ONLINE PAYDAY LENDER PONZI SCHEME ALLEGED IN UTAH

The following is a case brought by the SEC which alleges fraud by a Utah pay day firm. The commingled funds of investors and the company seemed to have been used to set up a Ponzi scheme. The following is an excerpt from the SEC web site:

“Washington, D.C., March 28, 2011 – The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of two online payday loan companies and their owner charged with perpetrating a $47 million offering fraud and Ponzi scheme.
The SEC alleges that John Scott Clark of Hyde Park, Utah, promised investors astronomical annual returns of 80 percent on their investments in his companies – Impact Cash LLC and Impact Payment Systems LLC. Investors were told their money would be kept in separate bank accounts and used to fund payday loans and other aspects of the companies’ operations. However, Clark instead commingled investor funds into a single pool and used them to make unauthorized investments, pay fictitious profits to earlier investors, and finance his own lavish lifestyle.

“Investors were promised extraordinary returns while Clark was actually diverting their money to make such extraordinary personal purchases as a fully restored classic 1963 Corvette Stingray,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “Clark recruited new investors through referrals from earlier investors who thought the Ponzi payments they received were actual returns on their investments and sought to share the lucrative opportunity with family and business associates.”
The SEC alleges that in addition to buying multiple expensive cars and snowmobiles, Clark stole investor funds to purchase a home theater, bronze statues and other art for himself.
According to the SEC’s complaint filed in U.S. District Court for the District of Utah, Clark lured at least 120 investors into his scheme. Besides word-of-mouth referrals from earlier investors, Clark also recruited investors by attending trade shows in various states, attending payday loan conferences, and paying salespeople to locate potential investors to meet with Clark. Clark paid one salesperson between more than a half-million dollars over a multi-year period to locate potential investors and attend payday loan conferences and trade shows.
The SEC alleges that from at least March 2006 to September 2010, Clark and the Impact companies raised funds from investors for the stated purposes of funding payday loans, purchasing lists of leads for payday loan customers, and paying Impact’s operating expenses. Impact did not distribute a private placement memorandum or any other document disclosing the nature of the investment or the risks involved to investors. The SEC’s complaint charges Impact and Clark with fraudulently selling unregistered securities.
According to the SEC’s complaint, Clark routinely altered investor account statements provided to him by Impact’s accounting department to create artificially high annual rates of return. The altered account statements with purported profits were then sent to investors. Account statements to customers showed annualized returns varying from 30 percent to more than 200 percent.
In addition to the asset freeze approved late Friday, the court has appointed a receiver to preserve and marshal assets for the benefit of investors. The SEC’s complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and financial penalties from Impact and Clark.”

When people are living well beyond their means that usually means one of two things: either they are borrowing their way into bankruptcy or they are stealing the money in some way.

In the following excerpt released by the SEC web site an Idaho company has been charged with fraudulently raising funds for a nuclear power project:

“ Washington D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged a self-described power company in Idaho with fraudulently raising funds for a $10 billion nuclear power project. The SEC is seeking an emergency court order to freeze the assets of the company and two executives.

The SEC alleges that Alternate Energy Holdings Inc. (AEHI) has raised millions of dollars from investors in Idaho and throughout the U.S. and Asia while fraudulently manipulating its stock price through misleading public statements that conceal the secret profits reaped by its CEO Donald L. Gillispie and Senior Vice President Jennifer Ransom. Gillispie has touted the company as a tremendous investment opportunity that could rival Exxon Mobil in profitability, despite the fact that AEHI has essentially no revenue and minimal operations.
The SEC suspended trading in AEHI stock earlier this week.
“In light of AEHI’s ongoing efforts to raise funding while promoting itself through a daily deluge of press releases, we needed to take immediate action to get to the bottom of the company’s misleading statements,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Documents we have obtained to date indicate a scheme to personally enrich the CEO at the expense of investors.”
According to the SEC’s complaint filed today in federal district court in Boise, AEHI’s fundraising was facilitated by a scheme to drive up the company’s stock price, both through frequent press releases (at least 87 in 2010 alone) and efforts of paid stock promoters to manipulate the stock price. The SEC alleges that the company has made multiple misrepresentations, including claims that its executives had such confidence in AEHI that they had not sold a single share of company stock. Records obtained by the SEC show that Gillispie and Ransom have instead secretly unloaded extensive stock holdings and funneled the money back to Gillispie.
The SEC’s complaint also alleges that AEHI reported to the SEC and investors that Gillispie’s compensation was $133,000. However, Gillispie has actually reaped approximately six times that amount in 2010.
The SEC’s complaint charges AEHI, Gillispie, and Ransom with violations of the anti-fraud provisions of the federal securities laws, and names as relief defendants two companies controlled by Gillispie and Ransom (Executive Energy Consulting LLC and Bosco Financial LLC). In a motion filed simultaneously with the enforcement action, the SEC seeks emergency relief for investors including an asset freeze and a temporary restraining order enjoining the defendants from further violations of the securities laws.
The SEC acknowledges the assistance of the Idaho Department of Finance and FINRA in this matter. The SEC’s investigation is continuing.”

