CHAIRMAN OF PUDA COAL, INC., IS CHARGED WITH FRAUD BY SEC

The following excerpt is from the SEC website:

SEC Charges Chairman and Ex-CEO of Puda Coal With Fraud

On February 22, 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 the Chairman of Puda Coal, Inc. (“Puda”) and the former CEO of Puda with securities fraud for the undisclosed theft of the primary asset of the U.S. public company they controlled. The Commission’s complaint alleges as follows:

Defendants Ming Zhao, the Chairman of Puda, and Liping Zhu, Puda’s former CEO, perpetrated a massive fraud on Puda’s public shareholders by effectively stealing and selling Puda’s operating subsidiary. Before the defendants’ fraud, Puda held an indirect 90% ownership stake in Shanxi Puda Coal Group Co., Ltd (“Shanxi Coal”), a coal mining company located in the Shanxi Province of the People’s Republic of China (“PRC”). In September 2009, just weeks before Puda announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao, with Zhu’s knowledge and complicity, transferred Puda’s 90% stake in Shanxi Coal to himself. In July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co. Ltd. (“CITIC Trust”), a Chinese private equity fund controlled by CITIC Group, which is reported to be the largest state-owned investment firm in the PRC. CITIC Trust placed its 49% stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. In addition, Zhao caused Shanxi Coal to pledge 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion ($516 million) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212 billion preferred shares in the trust. None of these asset transfers were approved by Puda’s board or its shareholders or disclosed in Puda’s various SEC filings, which Zhao and Zhu signed knowing that those documents were materially false and misleading. Puda also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in the coal company, Puda’s sole source of revenue. Thus, at the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling U.S. investors that Puda owned a 90% stake in that company.

In addition, Zhao and Zhu continued their fraudulent scheme to deceive public investors even after the Commission began its investigation. As part of the fraud, Zhu forged a letter purporting to be from CITIC Trust which falsely stated that no funds had actually been loaned to Shanxi Coal and disclaimed any interest in Puda’s or Shanxi Coal’s assets. Zhao’s counsel then provided the forged letter to the Commission’s investigative staff and to Puda’s audit committee in an effort to create the false impression that Puda and its public shareholders had not been harmed by the asset transfers. After Puda disclosed the letter to the public in an SEC filing, further misleading shareholders about the ownership of Puda’s assets, the letter was exposed as a forgery. Zhu admitted forging the letter and resigned as CEO, but Zhao remains Chairman. As a result of the defendants’ fraud, Puda is now little more than a shell company, with no ongoing business operations.

Both Zhao and Zhu are charged in the Commission’s complaint with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13b2-1, 13b2-2, 14a-3, and 14a-9a thereunder. Both men are also alleged to be liable pursuant to Section 20(a) of the Exchange Act as control persons of Puda for Puda’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and that they are also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting those violations. Zhu is also charged with violating Exchange Act Rule 13a-14. Finally, the Commission alleges, in the alternative, that Zhao and Zhu are liable pursuant to Section 20(a) of the Exchange Act as control persons of Puda for Puda’s violations of Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5(a), 10b-5(b), and 10b-5(c), 14a-3 and 14a-9, and that they are also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting those violations.

The complaint seeks a final judgment permanently enjoining the defendants from committing future violations of these provisions, ordering them to disgorge their ill-gotten gains plus prejudgment interest, imposing financial penalties and barring them from acting as officers or directors of a public company."

COMMODITY POOL OPERATOR CHARGED WITH ALLEGED FRAUD BY CFTC

The following excerpt is from the CFTC website:

“Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a complaint in federal court in North Carolina, charging defendant Mitchell Brian Huffman of Charlotte, N.C., with operating a fraudulent commodity pool scheme that defrauded participants of more than $3.2 million in connection with exchange-traded commodity futures contracts. Huffman has never been registered with the CFTC.

From at least August 2006 to March 11, 2011, Huffman allegedly solicited prospective and actual pool participants, mainly family and friends, via in-person and direct telephone solicitations, to buy and sell exchange-traded commodity futures contracts on their behalf. During the period, Huffman allegedly fraudulently solicited and accepted approximately $3.2 million from at least 30 participants throughout the United States. In doing so, he also allegedly misled prospective and actual participants about the likelihood of profits and the substantial risks involved in such investments.

According to the CFTC complaint filed on February 7, 2012, Huffman entered into “sponsorship agreements” with pool participants. Huffman told pool participants that he would trade commodity futures contracts on their behalf. Huffman allegedly said that he utilized a “proprietary trading program” that generated “profits” of 100 percent to 150 percent per year and claimed that he retained 20 percent of all purported profits from the “proprietary trading program” as a fee for his services. However, according to the complaint, all of Huffman’s representations of “profits” from trading were false, and his claimed rates of return were completely fictitious.

