FORMER GATEWAY CFO SETTLES SEC FRAUD ACTION

FROM:  SEC
April 18, 2012
FORMER GATEWAY CFO SETTLES SEC FRAUD ACTION
On April 10, 2012, a final judgment was entered against John J. Todd, a former CFO of Gateway, Inc. Todd consented to entry of the final judgment without admitting or denying the allegations made by the Securities and Exchange Commission that he engaged in fraud and other violations of the federal securities laws in connection with Gateway’s recognition of revenue in the third quarter of 2000. This concludes the litigation of this action, brought in 2003 against three former officers of Gateway.

The SEC alleged that Todd falsely represented Gateway’s financial condition in the third quarter of 2000 in order to meet financial analysts’ earnings and revenue expectations. Among other transactions, the SEC alleged that Todd caused Gateway to record $47.2 million in revenue from a one-time sale of fixed assets to Gateway’s third-party information technology services provider in violation of Generally Accepted Accounting Principles (GAAP), and that Todd, then Gateway’s CFO, caused Gateway to recognize an additional $21 million in revenue from an incomplete sale of computers to a second entity, also in violation of GAAP. The SEC alleged that absent either of these transactions, Gateway would not have met analysts’ expectations with regard to its third quarter revenue.

Todd consented to a final judgment permanently enjoining him from violations of the antifraud provisions of Section 10(b) and Rule 10b-5 thereunder, and from violations of SEC Rule 13b2-2, which prohibits making misrepresentations and omissions of material fact to company auditors, as well as from aiding and abetting the issuer reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Todd further consented to be barred for ten years from acting as an officer or director of a public company, and to pay disgorgement of $165,000, constituting his salary and bonus for the relevant quarter, together with prejudgment interest thereon of $138,162.24 totaling $303,162.24, and a $110,000 penalty.

Previously, on March 7, 2007, a jury had rendered a unanimous verdict finding Todd and defendant Robert D. Manza, Gateway’s former controller, liable for fraud, making false representations to auditors, aiding and abetting issuer reporting violations and other violations following a three week trial. On May 30, 2007, the Honorable Roger T. Benitez overturned the jury verdict as to the fraud and certain other claims. The SEC appealed that ruling, as well as the District Court’s prior August 1, 2006, grant of summary judgment to Gateway’s former CEO, Jeffrey Weitzen, dismissing the SEC’s case as to Weitzen. On June 23, 2011, the Ninth Circuit reversed those rulings and remanded the matter to the District Court. On January 25, 2012, the Court entered final judgments against Weitzen and Manza pursuant to their consents. [LR 22244 (January 31, 2012.]

FATHER AND SON HEDGE FUND MANAGERS CHARGED WITH FRAUD

FROM:  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 20, 2012 – The Securities and Exchange Commission today charged a Boston-based father-son duo of hedge fund managers and their firms with securities fraud for misleading investors about their investment strategy and past performance.

The SEC’s investigation found that Gabriel and Marco Bitran raised millions of dollars for their hedge funds through GMB Capital Management LLC and GMB Capital Partners LLC by falsely telling investors they had a lengthy track record of success based on actual trades using real money. In truth, the Bitrans knew the track record was based on back-tested hypothetical simulations. The Bitrans also misled investors in certain hedge funds to believe they used quantitative optimal pricing models devised by Gabriel Bitran to invest in exchange-traded funds (ETFs) and other liquid securities. Instead, they merely invested the money almost entirely in other hedge funds. GMB Capital Management later provided false documents to SEC staff examining the firm’s claims in marketing materials of a successful track record.

The Bitrans agreed to be barred from the securities industry and pay a total of $4.8 million to settle the SEC’s charges.

“The Bitrans solicited investors by touting an impressive track record and a unique investment strategy, and they lied about both,” said David P. Bergers, Director of the SEC’s Boston Regional Office.

According to the SEC’s order instituting settled administrative proceedings, Gabriel Bitran founded GMB Capital Management in 2005 for the stated purpose of managing hedge funds using quantitative models he developed based on his academic optimal pricing research to trade primarily ETFs. He and his son Marco Bitran solicited potential investors with three primary selling points:
Very successful performance track records based on actual trades using real money from 1998 to the inception of the hedge funds.

The firm’s use of Gabriel Bitran’s proprietary optimal pricing model to trade ETFs.
Gabriel Bitran’s involvement as founder and portfolio manager of the funds.
The SEC’s order states that over a period of three years, the Bitrans raised more than $500 million for eight hedge funds and various managed accounts while making these misrepresentations to investors. In order to market the hedge funds, GMB Management and the Bitrans created performance track records beginning in January 1998 showing double-digit annualized return without any down years. They distributed these track records to potential investors in marketing materials, and told investors that they were based on actual trading with real money using Gabriel Bitran’s optimal pricing models. In reality, the Bitrans knew their representations were false and the track records were based on hypothetical historical investments. For two of their hedge funds, they created track records showing annualized returns of 16.2 percent and 11.7 percent with no down years, and told investors the returns were based on actual trading when in fact they were based on hypothetical historical allocations to hedge fund managers.

