COMPANY AND EXECUTIVES CHARGED BY SEC OVER DISCLOSURES INVOLVING LIFE SETTLEMENTS

 The following excerpt is from the SEC website:

Jan. 3, 2012 

“Washington, D.C., — The Securities and Exchange Commission today charged Texas-based financial services firm Life Partners Holdings Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements.

The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin misled shareholders by failing to disclose a significant risk to Life Partners’ business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders.

The SEC alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” said Robert Khuzami, Director of the SEC's Division of Enforcement. “This deception misled shareholders into thinking that the company's revenue model was sustainable when in fact it was illusory.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”

Life Partners is a Nasdaq-traded company that generates virtually all of its revenues from brokering life settlements. Life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.

According to the SEC’s complaint filed in federal district court in Waco, Texas, Life Partners misrepresented and failed to disclose in public filings with the SEC that the company’s systematic use of materially underestimated life expectancy estimates constituted a material risk to the company’s revenues. Beginning in 1999, the company used life expectancy estimates provided by Dr. Donald T. Cassidy, a Reno, Nev.-based doctor with no actuarial training or prior experience rendering life expectancy estimates. The SEC alleges that Life Partners and Pardo failed to conduct any meaningful due diligence on Cassidy’s qualification to act as a life expectancy underwriter and instructed the doctor to use a life expectancy methodology that was created by the company’s former underwriter, a part-owner of Life Partners. Pardo, Peden, and Martin were aware that the Cassidy-rendered life expectancy estimates were systematically and materially short.

The SEC alleges that Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011 by prematurely recognizing revenues and understating impairment expense related to its investments in life settlements. Life Partners improperly accelerated revenue recognition from the closing date to the date it obtained a non-binding agreement with the policy owner to sell a life settlement. Life Partners use of Cassidy’s life expectancy estimates as part of its impairment calculations caused the company to understate millions of dollars in impairment expense.

The SEC further alleges that during this time, Pardo and Peden sold approximately $11.5 million and $300,000 respectively of Life Partners stock at inflated prices while in possession of material non-public information about the company’s dependency on short life expectancy estimates to generate revenues.

In addition to the alleged violations of the antifraud and reporting provisions of the federal securities laws by Life Partners, Pardo, Peden and Martin, the SEC’s complaint also seeks repayment to the company of stock sales profits and bonuses received by Pardo and Martin pursuant to Section 304 of the Sarbanes Oxley Act of 2002.”

SEC SUES EXECUTIVE AND HIS COMPANIES FOR ALLEGED FRAUDULENT NOTE OFFERINGS

The following excerpt is from the SEC website:

December 28, 2011
“On August 10, 2011, the Securities and Exchange Commission filed suit in the United States District Court for the Southern District of Texas against Damian Omar Valdez of New York and two Houston-area firms he controlled, Evolution Capital Advisors (“Evolution Capital”) and Evolution Investment Group I (“EIGI”). Evolution Capital was an investment adviser registered with the Commission until June 2010. The firms and Valdez raised at least $10 million from more than 80 investors through two fraudulent note offerings.
After a contested evidentiary hearing on October 19 and 20, 2011, the Court found that: (1) Valdez, Evolution Capital, and EIGI misled investors to believe that the notes were safe and secured by assets guaranteed by the United States government; (2) the defendants falsely promised to use leverage to purchase the assets securing the notes; (3) the assets securing the notes were subject to significant undisclosed default and prepayment risk; (4) the defendants paid themselves more than $2.4 million in fees and expenses and used approximately $2.7 million from the second note offering to make Ponzi payments to investors in the first note offering; (5) because of defaults and prepayments on the underlying assets, failure to obtain leverage, and excessive Ponzi payments and fees, the defendants lacked sufficient assets to repay investors in accordance with the notes; and (6) the defendants would have continued taking all monies from the account each month as “profit” had the Commission not brought its enforcement action. The Court specifically found that Defendant Valdez acted with fraudulent intent.
Based on these findings, the Court granted the Commission’s motion for preliminary and permanent injunction, asset freeze, and appointment of a receiver. The Court also permanently froze the defendants’ assets. In addition, the Court specifically enjoined the defendants against further violations of the anti-fraud provisions of Section 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 Commission’s requests for disgorgement of ill-gotten gains plus prejudgment interest, as well as civil penalties, remain pending.”

SEC HAS 12 TIPS FOR SAVING AND INVESTING

The following excerpt is from the SEC website:

Below are some suggestions on how to become a smarter investor in 2012.
Tip #12 Pay off high-interest debt. Paying off high-interest debt may be your best investment strategy. Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit card or other loans.

