SEC CHARGES MAN AND FIRMS WITH MISAPPROPRIATING $8.7 MILLION DOLLARS

The following is an excerpt from the SEC website:

July 12, 2011
The Securities and Exchange Commission today charged Sam Otto Folin (Folin), his Philadelphia-based registered investment adviser, Benchmark Asset Managers LLC (Benchmark) and its parent company, Harvest Managers LLC (Harvest) with misappropriating approximately $8.7 million from advisory clients, friends and family through material misrepresentations and omissions.
According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, from approximately 2002 through October 2010, Folin, Benchmark and Harvest offered and sold securities in Harvest, Benchmark, and Safe Haven Portfolios LLC (Safe Haven), a pooled investment vehicle, promising investors that their funds would be invested in public and private companies with “socially responsible” goals and purposes. Instead, the complaint alleges that Folin, Benchmark and Harvest diverted a portion of the invested funds to pay previous investors as well as to sustain Benchmark’s and Harvest’s expenses which included paying Folin’s salary.
More specifically, the complaint alleges that Benchmark and Harvest issued various “notes” to advisory clients, friends and family promising guaranteed above-market interest rates. Folin, Benchmark and Harvest assured investors that such notes were conservative and safe. According to the complaint, Folin, Benchmark and Harvest failed to disclose the true uses of those funds and continually misrepresented the value of the notes on quarterly statements.
In addition, the complaint alleges that in August 2004 Folin and Benchmark formed Safe Haven which purported to offer investments in several different portfolios, including the Private Fixed Income Portfolio, the Hedged Equity Portfolio, the Green Real Estate Portfolio and the Sustainable Enhanced Cash Portfolio. The complaint also alleges that Folin and Benchmark caused Benchmark’s advisory clients to invest in Safe Haven and that Folin and Benchmark also acted as investment advisers to Safe Haven. From 2006 through 2009, the complaint alleges that Folin and Benchmark caused Safe Haven to pay over $1.7 million to Benchmark and Harvest under the guise of “development costs.” The complaint alleges that these “development costs” did not relate to any actual expenses incurred by Harvest or Benchmark in connection with the formation or offering of Safe Haven securities. Rather, the complaint alleges, the payments coincided with Harvest’s and Benchmark’s need for funds to pay previous investors, expenses and Folin’s salary. Moreover, the complaint alleges that Folin and Benchmark improperly amortized the development costs rather than expensing them as incurred in accordance with Generally Accepted Accounting Principles (GAAP) thereby causing the reported net asset values of the Safe Haven portfolio to be overstated on statements provided to advisory clients and investors.
The complaint also alleges that Folin and Benchmark caused Safe Haven to make loans to Harvest and Benchmark in excess of $3.9 million. The complaint further alleges that Folin and Benchmark did not disclose these loans. Moreover, the complaint alleges that these loans violated several provisions of Safe Haven’s investment criteria including, among other things, that: (1) they were not supported by adequate collateral, (2) they violated the 5% net exposure requirement, and (3) they caused the portfolios to violate the “no leverage” provision. In addition, the complaint alleges that the financial statements provided by Folin and Benchmark to investors did not comply with GAAP. More specifically, the complaint alleges that the financial statements improperly valued the Safe Haven loans to Harvest and Benchmark at face value, rather than fair value or net realizable value. Finally, the complaint alleges that Folin and Benchmark failed to disclose to their advisory clients Benchmark’s dire financial situation and inability to sustain itself but for the monies it received under the guise of “development costs” and the loans from Safe Haven.
Without admitting or denying the allegations in the SEC’s complaint, Folin and Benchmark have consented to the entry of a final judgment enjoining them from future violations of Sections 17 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Harvest has consented to the entry of a final judgment enjoining it from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Folin, Benchmark and Harvest have also consented to pay, jointly and severally, disgorgement of $8,706,620 plus prejudgment interest of $1,454,177. In addition, Folin has consented to pay a civil penalty of $150,000 and Harvest and Benchmark have consented to pay civil penalties of $750,000 each. The settlements are subject to court approval.
Without admitting or denying the Commission's findings, Folin also consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which bars him from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor, or nationally recognized statistical ratings organization based upon the entry of the final judgment. Similarly, without admitting or denying the Commission’s findings, Benchmark consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which revokes its investment adviser registration based upon the entry of the final judgment.”

