BOTH FIRMS AND INDIVIDUALS CHARGED IN ALLEGED HIJACKED BROKERAGE ACCOUNT SCHEME

The following excerpt is from the SEC website:

January 26, 2012
“The Securities and Exchange Commission today charged a trader in Latvia for conducting a widespread online account intrusion scheme in which he manipulated the prices of more than 100 NYSE and Nasdaq securities and caused more than $2 million in harm to customers of U.S. brokerage firms.

The SEC also instituted related administrative proceedings today against four electronic trading firms and eight executives charged with enabling the trader’s scheme by allowing him anonymous and unfiltered access to the U.S. markets.

According to the SEC’s complaint filed in federal court in San Francisco, Igors Nagaicevs broke into online brokerage accounts of customers at large U.S. broker-dealers and drove stock prices up or down by making unauthorized purchases or sales in the hijacked accounts. This occurred on more than 150 occasions over the course of 14 months. Nagaicevs – using the direct, anonymous market access provided to him by various unregistered firms – traded those same securities at artificial prices and reaped more than $850,000 in illegal profits.

According to the SEC’s orders instituting administrative proceedings against the four electronic trading firms, they allowed Nagaicevs to trade through their electronic platforms without first registering as brokers. Each of the trading firms provided him online access to trade directly in the U.S. markets through an account held in the firm’s name. These firms gave Nagaicevs a gateway to the U.S. securities markets while circumventing the protections of the federal securities laws, including requirements for brokers to maintain and follow adequate procedures to gather information about customers and their trading.

The electronic trading firms and individuals named in the SEC’s administrative proceedings are:
Alchemy Ventures, Inc. of San Mateo, Calif.
Mark H. Rogers, the firm’s president, who lives in San Carlos, Calif.
Steven D. Hotovec, the firm’s vice president, who lives in Redwood City, Calif.
KM Capital Management, LLC of Philadelphia
Joshua A. Klein, the firm’s founder and co-owner, who lives in Philadelphia
Yisroel M. Wachs, the firm’s co-owner, who lives in Philadelphia
Zanshin Enterprises, LLC of Boise, Idaho
Frank K. McDonald, managing member of the firm, who lives in Boise
Richard V. Rizzo, an associate of the firm, who lives in Oceanside, N.Y.
Mercury Capital of La Jolla, CA
Lisa R. Hyatt, the firm’s president, who lives in Escondido, Calif.
Douglas G. Frederick, an associate of the firm, who lives in Brighton, Mich.
Mercury Capital, Hyatt, and Rizzo each agreed to a settlement in which they consented to SEC orders finding that they willfully committed or aided and abetted and caused violations of Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Hyatt and Rizzo each agreed to pay a $35,000 penalty.
The SEC’s administrative action will determine whether the non-settling trading firms and principals willfully violated Section 15(a) of the Exchange Act, or whether the non-settling principals willfully aided and abetted and caused violations of Section 15(a) of the Exchange Act, and what sanctions, if any, are appropriate as a result. The SEC’s complaint alleges that Nagaicevs violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.”

ALLEGED FAMILY TIPS HAS LED TO INSIDER TRADING CHARGES

January 24, 2012

"The Securities and Exchange Commission today charged three people with insider trading in the securities of Oak Hill Financial, Inc. (“Oak Hill”) ahead of a July 20, 2007 announcement that Oak Hill would be acquired by WesBanco, Inc. (Nasdaq: WSBC). The Commission alleges Dale Shafer, who at the time was Oak Hill’s interim CFO, shared information with his cousin, Jason Gonski, about the anticipated merger. Gonski purchased Oak Hill stock in his account and another account and made approximately $35,500 in illicit profits. In addition, Gonski tipped his friend Joseph Mroz, and the two men together made approximately $15,099 from illegal trading in Oak Hill stock.

The case was filed in the U.S. District Court for the Southern District of Ohio. The complaint alleges that:

Shafer learned of the planned merger on May 14, 2007, and told Gonski about it. Gonski misappropriated the information by trading on it. He later told Shafer that he bought Oak Hill stock. Shafer did not tell Gonski to stop trading and did not tell anyone at Oak Hill what had happened. Over the next several weeks, Shafer continued to provide material, nonpublic information about the merger to Gonski and during this time period, Gonski substantially increased his position in Oak Hill. Gonski also tipped his friend Mroz, and they both bought shares of Oak Hill using Mroz’s brokerage account. Total profits in the accounts Gonski traded in were approximately $50,000, which includes $15,099 in profits from trading in the account of Mroz.

