the above reports and used false information provided by their clients, without checking the accuracy of the information with the companies in question or otherwise ensuring that the statements they were making in the OTC Special Situations Reports were true.

The judgment enjoins Eiten from further violations of the antifraud provisions of the federal securities laws (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) and from certain specified activities related to penny stocks, including the promotion of a penny stock or deriving compensation from the promotion of a penny stock.  The judgment also imposed a penny stock bar against Eiten, which permanently bars him from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for the purpose of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock.  The judgment orders Eiten to pay disgorgement of $605,262, representing ill-gotten gains, plus prejudgment interest of $71,767 and a civil penalty of $50,000.

In a previous default judgment against NFC on July 24, 2013, the Court ordered NFC to pay over $1.6 million.

MORTGAGE-BACKED SECURITIES DEALER SENTENCED TO PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Connecticut-Based Broker-Dealer Representative Sentenced to Two Years in Prison for Defrauding Investors in Mortgage-Backed Securities

SEC's Enforcement Division Institutes Proceedings to Determine Whether to Bar Him From Securities Industry

The Securities and Exchange Commission announced today that Jesse Litvak, a former managing director of Jefferies & Co., Inc. (Jefferies), a New York-based broker-dealer, was sentenced to 24 months in prison followed by three years of supervised release and a fine of $1,750,000 following his conviction on 10 counts of securities fraud, one count of Troubled Asset Relief Program (TARP) fraud, and four counts of making false statements. The judgment of conviction was entered against Litvak on July 25, 2014. Based on that judgment, the SEC's Enforcement Division instituted administrative proceedings against Litvak on September 2, 2014 to determine what, if any, remedial action is appropriate in the public interest against Litvak. Such action could include a bar from the securities industry.

The SEC had also charged Litvak separately in a civil action with making misrepresentations and engaging in misleading conduct while he sold mortgage-backed securities (MBS) in the wake of the financial crisis. The Commission's civil action against Litvak remains pending. In its civil complaint filed in District Court for the District of Connecticut on January 28, 2013, the SEC alleged that Litvak, a senior trader on Jefferies' MBS Desk who worked at Jefferies' office in Stamford, Connecticut, bought and sold MBS from and to his customers. According to the SEC's civil complaint, on numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, those customers about the price at which Jefferies had purchased the MBS before selling it to another customer and the amount of his firm's compensation for arranging the trades. The SEC alleged that, on some occasions, Litvak also misled his customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies' inventory. According to the SEC's civil complaint, Litvak also misled customers about how much money they were paying in compensation to Jefferies. The customers included investment funds established by the United States government in the wake of the financial crisis to help support the market for MBS as well as other investment funds, including hedge funds.

The SEC's complaint charged Litvak with violating the antifraud provisions of the federal securities laws, particularly Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The SEC's action has been stayed pending the outcome of the criminal proceedings.

SEC ANNOUNCES FRAUD CHARGES IN LOAN FALSE CLASSIFICATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes.  As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions.  Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009.  Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies.  The SEC’s Division of Enforcement will continue to litigate its case against Neely.

“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”

According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting.  NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt.  Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced.  Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status.  By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP.  In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.

The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.

The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time.  The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures.  The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action.  Regions also will pay a $5 million penalty to the Alabama Department of Banking.

The SEC’s investigation was conducted in its Atlanta Regional Office.  The SEC appreciates the assistance of the Federal Reserve.

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.

FORMER ARTHROCARE CORPORATION CEO, CFO CONVICTED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, June 2, 2014

Former CEO and CFO of Arthrocare Corporation Convicted for Orchestrating $400 Million Securities Fraud Scheme

A federal jury convicted the former chief executive officer and the former chief financial officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for orchestrating a fraud scheme that resulted in shareholder losses of over $400 million.

Principal Deputy Assistant Attorney General Marshall L. Miller and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field Office made the announcement.

“These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million,” said Principal Deputy Assistant Attorney General Miller.   “Today’s convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain.”