FINAL JUDGMENT AGAINST MAN WHO SOLD UNREGISTERED SECURITIES TO ELDERLY

JULY 15, 2011
“The Securities and Exchange Commission announced that on July 12, 2011, the Honorable Leonard D. Wexler of the United States District Court for the Eastern District of New York entered a final judgment on consent against Defendant Glenn R. Harris, a former registered representative of Advanced Planning Securities, Inc., a former registered broker-dealer. The judgment (i) permanently enjoins Harris from violating Section 5 of the Securities Act of 1933 and (ii) finds Harris liable for disgorgement and prejudgment interest of $673,989, but waives payment of that amount and imposes no civil penalty based on Harris’s bankruptcy petition in the United States Bankruptcy Court for the Northern District of California, sworn bankruptcy schedules, and other documents. Harris consented to the entry of the judgment without admitting or denying any of the allegations of the Commission’s complaint.
The Commission’s complaint, filed on October 22, 2009, alleges that from 2004 through 2006, Harris violated the registration provisions of the securities laws by selling securities for which there was no registration statement in effect. Among other things, the complaint alleges that Harris sold securities to elderly, unsophisticated investors who could not have been expected to understand the risks associated with the investments.
In addition to the relief described above, Harris consented to the entry of an order in a separate Commission administrative proceeding barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating agency, and from participating in any offering of a penny stock, with the right to apply for reentry after eighteen months.”

ETHIOPIA'S DIRECTOR OFFICE OF INTERNATIONAL AFFAIRS SPEAKS

The following is an excerpt from the SEC website:

Risk Taking -- Banks & Markets
by
Ethiopis Tafara
Director
Office of International Affairs
U.S. Securities and Exchange Commission
G20 NEW FINANCIAL LANDSCAPE WORKSHOP
Measures to Promote Competition, Efficiency and Innovation
7 July 2011
Paris, France
Thank you, Malcolm (Edey) for that kind introduction.

First, permit me to give the SEC's standard disclaimer- what I say represents my own views and not necessarily the views of the Commission or other members of the Commission staff.

The topic for this panel is measures to promote competition, efficiency and innovation. I'd like to focus my remarks on innovation, because I think it is the most likely of these three to suffer from our current regulatory trends. More particularly, I'd like to focus on real as opposed to financial innovation.

What are the prerequisites of real innovation? First and foremost, it requires the presence of entrepreneurs, who can bring together technology and resources in new ways, to meet evolving needs and wants, in the form of a viable business model. This, in turn, requires a rare combination of technical savvy, extraordinary boldness and risk taking. After all, it is something new that is being generated here. There are no studies to show you how to do it. There is no metric that can tell you these are risks worth taking. No one has done it before this way. That is the point. It is innovation.

Of all these ingredients to innovation, perhaps the most important is boldness.

The philosopher of science, Karl Popper, argued that there was a dynamic "logic" to scientific discovery, which entailed an interactive series of bold conjectures, criticism, response to criticism and further conjecturing. The "logic" of innovation is much the same. Entrepreneurs put forth the bold conjectures-in the form of their innovative vision. The market, of course, provides the criticism; the product or service is purchased only if it effectively fulfills needs or wants, and the enterprise is only profitable if it delivers this product or service with efficiency. If the market rejects the entrepreneur's vision, she can adjust and perfect it in light of the market's "criticism". Alternatively, if the entrepreneur fails to adjust her model, her enterprise will fail and other businesses will fill the void. The possibility-and even the likelihood-of failure is an intrinsic part of the process. Just as science evolves through conjectures and refutations, real innovation is driven by an interactive dance of bold ideas and the market's tough, pointed criticism.

And innovation, whether in the form of green or biotechnology, is critical to our future prosperity. As you may have noticed, I have failed to mention one of the key ingredients to innovation, and that is, of course, finance. In the wake of the recent financial crisis, our regulatory reform efforts have-quite properly-focused upon the reduction of systemic risk. Among the regulatory challenges here, I believe, is the grave danger that our efforts to reduce systemic risk may result in a reduction of the kind of risk taking that drives real innovation. This could result in substantially reduced economic growth-foregone economic growth that might, in fact, serve to address current economic straits.