Tip #11 Pay yourself first. Regular automatic deductions from your paycheck or bank account into a savings or investment account will keep you on track toward your short and long-term financial goals.

Tip #10 Boost your 'rainy day' fund. Many experts recommend keeping about six months of expenses in a federally insured account to cover sudden unemployment or other emergencies.

Tip #9 Help stop affinity fraud in your community. Affinity fraud refers to investment scams that prey upon members of identifiable groups. Learn how you can help protect yourself and your community (.pdf file) from the potentially devastating impact of affinity fraud.

Tip #8 Don't put all your eggs in one basket. Think twice before investing heavily in shares of your employer's stock or any individual investment.

Tip #7 Take advantage of 'free money' (if available). In many employer-sponsored retirement plans, the employer will match some or all of your contributions. If your employer offers a retirement plan and you do not contribute enough to get your employer's match, you are passing up 'free money' for your retirement savings.

Tip #6 Beware of promises of 'guaranteed returns.' Promises of high returns, with little or no risk, are classic warning signs for fraud. If it sounds too good to be true, it probably is.

Tip #5 Understand the fees you pay to buy, own, and sell your investments. Investment costs shouldn't take you by surprise. Fees and expenses vary from product to product and can take a huge bite out of your returns. Even small differences in investment costs can translate into large differences in returns over time.

Tip #4 Teach your children about good financial habits. Recent research suggests that direct teaching by parents is an important predictor of a young person's future financial success.

Tip #3 Research investments before handing over any money. Smart investors always check whether an investment is registered with the SEC by using the SEC's EDGAR database or contacting the SEC's toll-free investor assistance line at (800) 732-0330.

Tip #2 Check the background of your investment professional. Many investors do not know that you can check the background of a broker or investment adviser. It's free and easy - and a key step for avoiding investment fraud.

Tip #1 Visit Investor.gov before making your next investment decision. Created by the U.S. Securities and Exchange Commission, Investor.gov is a free, easy to use web site with objective information on investing wisely and avoiding fraud. You can learn about financial products, research investment professionals, and find more information about the tips above.

GE FUNDING CAPITAL TO PAY $70 MILLION FOR ANTI-COMPETITIVE ACTIVITY IN THE MUNI BOND MARKET

The following excerpt is from the Department of Justice website:

"WASHINGTON – GE Funding Capital Market Services Inc. entered into an agreement with the Department of Justice to resolve the company’s role in anticompetitive activity in the municipal bond investments market and agreed to pay a total of $70 million in restitution, penalties and disgorgement to federal and state agencies, the Department of Justice announced today.

As part of its agreement with the department, GE Funding admits, acknowledges and accepts responsibility for illegal, anticompetitive conduct by its former traders.  According to the non-prosecution agreement, from 1999 through 2004, certain former GE Funding traders entered into unlawful agreements to manipulate the bidding process on municipal investment and related contracts, and caused GE Funding to make payments and engage in other related activities in connection with those agreements through at least 2006.  These contracts were used to invest the proceeds of, or manage the risks associated with, bond issuances by municipalities and other public entities.

“GE Funding’s former traders entered into illegal agreements to manipulate the bidding process on municipal investment contracts,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Justice Department’s Antitrust Division.  “This anticompetitive conduct harmed municipalities, as well as taxpayers.  Today’s resolution requires GE Funding to pay penalties, disgorgement and restitution to the victims of its illegal activity.  We will continue to use all the tools at our disposal to uphold our nation’s antitrust laws and ensure competition in the financial markets.”

Under the terms of the agreement, GE Funding agreed to pay restitution to victims of the anticompetitive conduct and to cooperate fully with the Justice Department’s Antitrust Division in its ongoing investigation into anticompetitive conduct in the municipal bond derivatives industry.  To date, the ongoing investigation has resulted in criminal charges against 18 former executives of various financial services companies and one corporation.  Nine of the 18 executives charged have pleaded guilty.    

The Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS) and 25 state attorneys general also entered into agreements with GE Funding requiring the payment of penalties, disgorgement of profits from the illegal conduct and payment of restitution to the victims harmed by the bid manipulation by GE Funding employees, as well as other remedial measures.

As a result of GE Funding’s admission of conduct; its cooperation with the Department of Justice and other enforcement and regulatory agencies; its monetary and non-monetary commitments to the SEC, IRS and state attorneys general; and its remedial efforts to address the anticompetitive conduct, the department agreed not to prosecute GE Funding for the manipulation of bidding for municipal investment and related contracts, provided that GE Funding satisfies its ongoing obligations under the agreement.