Without admitting or denying the allegations in the complaint, Shafer, Gonski and Mroz have offered to settle the case by consenting to the entry of a final judgment permanently enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The three settling defendants have agreed to pay disgorgement, prejudgment interest, and penalties totaling more than $150,000, as follows:

Gonski will pay disgorgement and prejudgment interest totaling $59,565.24 for which Shafer is jointly and severally liable for $38,957.81 of that amount and Mroz is jointly and severally liable for $8,766.74. Gonski will pay a civil penalty of $50,686.38. Shafer will pay a civil penalty of $33,484.08. Mroz will pay a civil penalty of $7,459.95. In addition, Shafer has agreed to be barred for five years from serving as an officer or director of a publicly traded company. Shafer has also consented to the issuance of an order under Rule 102(e)(3) suspending him from appearing or practicing before the Commission as an accountant with a right to apply for reinstatement after five years. The proposed settlements are subject to the court’s approval.

The Commission acknowledges the assistance of FINRA in this matter."

SEC FILES CIVIL INJUNCTION IN ALLEGED STOCK INFLATION SCHEME

 The following excerpt is from the SEC website:

January 25, 2012
“On January 25, 2012, the Securities and Exchange Commission (“Commission”) filed a civil injunctive action against a former senior vice president and a vendor of InPhonic, Inc., a now-bankrupt online retailer of cellular phones that was headquartered in Washington, D.C. According to the Commission’s complaint, from late 2005 through early 2007, Len A. Familant, then an InPhonic senior vice president, and Paul V. Greene, president of telephone supplier Americas Premiere Corporation (“APC”), engaged in a fraudulent scheme involving a series of “round-trip transactions” to artificially inflate InPhonic’s financial results.

The Commission’s complaint, filed in federal court in the District of Columbia, alleges:
After the end of the third quarter of 2005 and each quarter in 2006, but before InPhonic reported its financial results, Familant obtained a total of almost $10 million in sham credits from APC and Greene. Familant and Greene entered into an unwritten, undisclosed agreement that InPhonic would repay APC by purchasing cellular telephones and repair services from APC at inflated prices and by paying for fake repairs.

InPhonic improperly recorded the false credits from APC as a decrease in cost of goods sold. InPhonic subsequently made repayments to APC in the form of overpayments for cellular telephones, repair services and fake repairs.

The round-trip scheme agreed to and implemented by Familant and Greene resulted in material understatements of InPhonic’s net loss (between 7% and 55%) in quarterly and annual filings with the Commission and material overstatements of InPhonic’s adjusted EBITDA in earnings releases from 2005-2007.

Familant and Greene concealed the fraudulent round-trip scheme. For instance, together they identified particular telephone models APC could provide to InPhonic at inflated prices without raising suspicion.

Greene hid the round-trip scheme from InPhonic’s independent auditors even after APC’s accountant had informed Greene that APC’s sham credit transactions with InPhonic were illegal.

Familant encouraged APC to hide its billing for phony services after Familant learned that APC’s accountant had told Greene, “[w]e cannot do that. That is fraud. . . .”

In October 2007, as InPhonic’s business was failing and after APC had been unable to fully recoup the credits, Greene sent an email to himself outlining a proposed lawsuit against InPhonic. Greene referred to “the fake credits that were negotiated with INPC that they were using to hit certain quarterly numbers.”
Greene is charged with violating, and aiding and abetting InPhonic’s and Familant’s violations, of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rules 10b-5(a) and (c). Greene is also charged with violating the books and records provision of Exchange Act Rule 13b2-1, and with aiding and abetting InPhonic’s violations of the reporting and books and records provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking a permanent injunction, disgorgement, civil penalties and prejudgment interest against Greene.

Familant has agreed to settle the Commission’s charges without admitting or denying the allegations against him. Familant has consented to a final judgment enjoining him from violating the antifraud provisions of Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5(a) and (c), and the books and records provision of Exchange Act Rule 13b2-1, and from aiding and abetting InPhonic’s violations of the reporting and books and records provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13. Familant also has agreed to pay a $50,000 civil penalty and to be barred from serving as an officer or director of a public company. The proposed settlement with Familant is subject to the approval of the District Court.”

HEDGE FUND ADVISER TO PAY $9 MILLION TO SETTLE INSIDER-TRADING CHARGES

The following excerpt is from a SEC e-mail: 

01/23/2012 10:33 AM EST

"Washington, D.C., Jan. 23, 2012 — The Securities and Exchange Commission today announced that Diamondback Capital Management LLC has agreed to pay more than $9 million to settle insider-trading charges brought by the Commission on Jan. 18. The proposed settlement is subject to the approval of Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York. As part of the proposed settlement, the Stamford, Conn.-based hedge fund adviser also has submitted a statement of facts to the SEC and federal prosecutors, and entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.

