SEC FILES CIVIL INJUNCTIVE ACTION AGAINST THORNBURG MANAGEMENT SENIOR MANAGEMENT

The following excerpt is from the SEC website:
March 13, 2012
SEC Files Civil Injunctive Action Against Senior Management of Thornburg Mortgage, Inc. for Alleged Fraudulent Overstatement of Thornburg’s Income
On March 13, 2012, the Securities and Exchange Commission filed securities fraud charges in the United States District Court for the District of New Mexico against Larry Goldstone, the former chief executive officer and president, Clarence Simmons, the former chief financial officer and senior executive vice-president, and Jane Starrett, the former chief accounting officer of Thornburg Mortgage, Inc. (“Thornburg”), currently TMST, Inc., for allegedly materially misrepresenting the financial condition and liquidity of Thornburg, formerly the country’s second largest independent mortgage company. Goldstone, Simmons, and Starrett reside in Santa Fe, New Mexico.

The Complaint alleges that Thornburg, through Goldstone, Simmons, and Starrett, fraudulently overstated its quarterly income by more than $420 million in its 2007 annual report filed with the Commission. As a result, the Complaint alleges that Thornburg fraudulently reported a profit rather than a loss for the quarter. According to the Complaint, in the two weeks leading to the filing of its annual report, Thornburg received more than $300 million in margin calls from its lenders that severely drained its liquidity. The Complaint further alleges that, unable to meet its margin calls on a timely basis, Thornburg violated three of its lending agreements, and received a reservation of rights letter from one lender in which the lender reserved its right to declare Thornburg in default at any time. Accordingly, the Complaint alleges that in the days before Thornburg filed its annual report, the collateral it used for its lending agreements, adjustable rate mortgage (“ARM”) securities, was subject to being seized and sold by its lenders. According to the Complaint, given the circumstances of Thornburg’s liquidity crisis, circumstances that were misrepresented to, and concealed from, the company’s auditor, Goldstone, Simmons, and Starrett each knew, or was reckless in not knowing, that Thornburg did not have the intent or ability to hold its ARM securities until maturity or until their value recovered in the market. The Complaint concludes that the individual defendants also knew, or were reckless in not knowing, that this meant Thornburg was required to recognize on its income statement approximately $428 million of losses associated with the company’s ARM securities, and that the proper accounting treatment for these securities would have resulted in Thornburg reporting a loss rather than a profit for the quarter.

The Complaint claims that, based on this conduct, the defendants violated or aided and abetted the violation of, or in the case of Goldstone and Simmons are liable as control persons under Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) for Thornburg’s violation of, Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13b2-1, and 13b2-2 thereunder. The Complaint also claims that Goldstone and Simmons violated Rule 13a-14 of the Exchange Act. As part of this action, the Commission seeks against each of the defendants an injunction against future violations of the provisions set forth above, officer and director bars, and third tier civil money penalties.

SEC SETTLES JAMDAT MOBILE, INC., INSIDER TRADING CASE

The following excerpt is from the SEC website: 

March 12, 2012

SEC Settles With Former Wall Street Professional for Insider Trading Relating to the Acquisition of Jamdat Mobile, Inc.The Securities and Exchange Commission today announced that on March 9, 2012, Judge Katherine B. Forrest of the United States District Court in Manhattan, entered a final judgment against Alissa Joelle Kueng (“Kueng”), the last-remaining defendant in an insider trading action involving tipping and trading prior to an announcement that Jamdat Mobile Inc. (“Jamdat”), a software company that designed games for cell phones, would be acquired by Electronic Arts, Inc. (“Electronic Arts”). The final judgment permanently enjoins her from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and orders her to pay a $25,000 civil penalty. Kueng consented to the entry of the final judgment, without admitting or denying the allegations against her in the complaint.

The Commission’s civil complaint, filed in October 2009, alleged that Kueng, a former sales specialist at J.P. Morgan Securities Inc., in December 2005, had conveyed to a J.P. Morgan trader and two institutional customers, highly specific material, nonpublic information regarding Jamdat’s impending acquisition by Electronic Arts that she had received from a friend in the securities brokerage industry. The trader and the institutional customers invested in Jamdat stock on the basis of that information and realized profits totaling approximately $350,000. The Commission further asserted that given the specificity of the information Kueng had received, which included the price per share and the timing of the acquisition, she knew or should have known that the information had been obtained in breach of a duty to Jamdat. Also, in October 2009, the Commission filed a civil action in federal district court in Northern California charging four other defendants, including a Jamdat insider, with insider trading for tipping and/or trading on the basis ofmaterial, nonpublic information regarding Jamdat. Those defendants settled the charges against them.

