GLENCOE, ILLINOIS RESIDENT KENNETH A. DACHMAN ORDERED TO PAY OVER $2 MILLION FOR MISAPPROPRIATION AND OFFERING FRAUD

FROM:  SEC
April 11, 2012
Securities and Exchange Commission v. Kenneth A. Dachman, et al., 1:12-cv-00821 (N.D. Illinois) (filed on February 6, 2012).
On April 4, 2012, Judge Virginia M. Kendall of the United States District Court for the Northern District of Illinois entered a final judgment by default against Kenneth A. Dachman (Dachman), the former founder and Chairman of Central Sleep Diagnostics, LLC (Central Sleep), Central Sleep Diagnostics of Florida, LLC (Central Sleep Florida), and Advanced Sleep Devices, LLC (Advanced Sleep). Among other things, the Court ordered Dachman to pay disgorgement of over $1.8 million plus prejudgment interest related to his role in an offering fraud and misappropriation scheme.

The SEC’s complaint alleged that between July 2008 and June 2010, Dachman raised at least $3,594,709 from investors in 13 states and 12 foreign countries on behalf of Central Sleep and an additional $567,399 from investors in Central Sleep Florida and Advanced Sleep. According to the complaint, Dachman made numerous misrepresentations to investors while selling the investments, including lying about how investor funds would be used and his academic and business backgrounds. Dachman also failed to tell investors that he had misappropriated at least $1,875,739.42 of their funds, over 45% of the total funds raised. According to the SEC’s complaint, Dachman used investor funds for a variety of personal uses, including renting-to-own a 10,000 square foot home, family vacations to Alaska, Europe and elsewhere, a new Range Rover, rare books, collectibles and antiques, and other personal expenses and credit card bills. Dachman also diverted investor funds to a tattoo parlor that he co-owned with his son-in-law.

The Court’s final judgment against Dachman permanently enjoins him from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, orders Dachman to pay $1,875,739.42 in disgorgement and $194,756.43 in prejudgment interest, and permanently bars him from participating in any offering of penny stock.
For further information, please see Litigation Release Number 22254 (February 6, 2012).

SEC ADDRESSES INCENTIVE BASED PAY COMPENSATION

FROM:  SEC
Speech by SEC Commissioner:
Opening Remarks Regarding Incentive-Based Compensation Arrangements
by
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
Washington, D.C.
March 2, 2011
I, too, would like to thank the staff for your tireless efforts in preparing the proposed rules before us today. My thanks go especially to the staff of the Division of Trading and Markets for all the time you spent with me and my counsel. Thank you for your thoughtful consideration of my questions and concerns.

I would also like to welcome Eileen Rominger, our new Director of Investment Management, and Mark Cahn, to your first open meeting as General Counsel.
It was Ben Franklin who said, “Remember that time is money.” So, let me be brief and highlight just a few things about this proposal that are of interest to me.
As the release before us today notes, “flawed incentive compensation practices in the financial industry were one of many factors contributing to the financial crisis that began in 2007.” To me, it is simply common sense that a financial institution — and thus its shareholders — can be negatively affected if incentives drive behavior that is not consistent with the institution's overall interests.

To address these flawed compensation practices, Congress adopted Section 956 as part of the Dodd-Frank Act to require the Commission to jointly prescribe with other regulators the proposed rules before us today.

Given the critical role that financial institutions played in the financial crisis and the role that they are continuing to play in our economy’s recovery, I ask that you carefully consider our proposal and our requests for comment. Specifically, I ask that you think about whether the proposed definition of incentive-based compensation is sufficiently broad to include all types of compensation that should be covered under the rule.
Also, are the deferral arrangements required for executive officers appropriate (including the three-year and 50 percent minimums)? And, are there additional considerations that the Commission ought to consider in designing this provision, such as tax or accounting considerations that may affect the ability of larger covered financial institutions to comply with the proposed deferral arrangements?

