SEC STOPS PONZI SCHEME WHICH ALLEGEDLY TARGETED PERSIAN-JEWISH COMMUNITY

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Shuts Down Ponzi Scheme Targeting Persian-Jewish Community in Los Angeles
04/13/2012 03:30 PM EDT
Washington, D.C., April 13, 2012 –The Securities and Exchange Commission today obtained an emergency court order to halt an ongoing Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles.

The SEC alleges that for the past two years, Shervin Neman raised more than $7.5 million from investors by claiming to be a hedge fund manager. Neman told investors that his purported hedge fund – Neman Financial L.P. – invested in foreclosed residential properties that would be quickly flipped for profit as well as in Facebook shares obtained in private transactions and other highly anticipated initial public offerings including Groupon, LinkedIn, and Angie’s List. Although Neman promised investors exorbitant returns resulting from his investing acumen and access to pre-IPO shares of well-known companies, what they actually received was simply other investors’ money in hallmark Ponzi scheme fashion.

“Neman deceived members of his own community to raise money in this fraudulent Ponzi scheme,” said Michele Wein Layne, Associate Regional Director of the SEC’s Los Angeles Office. “By exploiting investors’ trust in him, Neman was continually able to raise more money to pay back existing investors and finance an extravagant lifestyle.”
The Honorable Jacqueline H. Nguyen for the U.S. District Court for the Central District of California granted the SEC’s request for a temporary restraining order and asset freeze against Neman and the entities he controlled.

According to the SEC’s complaint, Neman raised funds from at least 11 investors in the fraudulent securities offering. Most of the investors are members of the Los Angeles Persian-Jewish community along with Neman, who lives in the Century City area of Los Angeles. More than 99 percent of the money Neman raised was used either to pay existing investors or fund his lavish lifestyle. Neman spent nearly $1.6 million of investor funds to buy jewelry and high-end cars as well as to finance his wedding and honeymoon, other vacations, and VIP tickets to sporting events.

The SEC’s investigation was conducted by Cindy Eson of the Los Angeles Regional Office. Molly White will lead the litigation. Joshua Bauder, Harden Sooper, and Yanna Stoyanoff conducted the SEC examination that prompted the investigation.
Judge Nguyen has scheduled a court hearing for April 23 at 2 p.m. on the SEC’s motion for a preliminary injunction.

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

FROM:  SEC 

April 11, 2012

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

The U.S. Securities and Exchange Commission announced that on April 6, 2012, the United States District Court for the Central District of California entered a Final Judgment against David E. Howard II, Flatiron Capital Partners, LLC (FCP), and Flatiron Systems, LLC (FS). Between December 2007 and March 2009, FCP and FS operated as investment companies that purported to trade securities using an automated trading system. Howard, a resident of New York City, was a co-managing member of FCP and the sole managing member of FS. The Commission’s complaint alleged, among other things, that, between December 2007 and January 2009, approximately 192 investors, located in at least 38 states, purchased LLC membership interests in FCP and FS. Investors were persuaded through false and misleading statements made by Howard and others to invest approximately $2.15 million in FCP and FS, and in addition, paid approximately $1.1 million in purported license fees for access to the trading systems. Thereafter, Howard misused and/or misappropriated almost $500,000 of the investor money and he and other principals lost the majority of the remaining funds through unsuccessful trading. Investors lost over $3 million in the scheme.

Howard, FCP and FS did not respond to the SEC’s allegations and the court therefore ordered default judgment against them. Howard, FCP and FS have each been enjoined from committing 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. In addition, Howard has been enjoined from future violations of Sections 206(1), 206(2), 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and FCP and FS have each been enjoined from future violations of Section 7(1) of the Investment Company Act of 1940. The Judgment also found Howard and FCP jointly and severally liable to pay disgorgement of $487,028 plus prejudgment interest of $79,838.69 on that disgorgement for a total of $566,866.69 and Howard and FS jointly and severally liable to pay disgorgement of $1,124,218.95 plus prejudgment interest of $127,192.86 on that disgorgement for a total of $1,251,411.81. Finally, Howard was ordered to pay a penalty of $390,000.

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.