SEC ALLEGES FRAUD IN CASE INVOLVING THE TOUTING THE PROSPECTS OF CERTAIN MICROCAP COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

05/26/2015 12:30 PM EDT

The Securities and Exchange Commission today announced fraud charges against a securities lawyer who used his New York law office as the headquarters for planning and implementing market manipulation schemes.  Also charged are two stock promoters from Canada who assisted him.

The SEC alleges that Adam S. Gottbetter orchestrated promotional campaigns that touted the prospects of microcap companies and enticed investors to buy their stock at inflated prices so he and his cohorts could sell shares they controlled and reap massive profits.  Gottbetter enlisted Mitchell G. Adam and K. David Stevenson to help him in the last of three schemes he conducted in a six-year period.  They repeatedly cautioned each other about the dangers of missteps that might draw law enforcement attention to the scheme, such as failing to keep secret the identities of Adam and Stevenson.  The three rehearsed stories they would tell if ever questioned by law enforcement.  During one meeting in New York City, Gottbetter complained about the difficulties of stock manipulation but conceded that robbing a bank was the only other way to make so much money so quickly.

Gottbetter agreed to pay $4.6 million to settle the SEC’s charges.  Stevenson also agreed to settle the SEC charges against him while a case against Adam will be litigated in federal court in Newark, N.J.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Gottbetter, Adam, and Stevenson.

“As a securities lawyer, Gottbetter should have served as a gatekeeper and protected the capital markets and investors from fraudsters.  Instead, he swung the gates wide open and illicitly profited at investors’ expense,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

According to the SEC’s complaint, Gottbetter was involved in the manipulation of the stocks of Kentucky USA Energy Inc. (KYUS) and Dynastar Holdings Inc. (DYNA) before teaming up with Adam and Stevenson in July 2013 to utilize their offshore ties for a new and potentially more lucrative scheme.  Together they schemed to drive up the stock price for purported oil and gas exploration company HBP Energy Corp. (HBPE) through fraudulent trades generated by a trading algorithm.  They then planned to launch an extensive promotional campaign featuring multiple call centers, roadshows, and a listing on the Frankfurt Stock Exchange.  After creating the false appearance of liquidity and investor interest, they planned to dump their shares of the stock on unsuspecting investors around the world.  While Stevenson and Adam managed to do some small coordinated trades, the scheme was thwarted before the planned manipulation and promotion could be launched when Stevenson was arrested by the FBI.

The SEC’s complaint alleges that Gottbetter violated Sections 5(a), 5(c) and Section 17(a) of the Securities Act of 1933, and violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint alleges that Adam and Stevenson violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Gottbetter agreed to be barred from the penny stock industry in addition to paying $4.6 million in disgorgement and prejudgment interest from ill-gotten gains in the Kentucky USA Energy manipulation scheme.  He consented to injunctions against future violations.  Stevenson also agreed to be barred from the penny stock industry and consented to an injunction against future violations.  The settlements are subject to court approval.

The SEC’s investigation was conducted by Simona Suh of the Market Abuse Unit and Nancy A. Brown and Elzbieta Wraga of the New York office.  The case was supervised by Amelia A. Cottrell and Michael J. Osnato Jr.  The SEC’s litigation against Adam will be led by Ms. Brown and Ms. Suh.  The SEC appreciates the assistance of the Newark Field Office of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the District of New Jersey, and the Financial Industry Regulatory Authority.

SEC ALLEGES CO-OWNERS OF BROKERAGE FIRM USED INVESTOR FUNDS INAPPROPRIATELY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

05/20/2015 01:00 PM EDT

The Securities and Exchange Commission today announced fraud charges against the co-owners of a Manhattan-based brokerage firm.

The SEC alleges that as Arjent LLC and its UK-based affiliate Arjent Limited were approaching insolvency, chairman and CEO Robert P. DePalo attempted to keep the firms afloat and maintain his extravagant lifestyle by selling shares in a holding company called Pangaea Trading Partners.  DePalo along with managing director and co-owner Joshua B. Gladtke allegedly misrepresented to investors the value of Pangaea’s assets and how their money would be used – transferring the first $2.3 million raised in the offering directly to his own bank accounts and using it for his personal benefit.  DePalo also allegedly transferred investor funds to Gladtke, and sought to cover up their fraud by making misrepresentations to SEC examiners.

“We allege that DePalo and Gladtke sold overvalued interests in Pangaea and then raided investor funds for their own personal benefit,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “They later allegedly falsified records in an effort to cover up their scheme.”