Our policy challenge is the following: how do we ensure that finance continues to find its way to the kind of productive risk taking that I have described, while at the same time we effectively address the instabilities identified in the recent financial crisis? More specifically, we must ask ourselves: what is the right blend of regulatory tools to meet this challenge?

Traditionally, banking regulators have focused on prudential regulation, while securities regulators have focused on disclosure, transparency and enforcement. Where should we extend the traditional tools of the banking regulator and where should we extend those of the securities regulator?

There is little denying that the recent financial crisis, while involving all types of market participants, was essentially a banking crisis. Although unusual perhaps in the number of non-banks that undertook bank-like activities and certainly unique in that securitized financial products were the instigators, the pattern of the crisis differed from other banking crises only in its depth. Financial firms- closely linked to each other through leverage and counterparty arrangements-exposed themselves to too much risk. And when that risk became apparent, there was a "run" on these financial institutions.

As the heart of the problem is the maturity mismatch that characterizes traditional banking. The dangers of a maturity mismatch were amplified, however, by the potential for increased volatility on the asset side of the balance sheet attributable to the "embedded leverage" inherent in certain securitized products. Potential volatility was further increased through derivative products.

Now, clearly, it is important that we understand why these widely varying financial firms were acting like traditional banks. Moreover, I think most of us would agree that when systemically risky financial firms take on the role of banks, they should face the same kind of prudential regulation as do banks. But we must pause here and ask ourselves: if all major sources of financing today are to be treated as banks - with more or less one-size-fits-all capital requirements and conservative risk measurement mandates - where is the financing to come from for the next wave of high-risk/high-payoff innovations? Who will finance the next great development in transportation, or medicine, or artificial intelligence?

If we look back at the many fundamental economic innovations of the 20th century-Aircraft, antibiotics, the Internet, the transistor and semiconductor, the mass produced automobile and the plastics that Mr. McGuire told us to invest in the movie, "The Graduate"-we see relatively little bank financing, at least not at the inception of each innovation's lifecycle. This is unsurprising because, as we know, banks are the archetype of systemically risky financial entities. Consequently, banking regulation, when it is done properly, imposes a certain degree of financial conservatism.

But we must ask: as we reform our markets in light of the recent crisis, where will the financing come from for the truly risky enterprises of the 21st century? This is where the traditional tools of the securities regulator come into play. While banking regulation is designed to control and, to a certain extent, suppress risk taking, securities regulation is, in stark contrast, designed to facilitate it. In the financing of economic pursuits that entail substantial risk, the traditional tools of securities regulators-that is, disclosure, transparency and rigorous enforcement efforts to police fraud and abuse-have a substantial comparative advantage over banking regulatory tools. As mentioned above, failure is an essential part of the innovative process. But that's precisely what the banks should try to avoid.

In our collective efforts to reform our markets in light of the systemic crisis, the danger is that the tools of the banking regulator come to dominate the regulation of capital markets and thereby unintentionally suppress needed real innovation. As regulators, we must look at what capital needs to do to support economic growth. We must be careful to recognize why different avenues for financing exist. We need to recognize why securities regulation has historically differed from banking regulation. As legendary venture capitalist William Draper recently put it in an interview: "Facebook couldn't go to a bank and get a commercial loan to start up a company."

There is much at stake here. If we want to encourage innovation and realize its benefits, financial regulation has to make a space for risk-taking. Only by recognizing the inherent functional differences between capital markets and banking can we succeed in both addressing systemic risk while at the same time spurring economic growth through innovation. Those economies that recognize these differences, and which regulate and supervise accordingly, will grow and prosper and become the leaders in the 21st Century.

Thank you.

U.S. BODY ARMOR COMPANY ARMOR HOLDINGS SETTLES SEC CHARGES IN FOREIGN CORRUPT PRACTICES CASE

The following is an excerpt from the SEC website:

“Washington, D.C., July 13, 2011 – The Securities and Exchange Commission charged Armor Holdings, Inc. with violating the Foreign Corrupt Practices Act (FCPA) by participating in a bribery scheme from 2001 through 2006 to obtain contracts to supply body armor for use in United Nations (U.N.) peacekeeping missions. The SEC also charged Armor Holdings, a Florida-based manufacturer of military and law enforcement safety equipment, with failing to properly account for more than $4 million in commissions from 2001 through 2007 in violation of the books and records and internal controls provisions of the federal securities laws.