Furthermore, Huffman allegedly misappropriated participants’ funds for a variety of personal uses, including 1) purchasing multiple motor vehicles, including two Land Rovers and a Smart Car, 2) using at least $71,255 on purchases related to his classic car collection, 3) spending approximately $188,583 on personal travel and luxury vacations, including Disney cruises and first class airfare to Hawaii and Las Vegas, Nevada, and 4) using approximately $51,540 for charitable contributions in his name. The trip to Hawaii was allegedly a 25thwedding anniversary celebration for Huffman, and he brought along several pool participants on the trip, purportedly at his own expense. Huffman never disclosed to these participants that he was using their funds to pay for the luxury vacation, according to the complaint.
When Huffman could no longer sustain his fraudulent scheme, he admitted to special agents of the Charlotte, North Carolina office of the Federal Bureau of Investigation the fraudulent scheme and his participation, according to the complaint.
In September 2011, Huffman pleaded guilty to one count of commodities fraud (U.S. v. Mitchell Brian Huffman, Case No. 3:11-cr-246-RJC, U.S. District Court for the Western District of North Carolina).

The CFTC appreciates the assistance of the Office of the U.S. Attorney for the Western District of North Carolina and the Federal Bureau of Investigation, Charlotte Office.
CFTC Division of Enforcement staff responsible for this case are Timothy J. Mulreany, Michael Amakor, Paul Hayeck, and Joan Manley.”

SEC CHARGES BROADBAND RESEARCH CORPORATION WITH INSIDER TRADING

The following excerpt is from the SEC website:

“Washington, D.C., Feb. 17, 2012 — The Securities and Exchange Commission today charged John Kinnucan and his Portland, Oregon-based expert consulting firm Broadband Research Corporation with insider trading. The charges stem from the SEC’s ongoing investigation of insider trading involving expert networks.

The SEC alleges that Kinnucan and Broadband claimed to be in the business of providing clients with legitimate research about publicly-traded technology companies, but instead typically tipped clients with material nonpublic information that Kinnucan obtained from prohibited sources inside the companies. Clients then traded on the inside information. Portfolio managers and analysts at prominent hedge funds and investment advisers paid Kinnucan and Broadband significant consulting fees for the information they provided. Kinnucan in turn compensated his sources with cash, meals, ski trips and other vacations, and even befriended some sources to gain access to confidential information.

In a parallel criminal case, Kinnucan has been arrested and charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and two counts of securities fraud.

“Obtaining important and unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services — it’s old-fashioned insider trading,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

The SEC has charged 22 defendants in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms. The insider trading has occurred in the securities of 12 technology companies — including Apple, Dell, Fairchild Semiconductor, Marvell Technology, and Western Digital — for illicit gains totaling nearly $110 million. Related SEC insider trading cases stemming from the Galleon investigation involved illicit gains in excess of $91 million.

According to the SEC’s complaint filed in federal court in Manhattan, Kinnucan’s misconduct occurred from at least 2009 to 2010, a period during which he generated hundreds of thousands of dollars in annual revenues for Broadband. Kinnucan obtained material nonpublic information from well-placed employees at a variety of publicly-traded technology companies.

The SEC’s complaint specifically alleges that in July 2010, Kinnucan obtained material nonpublic information from a source at F5 Networks Inc., a Seattle-based provider of networking technology. On the morning of July 2, Kinnucan learned that F5 had generated better-than-expected financial results for the third quarter of its 2010 fiscal year, with the public announcement scheduled for July 21. Within hours of learning the confidential details, Kinnucan had phone conversations or left messages with several clients to convey that F5’s revenues would exceed market expectations. At least three clients — an analyst and two portfolio managers — caused trades at their respective investment advisory firms on the basis of Kinnucan’s inside information. The insider trading resulted in profits or avoided losses of nearly $1.6 million.
The SEC’s complaint, which charges Kinnucan and Broadband with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, requiring them to pay financial penalties, and permanently enjoining them from future violations.
The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone and Daniel Marcus — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.”

TEXAS MAN TO PAY $31 MILLION FOR PART IN FOREIGN CURRENCY TRADING SCHEME

The following excerpt is from the CFTC website:

“Federal Court Orders Texas Resident Robert D. Watson to Pay $31 Million for Defrauding Customers, Misappropriating Millions of Dollars, and Providing Fictitious Records in Forex Scheme
Watson’s business entities ordered to pay disgorgement of $21 million, and Texas resident Daniel J. Petroski ordered to pay more than $550,000 for his role in the scheme

In a related criminal matter, Watson was sentenced to 20 years in prison on February 10, 2012
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained federal court consent orders resolving its remaining claims against defendants Robert D. Watson and Daniel J. Petroski, both of Houston, Texas, PrivateFX Global One Ltd., SA, and 36 Holdings Ltd. Global One, a corporation formed in Panama, and 36 Holdings are under the control of a court-appointed receiver, Thomas L. Taylor III.

