THE SEC STOPS FRAUD IN BEVERLY HILLS

The following article was released by the SEC on January 11, 2010. It is in regards to a fraud scheme in Beverly Hills which targeted the Iranian Americans community.

“Washington, D.C., Jan. 11, 2010 — The Securities and Exchange Commission today announced that it has charged Beverly Hills, Calif.-based NewPoint Financial Services, Inc. and its co-owners and controller for conducting an unregistered offering fraud aimed at Iranian-Americans in the Los Angeles area. The SEC obtained an emergency court order to freeze their assets and preserve remaining funds that were collected from investors.
The SEC’s complaint, filed in U.S. District Court for the Central District of California, alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting New Point on a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and misled more than 100 investors into purchasing more than $20 million worth of debentures that they falsely told them were low-risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, government bonds, or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). The SEC alleges that most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

“They lured victims with false promises of investment safety while secretly enriching themselves and diverting investor funds for their personal use,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint further alleges that investor funds were used to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009. Since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint, saying that their money is safe and that they are guaranteed to get the entirety of their investment back. According to the SEC’s complaint, NewPoint lacks sufficient funds to make all investors whole, and John Farahi has been paying back some investors on a selective basis while failing to return money to other investors asking for a return of their investment.

The SEC has obtained a court order (1) freezing the assets of NewPoint, the Farahis, and Triple “J”; (2) appointing a temporary receiver over NewPoint and Triple “J”; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple “J”; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of the registration and antifraud violations of the federal securities laws. The SEC also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple “J.” A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for Jan. 15, 2010, at 10:00 a.m.”

GOLDMAN SACHS AGREES TO PAY $550 MILLION IN FINES

Considering all the things that Goldman has had it’s fingers into which led to the demise of the U.S. economy this is kind of an obscure case to bring Goldman Sacs up on charges. The way to think of it is that this is like bringing a gangster to justice not for murder but, for tax evasion. The following is an excerpt from the SEC web site which explains the case in some detail.

“Washington, D.C., July 15, 2010 — The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.
"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement, added, "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."
Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.
Today's settlement, if approved by Judge Jones, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman.”

The interesting thing to note is that the above case settlement does not affect any ongoing or future investigations against Goldman for other crimes. The individual investigators at the SEC that brought these charges should be hailed as national heroes. They stood up against the most powerful organization in the world.

SEC ALLEGES MORTGAGE AND TARP FRAUD OF 1.5 BILLION DOLLARS

The SEC has found yet another head of a Mortgage company that not only committed mortgage fraud but, decided to defraud the government out of tarp funds (Known commonly as bank bail-out money). Although financial professionals and politicians alike tout the case that no one in particular is to blame for the financial melt-down it would seem that, the SEC keeps finding a few of the people who are to blame and benefited greatly from the financial meltdown. What is interesting is that the same fraudsters who committed mortgage securities fraud turned right around to defraud the government out of bank bail-out money. The following is an excerpt from the SEC sites which gives the details of this case:

“The SEC alleges that Lee B. Farkas through his company Taylor, Bean & Whitaker Mortgage Corp. (TBW) sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas also was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.

As the country's mortgage markets began to falter, Farkas arranged the sale of more than one billion dollars worth of mortgage loans and securities he knew to be fictitious or impaired," said Lorin Reisner, Deputy Director of the SEC's Division of Enforcement. "Farkas also lied about a sham equity investment he engineered to defraud U.S. taxpayers and the U.S. Treasury's Troubled Asset Relief Program."

According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Fla. — filed for bankruptcy. TBW was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division (MWLD). Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.
According to the SEC's complaint, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured an officer at Colonial Bank to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.

The SEC alleges that in order to conceal this initial fraudulent conduct, Farkas devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Farkas also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Farkas's misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas caused BancGroup to misstate to investors and TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Contrary to his representations to BancGroup and the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.

The SEC's complaint charges Farkas with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company.”

The department of justice and FBI along with other government agencies has been noted to be involved with this case as members of the Financial Fraud Enforcement Task Force. Too often these cases result at best in just destroying the criminal careers of fraudsters by banning them from doing business in the securities markets. Financial crimes committed against the public seem to be the only crimes that have no personal consequences for the fraudsters. Perhaps Bernie Madoff would be spending his golden years living in the Cayman Islands had his son’s not turned him in for financial fraud. No doubt he is thinking that now as he sees how his peers are walking away very rich and very free as their criminals enterprises burn down behind them.