When you submit your comments, please provide constructive suggestions as to how the Commission can best carry out the language and intent of Section 956. You will note that, as a joint release, this release looks a bit different from the typical Commission release and does not contain the number of requests for comments you would typically see in a Commission proposing release. Please don’t let that dissuade you from sending us your typical, thoughtful comment letters. We encourage you to comment on any aspect of this proposal and especially on the issues noted in the preamble.
Thanks again to the Commission staff for your hard work, and I have no questions.

THE MAN WHO ALLEGEDLY PUT HIS FAITH IN A PONZI SCHEME

FROM:  SEC
Washington, D.C., April 12, 2012 — The Securities and Exchange Commission today charged a self-described “Social Capitalist” with running a Ponzi scheme that targeted socially-conscious investors in church congregations.

The SEC alleges that Ephren W. Taylor II made numerous false statements to lure investors into two investment programs being offered through City Capital Corporation, where he was the CEO. Instead of investor money going to charitable causes and economically disadvantaged businesses as promised, Taylor secretly diverted hundreds of thousands of dollars to publishing and promoting his books, hiring consultants to refine his public image, and funding his wife’s singing career.

The SEC also charged City Capital and its former chief operating officer Wendy Connor, who lives in North Carolina and along with Taylor received hundreds of thousands of dollars from investors in salary and commissions.

“Ephren Taylor professed to be in the business of socially-conscious investing. Instead, he was in the business of promoting Ephren Taylor,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “He preyed upon investors’ faith and their desire to help others, convincing them that they could earn healthy returns while also helping their communities.”

According to the SEC’s complaint filed in federal court in Atlanta, Taylor strenuously cultivated an image of a highly successful and socially conscious entrepreneur. He marketed himself as “The Social Capitalist” and touted that he was the youngest black CEO of a public company and the son of a Christian minister who understands the importance of giving back. He authored three books and appeared on national television programs, and promoted his investment opportunities through live presentations, Internet advertisements, and radio ads. For instance, Taylor conducted a multi-city “Building Wealth Tour” during which he spoke to church congregations including Atlanta’s New Birth Church and at various wealth management seminars.

The SEC alleges that Taylor and City Capital offered two primary investments: promissory notes supposedly funding various small businesses, and interests in “sweepstakes” machines. In addition to promising high rates of return, Taylor assured investors that he had a long track record of success and that investor funds would be used to support businesses in economically disadvantaged areas. A portion of profits were to go to charity. Taylor devoted considerable time to denigrating traditional investment vehicles such as CDs, mutual funds, and the stock market, labeling them as “foolish” and “money losers.” He told audiences they could make far greater returns using their self-directed IRAs for investments in small businesses and sweepstakes machines offered by City Capital.

In reality, according to the SEC’s complaint, more than $11 million that Taylor and City Capital raised from hundreds of investors nationwide from 2008 to 2010 was instead used to operate the Ponzi scheme. Investor money was misused to pay other investors, finance Taylor’s personal expenses, and fund City Capital’s payroll, rent, and other costs. City Capital’s business ventures were consistently unprofitable, and no meaningful amounts of investor money were ever sent to charities.

The SEC’s complaint seeks disgorgement, financial penalties and permanent injunctive relief against City Capital, Taylor, and Connor as well as officer and director bars against Taylor and Connor.

SEC CHARGES "SOCIAL CAPITALIST" WITH RUNNING A PONZI SCHEME

FROM:  SEC
Washington, D.C., April 12, 2012 — The Securities and Exchange Commission today charged a self-described “Social Capitalist” with running a Ponzi scheme that targeted socially-conscious investors in church congregations.

The SEC alleges that Ephren W. Taylor II made numerous false statements to lure investors into two investment programs being offered through City Capital Corporation, where he was the CEO. Instead of investor money going to charitable causes and economically disadvantaged businesses as promised, Taylor secretly diverted hundreds of thousands of dollars to publishing and promoting his books, hiring consultants to refine his public image, and funding his wife’s singing career.

The SEC also charged City Capital and its former chief operating officer Wendy Connor, who lives in North Carolina and along with Taylor received hundreds of thousands of dollars from investors in salary and commissions.