The consent orders, both entered on February 2, 2012, by the U.S. District Court for the Southern District of Texas, stem from a CFTC complaint filed in the same court on May 21, 2009, charging the defendants with operating a multi-million dollar fraudulent off-exchange foreign currency (forex) scheme (see CFTC Press Release 5661-09, May 26, 2009).

One consent order requires Watson, Global One, and 36 Holdings jointly and severally to pay $21 million in disgorgement and orders Watson to pay a $10 million civil monetary penalty. The other consent order requires Petroski to pay $414,723 in disgorgement and a $140,000 civil monetary penalty. The consent orders also require the defendants to give up their rights to funds and other assets held by the receiver.

The court previously entered a consent order of permanent injunction on February 24, 2010, that resolved liability against all defendants and permanently barred the defendants from engaging in any commodity-related activity and from registering with the CFTC. This earlier order found that on or about July 1, 2006, defendants began soliciting investors to purchase shares of Global One, whose purported objective was to speculate in the forex markets. Global One’s offering raised approximately $21 million from at least 80 investors by touting Global One’s purportedly successful forex trading performance, according to the order. From April 2006 through April 2009, the defendants reported monthly returns, purportedly generated through forex trading, to Global One investors of approximately 1.5 percent to nearly 3 percent and claimed to never have had a losing month trading forex, the court found. However, also according to the order, the defendants’ representations to Global One investors regarding Global One’s extraordinary forex trading profits and related returns to investors were false.
The earlier consent order also found that, prior to the filing of the CFTC’s complaint, the defendants provided the CFTC with fictitious third-party bank and forex trading records prepared by Watson to conceal the fraud.

In a related criminal matter, filed in the U.S. District Court for the Southern District of Texas as part of President Barack Obama’s Financial Fraud Enforcement Task Force, Watson pleaded guilty to one count of securities fraud. On February 10, 2012, the court sentenced Watson to the statutory maximum of 20 years in prison.
The CFTC thanks the Fort Worth Regional Office of the Securities and Exchange Commission for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Christopher Reed, Charles Marvine, Rick Glaser, and Richard Wagner“.

TWO COMPANIES CHARGED WITH SELLING UNREGISTERED PROMISSORY NOTES

The following excerpt is from the SEC website:

February 15, 2012

SEC Charges Venulum with Registration Violations in Connection with Offerings of Wine Contracts and Promissory Notes

"The Securities and Exchange Commission today charged two non-U.S. companies — Venulum Ltd. (a British Virgin Islands company) and Venulum Inc. (a Canadian company) — and their owner and chairman Giles Cadman (a resident of the United Kingdom), with registration violations in connection with unregistered offers and sales of promissory notes and interests in fine wines. The Commission’s suit, filed in Dallas federal court, alleges that, beginning in 2002, Venulum made unsolicited calls to American investors, primarily dentists, to solicit investments in interests in trading in fine wines to be managed by Venulum. Venulum’s solicitation highlighted its purported expertise in selecting, sourcing, storing and marketing fine wines for the benefit of investors. Then, starting in 2010, Venulum solicited 94 of its wine investors to purchase high-interest promissory notes. Neither of the offerings was registered with the Commission.

Without admitting or denying the Commission’s allegations, the defendants consented to permanent injunctions against violating Sections 5(a) and 5(c) of the Securities Act of 1933. The injunction is subject to court approval.

The Commission acknowledges the assistance of the Texas State Securities Board.

JUDGE FINDS COMPANY AND CEO DEFRAUDED MUTUAL FUNDS

The following excerpt is from the SEC website:

“On Tuesday, February 14, 2012, United States District Judge Robert W. Sweet of the Southern District of New York issued an Opinion in favor of the U.S. Securities and Exchange Commission finding that United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and Lewis Chester, PCM’s Chief Executive Officer, engaged in securities fraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, Judge Sweet found that Defendants PCM and Chester orchestrated a scheme to defraud mutual funds in the United States through late trading from February 2001 through September 2003. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. ET. Judge Sweet found that the Defendants “intentionally, and egregiously violated the federal securities laws through a scheme of late trading” through broker-dealer Trautman Wasserman & Company, Inc. (TW&Co.), and found that the scheme was “broad ranging over the course of several years and in no sense isolated.”

As a result of Defendants’ conduct, the Court found that PCM and Chester violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and granted the Commission’s request to enjoin PCM and Chester from future violations of those provisions. Judge Sweet further found PCM and Chester, together with Relief Defendant Pentagon Special Purpose Fund, Ltd., PCM’s advisory client, jointly and severally liable for disgorgement of $38,416,500 of profits from the U.S. mutual fund trades executed through TW&Co. plus prejudgment interest. Finally, Judge Sweet imposed civil penalties against Defendants in the amount of $38,416,500, equal to Defendants’ pecuniary gain for late trades through TW&Co.

The Court found in Defendants’ favor regarding charges of deceptive market timing of U.S. mutual funds.

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and it is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.”