JPMorgan Chase & Co., UBS AG and Wachovia Bank N.A. also reached agreements with the Department of Justice and other federal and state agencies to resolve anticompetitive conduct in the municipal bond derivatives market.  On May 4, 2011, UBS AG agreed to pay a total of $160 million in restitution, penalties and disgorgement to federal and state agencies for its participation in the anticompetitive conduct.  On July 7, 2011, JPMorgan agreed to pay a total of $228 million in restitution, penalties and disgorgement to federal and state agencies for its role in the conduct.  On Dec. 8, 2011, Wachovia Bank agreed to pay a total of $148 million in restitution, penalties and disgorgement to federal and state agencies for its participation in the anticompetitive conduct.

The department’s ongoing investigation into the municipal bonds industry is being conducted by the Antitrust Division, the FBI and the IRS-Criminal Investigation.  The department is coordinating its investigation with the SEC, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.  The department thanks the SEC, IRS and state attorneys general for their cooperation and assistance in this matter."

SECURITIES FRAUD AND DISCLOSURE VIOLATIONS MAKES MAN AND HIS TRUST PART WITH NEARLY $50 MILLION

The following excerpt is from the SEC website:

“The Securities and Exchange Commission announced that on December 21, 2011, United States District Court Judge Susan D. Wigenton entered a final judgment ordering defendants Alfred S. Teo, Sr. and the MAAA Trust, a trust Teo controlled, to pay a total of $49,493,143.15 in disgorgement, prejudgment interest and penalties for false filings regarding their Musicland Stores Corporation stock. In particular, the Court ordered Teo and the Trust to pay $17,422,054.13 in disgorgement plus $14,649,034.89 in prejudgment interest, and civil penalties of $17,422,054.13. These amounts are in addition to (i) $996,782.68 in disgorgement and prejudgment interest Teo paid for his insider trading violations pursuant to the Court’s previous order of March 15, 2010, and (ii) a $1 million fine that Teo paid in a parallel criminal action for insider trading. The Court also enjoined Teo and the Trust from further violations of Sections 13(d) and 16(a) of the Securities Exchange Act of 1934 and Rules 13d-1, 13d-2 and 16a-3 thereunder. Previously, the Court had enjoined Teo from further violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, and barred him from serving as an officer and director of a public company.
On May 25, 2011, following a ten day trial, a jury sitting in Newark, New Jersey returned a verdict in favor of the Commission finding Teo liable for securities fraud and disclosure violations on all counts against him and finding the Trust liable for disclosure violations. Prior to the trial, on August 10, 2010, the Court granted the Commission’s motion for summary judgment against Teo finding him liable for violations of Section 16(a) of the Exchange Act and Rule 16a-3 thereunder.
The Commission’s complaint, filed on April 22, 2004, charged Teo and others with insider trading and making false Commission filings. Specifically, Teo and ten of his relatives, friends and colleagues engaged in insider trading in Musicland and C-Cube Microsystems, Inc. stock. Teo, a major Musicland shareholder, learned about a tender offer for Musicland, and in breach of a duty of trust and confidence to Musicland, he purchased Musicland stock on the basis of this information prior to the company’s December 7, 2000 public announcement of the tender offer. Teo tipped eight others with this information, who purchased Musicland stock prior to the Musicland announcement. Teo also engaged in insider trading in the securities of C-Cube. Teo, a director of Cirrus Logic, Inc., which had been negotiating to acquire C-Cube, misappropriated from Cirrus material, non-public information regarding the negotiations, and he purchased C-Cube stock shortly before C-Cube announced on March 26, 2001 that it had agreed to be acquired by another company. Teo tipped his business partner, defendant Mitch Sacks, with this information, who purchased C-Cube stock prior to the C-Cube announcement. Teo also filed false information with the Commission and deceived the investing public regarding his Musicland stock ownership. Between July 1998 and January 2001, Teo, the Trust, and Teren Seto Handelman, the Trust’s trustee and Teo’s sister-in-law, filed multiple false and misleading Forms 13D with the Commission, and failed to make required filings, thereby materially misrepresenting their ownership of Musicland stock. Teo made false filings to avoid triggering Musicland’s shareholders rights plan, or “poison pill,” which Teo understood would have significantly diluted his stock causing massive losses to him. Instead, Teo’s fraud enabled him to secretly purchase millions of Musicland shares well above the poison pill threshold, which he eventually sold, receiving illicit profits.
Between May 3, 2004, and January 3, 2011, the Court entered final judgments against Teo’s tippees: defendants Teren Seto Handelman (Teo’s sister-in-law), Mitch Sacks (Teo’s business partner), Phil Sacks (Teo’s tennis partner and Mitch Sacks’ father), John Reier (CFO of Teo’s companies), Larry Rosen (Teo’s friend), Rich Herron (Teo’s yachting friend), Charles Fortune, Jerrold Johnston and Mark Lauzon (Teo’s business associates), David Ross (Teo’s yacht builder), and relief defendant James Ruffolo. These defendants and relief defendant consented to the entry of judgments without admitting or denying the allegations in the Commission’s complaint. On March 15, 2010, the Court entered a partial judgment on consent against Teo to settle the Commission’s insider trading charges against him, and the Court ordered him to pay $996,782.68 in disgorgement plus prejudgment interest, enjoined him against further violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, and barred him from serving as an officer or director of any public company. Prior to the December 21, 2011 final judgment, the Court ordered a total of $3,869,647.76 in disgorgement, prejudgment interest and civil penalties against Teo and his tippees.
In a separate action, the United States Attorney’s Office for the District of New Jersey prosecuted Teo for violations of the federal securities laws. On June 27, 2006, after a six week trial, Teo pled guilty to insider trading charges. Thereafter, on February 6, 2007, Teo was sentenced to 30 months in prison, followed by two years supervised release and ordered to pay a $1 million fine. United States v. Alfred S. Teo, 04-Cr.-583 (KSH) (D.N.J.)
Teo, age 65 and a resident of Kinnelon, New Jersey and Fisher Island, Florida, is the Chairman of several private companies which produce industrial plastics. Teo’s companies are some of the largest producers of plastic bags in North America. Teo was a director and audit committee member of two public companies: Navarre Corp. from May 1, 1998 to April 22, 2004; and Cirrus from July 21, 1998 to April 10, 2001.
The Commission expresses its appreciation to the United States Attorney’s Office for the District of New Jersey and the New York Stock Exchange for their assistance in this matter.”