“Going Green” might be the next mortgage fraud/crisis. A lot of money is sloshing around out there for “Going Green” projects and where there is money there will be some if not a lot of fraud.

RADIO MAN FINED FOR FRAUD BY SEC

The following excerpt from the SEC blog outlines a case and the punishment for a businessman who is accoused fraud:

Washington, D.C., March 25, 2011 — The Securities and Exchange Commission today charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.
The SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan." Frishberg failed to tell his clients about BizRadio's poor financial condition or his significant conflicts of interest with the note offerings that helped fund his salary at BizRadio.

Frishberg agreed to settle the SEC's charges by paying a $65,000 penalty that will be distributed to harmed investors. He will be barred from future association with any investment adviser.
"Contrary to his obligations as an investment adviser, Frishberg approved risky investment recommendations to his clients without ensuring that the risks and conflicts were properly disclosed," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Frishberg personally benefitted from the questionable investments that were recommended to his clients."
According to the SEC's complaint filed in federal district court in Houston, at least $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg's associate Albert Fase Kaleta. Frishberg and Kaleta jointly controlled BizRadio.
The SEC charged Kaleta and his firm with fraud in 2009, and the court appointed a receiver to marshal the assets of KCM and relief defendants BizRadio and DFFS.
The SEC alleges that Frishberg authorized Kaleta to recommend the notes to DFFS clients, and clients were not provided with critical disclosures. Investors were not told of BizRadio's poor financial condition and the likely inability of KCM and BizRadio to repay the notes. Nor were investors informed about Frishberg's significant conflicts of interest in the note offerings because the proceeds funded his salary as a BizRadio talk show host.
The SEC alleges that Frishberg chose Kaleta to recommend the BizRadio notes even though he was aware of complaints about Kaleta's lack of truthfulness in sales presentations regarding other investments.
The SEC's complaint alleges that Frishberg violated Section 206(2) of the Investment Advisers Act of 1940 and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act.
Without admitting or denying the SEC's allegations, Frishberg consented to the entry of a permanent injunction against these violations and to pay a $65,000 penalty. Frishberg consented to the establishment of a fair fund for the distribution of his penalty to harmed investors, and agreed to be barred from association with any investment adviser or certain other registered entities.”

SHELIA BAIR SPEAKES

The following is an excerpt from the FDIC web site:

"Remarks by FDIC Chairman Sheila C. Bair to the ICBA National Convention, San Diego, CA
March 22, 2011

It is always a pleasure to address the annual meeting of the ICBA. I have addressed your meeting every year of my five year term at the FDIC, and I've always had an affinity for this group. You are fiercely independent in your core mission of defending the interests of the nation's community bankers.

As you know, I am also tenacious in defending the interests of the FDIC as it pursues its vital public mission of depositor protection and financial stability. Like me, you are frequently direct and pointed in your communications. You pride yourselves in your professionalism, and you influence opinion through reasoned public debate. Like me, you stay focused on your objectives. And you are never confused about who you represent. That has been a key to your considerable effectiveness in Washington.

You may not be aware of this, but my experience with community banking extends back into my early childhood. In fact one of those experiences helped prepare me for the Chairmanship of the FDIC. When I was in grade school, I loved accompanying my father to Citizens Bank in Independence Kansas each Friday afternoon when he would deposit the week's earnings from his medical practice. As I would stand with him in the teller line waiting for our turn at the window, I would always stare in fascination at the big, shiny steel door of the bank's vault. It had a huge, round metal handle with prongs like the steering wheel of a ship. I imagined that behind that door stood tall stacks of crisp green bills and piles of gleaming coins.

One Friday afternoon, as we entered the bank, I noticed that the vault door was open a crack. My heart raced. Someone had forgotten to close the door! Now was my chance to sneak a peak at the treasures within. As my father was pre-occupied in conversation with a friend, I slipped away from him and edged furtively to the vault door in rapt anticipation. But when I reached the vault and peeked expectantly into the small slit of an opening, I had the surprise of my life -- no crisp greenbacks, no bags of shiny coins -- just rows and rows of little metal drawers with numbers on them. "There's no money in the bank, there's no money in the bank" I shouted, racing back to my father to forewarn him that someone had been absconding with his and other bank depositors' hard-earned cash.

As you might imagine, this created quite a stir among the long line of customers waiting to deposit their week's earnings. The bank's President came rushing out of his office to find out what was causing all the commotion. After giving me a few somewhat forceful pats on the head, he assured me that everyone's money was quite safe. He then invited me and my father into his office for a quick tutorial on reserve banking. I didn't understand much of it, except for the idea that most of the depositors' money was loaned out to others to help them buy things like cars and homes, which I thought was nice.

So this was my first introduction to the community banking model, as well as the importance of depositor confidence. Ironic that a six-year-old who nearly instigated a bank run that day would later become Chairman of the Federal Deposit Insurance Corporation.

We have had quite a ride over these past five years. When I first came to the FDIC in June of 2006, I thought that my main challenges would be dealing with the Wal-Mart ILC application and implementing our new authorities under the Federal Deposit Insurance Reform Act to begin assessing risk based premiums on all banks.

