SEC ALLEGES JUPITER GROUP CAPITAL ADVISORS MADE FALSE STATEMENTS TO SEC

The following case is an excerpt from the SEC web site:

“Litigation Release No. 21961 / May 10, 2011
SEC CHARGES INVESTMENT FIRM AND ITS PRESIDENT WITH FALSE STATEMENTS
Firm and President Refused to Comply with SEC Requests to Examine Records
The Securities and Exchange Commission today announced it has obtained a court order against an investment firm purportedly located in Kirkland, Wash., and its president, who lives in Honolulu, for making false statements in a report to the SEC and refusing to allow the Commission’s staff to review the firm’s books and records.
U.S. District Court Judge Leslie E. Kobayashi issued a temporary restraining order on May 9 requiring the firm to produce the firm’s books and records for examination and providing additional equitable relief.
The SEC alleges that Jupiter Group Capital Advisors LLC and Rick Cho falsely reported that the advisory firm managed $153 million in 38 investor accounts. The false statements were made on Jupiter Group’s Form ADV filing – the public form used by investment advisers to register with the SEC or state securities authorities. When SEC staff sought to conduct an examination of Jupiter Group after the filing was made, Cho initially failed to respond and then later claimed that the filing referred to estimated future assets and stated that Jupiter Group has no client accounts.
According to the SEC’s complaint, Cho refused to provide any evidence for his claim that the assets identified on Jupiter Group’s March 2010 Form ADV filing with the SEC belong to an unrelated business venture. He also failed to explain why the document originally filed in October 2009 was amended to show an increased number of clients and assets under management, when in reality there weren’t any client accounts. The SEC alleges that Jupiter Group did not manage $25 million or more of client assets for any reporting period, and therefore was not eligible for SEC registration. In addition, from December 2010 to the present, Jupiter Group and Cho have refused to submit to an examination.
The SEC alleges that Jupiter Group violated Sections 203A, 204, and 207 of the Investment Advisers Act, and that Cho violated Section 207 of the Advisers Act and aided and abetted Jupiter Group’s violations of Sections 203A and 204 of the Advisers Act. The parties stipulated to the terms of the May 9 temporary restraining order prohibiting Jupiter Group from making false statements in Commission filings, and orders requiring Jupiter Group to submit to an examination of its books and records, requiring withdrawal of Jupiter Group’s Form ADV, prohibiting Jupiter Group and Cho from destroying documents, requiring accountings, and granting expedited discovery. The Commission also requested a preliminary injunction, permanent injunction, and civil penalties. The court set a hearing regarding the preliminary injunction for May 31, 2011 at 9:45 a.m.”