Kueng also has agreed to the issuance of an administrative order, based on the entry of the permanent injunction against her, barring her from association with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with a right to reapply for association in a non-supervisory capacity after ten years and barring her from participating in the offering of a penny stock, with the right to apply for re-entry after ten years.

PRIVATE INVESTMENT FUND MANAGERS CHARGED BY SEC WITH MISLEADING INVESTORS

The following excerpt is from the SEC website:
SEC Announces Charges from Investigation of Secondary Market Trading of Private Company Shares
Washington, D.C., March 14, 2012 — The Securities and Exchange Commission today charged two managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms with misleading investors and pocketing undisclosed fees and commissions. The SEC alleges that the fund managers collectively raised more than $70 million from investors.

Separately, the SEC charged SharesPost, an online service that matches buyers and sellers of pre-IPO stock, with engaging in securities transactions without registering as a broker-dealer.
The charges stem from the SEC’s yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market.

“While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation,” said Robert Khuzami, Director of the SEC's Division of Enforcement.

“Fund managers must fully disclose their compensation and material conflicts of interest. Investors deserve better than the kind of undisclosed self-dealing present in these cases,” said Robert Kaplan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

SEC v. Frank Mazzola, Felix Investments LLC, and Facie Libre Management Associates LLC
The SEC alleges that Mazzola, who lives in Upper Saddle River, N.J., and his firms created two funds to buy securities of Facebook and other high profile technology companies. However, Mazzola and his firms engaged in improper self-dealing — earning secret commissions above the 5 percent disclosed in offering materials on the funds’ acquisition of Facebook stock and on re-sales of fund interests to new investors. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares.

According to the SEC’s complaint filed in federal court in San Francisco, Mazzola and his firms also made false statements to investors in other funds they created to invest in various pre-IPO companies. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. They also made false representations about Twitter’s revenue to attract investors to their Twitter fund.

The SEC’s lawsuit against Mazzola, Felix Investments, and Facie Libre seeks court orders prohibiting them from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.

In the Matter of EB Financial Group LLC and Laurence Albukerk
According to the SEC’s administrative proceeding against Laurence Albukerk, who lives in San Francisco, he and his firm hid from investors significant compensation earned in connection with two Facebook funds they managed. In written offering materials for the funds, Albukerk told investors he charged only a 5 percent fee for an initial investment and a 5 percent fee when the shares were distributed to fund investors upon a Facebook IPO. However, Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Funds while charging investors a mark-up. Albukerk also earned a brokerage fee on the acquisition of Facebook shares from the original stockholders. As a result of the fee and mark-up, investors in Albukerk’s two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials.

Without admitting or denying the SEC’s findings, Albukerk and EB Financial consented to entry of a SEC order finding that they violated Section 17(a)(2) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

In the Matter of SharesPost Inc. and Greg Brogger
According to the SEC’s administrative proceeding against SharesPost and its CEO Greg Brogger of Park City, Utah, the online platform facilitated securities transactions without registering with the SEC as a broker-dealer. SharesPost engaged in a series of activities that constituted the business of effecting securities transactions and thus were required to register as a broker-dealer. SharesPost held itself out to the public as an online service to help match buyers and sellers of pre-IPO stock and allowed registered representatives of other broker-dealers to hold themselves out as SharesPost employees and earn commissions on transactions they facilitated through the SharesPost platform. SharesPost and affiliated broker-dealers also created a commission pool that was distributed by an executive to employees who were representatives of these broker-dealers. The company also collected and published on its website third-party information concerning issuers’ financial metrics, SharesPost-funded research reports, and a SharesPost-created valuation index. Additionally, the SharesPost platform was used to create an auction process for interests in funds managed by a SharesPost affiliate and designed to buy stock in pre-IPO companies.

“The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Broker-dealer registration helps ensure those who effect securities transactions can be relied upon to understand and faithfully execute their obligations to customers and the markets. SharesPost skirted these important provisions.”

SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. Subsequent to the SEC’s investigation, SharesPost acquired a broker-dealer and its membership agreement was approved by the Financial Industry Regulatory Authority (FINRA).

These cases were investigated by Michael E. Liftik, Erin E. Schneider and Robert S. Leach of the San Francisco Regional Office. Ms. Schneider and Mr. Leach are members of the SEC’s Asset Management Unit. Fred Jolivet of the San Francisco Regional Office’s broker-dealer program conducted an examination relating to the SharesPost matter. The SEC’s litigation effort will be led by Robert L. Mitchell and Robert L. Tashjian of the San Francisco Regional Office.

The SEC thanks FINRA for its assistance in this matter.