To be honest, back then, I didn't really know where I stood on the issue of commercial ownership of banks. But I came quickly to understand that the Wal-Mart application, if approved, had the potential to radically transform the structure of the banking industry. This was a step that needed to be decided by Congress, not by the FDIC. This application risked embroiling the FDIC in a never-ending controversy which would divert it from its core public mission.

So we imposed a moratorium on ILC applications to give Congress time to act, and Wal-Mart eventually withdrew its application, making the issue somewhat moot. Dodd-Frank has now closed the so-called ILC loophole to bank holding company rules. So I am glad we imposed the moratorium, and I think that the end result was the right one.

Though community banks were obviously pleased by our early decision on the Wal-Mart application, you were a bit more mixed on our decision to move ahead with a new risk-based pricing system that would begin charging all banks something for their deposit insurance.

As most of you will recall, prior to 2006, the FDIC was essentially prohibited from charging CAMELS 1 or 2 banks for deposit insurance so long as the reserve ratio stayed above 1.25. This was a nice deal for the more than 95 percent of the industry which had the requisite high CAMELS rating. The downside, however, was that a number of new banks had been chartered which never had to pay anything for deposit insurance, an inherently unfair situation for older banks which had paid dearly to cover losses from the last bank and thrift crisis.

Another significant downside was that if the fund were to dip below 1.25, everyone would be whacked with a 23 basis-point assessment. When the deposit insurance reform law said we could start charging a premium to every institution, it also gave us the ability to manage the fund within a range. This would allow us to build reserves in the good times and provide a cushion against the need for pro-cyclical premium hikes during downturns. In addition, the law gave older banks a credit in recognition of past assessments, so the brunt of the initial assessment would fall on so-called "free riders."

I remember well the strongly-worded comment letters and tense meetings with newer banks, many of whom followed non-traditional strategies through internet deposits or affiliations with investment banks. They were not happy with us, and I recall many saying we had no need to build the fund because of the health of the industry and lack of bank failures.

Yes, they assumed, the good times would go on forever, so why in the world did we need more money? The rest, as they say, is history. We went ahead with the new assessment rate schedule, which was my first major rulemaking just two weeks into my tenure.

But as it turned out, it was too little, too late. As the crisis hit, bank failures mounted, and so did losses to the Deposit Insurance Fund. The low point was the fourth quarter of 2009, when the fund dipped to a negative balance of $20.8 billion. But the fund, like the banking industry, is healing, and I anticipate that it will achieve a positive balance before the end of the year.

So where are we now? Community banks' return on assets in 2010 was 0.33 percent, and 4 out of every 5 community banks operated at a profit. Noncurrent loans stood at 3.5 percent, with a net charge-off rate of 1.27 percent. This is a major improvement from the fourth quarter of 2009, when ROA was a negative 0.65 percent, and more than one in three community banks were unprofitable.

However, the current situation still pales in comparison to the robust earnings enjoyed by most banks during the so-called "golden age of banking" prior to the crisis. Now, as the industry is beginning to recover from the setbacks of the past few years, you are moving forward to a future which holds much promise but also considerable uncertainty.

As with previous crises, there has been significant consolidation over the past few years, and nearly 300 community banks have failed. As I've discused with you many times before, we at the FDIC have a keen appreciation for the unique role community banks play, not only in their local markets but also through the contributions they make to the national economy.

Quarter after quarter, throughout the crisis and ensuing recession, we saw you maintain and even modestly grow your loan balances as the largest institutions were pulling back dramatically. Small businesses, in particular, come to you for credit because you understand the local economy and you understand their particular credit needs. In the wake of the most severe recession since the 1930s, we need a thriving community banking sector to support the credit needs of local households and businesses.

I know that you have many concerns about the future of community banking and how it will be affected by the changes that are taking place as regulators implement Dodd-Frank. Yours is already one of the most heavily regulated industries in America. Congress just passed a 2,000 page bill mandating scores of new regulations. You are understandably wary of how the new law will be implemented, and even if you are not the target of its many reforms, you are concerned that there could be collateral damage to your industry.

I am not going to claim that we have always seen things the same way on every issue. We have not, and we should not. Our respective jobs are quite different. But I will say this: We at the FDIC are committed to a future regulatory structure that will support a vibrant, competitive community banking sector, that will assure a level playing field between large and small banks, and most importantly, that will put an end to the pernicious doctrine of too big to fail.

Throughout this crisis, we have consciously pursued policies to protect community banks and their customers from the fall out of the financial crisis—a crisis that was not of your making, to mute the impact of deposit insurance fund losses while maintaining the integrity of industy funding, to preserve continuation of community banking services in areas impacted by failing institutions, and to assure that financial reform measures take into account the potential impact on smaller banks.

We were early and strong advocates for interagency guidance addressing high-risk mortgages. We were among the first to see the dangers of these unaffordable mortgages to the broader banking sector -- indeed to the entire economy. We supported strong guidance in 2006 to tighten standards on so-called pick-a-pay loans, and successfully pushed for extending those standards to subprime hybrid loans in early 2007.