“Ephren Taylor professed to be in the business of socially-conscious investing. Instead, he was in the business of promoting Ephren Taylor,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “He preyed upon investors’ faith and their desire to help others, convincing them that they could earn healthy returns while also helping their communities.”

According to the SEC’s complaint filed in federal court in Atlanta, Taylor strenuously cultivated an image of a highly successful and socially conscious entrepreneur. He marketed himself as “The Social Capitalist” and touted that he was the youngest black CEO of a public company and the son of a Christian minister who understands the importance of giving back. He authored three books and appeared on national television programs, and promoted his investment opportunities through live presentations, Internet advertisements, and radio ads. For instance, Taylor conducted a multi-city “Building Wealth Tour” during which he spoke to church congregations including Atlanta’s New Birth Church and at various wealth management seminars.

The SEC alleges that Taylor and City Capital offered two primary investments: promissory notes supposedly funding various small businesses, and interests in “sweepstakes” machines. In addition to promising high rates of return, Taylor assured investors that he had a long track record of success and that investor funds would be used to support businesses in economically disadvantaged areas. A portion of profits were to go to charity. Taylor devoted considerable time to denigrating traditional investment vehicles such as CDs, mutual funds, and the stock market, labeling them as “foolish” and “money losers.” He told audiences they could make far greater returns using their self-directed IRAs for investments in small businesses and sweepstakes machines offered by City Capital.

In reality, according to the SEC’s complaint, more than $11 million that Taylor and City Capital raised from hundreds of investors nationwide from 2008 to 2010 was instead used to operate the Ponzi scheme. Investor money was misused to pay other investors, finance Taylor’s personal expenses, and fund City Capital’s payroll, rent, and other costs. City Capital’s business ventures were consistently unprofitable, and no meaningful amounts of investor money were ever sent to charities.

The SEC’s complaint seeks disgorgement, financial penalties and permanent injunctive relief against City Capital, Taylor, and Connor as well as officer and director bars against Taylor and Connor.

SEC SAYS GOLDMAN, SACHS & CO. LACKED ADEQUATE PROCEDURES FOR RESEARCH "HUDDLES"

FROM:  SEC
SEC Charges Goldman, Sachs & Co. Lacked Adequate Policies and Procedures for Research “Huddles”
FOR IMMEDIATE RELEASE
2012-61
Washington, D.C., April 12, 2012 — The Securities and Exchange Commission today charged that Goldman, Sachs & Co. lacked adequate policies and procedures to address the risk that during weekly “huddles,” the firm’s analysts could share material, nonpublic information about upcoming research changes. Huddles were a practice where Goldman’s stock research analysts met to provide their best trading ideas to firm traders and later passed them on to a select group of top clients.

Goldman agreed to settle the charges and will pay a $22 million penalty. Goldman also agreed to be censured, to be subject to a cease-and-desist order, and to review and revise its written policies and procedures to correct the deficiencies identified by the SEC. The Financial Industry Regulatory Authority (FINRA) also announced today a settlement with Goldman for supervisory and other failures related to the huddles.

“Higher-risk trading and business strategies require higher-order controls,” said Robert S. Khuzami, Director of the Commission’s Division of Enforcement. “Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.”

The SEC in an administrative proceeding found that from 2006 to 2011, Goldman held weekly huddles sometimes attended by sales personnel in which analysts discussed their top short-term trading ideas and traders discussed their views on the markets. In 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.

According to the SEC’s order, the programs created a serious risk that Goldman’s analysts could share material, nonpublic information about upcoming changes to their published research with ASI clients and the firm’s traders. The SEC found these risks were increased by the fact that many of the clients and traders engaged in frequent, high-volume trading. Despite those risks, Goldman failed to establish adequate policies or adequately enforce and maintain its existing policies to prevent the misuse of material, nonpublic information about upcoming changes to its research. Goldman’s surveillance of trading ahead of research changes — both in connection with huddles and otherwise — was deficient.