SEC CHARGES KENNETH IRA STAR WITH FRAUD

It seems another Wall Street investment guru has come under the scrutiny of the SEC. It looks like in this case the alleged perpetrators just openly stole funds from their client’s accounts. These alleged perpetrators stole the money in a way that they could easily be caught. The way the smart people on Wall Street steal is to pay themselves fantastical amounts of compensation no matter how poorly their companies are performing. Stealing money out of a company through perks and compensation should be the number one class at all business school. What is nice about looting a business via compensation packages is that it is legalized stealing. The government has given such schemes the stamp of approval. Setting up Ponzi schemes and taking money out of client accounts is just stupid.

The following is part of a press document released by the SEC and posted on their web site:

“Washington, D.C., May 27, 2010 — The Securities and Exchange Commission today charged Manhattan-based financial advisor Kenneth Ira Starr with fraud and is seeking an emergency court order to freeze his assets after he stole client money for his personal use, including the purchase last month of a multi-million dollar apartment where he and his wife now reside.

Starr and two entities he controls — Starr Investment Advisors LLC and Starr & Company LLC — have made unauthorized transfers of money in client accounts that ultimately wound up in Starr’s personal accounts. They violated securities laws pertaining to investment advisers in order to perpetrate the scheme.

Most investment advisers do not maintain physical custody of their clients’ assets, and those assets are instead held by qualified third-party custodians such as a regulated bank or a registered broker-dealer. In this case, the SEC alleges that certain client assets were held in a safe in Starr & Company’s offices despite the fact that Starr and his firms were not qualified custodians. Their ability to steal client funds was enhanced by the failure of Starr Investment Advisors to comply with asset custody rules that require firms to engage an independent public accountant to perform yearly surprise examinations of client assets in the firm’s custody.

“Starr breached his fiduciary duty as an investment adviser in the most egregious manner possible — he stole the funds his clients entrusted to him,” said George Canellos, Director of the SEC’s New York Regional Office. “Starr betrayed the trust of some clients who have looked to him for years for investment advice and financial guidance.”

According to the SEC’s complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed.

The SEC’s complaint alleges that the unauthorized transfers in April 2010 were not the only instances when Starr misappropriated client funds. In August 2009, Starr and his entities began transferring approximately $1.7 million from the personal account of a client and from the account of a charity run by this client. These were all unauthorized transfers. In April 2010, an additional transfer of $750,000 was attempted from an account belonging to this client. But this time, Starr’s plans were frustrated because the bank alerted the client, who then halted the transfer. The client then reviewed the account transactions and uncovered the unauthorized $1.7 million transfers in 2009. When confronted about these transactions, Starr gave improbable explanations before eventually reimbursing the client with money that appears to have come from the bank account of another unrelated party.

The SEC’s complaint names two relief defendants in order to recover client assets now in their possession:

Diane Passage — Starr’s wife with whom he has a joint bank account.

Colcave LLC — An entity through which Starr purchased the apartment.

The SEC’s complaint charges each of the three defendants with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and, further, charges Starr Investment Advisors with violations of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(1) thereunder. In addition to the emergency relief, the SEC’s complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants’ and relief defendants’ ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants.”

With all the fraud charges the SEC actually files you hear of almost no criminal follow-up by the FBI or any authority that could put a few of the bad guys behind bars for at least the summer. At the very least they should have to wear a T-shirt for a month that says “I’m A Wall Street Fraudster”.

MAKER OF ATM AND VOTING MACHINES CHARGED WITH FRAUD

The security firm Diebold, Inc., of Canton Ohio, has been charged along with three former executives with fraudulent accounting. Diebold is listed on Wikipedia as one of the largest ATM manufacturing companies in the United States. The executives at Diebold Inc., tried to get their earnings numbers to correspond to the estimates given by Wall Street analysts. Companies who miss estimates often have their market value slide lower and can even have more difficulty in obtaining credit. Most importantly to many executives is the fact their bonus might not be as lucrative if the stock price takes a nose dive because the management did not meet the expectations of market analysts. The following is an excerpt of the post the SEC has put up:

“Washington, D.C., June 2, 2010 — The Securities and Exchange Commission today charged Diebold, Inc. and three former financial executives for engaging in a fraudulent accounting scheme to inflate the company's earnings. The SEC separately filed an enforcement action against Diebold's former CEO seeking reimbursement of certain financial benefits that he received while Diebold was committing accounting fraud.