While commercial real estate lending was not the cause of the crisis, we could see in 2006 that poorly managed commercial real estate concentrations were becoming a growing threat to the deposit insurance fund. So we also supported heightened supervisory standards for CRE concentrations.

I know we disagreed on that guidance, but looking back it is clear that weak banks with high levels of CRE concentrations – especially construction and development concentrations – represent the lion's share of small bank failures. So this was not a case of overzealous regulation.

At the same time, going forward, I believe that supervisory policies need to reflect the reality that most community banks are specialty CRE lenders and that examiners need to focus on assuring quality underwriting standards and effective management of those concentrations. Though hundreds of small banks have become troubled or failed because of CRE concentrations, thousands more have successfully managed those portfolios. We need to learn from the success stories and promote broader adoption of proven risk-management tools for banks concentrated in CRE.

As the crisis unfolded, we worked with our fellow regulators and the Treasury Department to promote public confidence and system stability. Foreseeing the risk of increased failures from growing problems in the housing sector, we launched in 2008 an intensive public education campaign about deposit insurance. We used the occassion of our 75th anniversary to re-acquaint the general public about the FDIC's strong record in protecting insured bank deposits. Here again, our objective was to assure the stabiliy of insured deposits, the lifeblood of community banks, and in that we were successful.

However, as conditions deteriorated in the summer and fall of 2008, we witnessed growing volatility in uninsured deposits and a troubling trend of business accounts "fleeing" community banks for larger institutions perceived as too big to fail. For this reason, when we were asked by the Treasury Department and the Federal Reserve Board to develop a debt guarantee program which would have primarily benefited larger institutions, we also proposed an unlimited temporary guarantee for non-interest bearing transaction accounts. This program proved enormously successful in stabilizing these accounts and averting liquidity stress or failures in otherwise healthy community banks.

Throughout the crisis, we were determined not to turn to taxpayer borrowing but rather to manage our losses and liqudity needs through our industry-funded resources. In retrospect, given the understandable public backlash to TARP and the taxpayer bailouts, I am more convinced than ever that this was the right decision. At the same time, we used strategies to soften the impact of additional assessments on a distressed banking sector.

We worked with you to bolster public confidence in our resources by convincing Congress to substantially raise our borrowing line, ameliorating the need for a large special assessment. We also successfully secured legislation to make clear that any losses on the FDIC's debt guarantee program would be assessed on those holding companies availing themseves of that program, not insured banks.

We required prepayment of three years worth of premiums to make sure that our cash resources were adequate to cover bank failures, while allowing you to expense those premiums gradually over time.

And finally, we deployed resolution strategies to sell failing banks to other insured depositories, while providing credit support on futures losses from failed banks' troubled loans. This strategy has saved us $40 billion over losses we would have incurred if we had liquidated those banks. But perhaps more importantly, this strategy provided continuation of banking services in local areas served by the failed banks, frequently through the acquisition of a failed communty bank by a healthy one. Now, the system is on the mend. Bank failures peaked last year at 157. Profitability is returning, loan quality is improving, and borrower demand is starting to pick up somewhat with an improving economy.

Unfortunately, many of the obvious problems that led to this crisis -- excess leverage, unregulated credit derivatives, skewed incentives from securitization, too big to fail -- have yet to be fixed. And increasingly, regulators are being called to task for doing too much too fast, just as a few years go we were being pilloried for being asleep at the switch.

Do not misunderstand. Accountability and oversight are a good thing for the regulatory process. As a market-oriented Republican, I wholeheartedly concur that our regulations should be tightly focused on fixing what went wrong. But we must not lose sight of the fact that A lot went wrong and it does need to be fixed. Which brings me back to Dodd-Frank.

Dodd-Frank is not a perfect law. There are many things in it that I would like to change. But, on balance, it is a good law and one which I think will strengthen, not weaken, communtiy banks. Let's start with the basics.

If Dodd-Frank had not been enacted, deposit insurance limits would have reverted to $100,000. The transaction account guarantee would have expired. The too big to fail doctrine would have remained intact. A public still uncertain about the strength of smaller banks would have pulled their newly uninsured deposits and fled to the large, too big to fail institutions. This would have led to more small bank failures and higher costs for the deposit insurance fund.

So you would have lost large deposit accounts, and it is likely that your deposit insurance premiums would have gone up. But none of that happened.

Dodd-Frank made permanent the $250,000 deposit insurance limit and provided a two-year extension of the transaction account guarantee. It attacked the doctrine of too big to fail by extending the FDIC's resolution process to large, systemically-important financial institutions. It subjected all financial institutions, large and small, bank and non-bank, to our resolution process, which imposes losses where they belong -- on shareholders and creditors -- not on taxpayers.

It also required that large financial entities have capital cushions at least as strong as those that apply to community banks. And it changed the assessment base so that instead of your premiums going up, they will be reduced by about 30 percent later this year. Why did this happen? You.