Armor Holdings agreed to settle the SEC’s charges by paying nearly $5.7 million in disgorgement, prejudgment interest, and penalties. Armor Holdings also agreed to pay a $10.29 million fine to settle a parallel criminal investigation announced by the U.S. Department of Justice today. Since 2010, the SEC has filed 32 FCPA cases, including the case against Armor Holdings, and obtained more than $600 million in penalties, disgorgement and interest.
“Illicit payments to U.N. officials are no less reprehensible than bribes to foreign government officials,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The important process of selecting body armor for peace keepers should not be affected by which company pays the best bribes.”
Gerald W. Hodgkins, Associate Director of the SEC’s Division of Enforcement, added, “Armor failed to maintain adequate internal controls to prevent its subsidiary from making illegal payments to win U.N. supply contracts. Just as troubling, Armor improperly accounted for sales commissions for several years even after being warned that the accounting treatment was wrong.”
The SEC’s complaint alleges that certain agents of Armor Holdings caused its U.K. subsidiary to wire at least 92 payments, totaling approximately $222,750 to a third-party intermediary, with the understanding that part of these payments would be offered to a U.N. official who could help steer business to Armor Holdings’ U.K. subsidiary. The complaint alleges that agents of Armor Holdings caused its U.K. subsidiary to enter into a sham consulting agreement with the intermediary for purportedly providing legitimate services in connection with the sale of goods to the U.N. The complaint alleges that, through this bribery scheme, Armor Holdings derived gross revenues of $7,121,237, and net profits of $1,552,306.
The SEC alleges that another Armor Holdings subsidiary disguised in its books and records commissions paid to intermediaries who brokered the sale of goods to foreign governments. Even after being warned by internal and external accountants that this practice violated U.S. Generally Accepted Accounting Principles, Armor Holdings’ subsidiary continued the improper accounting practice. As a result, approximately $4 million in commissions was not properly disclosed in the books and records of the company.
On July 31, 2007, after the conduct alleged in the SEC’s complaint had occurred, Armor Holdings was acquired by BAE Systems, Inc., an indirect wholly owned U.S. subsidiary of Britain’s BAE Systems PLC. Accordingly, Armor Holdings is no longer an issuer of securities.
The SEC’s complaint charges Armor Holdings with violating Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the allegations, Armor Holdings consented to the entry of a permanent injunction against further violations and agreed to pay $1,552,306 in disgorgement, $458,438 in prejudgment interest, and a civil money penalty of $3,680,000. Armor Holdings also agreed to comply with certain undertakings regarding its FCPA compliance program. The settlement is subject to court approval. Armor Holdings conducted a thorough investigation to determine the scope of the improper payments and cooperated with the SEC’s inquiry.
Richard J. Kutchey and Gregory G. Faragasso conducted the SEC’s investigation. The Commission acknowledges the assistance of the Fraud Section of DOJ’s Criminal Division and the Federal Bureau of Investigation. The SEC’s investigation is continuing.”

FEDERAL COURT ORDERS CONVICTED COMMODITY POOL FRAUDSTER TO PAY $2.1 MILLION PENALTY

A lot of millionaires make their money the old fashion way: they steal it. The following is an excerpt from the CFTC website:

"July 13, 2011

Federal Court in Illinois Orders Joseph A. Dawson to Pay $2.1 Million Penalty for Commodity Pool Fraud and Misappropriation
Dawson sentenced to 54 months of imprisonment and ordered to pay $3.3 million in restitution in criminal proceeding for the same scheme.
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that on July 5, 2011, Judge Virginia M. Kendall of the U.S. District Court for the Northern District of Illinois entered a supplemental consent order imposing a $2.1 million civil monetary penalty on Joseph A. Dawson of Fox Lake, Ill. The CFTC charged Dawson and his company, Dawson Trading LLC (Dawson Trading) of McHenry, Ill., with fraudulent solicitation and misappropriation of customer funds in a commodity pool scheme (see CFTC Press Release 5860-10, July 26, 2010).