In a parallel action, the New York County District Attorney’s Office today announced criminal charges against DePalo and Gladtke.

The SEC’s complaint filed in federal court in Manhattan charges DePalo and Gladtke with violating the antifraud and books-and-records provisions of the federal securities laws.  Also charged in the SEC’s complaint are Pangaea, the Arjent entities, and another entity owned and controlled by DePalo called Excalibur Asset Management.  The SEC also charged another principal at Arjent LLC named Gregg A. Lerman, who agreed to settle the charges.  Subject to court approval, Lerman is enjoined from future violations with any disgorgement and financial penalty amounts to be determined by the court at a later date.

The SEC’s investigation was conducted by Andrew Dean, Kerri Palen, Nathaniel Kolodny, Bennett Ellenbogen, and Lara Mehraban in the New York Regional Office.  The case was supervised by Amelia A. Cottrell, and the SEC’s litigation will be led by Michael Birnbaum and Mr. Dean.  The examination that preceded the investigation was led by Steven Vitulano, Terrence Bohan, Doreen Piccirillo, and Frank Sze of the New York office.  The SEC appreciates the assistance of the New York County District Attorney’s Office, Financial Industry Regulatory Authority, Financial Conduct Authority in the United Kingdom, City of London Police, and Northumbria Police.

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.

DEUTSCHE AGREES TO PAY $55 MILLION TO SETTLE SEC CHARGES IT FILED MISSTATED FINANCIAL REPORTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

05/26/2015 11:25 AM EDT

The Securities and Exchange Commission today charged Deutsche Bank AG with filing misstated financial reports during the height of the financial crisis that failed to take into account a material risk for potential losses estimated to be in the billions of dollars.

Deutsche Bank agreed to pay a $55 million penalty to settle the charges.

An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of “Leveraged Super Senior” (LSS) trades through which the bank purchased protection against credit default losses.  Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction (approximately 9 percent) of the $98 billion total in purchased protection.  This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario.  Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection.  Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions.

According to the SEC’s order instituting a settled administrative proceeding, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether.  For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its LSS positions as though the market value of its protection was fully collateralized.  According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.

“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”

In addition to the $55 million penalty, the SEC’s order requires Deutsche Bank to cease and desist from committing or causing any violations or future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-16.  Deutsche Bank neither admits nor denies the SEC’s findings in the order.

The SEC’s investigation was conducted by Amy Friedman, Michael Baker, Eli Bass, and Kapil Agrawal.  The case was supervised by Scott Friestad, Laura Josephs, Ms. Friedman, and Dwayne Brown.  The SEC appreciates the assistance of the German Federal Financial Supervisory Authority and the United Kingdom Financial Conduct Authority.

MICROSOFT EMPLOYEE AND FRIEND RESOLVE ALLEGATIONS OF INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation ReleaSe No. 23261 / May 14, 2015

Securities and Exchange Commission v. Brian D. Jorgenson, et al., Civil Action No. 13-cv-02275 (W.D. Wash.)

Former Microsoft Employee and His Friend Resolve Insider Trading Case

The Securities and Exchange Commission today announced that a former Microsoft employee and his friend have agreed to settle insider trading charges filed in 2013 alleging that they unlawfully traded based on material nonpublic information misappropriated from Microsoft.

In consent judgments approved by the U.S. District Court for the Western District of Washington, Brian D. Jorgenson, a former Senior Portfolio Manager in Microsoft's corporate finance and investments division, and Sean T. Stokke, Jorgenson's long-time friend and business partner, admitted their unlawful conduct and consented to the entry of orders holding them jointly and severally liable for over $400,000 in ill-gotten gains realized from their illegal trading as well as prejudgment interest. Both men are enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Jorgenson is also barred from acting as an officer or director of a public company.

Both men previously pled guilty to criminal charges arising out of the same conduct. Jorgenson was sentenced to 24 months in jail and Stokke was sentenced to 18 months in jail.

The SEC's litigation has been led by John V. Donnelly III and G. Jeffery Boujoukos of the SEC's Philadelphia Regional Office. The SEC's investigation was conducted by Brendan P. McGlynn, Patricia A. Paw, John S. Rymas, and Daniel L. Koster.

The SEC appreciates the assistance of the US Attorney's Office for the Western District of Washington, Federal Bureau of Investigation, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.

Effective Regulatory Oversight and Investor Protection Requires Better Information

Effective Regulatory Oversight and Investor Protection Requires Better Information