Instead of stridently opposing even the most modest of reforms, the ICBA stayed engaged. You maintained a constructive dialogue with the key sponsors of the legislation. You gave voice to the views of community banks, and Congress listened. Most of the other financial trade groups tried to stop reform. It didn't matter. A bill was going to pass. The ICBA realized the inevitability of the process. You kept a seat at the table, and you had an impact on the outcome.

I know you have many concerns about this legislation. I understand your concerns. It is a massive law, and you would be foolish not to take an active interest in the new regulations as they are developed. We are proceeding to implement the provisions of Dodd-Frank as transparently and expeditiously as possible.

We are going beyond the normal steps that we use in the rulemaking process. We are holding roundtables to discuss issues, and documenting meetings between senior FDIC officials and outside parties that are related to Dodd-Frank implementation. In addition, we continue to discuss issues related to Dodd-Frank during the visits by the state banking delegations to the FDIC and at meetings of our Advisory Committee on Community Banking.

So you will continue to have many venues to provide feedback to us as implementation moves forward. And I want you to know that we're paying close attention to the potential impact of the law on community banks.

On March 10, we sent a letter to Federal Reserve Chairman Bernanke commenting on the proposed rule on debit-card interchange fees. We are extremely concerned that community banks may not actually receive the benefit of the interchange fee limit exemption explicitly provided by Congress. In the comment letter, we urged the Board to use its authority under the Electronic Fund Transfer Act to address the practical implications of the proposal. The proposed rule assumes the creation of a two-tiered interchange structure, and failure to maintain a two-tiered structure could result in a loss of income for community banks, and higher banking costs for your customers.

We also urged the Board to expand its survey methodology to gain information on the costs incurred by issuers of all asset sizes; to include costs associated with anti-fraud protection; and to revise its fee cap proposal as appropriate.

Your concerns about the potential impact of the interchange fee provision are well-founded, and we are working hard to assure that you receive the protection promised by the law. At the same time, I would ask you to maintain an open-mind about the potential positive benefits of the new consumer protection agency. Many of the fears I have heard expressed about this new agency are not well-founded.

On the contrary, I believe that this agency holds the promise of doing tremendous good by simplifying consumer rules and disclosures, reducing compliance costs for you and making products easier to understand for your customers. I also think this agency can help level your competitive playing field by applying much-needed regulation and enforcement to non-bank mortgage originators and other providers of consumer credit.

Banking has come a long way since the days when I used to accompany my father to Citizen's Bank every Friday afternoon. We have just come through the worst financial crisis and most severe recession since the 1930s. I know these are uncertain times for you, when the economic environment remains difficult, and the regulatory outlook seems unclear.

I ask you to continue our dialogue, and to work with us to get the details right on the regulatory reforms now underway. It is my hope and belief that public dissatisfaction with impersonal, model-driven banking will bring more customers back to those institutions which bank the old-fashioned way – to banks who know their customers and tend to their individual banking needs – to banks run by hands-on executives willing to take some time to explain to a six-year-old why all the depositors' money isn't sitting in the vault.

Community banking is the foundation of our economy. The future belongs to you, and it depends on you. That is why I am asking you to support the reforms that are needed to restore financial stability and lay the foundation for a stronger U.S. economy in the years ahead. Thank you."

SEC ALLEGES HIGH TECH PUMP AND DUMP: IS THIS 1999 AGAIN?

Back in the 1990’s when technology stocks crashed it was found that many tech companies were in fact just sham organizations that had no workable business models. The companies existed only to sell stock to investors with the proceeds of the stock sales going to the corporate executives. At the end of the 1990’s most of these sham companies just folded and the executives cashed out billions of dollars.

Back in the 1990’s most of the sham companies had businesses based upon the high speed communications technologies like the internet. In the case below the Sec alleges that a technology company created a pump-and-dump fraud based on the current popular tech fad based upon saving the envirorment. It seems everyone wants a new magical technology to save the enviorment when sacrifices like driving a little less or adjusting environmental controls a few degrees is just too hard.

The following is an excerpt from the SEC website which explains in detail the formula for a recent alleged pump-and-dump scheme:

“Washington, D.C., Feb. 18, 2011 — The Securities and Exchange Commission today charged a group of seven individuals who perpetrated a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming.