“This case demonstrates the FBI’s commitment to unraveling elaborate and complex fraud schemes leaving no financial stone unturned,” said FBI SAC Combs. “Those who abuse their position of trust to illegally enrich themselves, at the expense of shareholders and members of the investing public, will be held accountable for their actions.”

After a four-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 55, guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.   Michael Gluk, 56, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.   Baker and Gluk were charged in a superseding indictment returned on April 1, 2014.

Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009.   Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.   Baker, Gluk and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.   ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.   Evidence at trial showed that, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

Baker, Gluk and others lied to investors and analysts about ArthroCare's relationships with its distributors, including DiscoCare.   Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.

Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about the DiscoCare relationship.

Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.   The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Following today’s verdict, U.S. District Judge Sam Sparks remanded Baker into custody.    A sentencing date for Baker and Gluk has not yet been scheduled.

This case was investigated by the FBI’s San Antonio Field Office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section.   The Department appreciates the substantial assistance of the U.S. Securities and Exchange Commission.

CONNECTICUT-BASED FUND MANAGER LOSES JURY TRIAL IN CASE INVOLVING PETTERS PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Wins Jury Trial Against Connecticut-Based Fund Manager Who Facilitated Petters Ponzi Scheme

The Securities and Exchange Commission today announced that a jury has found Connecticut-based fund manager Marlon M. Quan and his firms liable for securities fraud in connection with a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.

Following a two-week civil trial before the Hon. Ann D. Montgomery in federal court in Minneapolis, the jury reached a verdict that Quan and his firms Stewardship Investment Advisors LLC, Acorn Capital Group LLC and ACG II LLC violated Sections 17(a)(2) and (3) 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 1940 and Rule 206-4(8).

Based on the jury verdict, the SEC is seeking an entry of a court order of permanent injunction against Quan and his firms as well as an order of disgorgement, prejudgment interest, and financial penalties.

The SEC filed its complaint against Quan and his firms in March 2011, alleging that he facilitated the Petters fraud and funneled several hundred million dollars of investor money into the scheme. The SEC further alleged that Quan and his firms invested hedge fund assets with Petters while pocketing millions in fees. Quan and his firms falsely assured investors that their money would be protected by use of a number of safeguards including a "lock box account" into which third-party retailers made payments and Quan purportedly monitored against defaults. When Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms embarked on a series of convoluted transactions to conceal Petters's defaults from investors.

The SEC's case was litigated by John E. Birkenheier, Charles J. Kerstetter, Timothy S. Leiman and Michael Mueller, assisted by Donald A. Ryba, Sara Renardo, Sally Hewitt, Mark Sabo and Estera Cardos.

MAN SENTENCED TO PRISON FOR ROLE IN PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

Massachusetts Resident Steven Palladino Sentenced to 10-12 Years in Prison for Role in Multi-Million Dollar Ponzi Scheme

The Securities and Exchange Commission announced today that, on January 21, 2014, a Massachusetts state court judge sentenced Massachusetts resident Steven Palladino to a prison term in a criminal action filed by the Suffolk County (Massachusetts) District Attorney.  The criminal action against Palladino and his company, Massachusetts-based Viking Financial Group, Inc., was initially filed in March 2013 and involves the same conduct alleged in a civil securities fraud action brought by the Commission in April 2013.  Suffolk Superior Court Judge Janet Sanders sentenced Palladino, of West Roxbury, Massachusetts, to serve a prison term of 10-12 years, followed by a probationary period of five years, and to pay restitution to victims, for crimes that he committed in connection with a Ponzi scheme perpetrated through Viking.  At the same hearing, Palladino pled guilty to criminal charges that included conspiracy, being an open and notorious thief, larceny, and larceny from elderly person(s).  Viking also pled guilty to related charges and was sentenced to a probationary period of five years and ordered to pay restitution to victims.  The Court set a further hearing for March 7, 2014 to determine, among other things, the amount of restitution to be paid to victims.

The Commission previously filed an emergency action against Viking and Palladino (collectively, “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 loans.  The complaint alleged that, in truth, Defendants made very few real loans to borrowers, and instead used investors’ funds largely to pay earlier investors and to pay for the Palladino family’s substantial personal expenses, including cash withdrawals, gambling debts, vacations, luxury vehicles and tuition.