JUDGE ORDERS COMMODITY COMPANY MANAGEMENT TO PAY MILLIONS

Investing in foreign currencies might be a bit of a gamble especially if the people you are placing your money with are dishonest. The old adage “It’s all Greek to me,” might be something foreign currency investors should bear in mind. The following is an excerpt from the CFTC website: “Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that the Honorable Judge John Antoon II of the U.S. District Court for the Middle District of Florida ordered Capital Blu Management, LLC (Capital Blu) of Melbourne, Fla., Donovan Davis Jr. of Palm Bay, Fla., Damien Bromfield of Ocoee, Fla., Blayne Davis of Naples, Fla., and DD International Holdings, LLC (DDIH) of Palm Bay, Fla., jointly and severally to pay restitution of $2,463,592.12. Judge Antoon ordered Bromfield and Blayne Davis each to pay a civil monetary penalty of $4,927,184.24 and ordered Donovan Davis Jr. and DDIH jointly and severally to pay a civil monetary penalty of the same amount. The federal order, entered on June 9, 2011, also permanently bars all defendants from engaging in any commodity-related activity, including trading and registering with the CFTC The order follows a verdict returned on February 3, 2011 against Donovan Davis Jr. and Bromfield by a jury in Orlando, Fla., that heard testimony and arguments for almost three weeks. In 2009, the CFTC charged the defendants with operating a fraudulent commodity pool that solicited approximately $17 million from about 100 investors purportedly to invest in off-exchange foreign currency futures (see CFTC Press Release 5643-09, April 7, 2009). According to the evidence adduced at trial, Donovan Davis Jr. (through his wholly owned company, DDIH) and Bromfield were two of the three principals of Capital Blu, a commodity pool operator that managed a foreign currency trading fund called the CBM FX Fund, LP. Donovan Davis Jr. was Capital Blu’s Director of Corporate Affairs and Bromfield was its Director of Operations. The third principal of Capital Blu, Blayne Davis, was the Director of Trading. Because Blayne Davis, Capital Blu and DDIH did not respond to the CFTC’s complaint, the court entered default judgments against them. According to the evidence presented at trial, Capital Blu began soliciting participants for the CBM FX Fund in August 2007 and ultimately obtained contributions from participants totaling approximately $17 million. In January 2008, the CBM FX Fund sustained losses of about $1.8 million. Instead of reporting a loss for the month to the participants, Donovan Davis Jr. instructed Capital Blu’s Controller to report a 1.6 percent gain for January 2008. Thereafter, Bromfield, Donovan Davis Jr. and Blayne Davis developed and implemented a plan to put the money that had been lost back into the CBM FX Fund, which included raising additional funds from new participants, trading aggressively and falsifying statements to participants. At roughly this same time, Capital Blu’s expenses began to exceed its revenue. At the direction of its principals, Capital Blu began to pay operating expense with money from the CBM FX Fund. These expenses included the purchase and operation of a jet. After some short-term trading success from April to July 2008, in August 2008 the CBM FX Fund sustained millions of dollars in losses. Instead of reporting these losses, Bromfield and Donovan Davis Jr. again provided participants with falsified statements and reported a 0.16 percent profit for August 2008. Bromfield and Donovan Davis Jr. also sent participants a notice that their funds would be locked up for four months. All the while, Bromfield, Donovan Davis Jr. and Blayne Davis continued to use CBM FX Fund money to pay operating expenses, including their own salaries of $15,000 per month each. Capital Blu’s operations were shut down after the National Futures Association (NFA) conducted a surprise audit in September 2008 after receiving information from several sources, including an employee of Capital Blu. During the trial and a subsequent damages hearing conducted on March 2, 2011 before Judge Antoon, the CFTC established that, from January 2008 through September 2008, the CBM FX Fund sustained trading losses of approximately $5.4 million and defendants misappropriated approximately $2.46 million of participants’ funds. Judge Antoon ordered the defendants to pay the amount misappropriated as restitution and ordered a civil monetary penalty equal to twice the amount that the defendants misappropriated. The CFTC thanks the NFA for its assistance.”

FORMER GALLEON MANAGER SETTLES INSIDER TRADING CHARGES

The case below is an excerpt from the SEC web site:
June 17, 2011
The Securities and Exchange Commission announced today that, on May 31, 2011, The Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York entered a judgment against Adam Smith in SEC v. Adam Smith, 11-CV-0535, an insider trading case the SEC filed on January 26, 2011.
The Complaint alleged that Smith, a former portfolio manager at New York-based hedge fund investment adviser Galleon Management, LP, traded in the securities of ATI Technologies Inc., based on material nonpublic information concerning the acquisition of ATI by Advanced Micro Devices Inc. that was announced in July 2006. Prior to the announcement, Smith learned of the acquisition from an investment banker, who had received such information while serving as an employee of an investment bank that was advising one of the parties to the acquisition.
To settle the SEC’s charges, Smith consented to the entry of a judgment that: (i) permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders him to pay disgorgement and prejudgment interest, for a total of $149,706.25. The judgment further provides that, based on his agreement to cooperate with the Commission, the Court is not ordering Smith to pay a civil penalty. In a related SEC administrative proceeding, Smith consented to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. Smith previously pleaded guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case, United States v. Adam Smith, 1:11-cr-00079 (S.D.N.Y.), and is awaiting sentencing.”