The SEC alleges that the group included stock promoters, traders, and a lawyer who wrote a fraudulent opinion letter. The scheme resulted in more than $7 million in illicit profits from sales of stock in CO2 Tech Ltd. at artificially inflated prices. Despite touting impressive business relationships and anti-global warming technology innovations, CO2 Tech did not have any significant assets or operations. The company was purportedly based in London, and its stock prices were quoted in the Pink Sheets.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was perpetrated through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. The U.S. Department of Justice today announced related criminal charges against six of the individuals.
“This group of illicit stock promoters sought to hide their scheme behind offshore entities, but their misconduct was exposed by the excellent cooperation of law enforcement agencies here and abroad,” said Cheryl Scarboro, Associate Director in the SEC’s Division of Enforcement.
According to the SEC’s complaint, the fraudulent pump-and-dump scheme in CO2 Tech stock occurred from late 2006 to April 2007 through the efforts of the following individuals:
Jonathan R. Curshen, a Sarasota, Fla., resident who founded and led Red Sea.
David C. Ricci and Ronny Morales Salazar of San Jose, Costa Rica, who were Red Sea stock traders.
Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients.
Robert L. Weidenbaum of Coral Gables, Fla., a stock promoter who operates a company called CLX & Associates.
Michael S. Krome of Lake Grove, N.Y., a lawyer who allegedly wrote a fraudulent opinion letter.
The SEC’s complaint alleges that CO2 Tech falsely touted business relationships that the company had not formed, including a relationship with the Boeing Company. In fact, there were no communications, correspondence or understandings between CO2 Tech and Boeing.
The SEC alleges that Weinbaum and Zigdon initiated the pump-and-dump of CO2 Tech by utilizing the services of Krome, who issued a fraudulent opinion letter to enable them to have the restrictive legend removed from their CO2 Tech stock certificate. This provided them nearly full control over the freely tradeable shares of CO2 Tech stock. Weinbaum then hired Red Sea to sell massive quantities of CO2 Tech stock to the investing public through its web of nominee brokerage accounts. Zigdon caused the materially false and misleading information about CO2 Tech to be disseminated in press releases and on CO2 Tech’s website.
According to the SEC’s complaint, Weinbaum hired Weidenbaum to redistribute the false information through websites, spam e-mails and fax blasts. Weidenbaum enlisted a group of stock promoters who then executed illegal “matched orders” with Red Sea’s nominee brokerage accounts in order to “jump-start” the market and increase the price of the stock. As a result of the false media campaign and the illegal matched orders, the market price of CO2 Tech stock increased 81 percent increase in one day and trading volume increased 1,573 percent.
The SEC alleges that after Weinbaum hired Red Sea, he directed Red Sea stock traders Ricci and Salazar to sell the stock. Ricci and Salazar placed multiple layered orders to sell CO2 Tech stock – thereby creating the false appearance that the market for the stock was deeper than it actually was. This coordinated misconduct enabled stock sales at artificially inflated prices for profits of more than $7 million at the expense of unsuspecting investors.
The SEC’s complaint alleges that Curshen, Ricci, Salazar, Weinbaum, Zigdon, and Krome violated Section 5(a), (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Weidenbaum is charged with aiding and abetting Weinbaum and Zigdon’s violations of Exchange Act 10(b) and Rule 10b-5. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.
In the related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants are charged in the Southern District of Florida variously with conspiracy to commit securities, mail and wire fraud; wire fraud; mail fraud; violating the securities regulation laws and obstruction of justice.

The SEC acknowledges the assistance of the Fraud Section of the Criminal Division of the U.S. Department of Justice, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service. The SEC also acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) and several foreign law enforcement agencies that provided substantial support to the investigation, including the Costa Rican Police, British Columbia Securities Commission, Israel Securities Authority, United Kingdom Financial Services Authority, and The City of London Police.”

The list of organizations and governments cooperating in the above case is quite impressive. This was relatively a small case in case of the amount of money involved. At least comparing this case with the alleged trillion dollars or more defrauded from investors worldwide by large banking and insurance organizations in the recent real estate crash. The moral being: Help to steal millions of dollars and you will be prosecuted. Help to steal trillions of dollars and you will get a job advising the president and congress on how to write and enforce regulatory laws. In fact, you might even get a job in the cabinet.

FDIC CHAIRMAN'S SPEECH AT ABA GOVERNMENT RELATIONS SUMMIT

The following speech given by the FDIC Chairman was excerpted from the FDIC web site:

"Remarks by FDIC Chairman Sheila C. Bair to the ABA Government Relations Summit, Washington, DC
March 16, 2011

Good morning. I am pleased to have the opportunity to join you for this year’s ABA Government Relations Summit.

We are, in many ways, at a crossroads in terms of the future of the commercial banking industry -- how it is regulated, and whether it will in fact fulfill its promise as an engine of growth for the U.S. economy. The past few years have taught all of us some painful lessons.

In 2008, our financial markets and institutions came literally to the brink of systemic collapse. Despite a massive infusion of federal support, our economy still experienced its worst recession since the 1930s. Economists tell us that the recession ended almost two years ago, and it’s true that overall business activity has continued to trend higher since then.

But 13.7 million people remain officially unemployed, and millions more are underemployed. Six million Americans have been officially out of work for more than six months. The banking industry is indeed recovering, but that process remains incomplete.

Problem loans are declining, as are loan-loss provisions. But bankers remain concerned about rebuilding their earnings capacity in the wake of the crisis. And many of you are pointing to heightened regulatory oversight as a primary source of concern in the earnings outlook.

We have heard:

that higher capital standards will reduce lending and economic growth,


that restrictions on capital markets activities will push business overseas, and
that the impending Dodd-Frank reforms are both creating unresolved uncertainty for banks and moving along too fast for comfort.
This may be my last opportunity to speak with you before the end of my term in June.

I would like to take this opportunity to discuss with you what I think are some real challenges facing the banking industry, and how the industry can play a more constructive role in the economic recovery and the reform process. Despite the sometimes heated rhetoric about the direction of regulation, I think bankers, regulators, and the public really do share many of the same goals and concerns for the future.