The Commission first filed this action on April 30, 2013, seeking a temporary restraining order, asset freeze, and other emergency relief – which the Court granted.  On May 15, 2013, the Court also issued an escrow order, which ordered Defendants to deposit all funds and assets 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.  On July 15, 2013, the Court held that Defendants’ conduct violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933.  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 September 4, 2013, the Commission filed a motion for contempt against Palladino for violations of the asset freeze and the escrow order.  The motion 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 all cash in his possession 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 restored ownership of two of the vehicles but has failed to restore ownership of one vehicle.  As a result, the Court refused to dismiss the contempt finding against him at hearings on December 3, 2013 and January 17, 2014.  The Court has set a further hearing date of February 20, 2014 to address, among other things, whether Palladino remains in contempt.

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.

FORMER BROKER SENT TO PRISON FOR FOGUE TRADES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Former Rochdale Securities Broker Sentenced to 30 Months' Imprisonment for Rogue Trades

The Securities and Exchange Commission announced today that on November 19, 2013, the Honorable Robert N. Chatigny of the United States District Court for the District of Connecticut sentenced David Miller, 41, of Rockville Center, New York, to 30 months imprisonment, followed by three years of supervised release, for his role in a fraudulent scheme to place a series of unauthorized purchases of more than 1.6 million shares of Apple, Inc. stock on October 25, 2012 while employed as an institutional sales trader for Rochdale Securities LLC ("Rochdale") of Stamford, Connecticut. Judge Chatigny also ordered Miller to make full restitution to Rochdale, which suffered a loss of $5,292,202.50 and ceased all business operations as a result of Miller's actions. Miller was arrested on December 4, 2012, and on April 15, 2013 he pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud, and one count of wire fraud.

On April 15, 2013, the Commission filed a partially settled civil injunctive action against Miller in federal court in Connecticut arising out of the same conduct. To settle the Commission's charges, Miller consented to be enjoined from future violations of the antifraud provisions of the federal securities laws. The amount of a civil monetary penalty will be determined at a later date. In related administrative proceedings that the Commission separately instituted on April 25, 2013, Miller consented to a Commission Order barring him from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and barring him from participating in any offering of penny stock.

SEC ANNOUNCES SENTENCE OF ANDREW FRANZ RELATING TO MISAPPROPRIATION OF CLIENT FUNDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Commission announced that on October 23, 2013, the Honorable Christopher A. Boyko sentenced Andrew J. Franz (“Franz”) to 57 months imprisonment, to be followed by three years of supervised release, as well as $357,068.77 in criminal restitution. U.S. v. Andrew J. Franz, Criminal Action No. 1:13-cr-00331 (N.D. Ohio). Previously, on July 23, 2013, Franz pled guilty to ten counts, including counts of mail fraud, securities fraud, investment adviser fraud, and income tax evasion. The criminal information in this action alleged, among other things, that Franz stole hundreds of thousands of dollars from advisory clients at Ruby Corporation, a registered investment adviser with which he was associated.

Previously, the SEC filed an action against Franz in the U.S. District Court for the Northern District of Ohio. SEC v. Andrew J. Franz, Civil Action No. 5:12-cv-00642 (N.D. Ohio). The SEC’s complaint alleged that Franz operated a fraudulent scheme in which, through forgery and other fraudulent means, he misappropriated approximately $865,969 from clients of Ruby Corporation, including $779,418 from family members and $86,551 from other clients. The complaint alleged that Franz kept a net of approximately $354,000 in stolen funds. According to the SEC complaint, Franz violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and aided and abetted violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act).

At the SEC’s request for emergency relief, on March 15, 2012, the Honorable Benita Y. Pearson, United States District Court, Northern District of Ohio, entered an order of permanent injunction against further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Advisers Act, as well as an order freezing all assets under Franz’s control and other emergency relief. Finally, on March 15, 2013, Franz was permanently barred from the securities industry.