COURT ORDERS FOUNDING PARTNERS CAPITAL EXEC. TO PAY 31 MILLION FOR FRAUD

The following is an excerpt from the SEC web site:
“The Commission announced that on June 13, 2011, the United States District Court for the Middle District of Florida, upon Motion of the Commission, has issued an Order and Opinion Setting Disgorgement and Prejudgment Interest Amounts and Imposing a Civil Penalty against Defendant William L. Gunlicks. A supplemental final judgment was issued on June 15, 2011 ordering Gunlicks to pay disgorgement in the amount of $28,635,966.55 representing the ill-gotten gains received, pre-judgment interest in the amount of $2,193,842.31, and a civil penalty in the amount of $1,000,000.00.
The Complaint filed by the Commission against Gunlicks and Founding Partners Capital Management, Co. on April 20, 2009 alleged violation of the antifraud provisions of the federal securities laws. On March 3, 2010 an Order of Permanent Injunction by Consent was entered against Gunlicks, enjoining him from violating Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1), 206(2), 206(4) and Rule 206(4)-8 of the Investment Advisers Act of 1940. The Court will retain jurisdiction of this matter for the purpose of implementing the payment terms of the judgment.”

FORMER BOARD CHAIRMAN OF FIRST CASH FINANCIAL SERVICES CHARGED WITH INSIDER TRADING

Filed June 10, 2011

Securities insider trading is possibly the most heinous crime someone can commit against honest investors. Many would argue that Ponzi schemes are worse for the market. However, Ponzi crimes are often perpetrated upon people who do not have the technical skills to examine an investment using both mathematics along with the prerequisite skill do be able to look at a situation and realize something must be wrong in order to generate large rates of returns. Insider trading offers no clues at all to even the most astute investor before money is committed and lost since only the insider has the necessary information to make the right call and when that insider makes that right call then all the most technically oriented and sophisticated investors may well pay the price and then declare openly that “the U.S. securities market is rigged”. Thus, not only are the trading markets seen as being compromised and fixed but, the entire capitalist system is then seen as corrupt and without any redemptive remedies.

In the following case, the SEC has alleged that the former chairman of the board of First Cash Financial Services, Inc. engaged in insider trading. Below is an excerpt from the SEC website:


The Securities and Exchange Commission today charged Phillip E. (Rick) Powell, former chairman of the board of First Cash Financial Services, Inc. (“First Cash”), with illegal insider trading. The SEC’s Complaint, filed in United States District Court for the Western District of Texas (Waco Division), alleges that in early March 2008 Powell, while he was serving as the chairman of the board of First Cash, learned material, non-public information about the commencement of a company share buyback.
According to the Complaint, on November 6, 2007, the company had announced that it had authorized a buyback of up to 1 million First Cash shares. That announcement did not disclose when the authority would be exercised or even whether management would actually exercise the authority. The SEC alleges that Powell, through his position as chairman of First Cash’s board of directors, later learned, among other things, that First Cash had decided to actually exercise its repurchase authority and was set to begin the repurchase.
According to the Complaint, Powell, armed with this material, non-public information, called his broker on March 11, the same day that First Cash entered into an agreement with JP Morgan Securities to facilitate the repurchase and the day before First Cash began repurchasing its shares. He instructed the broker to buy 100,000 First Cash shares. According to the SEC’s Complaint, Powell insisted that the purchase needed to be made that day.
As alleged in the Complaint, Powell’s pre-buyback purchases caused First Cash to overpay $36,000 for its own securities between March 12 and March 14, 2008. In addition, the SEC alleges that, as a result of the share price increase following disclosure that the buyback had commenced, Powell profited in the amount of $124,000 from his illegal purchase.
Powell is alleged to have repeatedly tried to hide his trading from First Cash and its shareholders. For example, the Complaint alleges that he misled another board member when he was warned against purchasing in advance of the buyback, and later he misled First Cash’s chief executive officer when he asked about the trade. In addition, after his broker warned him that Commission rules required him to file a Form 4 disclosing his trade, he refused to do so and delayed filing his Form 4 until April 30, 2009, over thirteen months after it was required by Commission rules and only after he knew the Commission was investigating his trades.
The SEC’s complaint alleges that, as a result of his conduct, Powell violated Sections 10(b) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 16a-3 thereunder. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, a monetary penalty, and an order barring Powell from serving as an officer or director of a public company.
The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Northern District of Texas and the Federal Bureau of Investigation.”

