SEC ANNOUNCES ASSET FREEZE AGAINST MONEY MANAGER AND HEDGE FUND ADVISORY FIRM

The following excerpt is from the SEC website: Washington, D.C., August 31, 2011 – The Securities and Exchange Commission today announced an asset freeze against a Chicago-area money manager and his hedge fund advisory firm that the SEC charged with lying to prospective investors in their startup quantitative hedge fund. A federal court today entered a preliminary injunction order in the case, which was unsealed earlier this week. The SEC alleges that Belal K. Faruki of Aurora, Ill., and his advisory firm Neural Markets LLC solicited highly sophisticated individuals to invest in the "Evolution Quantitative 1X Fund," a hedge fund they managed that supposedly used a proprietary algorithm to carry out an arbitrage strategy involving trading in liquid exchange-traded funds (ETFs). Faruki and Neural Markets falsely represented the existence of investor capital and that trading was generating profits when, in fact, losses were being incurred. They defrauded at least one investor out of $1 million before confessing the losses, and were soliciting other wealthy investors before the SEC obtained a court order to halt the scheme. "Faruki and Neural Markets lied throughout this elaborate scheme in order to attract capital from sophisticated investors," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Even sophisticated institutional investors should be wary of unscrupulous hedge fund managers who cloak their misrepresentations in lofty pitches about a complex investment strategy." According to the SEC's complaint filed in federal court in Chicago, Faruki and Neural Markets told investors that their hedge fund began trading in 2009. From January 2010 until at least October 2010, Faruki and Neural Markets distorted the hedge fund's performance track record, misrepresented that wealthy investors had invested $5 million in the fund, and misstated that it had engaged a top-tier auditor to assist in preparing the fund's quarterly and annual financial statements. Faruki also falsely told investors that he had invested his own money in the hedge fund so that his interests were aligned with the other supposed investors. According to the SEC's complaint, Faruki boasted that he was making his investors rich at a time when he actually had no investors. He falsely stated that the names of other wealthy investors had to remain confidential because they did not want their identities revealed. The lone investor in the hedge fund has unsuccessfully attempted to redeem his investment and recover the remaining balance of his funds from Faruki and Neural Markets, who in turn threatened that they would use the investor's funds to defend themselves if help was sought from regulators. The SEC filed its complaint under seal on Aug. 10, 2011, and that same day the court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze. The court lifted the seal order on August 29, and the preliminary injunction order entered today with the defendants' consent continues the terms of the temporary restraining order until the final resolution of the case.”

SEC ANNOUNCES FINAL JUDGEMENTS AGAINST ALLEGED FRAUDULENT STOCK OFFERING

"The Securities and Exchange Commission announced that on August 29, 2011, the United States District Court for the Southern District of Florida entered final judgments of permanent injunction against Pharma Holdings, Inc. ("Pharma Holdings"), Edward Klapp IV ("Klapp IV") and Edward Klapp, Jr. ("Klapp Jr."). The judgment against Klapp IV also imposed a disgorgement of $1,180,682.80, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $65,407.39; and a civil penalty in the amount of $130,000. The judgment against Klapp Jr. also imposed a disgorgement of $504,696.86, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $27,959.17; and a civil penalty in the amount of $130,000. In addition, both Klapp IV and Klapp Jr. are prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Securities and Exchange Act, 15 U.S.C. § 78, or that is required to file reports pursuant to Section 15(d) of the Exchange Act , 15 U.S.C. § 78o(d). The SEC's complaint alleged that from 2005 through September 2009, Pharma Holdings, purportedly in the pharmaceutical supply business, and the Klapps raised approximately $5 million from at least 80 European investors, primarily residing in the United Kingdom, through the fraudulent offer and sale of Pharma Holdings stock. In connection with its stock offerings, Pharma Holdings issued false press releases and made false postings on its website overstating Pharma Holdings' sales revenues and net profits, and touting non-existent business agreements with multinational corporations, including a purported IPO and/or acquisition by a large corporation or mutual fund. Further, Pharma Holdings and the Klapps failed to disclose that Edward Klapp IV had been criminally convicted of a felony involving fraud."