ONE FOUND LIABLE ONE FOUND NOT LIABLE FOR INSIDER TRADING

The following excerpt is from the SEC website:

March 12, 2012

JURY FINDS DEFENDANT ALBERTO PEREZ LIABLE AND DEFENDANT SEBASTIAN DE LA MAZA NOT LIABLE FOR INSIDER TRADING IN VIOLATION OF THE SECURITIES AND EXCHANGE ACT OF 1934.

The Commission announced that on June 13, 2011 after a two week trial against Defendants Alberto Perez and Sebastian De La Maza, a jury found Alberto Perez liable for insider trading of Neff Corporation securities before an April 7, 2005 announcement of Neff’s acquisition by Odyssey Investment Partners in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (“Exchange Act”). The commission will file a motion with the court to determine the amount of disgorgement, pre-judgment interest and civil penalty to be levied upon Perez. The same jury found Defendant Sebastian De La Maza not liable of the same charge.

The Commission also announced that on December 22, 2010, and December 23, 2010, the United States District Court for the Southern District of Florida entered a Final Judgment of Permanent Injunction by consent, against Defendants Kevan D. Acord, Jose G. Perez and Philip C. Growney enjoining the Defendants from violations of Section 10(b) and Rule 10b-5 of the Exchange Act. United States District Judge Adalberto Jordan ordered the Defendants to pay disgorgement, prejudgment interest and a civil penalty. The Court ordered Defendant Acord to pay a total of $176,533.95 which includes disgorgement of $154,292.48, pre-judgment interest of $6,801.85 and a civil penalty of $15,439.62 pursuant to Section 21A of the Exchange Act. The Court ordered Defendant Growney to pay a total of $26,479.98 which includes disgorgement of $12,954.45, pre-judgment interest of $571.08 and a civil penalty of $12,954.45 pursuant to Section 21A of the Exchange Act. The Court ordered Defendant Perez to pay disgorgement, pre-judgment interest and a civil penalty pursuant to Section 21 A of the Exchange Act, the amount to be determined upon motion of the Commission.

The Commission commenced this action by filing its Complaint on July 15, 2009, against six individuals for insider trading in the securities of Neff Corporation before an April 7, 2005, announcement of its acquisition.

SEC BRINGS CHARGES AGAINST SEVERAL INDIVIDUALS ALLEGEDLY INVOLVED IN PUMP-AND-DUMP

The following excerpt is from the Securities and Exchange Commission website:

SEC Charges CEO of Las Vegas-Based Penny Stock Company and Several Consultants in Pump-and-Dump Scheme
“Washington, D.C., March 7, 2012 — The Securities and Exchange Commission today charged a Las Vegas-based food and beverage company and its CEO with conducting a fraudulent pump-and-dump scheme, and charged several consultants for their illegal sales of company shares into the markets.

The SEC alleges that Prime Star Group Inc. under the direction of CEO Roger Mohlman issued false and misleading press releases that touted lucrative agreements for the company’s food and beverage products. For example, Prime Star falsely claimed in a March 2010 press release that it had entered in a distribution agreement with another company in the beverage business valued at up to $16 million annually. Furthermore, certain Prime Star reports filed with the SEC understated the company’s net losses or overstated its cash balance.

The SEC suspended trading in Prime Star in June 2011 due to questions about the adequacy and accuracy of information about the company.
“Prime Star and Mohlman used backdated consulting agreements and forged attorney opinion letters as a means to issue millions of shares to the consultants who then dumped them on unsuspecting investors,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC will persist in its efforts to stamp out microcap fraud schemes.”

Since the beginning of fiscal year 2011, the SEC has filed more than 50 enforcement actions for misconduct related to penny stocks, and issued more than 65 orders suspending the trading of suspicious microcap issuers. Microcap stocks are issued by the smallest of companies and tend to be low priced and trade in low volumes. Many penny stock companies do not file financial reports with the SEC, so investing in them entails many risks. The SEC has published a microcap stock guide for investors and an Investor Alert about avoiding microcap fraud perpetrated through social media.
The SEC’s complaint against Prime Star and Mohlman alleges that they fraudulently issued free-trading Prime Star shares to consultants who also are charged in the scheme:
Kevin Carson of Lake Worth, Fla.

Danny Colon of Edgewater, N.J.

Colon’s company DC International Consulting LLC

Colon’s wife Marysol Morera of Edgewater, N.J.

Colon’s half brother Felix Rivera of Clifton, N.J.

Esper Gullatt, Jr. of Aurora, Colo.

Gullatt’s Minnesota-based company The Stone Financial Group Inc.