Under the proposed settlement, Diamondback will give up more than $6 million of allegedly ill-gotten gains and pay a $3 million civil penalty. In addition, Diamondback consented to a judgment that permanently enjoins it from future violations of federal anti-fraud laws. The proposed settlement would resolve charges of insider trading by Diamondback in shares of Dell Inc. and Nvidia Corp. in 2008 and 2009.

“We are pleased to have reached a prompt resolution of the charges against Diamondback,” said George S. Canellos, Director of the SEC’s New York Regional Office. “If approved by the court, we believe that the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co-defendants.”

Last week, the SEC filed insider-trading charges against Diamondback, a second hedge fund advisory firm, and seven individuals, including a former Diamondback analyst and former Diamondback portfolio manager. In reaching the proposed settlement announced today, the SEC considered the substantial cooperation that Diamondback provided, including conducting extensive interviews of staff, reviewing voluminous communications, analyzing complex trading patterns to determine suspicious trading activity, and presenting the results of its internal investigation to federal investigators."

JUDGEMENT ANNOUNCED AGAINST PERMAPAVE ENTITIES

The following excerpt is from the SEC website:

January 23, 2012
“The Securities and Exchange Commission today announced that, on January 19, 2012, the Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York entered a default judgment that imposes a permanent injunction against future violations of the registration and antifraud provisions of the federal securities laws against PermaPave Industries, LLC, PermaPave USA Corp., PermaPave Distributions, Inc., and Verigreen, LLC (the PermaPave Entities) and that also imposes a permanent injunction against future violations of the reporting and antifraud provisions of the federal securities laws against Interlink-US-Network, Ltd.

As to monetary relief, the judgment orders the PermaPave Entities to pay disgorgement, prejudgment interest, and civil penalties and orders Interlink to pay civil penalties. The judgment also orders relief defendants DASH Development, LLC, Aron Holdings, Inc., PermaPave Construction Corp., Dymoncrete Industries, LLC, Dymon Rock LI, LLC, and Lumi-Coat, Inc. to disgorge the ill-gotten gains they received from defendants.

This judgment resolves the Commission’s claims and grants all relief sought against the PermaPave Entities, Interlink, DASH, Aron Holdings, PermaPave Construction, Dymoncrete Industries, Dymon Rock, and Lumi-Coat in a civil action filed on October 6, 2011.

The Commission’s Complaint alleged that, from 2006 to 2010, the PermaPave Entities raised more than $26 million from the sale of promissory notes and “use of funds” agreements to over 140 investors. Their management told investors that there was a tremendous demand for the product that the PermaPave Entities ostensibly sold – permeable paving stones – and that investors would be repaid by the profits generated by the guaranteed sales of this product. In reality, however, there was little demand for the product, and defendants used investor proceeds to make “interest” and “profit” payments to earlier investors and to fund management’s lavish lifestyles. The management of the PermaPave Entities also caused Interlink to issue a Form 8-K stating that a company that had never heard of Interlink had agreed to invest $6 million in Interlink.

The judgment (i) permanently enjoins the PermaPave Entities from future violations of 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 Exchange Act Rule 10b-5, (ii) permanently enjoins Interlink from future violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, and 13a-11, (iii) orders the PermaPave Entities to pay $7,734,983 in disgorgement, $281,268 in prejudgment interest, and $7.7 million in civil penalties, (iv) orders Interlink to pay $375,000 in civil penalties, and (v) orders relief defendants DASH, Aron Holdings, PermaPave Construction, Dymoncrete Industries, Dymon Rock, and Lumi-Coat to disgorge ill-gotten gains received from defendants totaling $4,236,252 and prejudgment interest totaling $214,233.

The Commission’s civil action continues against Defendants Eric Aronson, Vincent Buonauro, Robert Kondratick, Fredric Aaron, and Permeable Solutions, Inc. and Relief Defendants Caroline Aronson and Deborah Buonauro.”

SEC CHARGES BIG HEDGE FUNDS WITH INSIDER TRADING SCHEME INVOLVING DELL AND NVIDIA CORPORATION

The following excerpt is from the SEC website:

“On January 18, 2012, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep “Sandy” Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

According to the SEC’s complaint, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.
The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.
The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcements, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

The SEC’s complaint charges each of the defendants with violations 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, and, additionally, charges Goyal, Tortora, Newman, Adondakis, Chiasson, Horvath and Kuo with aiding and abetting others’ violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.”