TWO FORMER EXECUTIVES OF ARTHROCARE CORP. CHARGED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Wednesday, July 17, 2013
Former CEO and Former CFO of ArthroCare Corp. Charged with Orchestrating $400 Million Securities Fraud Scheme

The former chief executive officer and former chief financial officer of ArthroCare Corp., a publicly traded medical device company based in Austin, Texas, were charged for their alleged leading roles in a $400 million scheme to defraud the company’s shareholders and members of the investing public by falsely inflating ArthroCare’s earnings by tens of millions of dollars, announced Acting Assistant Attorney Mythili Raman of the Department of Justice’s Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas.

A 17-count indictment was unsealed today in the U.S. District Court for the Western District of Texas against Michael Baker, the former chief executive officer and director of ArthroCare, and Michael Gluk, the former chief financial officer of ArthroCare.  Both defendants surrendered to authorities this morning.

The indictment, which was returned on July 16, 2013, charges Baker and Gluk with one count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud, and two counts of securities fraud; it charges Baker alone with three counts of false statements. The indictment also seeks forfeiture of assets held by Baker and Gluk.

“Truthful corporate earnings reports are critical to the soundness of our financial system,” said Acting Assistant Attorney General Raman.  “Today’s indictment alleges that those at the top of ArthroCare deceived investors and regulators by manipulating the company’s reports to inflate its stock, ultimately causing hundreds of millions in losses in shareholder value.  The Criminal Division will continue to aggressively pursue corporate executives who undermine our financial markets for personal gain.”

According to the indictment, from at least December 2005 through December 2008, Baker, Gluk and other senior executives and employees of ArthroCare allegedly falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors.  According to court documents, Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.  Baker, Gluk and others then allegedly caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.  ArthroCare would then report these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

The indictment alleges that ArthroCare’s distributors agreed to accept shipment of millions of dollars of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other special conditions, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others allegedly used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.  According to the indictment, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

In addition, Baker, Gluk and others allegedly lied to investors and analysts about ArthroCare's relationships with its distributors, including its largest distributor, DiscoCare.  According to the indictment, Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare's relationship with DiscoCare.

The indictment further alleges that when Baker was deposed by the U.S. Securities and Exchange Commission about the DiscoCare relationship in November 2009, he lied again on multiple occasions.

According to court documents, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.  On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.  The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

If convicted, Baker and Gluk would face a maximum prison sentence of 25 years for the conspiracy charge, 20 years for each count of wire fraud, and 25 years for each securities fraud count. Baker faces five years for each count of false statements.

An indictment is merely a charge, and the defendants are presumed innocent until proven guilty.

This case was investigated by the FBI’s Austin office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division’s Fraud Section.  The Department recognizes the substantial assistance of the U.S. Securities and Exchange Commission.

STATE OF ILLINOIS CHARGED WITH SECURITIES FRAUD

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

"Municipal investors are no less entitled to truthful risk disclosures than other investors," said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. "Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system."

Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, "Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit."

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.

The SEC’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Peter K. M. Chan along with Paul M. G. Helms in the Chicago Regional Office and Eric A. Celauro and Sally J. Hewitt in the Municipal Securities and Public Pensions Unit. They were assisted by other specialists in the unit including Joseph O. Chimienti, Creighton Papier, and Jonathan Wilcox.

SEC SETTLES PENDING CIVIL FRAUD CHARGES AGAINST THREE FORMER EXECUTIVES OF ENRON BROADBAND SERVICES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced today that former Enron senior vice presidents Rex T. Shelby and Scott Yeager and the former chief financial officer of Enron Broadband Services (EBS) Kevin A. Howard have agreed to settle the SEC's pending civil actions against them.

The SEC charged Shelby and Yeager with securities fraud and insider trading on May 1, 2003, amending a complaint previously filed March 12, 2003, which charged Howard and Michael W. Krautz, a former senior director of accounting at EBS, with securities fraud. The SEC’s civil case was stayed by the U.S. District Court while criminal proceedings occurred against these defendants.