Joshua Konigsberg of Palm Beach Gardens, Fla.
The SEC alleges that Prime Star and Mohlman pumped the stock by exaggerating the company’s operations and contracts in a series of press releases issued in October 2009 and March 2010. For instance, they issued an October 14 press release claiming Prime Star’s subsidiary Wild Grill Foods had received purchase orders for more than $1.25 million of seafood products. Mohlman was quoted saying, “Prime Star Group is thrilled at the growth of this business unit. We will continue to grow the Wild Grill brand, its domestic distribution, and have begun exploring international opportunities for distribution abroad.” However, in reality, Prime Star’s just-established Wild Grill subsidiary had no operations and there were no purchase orders.

According to the SEC’s complaint, Prime Star’s press releases coincided with the illegal issuance of millions of unregistered shares of Prime Star stock to the purported business consultants from August 2009 to March 2010. Although Prime Star had a class of shares registered pursuant Section 12(g) of the Securities Exchange Act of 1934, that section does not permit transfers of those shares. To transfer Prime Star stock in compliance with the securities laws, Mohlman, Prime Star and the consultants had to either register an offering of the company’s shares or meet an exemption to the offering registration requirement. However, they did neither.

The SEC alleges that Mohlman and Prime Star’s fraudulent promotional activities caused Prime Star’s stock price and trading volume to increase markedly. For instance, on March 16, a prior day press release caused trading volume to spike to more than 16 million shares, which was 10 times more than the previous day’s trading volume. Prime Star’s stock price plummeted the following day.

The SEC’s complaint filed in federal court in Nevada alleges Prime Star and Mohlman violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The complaint also alleges that Prime Star violated 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. The complaint further alleges that Mohlman violated Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1 and 13b2-2 thereunder and aided and abetted Prime Star’s violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The SEC also alleges Section 5(a) and 5(c) violations against Colon, Morera, Rivera, DC International Consulting, Carson, Gullatt, The Stone Financial Group, and Konigsberg.

One of the consultants — Konigsberg — has agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to the entry of a judgment that would enjoin him from future violations of Sections 5(a) and 5(c) of the Securities Act. The SEC is seeking penalties and disgorgement plus prejudgment interest against the other consultants and Mohlman as well as an officer and director bar against Mohlman, penny stock bars against Mohlman, Colon, Morera, Rivera, Carson, and Gullatt, and permanent injunctions against all defendants. Separately, the Commission instituted administrative proceedings to determine whether the registration of each class of Prime Star securities should be revoked or suspended based on its failure to file required periodic reports.

The SEC’s investigation was conducted by Julie Russo, Elisha Frank, and Karaz Zaki of the Miami Regional Office, and Edward McCutcheon is leading the SEC’s litigation.”

KOSS COMPANY AND TOP EXECUTIVES AGREE TO KEEP BETTER BOOKS

The following excerpt is from the SEC website:
March 9, 2012
“DISTRICT JUDGE APPROVES SEC SETTLEMENT WITH KOSS CORPORATION AND MICHAEL J. KOSS, ITS CEO AND FORMER CFO
On February 22, 2012, the Honorable Rudolph T. Randa, U.S. District Judge for the Eastern District of Wisconsin, approved the settlement of the Securities and Exchange Commission’s Complaint against Koss Corporation (“Koss”), located in Milwaukee, Wisconsin, and Michael J. Koss, its CEO and former CFO. The case is based on Koss Corporation’s preparation of materially inaccurate financial statements, book and records, and lack of adequate internal controls from fiscal years 2005 through 2009. The S.E.C. responded to a letter dated December 20, 2011, in which the District Judge Randa requested that the S.E.C. address concerns about the proposed settlement. Based on the S.E.C.’s response, District Judge Randa stated the Court was “satisfied that the injunctions are sufficiently specific… [and] that the proposed final judgments are fair, reasonable, adequate, and in the public interest.” The Injunctive Orders:

(1) Enjoin Koss from violating and Michael J. Koss from aiding and abetting violations of the reporting, books and records and internal controls provisions (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13) of the federal securities laws and Michael J. Koss from violating the certification provision (Section 13a-14 of the Exchange Act) and

(2) Order Michael J. Koss to reimburse Koss $242,419 in cash and 160,000 of options pursuant to Section 304 of the Sarbanes-Oxley Act. This bonus reimbursement, together with his previous voluntary reimbursement of $208,895 in bonuses to Koss Corporation represents his entire fiscal year 2008, 2009 and 2010 incentive bonuses.

The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of Wisconsin, the Federal Bureau of Investigation and the Public Company Accounting Oversight Board. The Commission considered the cooperation of Koss Corporation and Michael J. Koss in determining to accept their settlement.”