SEC ALLEGES MAGYAR TELEKOM PLC. BRIBED OFFICIALS IN MACEDONIA AND MONTENEGRO

The following excerpt is from the SEC website:

December 29, 2011
“The Securities and Exchange Commission today charged the largest telecommunications provider in Hungary and three of its former top executives with bribing government and political party officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry.

The SEC alleges that three senior executives at Magyar Telekom Plc. orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to prevent the introduction of a new competitor and gain other regulatory benefits. Magyar Telekom’s subsidiaries in Macedonia made illegal payments of approximately $6 million under the guise of bogus consulting and marketing contracts. The same executives orchestrated a second scheme in 2005 in Montenegro related to Magyar Telekom’s acquisition of the state-owned telecommunications company there. Magyar Telekom paid approximately $9 million through four sham contracts to funnel money to government officials in Montenegro.
Magyar Telekom’s parent company Deutsche Telekom AG also is charged with books and records and internal controls violations of the Foreign Corrupt Practices Act (FCPA).

Magyar Telekom agreed to settle the SEC’s charges by paying more than $31.2 million in disgorgement and pre-judgment interest. Magyar Telekom also agreed to pay a $59.6 million criminal penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice. Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.
The three former top executives at Magyar Telekom charged by the SEC for orchestrating the bribery schemes are:
Elek Straub, former Chairman and CEO.

Andras Balogh, former Director of Central Strategic Organization.

Tamas Morvai, former Director of Business Development and Acquisitions.
According to the SEC’s complaints filed in the Southern District of New York, in the wake of legislation intended to liberalize the Macedonian telecommunications market, Magyar Telekom entered into a secret agreement entitled the “Protocol of Cooperation” with senior Macedonian government officials to delay or preclude the issuance of a license to a new competitor and mitigate other adverse effects of the new law. To win their support, Magyar Telekom paid €4.875 million to a third-party intermediary under a series of sham contracts with the intention that the intermediary would forward money to the government officials. Magyar Telekom also promised a Macedonian political party the opportunity to designate the beneficiary of a business venture in exchange for the party’s support.

The SEC further alleges that in Montenegro, Magyar Telekom used intermediaries to pay bribes to government officials in return for their support of Magyar Telekom’s acquisition of the state-owned telecommunications company on terms favorable to Magyar Telekom. At least two Montenegrin government officials involved in the acquisition received payments made through the bogus contracts. A family member of a top Montenegrin government official also received payments.

The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 13b2-1 and 13b2-2, and that they aided and abetted violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions. The SEC’s complaint against Magyar Telekom and Deutsche Telekom alleges that Magyar Telekom violated Section 30A of the Exchange Act and that Magyar Telekom and Deutsche Telekom violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Magyar Telekom and Deutsche Telekom consented to the entry of final judgments without admitting or denying the SEC’s allegations. The settlements are subject to court approval.”