FORMER CFO BEAZER HOMES USA AGREES TO GIVE BACK NEARLY $1.5 MILLION

The following is an excerpt from the SEC website: “Washington, D.C., Aug. 30, 2011 – The Securities and Exchange Commission today announced a settlement with the former chief financial officer of Beazer Homes USA to recover his bonus compensation and stock sale profits from the period when the Atlanta-based homebuilder was committing accounting fraud. According to the SEC’s complaint filed in federal court in Atlanta, James O’Leary is not personally charged with misconduct, but is still required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006. The SEC’s settlement with O’Leary is subject to court approval. Earlier this year, the SEC reached a settlement with Beazer CEO Ian McCarthy to recover several million dollars in bonus compensation and stock profits that he received. Beazer settled an SEC enforcement action in September 2008, and the SEC charged its former chief accounting officer Michael Rand in July 2009. The litigation against Rand, who perpetrated the fraud, is still ongoing. “Section 304 of the Sarbanes-Oxley Act encourages senior management to take affirmative steps to prevent fraudulent accounting schemes from occurring on their watch,” said Rhea Kemble Dignam, Director of the SEC’s Atlanta Regional Office. “O’Leary received substantial incentive compensation and stock sale profits while Beazer was misleading investors and fraudulently overstating its income.” Section 304 requires reimbursement by some senior corporate executives of certain compensation and stock sale profits received while their companies were in material non-compliance with financial reporting requirements due to misconduct. This can include an individual who has not been personally charged with the underlying misconduct or alleged to have otherwise violated the federal securities laws. Without admitting or denying the SEC’s allegations, O’Leary agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. The settlement amount also includes $274,525 in stock sale profits.”

SEC FILES ORDER TO SHOW CAUSE FOR DEFENDANT TO SELL FROZEN ASSETS

The following is an excerpt from the SEC website: "On August 29, 2011, the Securities and Exchange Commission filed an emergency application for an Order to Show Cause why Defendant Stanley J. Kowalewski (“Kowalewski”) should not be held in civil contempt for failing to comply with the Court’s Orders freezing his assets. The Court has ordered a hearing on the Commission’s application for August 31, 2011. The emergency application arises out of a complaint filed earlier this year by the Commission to stop an alleged offering and investment advisory fraud being perpetrated by Kowalewski against investors, primarily consisting of pension funds, school endowments, hospitals and foundations. See LR-21800, January 7, 2011. According to the Commission, Kowalewski misappropriated, misused and misspent at least $12.5 million of investor money entrusted to his management by, among other things, having his hedge fund: (1) buy his personal home for $2.8 million, (2) purchase a vacation beach home for his use for $3.9 million, and (3) pay his investment management company over $10 million in unfounded fees, of which he paid himself $7.6 million in “advances” and “salary draws”. To further conceal his scheme, the Commission alleges that Kowalewski sent fraudulent monthly account statements to the investors that grossly inflated the actual asset values and returns. Following the filing of the Commission’s complaint, the U.S. District Court entered and subsequently extended an asset freeze over Kowalewski’s assets, including over the house that he had previously caused his hedge fund to “purchase” from him for $2.8 million. As set forth in its emergency application, Kowalewski violated and is violating the Court’s asset freeze by removing and selling from that same house: kitchen and wall-mounted cabinets, light fixtures, doors, and other structural elements, with an estimated value of at least $176,000, while substantially damaging the house in the process. By its emergency application, the Commission seeks to stop the on-going harm, require Kowalewski to account for and return to the Receiver the items taken from the house, and pay the Receiver for the damage he has caused to it. The Commission previously filed a motion with the Court for disgorgement and penalties against Kowalewski seeking disgorgement of $8.4 million, plus prejudgment interest, and penalties in an amount to be determined by the Court, but which could be as high as an additional $67 million. That motion is currently pending." The SEC alleges in the above case that the defendant removed items from his home (a court ordered frozen asset) such as light fixtures and doors. This type of thing happens a lot in low rent districts when landlords evict tenants.