Previously, on April 26, 2011, the court entered a consent order of permanent injunction against Dawson finding that he violated the anti-fraud provisions of the Commodity Exchange Act (CEA), as charged. The consent order found that, between at least February 2005 and December 2009, Dawson and his company misappropriated approximately $2.1 million of Dawson Trading participant funds. The order found that Dawson used the misappropriated funds for personal purchases and expenses, including a down payment on a personal residence, mortgage payments, an in-ground swimming pool, landscaping, furniture, restaurant bills, movie tickets, and car payments. The order permanently barred Dawson from any commodity-related activity, including trading and registering or seeking exemption from CFTC registration, and from violating the CEA’s anti-fraud provisions. The order left the issues of any restitution and a civil monetary penalty to be resolved later.

On July 11, 2011, Judge Kendall entered a default judgment and permanent injunction order against Dawson Trading, finding that the company violated the same CEA anti-fraud provisions as Dawson, was liable for Dawson’s violations as his principal, failed to register as a commodity pool operator as required by CFTC regulations, and unlawfully permitted Dawson to act as its agent without being lawfully registered as an associated person of the company. The order requires Dawson Trading to pay a $2.1 million civil monetary penalty and permanently prohibits it from engaging in any commodity-related activity, including trading and registering with the CFTC.

In a related criminal proceeding in March 2011, Dawson was sentenced to 54 months imprisonment and required to pay $3.3 million in restitution to pool participants (U.S. v. Dawson, 09-cr-1037-1 (N.D. Ill.)).

The CFTC thanks the U.S. Attorney’s Office for the Northern District of Illinois, the Federal Bureau of Investigation, and the Securities and Exchange Commission for their assistance.

CFTC Division of Enforcement staff responsible for this action are Stephanie Reinhart, William Janulis, Ken Hampton, Scott Williamson, Rosemary Hollinger, and Richard Wagner."

After reading the above story I'll be wondering about how every neighbor made the money they used to put in their new pool.

THE CURRENCY TRADER WHO WASN’T

The following is an excerpt from the SEC website:

“Washington, D.C., July 15, 2011 – The Securities and Exchange Commission filed fraud charges Thursday against the CEO of a purported foreign currency trading firm, alleging he scammed hundreds of investors with false promises of high, fixed-rate returns while secretly using their money to fund his start-up alternative newspaper.

First Capital Savings & Loan Ltd. Chief Executive Jeffery A. Lowrance, who had fled to Peru and was arrested there earlier this year, was arraigned today on criminal fraud charges in a 2010 indictment filed by the United States Attorney’s Office for the Northern District of Illinois. In addition, the Commodity Futures Trading Commission filed fraud charges Thursday against Lowrance and First Capital.
The SEC alleges that Lowrance raised approximately $21 million from investors in at least 26 states, including California, Oregon, Illinois and Utah, by promising huge profits from a specialized foreign currency trading program. First Capital actually conducted little foreign currency trading, lost money on the little trading that it conducted, and never engaged in any profitable business operations. Lowrance targeted certain investors by purporting to share their Christian values and their limited-government political views. He solicited investors through, among other things, ads in his start-up newspaper USA Tomorrow, which he distributed at a September 2, 2008 political rally in Minneapolis, Minnesota.
“Lowrance ironically portrayed himself as a crusader against corruption in government, while he ripped off investors who put their trust in him,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office.
According to the SEC’s complaint, filed in federal district court in San Jose, California, Lowrance and First Capital promised investors a “predictable monthly income,” with monthly returns up to 7.15 percent through foreign currency trading. Some investors were told their investments were guaranteed and were given bogus letters of credit. First Capital also published a spreadsheet purporting to show its multi-year history of profitable trades, but the trades were fictitious, the SEC alleged. Instead of engaging in foreign currency trading as claimed, the SEC said Lowrance and First Capital secretly diverted investor funds to pay fake returns to earlier investors, to pay Lowrance (despite his failure to earn a profit for the investors), and to fund his newspaper.
Lowrance’s scheme began to unravel in June 2008 and Lowrance and First Capital had lost all of the investors’ money by September 2008. Nevertheless, Lowrance solicited at least an additional $1 million from at least 36 investors between June 2008 and February 2009 by continuing to tout First Capital’s fictitious high returns, the SEC alleged.
The SEC’s lawsuit seeks court orders prohibiting the defendants from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.”