The SEC alleges that Diebold's financial management received "flash reports" — sometimes on a daily basis — comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.

Diebold — an Ohio-based company that manufactures and sells ATMs, bank security systems and electronic voting machines — agreed to pay a $25 million penalty to settle the SEC's charges. Diebold's former CEO Walden O'Dell agreed to reimburse cash bonuses, stock, and stock options under the "clawback" provision of the Sarbanes-Oxley Act.

The SEC's case against Diebold's former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller is ongoing.

“Financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, Director of the SEC's Division of Enforcement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases."
Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

Improper use of "bill and hold" accounting.
Recognition of revenue on a lease agreement subject to a side buy-back agreement.

Manipulating reserves and accruals.
Improperly delaying and capitalizing expenses.
Writing up the value of used inventory.

Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

The SEC charged Geswein, Krakora, and Miller, in a complaint filed in U.S. District Court for the Northern District of Ohio, with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b 5 and 13b2-1; and aiding and abetting Diebold's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. In addition, the SEC charged Geswein and Krakora with violating Exchange Act Rules 13a-14 and 13b2-2 and Section 304 of the Sarbanes-Oxley Act. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks officer-and-director bars against Geswein and Krakora as well as their reimbursement of bonuses and other incentive and equity compensation.”

Most people should feel just a bit uneasy to know that the company responsible for the security of their bank and many other financial transactions has just been found guilty of accounting fraud. Diebold Inc. seems to have a lot of issues in regards to honesty and integrity. The following is from Wikapedia and helps to outline some of the company’s ongoing problems.

“In August 2003, Walden O'Dell, then the chief executive of Diebold, announced that he had been a top fund-raiser for President George W. Bush and had sent a get-out-the-funds letter to 100 wealthy and politically inclined friends in the Republican Party, to be held at his home in a suburb of Columbus, Ohio.

In December 2005, O'Dell resigned following reports that the company was facing securities fraud litigation surrounding charges of insider trading.
In March 2007, it was reported by the Associated Press that Diebold was considering divesting itself of its voting machine subsidiary because it was "widely seen as tarnishing the company's reputation".
In August 2007, Wikipedia Scanner found that edits via the company's IP addresses occurred to Diebold's Wikipedia article, removing criticisms of the company's products, references to its CEO's fund-raising for President Bush and other negative criticism from the Wikipedia page about the company in November 2005.”

SEC GETS NEARLY 180 MILLION BACK FOR INVESTORS

The SEC has forced Millennium Partners to return 178 million dollars to investors. Unfortunately this distribution of funds fraudulently obtained by Millennium was from an enforcement action started way back in 2005. Can the wheels of justice turn any more slowly when it comes to financial crimes? The following is an excerpt of the action taken by the SEC and posted on their government web site:

“Washington, D.C., May 21, 2010 — The Securities and Exchange Commission today announced the completion of a distribution of more than $178 million to investors affected by improper market timing by Millennium Partners and its related entities. The Millennium Fair Fund distributions went to more than 1,000 mutual funds and annuities.

“The total distribution of more than $178 million in this case further demonstrates the SEC’s commitment to holding wrongdoers accountable and recovering funds for injured investors from illegal activity,” said George Canellos, Director of the SEC’s New York Regional Office.

The Sarbanes-Oxley Act of 2002 gave the SEC authority to increase the amount of money returned to injured investors by allowing civil financial penalties to be included in distributions. Prior to Sarbanes-Oxley, only ill-gotten gains could be returned to investors.

In 2005, the SEC brought an enforcement action charging Millennium Partners, L.P., Millennium Management, L.L.C., Millennium International Management, L.L.C., and several individuals with devising and carrying out a fraudulent scheme to avoid detection and circumvent restrictions that mutual funds imposed on market timing. The Millennium Fair Fund distribution fully reimburses the recipient mutual funds and annuities for their injury from the market timing. Pursuant to the Plan of Distribution, any remaining funds will be sent to the U.S. Treasury."

It appears that in this case the Sarbanes-Oxley Act that was mentioned so prevalently in the press when it was passed in 2002, made a difference in regards to the amount of the recovery for investors. Under Sarbanes-Oxley civil financial penalties were increased which allows for increased compensation for the parties who were harmed by criminal activities.