“Firms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.

In 2003, Goldman paid a $5 million penalty and more than $4.3 million in disgorgement and interest to settle SEC charges that, among other violations, it violated Section 15(f) of the Securities Exchange Act of 1934 by failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information obtained from outside consultants about U.S. Treasury 30-year bonds.  The 2003 order found that although Goldman had policies and procedures regarding the use of confidential information, its policies and procedures should have identified specifically the potential for receiving material, nonpublic information from outside consultants. Goldman settled the SEC’s 2003 proceeding without admitting or denying the findings.

The order issued today finds that Goldman willfully violated Section 15(g) of the Exchange Act (formerly Section 15(f)). The SEC censured the firm and ordered it to cease and desist from committing or causing any violations and any future violations of Section 15(g) of the Exchange Act. Under the terms of the settlement, Goldman will pay a $22 million penalty, $11 million of which shall be deemed satisfied upon payment by Goldman of an $11 million penalty to FINRA in a related proceeding. The SEC considers a variety of factors, including prior enforcement actions, when determining sanctions.

In addition, Goldman agreed to complete a comprehensive review of the policies, procedures, and practices relating to the SEC’s findings in the order, and to adopt, implement, and maintain practices and written policies and procedures consistent with the findings of the order and the recommendations in the comprehensive review. In June 2011, Goldman entered into a consent order relating to the huddles and ASI with the Massachusetts Securities Division (Docket No. 2009-079). In the SEC’s action, Goldman admits to the factual findings to the extent those findings are also contained in Section V of the Massachusetts Consent Order, but otherwise neither admits nor denies the SEC’s findings.

Stacy Bogert, Drew Dorman, Dmitry Lukovsky, Alexander Koch, and Yuri Zelinsky in the SEC’s Division of Enforcement conducted the investigation.
The SEC thanks FINRA for its assistance in this matter.

FALSELY CLAIMING HIS COMPANIES TO BE THE "NEXT GOOGLE" GETS MAN SOME SEC TROUBLES

FROM:  SEC
SEC Settles Fraud Charges Against Silicon Valley Man
Washington, D.C., April 9, 2012 – The Securities and Exchange Commission today charged a Silicon Valley man who raised millions for two Internet start-ups by falsely promising investors that his companies were on the verge of undergoing successful initial public offerings and were well on their way to becoming the “next Google.”

The SEC alleges that Benedict Van, of San Jose, Calif., lured investors into web-based start-ups hereUare, Inc. and eCity, Inc. by falsely telling them that the companies would go public within a matter of months and generate millions in quick returns. In truth, Van had no plans to take the companies public and relied solely on investor funds to stay in business. Ultimately, when investor funds ran out by the end of 2008, Van was forced to shut down operations.

“Van played on the hopes of investors, tricking them into believing that his companies were on the verge of becoming the next Silicon Valley success stories,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Investors should be wary of pitches promising IPO riches from companies with minimal operations and track records.”

According to the SEC’s complaint, filed in federal court in the Northern District of California, Van raised more than $6.2 million from investors for hereUare in 2007 and 2008, and raised $880,000 in investor funds for eCity in 2008. In presentations to prospective investors, chiefly in homes in Sacramento and Stockton, Van held himself out as a wealthy venture capitalist with prior IPO experience. Van told prospective investors that the companies had lucrative deals and patents, and that he had retained Goldman Sachs and an international law firm to help take the companies public within six months. According to the SEC, all of these representations were false.

The SEC’s complaint charges Van and hereUare violated the antifraud and registration provisions of U.S. securities laws, and charges eCity with violations of the antifraud provisions. Van, hereUare, and eCity have agreed to settle the charges against them without admitting or denying the SEC’s allegations and have consented to permanent injunctions. Van also consented to a district court order to permanently bar him from serving as a public company officer or director, and hereUare has consented to an administrative proceeding order deregistering its stock with the Commission. The SEC waived any financial payment against Van based on his demonstrated inability to pay.
Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office conducted the SEC’s investigation.