Short-Term Challenges and the Long-Term Economic Future

First, I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy.

Yes, as we found out in the Fall of 2008, banking is critically important to the ability of our economy to function. And in the wake of the crisis, it looks like bank lending will have to be an even more important ingredient in financing economic activity than it was just a few years ago.

But, in policy terms, the success of the financial sector is not an end in itself, but a means to an end – which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children.

In our national economic life, your contribution as bankers, and ours as regulators, can only be measured against this yardstick. And let’s be completely honest – in the period that led up to the financial crisis we did not get the job done. FDIC-insured institutions booked record earnings in each of the first six years of the last decade.

But in the recession that followed, the U.S. economy lost over 8-and-a-half million jobs, of which only about 1.2 million have been regained in the recovery. There are almost two million fewer private-sector jobs in this country today than there were in December 1999, eleven years ago. More than nine million residential mortgages have entered foreclosure in the past four years, and the backlog of seriously past due mortgages stands at more than two-and-a-half million.

The lesson for policymakers is that having a profitable banking industry, even for years at a time, is not sufficient on its own to support the long-term credit needs of the U.S. economy. Instead, the industry also needs to be stable, and its earnings must be sustainable over the long term. This, quite simply, is why regulatory changes must be made.
Is the Problem Regulation – or Confidence?

While it is clearly recovering, our economy continues to face some significant challenges.
The balance sheets of households, depository institutions, state and local governments and the federal government all suffered serious damage as a result of the recession. All of these sectors are taking steps to repair that damage, but in some cases it will be a long, painful process.

In some respects we have seen a dramatic improvement in investor confidence and the functioning of financial markets. Credit spreads are down, stock prices are up, and lending standards have eased a little. We’re finding that troubled institutions have recently been better able to raise capital or find an acquirer before failure, and we have also been getting better bids for failed banks that have good retail franchises.

But not every part of our financial system is working the way it is supposed to.

The issuance of private mortgage-backed securities last year was just $60 billion, the same as in 2009 and down almost 95 percent from the peak years of 2005 and 2006. Let’s be clear – the collapse in this market is not the result of actual or anticipated regulatory intervention. Instead, it is the result of a crisis of confidence on the part of investors who lost hundreds of billions of dollars in the mortgage crisis.

And this is not the only area of lending where volume has declined sharply.

The issuance of non-mortgage asset-backed securities is down by well more than half. And in the last three years, the volume of loans for the construction and development of real estate, or C&D loans, held by FDIC-insured institutions also has fallen by half. Net charge-offs of C&D loans during this period now exceed 10 percent of the loans that were on the books at year-end 2007.

There are some who continue to point to over-zealous regulators as the reason for rising charge-offs and declining balances in C&D portfolios. But the truth is that small and mid-sized institutions held record-high concentrations of these loans when U.S. real estate markets began their historic slide in 2006 and 2007. Regulators have done what they can in the wake of the crisis to facilitate loan workouts that help borrowers and banks while conforming to accepted accounting principles.

But we cannot make the problem go away overnight.

The Industry Needs Regulation to Prevent Excesses

With the benefit of hindsight, I think we all can agree that the time for action would have been before the crisis – when rapid growth in subprime and nontraditional mortgage loans was undermining the foundations of our housing markets, and poorly-managed concentrations in commercial real estate and construction lending were making many small and mid-sized institutions highly vulnerable to a real estate downturn.

As you will recall, regulators did propose and issue guidance on managing commercial real estate concentrations and on nontraditional mortgage lending in 2006, and then extended the mortgage guidance to cover subprime hybrid loans in early 2007. In retrospect, it could have been very helpful if well-run institutions had supported these proposals.

But a review of comment letters sent to regulators by industry trade associations before the crisis shows a consistent pattern of opposition. With regard to commercial real estate concentrations, comments from the various trade associations asserted that:

new guidance was not needed and would only increase regulatory burden,


industry practices had vastly improved since the last real estate downturn, and
high levels of commercial real estate lending were necessary in order for small and midsized institutions to effectively compete against larger institutions.


When we issued proposed guidance on non-traditional mortgages, industry comments found the guidance too proscriptive, saying that it “overstate[d] the risk of these mortgage products,” and that it would stifle innovation and restrict access to credit. Later, when we proposed to extend these guidelines to hybrid adjustable-rate mortgages, which at that time made up about 85 percent of all subprime loans, we received a letter co-signed by nine industry trade associations expressing “strong concerns” and saying that “imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options.”

For our part, I think it is clear in hindsight that while our guidance was a step in the right direction, in the end it was too little, too late. To be sure, most—but not all – of the high risk mortgage lending was originated outside of insured banking institutions. But many large banks funded non-bank originators without appropriate oversight or controls.

And CRE lending did not cause the crisis, though poor management of CRE concentrations made far too many institutions vulnerable to the housing market correction when it finally turned. I think we all missed some opportunities before the crisis to help protect well-run institutions from the high-fliers – both within and outside the banking industry – whose risky lending practices were paving the way for the real estate crisis.