SEC ACCUSES TWO FLORIDA MEN OF OPERATING A PONZI SCHEME

There have been so many Ponzi schemes uncovered lately by the SEC and others it just seems very difficult to imagine that investors ae still not investigating potential investments that are purport to be able to generate huge profits. The case below alleges yet another Ponzi scheme. The following excerpt is from the Sec Website: "Washington, D.C., Aug. 29, 2011 – The Securities and Exchange Commission today charged two Florida men with operating a Ponzi scheme disguised as a purported private equity fund that fraudulently raised approximately $22 million from more than 100 investors, many of whom were Florida teachers or retirees. According to the SEC’s complaint filed in U.S. District Court for the Middle District of Florida, James Davis Risher of Sanibel was responsible for handling the fund’s trading operations, and Daniel Joseph Sebastian of Lakeland distributed offering materials and solicited investors for the fund. Risher boasted to investors that he had substantial experience in trading equities and providing wealth and asset management services. In reality, Risher had no such experience but rather a lengthy criminal history, spending 11 of the last 21 years in jail instead of growing a thriving retail brokerage business as he claimed. The SEC alleges that Risher and Sebastian falsely told investors that the fund earned annual returns ranging from 14 percent to 124 percent by investing in public equity securities through a broker-dealer. They sent investors fabricated account statements indicating such high returns to support their false claims. Only a fraction of the money raised was actually invested, and Risher instead misspent investor funds on such personal purchases as jewelry, gifts, and property in North Carolina and Florida. Risher and Sebastian also paid themselves millions of dollars in phony management and performance fees. “Risher, who masqueraded as a highly successful equity trader, teamed up with Sebastian to tout sophisticated trading strategies they claimed would generate substantial profits for investors. Instead, Risher and Sebastian used investors’ life savings and retirement nest eggs to line their own pockets,” said Eric Bustillo, Director of the SEC’s Miami Regional Office. According to the SEC’s complaint, Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in fund offering documents as “two unique individuals” who used their expertise to “create an investment vehicle that would allow investors to capitalize from both bull and bear markets.” The SEC alleges that Sebastian often solicited his former customers at his prior job as an insurance broker. He primarily pitched the investment opportunity to educators, retirees, and members of several churches in Florida, but also solicited investors in California, other states, and Canada. Sebastian persuaded former customers to roll over money in their insurance and annuity products into the fund. He told them the fund would provide a higher rate of return than they could receive from the products he had previously sold them. At least one investor liquidated an annuity she had purchased from Sebastian and invested the proceeds in the fund. The SEC alleges that Risher and Sebastian made a number of material false statements and omissions to investors about Risher’s criminal history, the fund’s investment strategy, the fund’s investment returns, the safety of investors’ principal, and the existence of audited financial statements. Risher misrepresented that the fund was registered in Bermuda, and he and Sebastian falsely claimed that the fund was audited annually by a Bermudan auditor. Sebastian verbally told investors during telephone calls and meetings that they would never lose their principal investments in the fund. He even provided some investors with written guarantees from a company he owned that would reimburse any loss. In reality, Sebastian knew that the company had no assets to reimburse investors for losses, making his guarantee meaningless. The SEC charged Risher and Sebastian with violating Sections 5(a), 5(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. The SEC further charged Risher with violating Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and Sebastian with aiding and abetting Risher’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC seeks permanent injunctions, disgorgement, and financial penalties against Risher and Sebastian. The U.S. Attorney’s Office for the Middle District of Florida, which conducted a parallel investigation of this matter, has filed criminal charges against Risher. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Middle District of Florida, Federal Bureau of Investigation, Internal Revenue Service, U.S. Postal Inspector Service, Florida Department of Law Enforcement, and Florida Office of Financial Regulation.”

COMMODITY POOL OPERATOR SETTLES CHARGES WITH CFTC

The following excerpt is from the CFTC website: Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and simultaneously settling charges against Dearborn Trading, Inc. (Dearborn), a commodity pool operator (CPO), and Joel Bronstein (Bronstein), Dearborn’s owner and principal, for failing to file a closing Annual Report (liquidation statement) for Dearborn Trading Fund, LLC, a commodity pool operated by Dearborn. The CFTC order requires Dearborn to pay a $180,000 civil monetary penalty and file the pool’s liquidation statement within 30 days of the entry of the order. The CFTC order finds that from about January 2009 until approximately June 2009, Dearborn was operating the pool when it ceased trading on or about June 30, 2009. Dearborn failed to file the pool’s closing Annual Report (liquidation statement) within 90 calendar days after the pool ceased trading, in violation of CFTC regulation 4.22(c), 17 C.F.R. § 4.22(c) (2009). The CFTC thanks the National Futures Association for its assistance."