To settle the SEC’s action against them, Shelby agreed to pay a civil penalty of $1 million, and Yeager and Howard agreed to pay civil penalties of $110,000 and $65,000, respectively. In addition, they each consented to the entry of a final judgment enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and permanently barring them from serving as an officer or director of a public company. Howard also agreed to be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. These settlement agreements are subject to court approval. Separately, Howard also consented to the entry of an Administrative Order, pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant.

In the related criminal proceedings, the Department of Justice previously entered into plea agreements with Shelby and Howard on related charges. Shelby and Howard agreed to respectively forfeit $2,568,750 and $25,000 that, along with the Commission's civil penalties announced today, will contribute $3,658,750 for the benefit of injured investors through the Commission's Enron Fair Fund. Yeager was acquitted in a related criminal proceeding.

As alleged in the Commission's complaint, Shelby, Yeager and other EBS executives engaged in a fraudulent scheme to, among other things, make false or misleading statements about the technological prospects, performance, and financial condition of EBS. These statements were made at Enron's annual analyst conference and in multiple press releases during 2000. While aware of material non-public information concerning the true nature of EBS' technological and commercial condition, Shelby and Yeager sold a large amount of Enron stock at inflated prices. In another part of the scheme, Howard engaged in a sham transaction, known as "Project Braveheart," in which Enron improperly recognized $53 million in earnings in the fourth quarter of 2000 and $58 million in earnings in the first quarter of 2001.

The Commission also announced today that it filed notices of voluntary dismissal of its case against Krautz, along with its case against Schuyler M. Tilney and Thomas W. Davis, two former Merrill Lynch executives who were charged on March 17, 2003 with aiding and abetting Enron’s securities fraud. Krautz was acquitted at trial in a related criminal proceeding.

MAN PLEADS GUILTY IN SECURITEIS FRAUD CASE AND IS BARRED FROM SECURITIES INDUSTRY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

December 4, 2012

Defendant in SEC Action Pleads Guilty to Criminal Charges and is Barred from the Securities Industry
the Securities and Exchange Commission announced today that Arnett L. Waters of Milton, Massachusetts, a principal of a broker-dealer and investment adviser who is a defendant in a securities fraud action filed by the Commission in May 2012, has pleaded guilty to criminal charges brought by the U.S. Attorney for the District of Massachusetts and has been barred from the securities industry by the Commission. Waters' guilty plea to securities fraud and other charges occurred on November 29, 2012, and follows an earlier guilty plea by Waters in October 2012 to criminal contempt charges for violating a preliminary injunction order obtained by the Commission in its case. The Commission's Order barring Waters from the securities industry was issued on December 3, 2012.

The Commission filed an emergency enforcement action against Waters on May 1, 2012, alleging that he and two companies under his control, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, defrauded investors from at least 2009-2012 by, among other things, misappropriating investor funds and spending it on personal expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze Waters' assets and required him to provide an accounting of all his assets to the Commission. On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Court ordered him detained pending sentencing.

The Commission's Order barring Waters from the securities industry was issued on December 3, 2012, and is based on his October 2, 2012 guilty plea to criminal contempt charges. The Order bars Waters from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

The U.S. Attorney for the District of Massachusetts also charged Waters with a broader array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice. The counts of the criminal information to which Waters pleaded guilty alleged that, from at least 2007 through 2012, he used fictitious investment-related partnerships to draw in investors, misappropriate their investment money, and spend the vast majority of it on personal and business expenses and debts. Waters raised at least $839,000 from at least thirteen investors, including $500,000 from his church in March 2012. Waters also pleaded guilty to engaging in a criminal scheme to defraud clients of his rare coin business. Under this scheme, Waters defrauded coin customers out of as much as $7.8 million by selling coins at prices inflated, on average, by 600% and by inducing coin purchasers to return coins to him, on the false representation that he would sell those coins on the customers' behalf, when, in fact, he sold most or all of the coins and kept the proceeds for himself. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to allegations that he made multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. Waters is charged with obstruction of justice related to this conduct.