This is where I think the regulators and the industry should stand on common ground, in our determination to prevent a race to the bottom in lending practices and portfolio structures. This will protect the Deposit Insurance Fund and well-managed banks from higher assessment rates in the midst of some future industry downturn. And I do see some recent signs of common purpose in the reforming bank regulation.

In comment letters we received earlier this year, the ABA, for example, has expressed its support for the implementation of the Orderly Liquidation Authority and other measures under Dodd-Frank that will help to restore competitive balance to the industry by ending the doctrine of Too Big To Fail. But when I hear some of the public statements of industry leaders about how stronger capital requirements or risk retention in securitization will stifle lending and douse the recovery, I do worry about the depth of that commitment.

I think there is great pressure to restore earnings to pre-crisis levels.

As we saw in the years leading up to the crisis, there is always the temptation to try to squeeze out a few more basis points in earnings now by watering down certain regulatory provisions that are designed to preserve the long-term stability of our financial system and the deposit insurance fund.

I’ll give one example.

Comments received earlier this year on our proposed change in the assessment base under Dodd-Frank said, in part, “it is best to err on the side of collecting less, not more, from the industry.” This comment was received at a time when the reported balance of the Deposit Insurance Fund was negative 8 billion dollars.

We need to get past rhetoric that implies that, when it comes to financial services, the best regulation is always less regulation.

We need to stand together on the principle that prudential standards are essential to protect the competitive position of responsible players from the excesses of the high-fliers.

And I would very much like to hear from the industry a constructive regulatory agenda that would use the provisions of Dodd-Frank to fix the problems that led to the crisis and help to protect consumers and preserve financial stability in the years ahead.

Public Perceptions of Banks in the Wake of the Crisis

This is not just my vision of how the regulators and the industry need to work together. My reading of recent polling data on how the public views banks also speaks to the need for a different approach from your industry. In April 2010, a Pew Research poll found that just 22 percent of respondents rated banks and other financial institutions as having “a positive effect on the way things are going in this country.”

This was lower than the ratings they gave to Congress, the federal government, big business, labor unions, and the entertainment industry. Even though Americans remain skeptical about government control over the economy, an April 2010 poll conducted by Pew Research found that some 61 percent of respondents supported more financial regulation, virtually unchanged from the spring of 2009.

If you narrow the focus of the questions just to Wall Street firms, the results are even more striking. In a Harris poll conducted in early 2010, some 82 percent of respondents agreed that “recent events have shown that Wall Street should be subject to tougher regulations.” Despite perennial concerns about the government’s role in the economy, only 25 percent of investors polled by Gallup earlier this month agreed that “new financial regulations” were doing a lot to hurt the investment climate.

Nearly three times as many felt that the federal budget deficit and high unemployment were major sources of concern. What really seems to stick in the craw of the public is the extraordinary assistance that was provided to financial companies while millions of Americans were losing their jobs and their homes.

A July 2010 poll conducted by the Pew Research Center and the National Journal shows that some 74 percent of respondents believed that government economic policies since 2008 had helped large banks and financial institutions “a great deal” or “a fair amount.” Only 27 percent thought these policies had helped the middle class, and only 23 percent felt they had helped small business. A Rasmussen poll published earlier this year shows that fully 50 percent of Americans believe the federal government is more concerned with making Wall Street firms profitable than with making sure the U.S. financial system works well for all Americans.



Manage Your Reputational Risk

Bank regulators are never going to be popular or glamorous in the eyes of the public. But the banking industry seems to have an even bigger image problem in the wake of the financial crisis.

What is important for you to recognize is that this type of reputation risk will eventually have implications for your bottom line and the confidence of your investors and customers. In this light, the biggest risk to the long-term success of the banking industry is not today’s difficult economic environment. That will improve over time.

And it is not the introduction of new regulatory rules that will curb the excesses that led to the financial crisis. The vast majority of well-run institutions will benefit from these changes. Instead, the biggest long-term risk to the success of the banking industry would be its failure to support the reforms needed to ensure long-term stability in our financial markets and our economy.

The American people have suffered enormous economic losses as a result of the financial crisis. In the years ahead, they will be asked to make more sacrifices to balance government budgets, repair public infrastructure, and rebuild our economic competitiveness. As this historical era unfolds, public opinion as to the role played by the banking industry seems unlikely to be neutral.

It is far more likely that banks will come to be viewed either as a group that supported the restoration of free enterprise and public responsibility in the American economy, or as a group that mainly looked out for its own short-term interests and resisted reforms that could have restored a sense of confidence and fairness in our financial markets.

Conclusion

Every one of your branches prominently displays the FDIC seal. It is a symbol of public confidence that assures the public that their money is safe if your institution should fail. But that seal also carries with it the expectation of your customers that they will be treated fairly and protected from unsuitable loan products and hidden service charges.

That public trust is sacred, and it is the very foundation of the long-term success of your industry.

If bankers and regulators are to uphold that trust, we must demonstrate the ability to work together and engage in long-term thinking that will protect consumers, preserve financial stability, and lay the foundation for a stronger U.S. economy in the years ahead.

Thank you."