SEC INSTITUTES STOP ORDER PROCEEDINGS AGAINST TWO COMPANIES

The SEC has an important role in making sure that traded securities are issued by companies that have made correct statements about themselves. Incorrect statements maybe misleading to the public and hence, cause people to invest in a business without the relevant facts. The following is an excerpt from the SEC website:

Washington, D.C., June 13, 2011 – The Securities and Exchange Commission today announced that it has instituted proceedings to determine whether stop orders should be issued suspending the effectiveness of registration statements filed by two companies – China Intelligent Lighting and Electronics Inc. (CIL) and China Century Dragon Media Inc. (CDM).
The SEC instituted the stop order proceedings against each company after the companies’ independent auditor resigned and withdrew its audit opinions on the financial statements included in the companies’ registration statements.

“The Division of Enforcement is seeking stop orders to protect investors by preventing any further sales under materially misleading and deficient offering documents,” said Kara Brockmeyer, Assistant Director of the SEC’s Division of Enforcement and co-head of the Cross Border Working Group. The Cross Border Working Group has representatives from each of the SEC’s major divisions and offices, and focuses on U.S. companies with substantial foreign operations.
The purpose of a stop order is to prevent a company or its selling shareholders from selling their privately-held shares to the public under a registration statement that is materially misleading or deficient. If a stop order is issued, no new shares can enter the market pursuant to that registration statement until the company has corrected the deficiencies or misleading information in the prospectus.
In proceedings instituted against CIL on June 10, the SEC’s Division of Enforcement alleges that CIL’s independent auditor resigned on March 24, 2011, due to accounting fraud at the company involving forged accounting records and bank statements. The auditor also notified the company that it could no longer support its audit opinions relating to the company’s previously-issued financial statements – which were included in registration statements filed by CIL in June and December 2010 – and that the financial statements contained in the registration statements cannot be relied upon. The Division of Enforcement alleges that, as a result, CIL’s registration statements are materially misleading and deficient.
In separate proceedings instituted against CDM on June 13, the SEC’s Division of Enforcement alleges that CDM’s independent auditor resigned on March 22, 2011, due to “discrepancies noted on customer confirmations and the auditor’s inability to directly verify the Company’s bank records,” which could indicate a material error in the company’s previously-issued financial statements. The auditor also notified the company that it could no longer support its audit opinions relating to the company’s previously-issued financial statements, which were included in a registration statement filed by CDM in February 2011, and that those financial statements cannot be relied upon. The Division of Enforcement alleges that, as a result, CDM’s registration statement is materially misleading and deficient.
The Commission instituted the proceedings against CIL and CDM, respectively, pursuant to Section 8(d) of the Securities Act of 1933 to determine whether the allegations of the Division of Enforcement are true, to afford each company an opportunity to establish any defenses to these allegations, and to determine whether in each case a stop order should be issued suspending the effectiveness of the registration statement or statements.
Trading in the companies’ stock on the NYSE Amex LLC has been halted since March 2011, pending the outcome of Amex’s delisting proceedings against each company for failure to meet Amex’s listings requirements.”