Waters has been detained since October 2, 2012, when the Court ordered him held pending sentencing in the criminal contempt action. He is currently scheduled to be sentenced in April 2013 in connection with the guilty pleas in the two separate criminal actions against him.

COURT ENTERS FINAL JUDGMENT AGAINST ALERO ODELL MACK, JR.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The U.S. Securities and Exchange Commission announced today that on August 7, 2012, the United States District Court for the Central District of California granted the Commission’s motion for summary judgment and entered a Final Judgment against defendant Alero Odell Mack, Jr. ("Mack") in a pending civil action. The Final Judgment enjoins Mack from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. In addition, the Court ordered Mack to pay disgorgement of $1,079,879, prejudgment interest of $58,905.32, and a civil penalty of $150,000.

According to the complaint, from 2007 through as late as March 2010, Mack, Steven Enrico Lopez, Sr., and various entities under Mack’s control, obtained approximately $4 million in investor funds through various fraudulent investment schemes that primarily involved the offer and sale of investments in various purported hedge funds, as well as in an investment adviser to a hedge fund. The Commission previously obtained judgments against defendants Steven Enrico Lopez, Sr., Easy Equity Asset Management, Inc., Easy Equity Management, L.P., Easy Equity Partners, L.P, Alero Equities The Real Estate Company, L.L.C., and Alero I.X. Corporation.

FORMER EXECS FAIR FINANCIAL COMPANY CONVICTED IN $200 MILLION FRAUD SCHEME

FROM:  U.S. DEPARTMENT OF JUSTICE 
Thursday, June 21, 2012
Three Former Executives Convicted for Roles in $200 Million Fraud Scheme Involving Fair Financial Company Investors
Three former executives of Fair Financial Company, an Ohio financial services business, were found guilty for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; Joseph H. Hogsett, U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Robert Holley of the FBI in Indiana announced today.

Following an eight-day trial, a federal jury in the Southern District of Indiana returned its verdict late yesterday.   Timothy S. Durham, 49, the former chief executive officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud.   James F. Cochran, 56, the former chairman of the board of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and six counts of wire fraud.   Rick D. Snow, 48, the former chief financial officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and three counts of wire fraud.

“Mr. Durham and his co-conspirators used lies and deceit as their business model,” said Assistant Attorney General Breuer.   “They duped investors into thinking they were running a legitimate financial services company and misled regulators and others about the health of their failing firm.   But all along, they were lining their pockets with other people’s money.   The jury held them accountable for their crimes, and they each now face the prospect of significant prison time.”

“No matter who you are, no matter how much money you have, no matter how powerful your friends are, no one is above the law,” U.S. Attorney Hogsett said. “The Office of the United States Attorney will not stand idly by and allow a culture of corruption to exist in this community, this state, or this country.   The decision made in this courtroom sends a powerful warning that if you sacrifice the truth in the name of greed, if you steal from another’s American dream to try and make your own, you will be caught.”

“This verdict represents a victory in the pursuit of justice,” said FBI Special Agent in Charge Holley.   “I would like to commend the hard work and dedication of the prosecution team and the FBI investigative team, however, we must remember that the victims of this fraud are still suffering.  I would also like to thank Indiana State Police Superintendent Paul Whitesell for the contributions of his task force officer in this investigation.”

Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002.  According to the evidence presented at trial, between approximately February 2005 through the end of November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money.   The evidence also established that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.

When Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million.   By November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.  

After Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds.   Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.

Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral.   After firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009.   With independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.
         
The evidence presented at trial established that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the State of Ohio Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates.   The defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.

The defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates.   Even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.

This case was prosecuted by Assistant U.S. Attorneys Winfield D. Ong and NicholasE. Surmacz of the Southern District of Indiana, Trial Attorney Henry P. Van Dyck and Senior Deputy Chief for Litigation Kathleen McGovern of the Fraud Section in the Justice Department’s Criminal Division.  The investigation was led by the FBI in Indianapolis.

Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count.   Additionally, each defendant could be fined $250,000 for each count of conviction.
         
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.