According to the SEC’s order, investors were misled to believe their money was being invested according to Gabriel Bitran’s unique quant strategy when in reality certain GMB hedge funds were merely investing predominantly in other hedge funds without his involvement. For example, investors in two GMB hedge funds were told that Gabriel Bitran spent 80 percent of his time managing the funds and was involved in reviewing trades in the funds on a daily basis. However, he actually had no role in the management of either fund. Both funds experienced a series of losses at the end of 2008, and GMB eventually dissolved them. When a possible financial fraud at the Petters Group Worldwide was reported in late September 2008, the two hedge funds’ investments in a fund that was entirely invested in the Petters Group became illiquid. However, GMB did not disclose to investors that it had been impacted by the Petters fraud, instead sending investors a letter stating that “a swap instrument that the Fund entered into seeking to realize a higher return on a portion of its uninvested cash” had become illiquid because “one of the parties underlying the swap instrument is currently experiencing a credit and liquidity crisis, in conjunction with other alleged factors.” Furthermore, the two GMB funds suffered significant losses in hedge funds that had invested with Bernard Madoff. These investments in funds that ultimately invested with the Petters Group and Madoff were made contrary to what GMB investors were told.

According to the SEC’s order, during an SEC examination of GMB Capital Management, the firm produced a document that the Bitrans claimed was a real-time record of Gabriel Bitran’s trades since 1998. In fact, the document was false and created solely for the purpose of responding to the SEC staff’s request for the books and records that supported GMB’s performance claims.

The GMB entities and the Bitrans neither admitted nor denied the SEC’s findings in settling the charges. They agreed to pay disgorgement of $4.3 million. Gabriel and Marco Bitran also agreed to pay $250,000 each in penalties and be barred from the securities industry, and the GMB entities will be censured. The SEC’s order requires the Bitrans and the GMB entities to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-8 thereunder.

The SEC’s investigation was conducted by Kerry Dakin, Kevin Kelcourse, and Kathleen Shields of the Boston Regional Office. Paul Prata, Elizabeth Ward, and Milton Pepin of the Boston Regional Office worked on the SEC’s examination. Stuart Jackson of the SEC’s Division of Risk, Strategy, and Financial Innovation assisted in the investigation.

SEC CHARGES LOS ANGELES-BASED PERPETRATOR FOR MUNICIPAL BOND FRAUD SCHEME

April 17, 2012
FROM:  SEC
The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of a Los Angeles man orchestrating a securities fraud by falsely presenting himself to investors as a specialist in municipal bond investments.

The SEC alleges that Michael Anthony Gonzalez raised approximately $1 million since February 2010 by telling investors he would invest their money in specific tax-exempt municipal bonds insured by the Securities Investor Protection Corporation (SIPC) . In reality, Gonzalez never purchased the bonds and instead deposited investor money into his own bank account for personal use. He later attempted to conceal the scheme by providing investors with phony confirmation statements.

According to the SEC’s complaint filed in the United States District Court for the Central District of California, Gonzalez falsely told investors that he was associated with New York-based broker-dealer May Capital Group in order to portray himself as a legitimate money manager. Gonzalez had no dealings with May Capital, and through his false representations and fake confirmations he succeeded in giving investors the false impression that their investments were insured and safe. Gonzalez also provided investors with phony trade confirmations that identified securities that were either not purchased or non-existent.

The Honorable S. James Otero, United States District Judge, granted the SEC’s request for a temporary restraining order against Gonzalez and issued orders freezing his assets, requiring accountings, prohibiting the destruction of documents, and granting expedited discovery .  The court will hold a hearing on the SEC’s motion for a preliminary injunction on May 25, 2012.

The SEC’s complaint charges Gonzalez with violating the antifraud provisions, 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 the registration provisions of Section 15(a) of the Exchange Act . In addition to the emergency relief, the SEC’s complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, and financial penalties against Gonzalez.

SEC ANNOUNCES SETTLEMENT OF ACCOUNTING FRAUD CHARGES AGAINST FORMER CSK AUTO CORPORATION MANAGEMENT

FROM:  SEC 
April 18, 2012
On April 18, 2012, the Securities and Exchange Commission announced that final judgments have been entered in the United States District Court in Phoenix, Arizona against three former officers and managers of Phoenix-based CSK Auto Corporation (CSK). The Commission’s complaint, filed in 2009, alleged that from 2002 to 2004, Don W. Watson, CSK’s former chief financial officer, senior vice president, and treasurer, Edward W. O’Brien, CSK’s former controller, and Gary M. Opper, CSK’s former director of credit and receivables, engaged in a scheme to materially overstate CSK’s income by aggressively recognizing vendor allowances and failing to write off vendor allowance receivables when management knew the receivables were uncollectible. Because of the scheme, CSK filed false financial statements overstating pre-tax income for fiscal year 2002 by 48.6%, or $11.2 million, fiscal year 2003 by at least $37.4 million, thereby reporting pre-tax income instead of a pre-tax loss, and fiscal year 2004 by at least 67.2%, or $21.4 million. At the time of the fraud, CSK was one of the nation’s largest auto parts retailers with over 1000 stores located throughout the western United States. In July 2008, CSK became a wholly owned subsidiary of O’Reilly Automotive, Inc.

Pursuant to his final judgment, Watson consented to a permanent injunction, a permanent officer and director bar, and agreed to reimburse O’Reilly Automotive, Inc. (“O’Reilly”), which acquired CSK, $646,404.17 in bonuses and stock profits pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, (“SOX”), 15 U.S.C. § 7243. In a related criminal action brought by the U.S. Department of Justice, on September 21, 2011, Watson was sentenced to two years’ imprisonment, to be followed by three years’ supervised release, and ordered to pay restitution in the amount of $1,016.13, based on his guilty plea to a to a one-count superseding felony information, charging him with conspiracy to commit securities fraud and mail fraud, in violation of 18 U.S.C. § 371.

Pursuant to his final judgment, O’Brien consented, without admitting or denying the allegations in the Commission’s complaint, to a permanent injunction, a permanent officer and director bar, and agreed to pay $33,386 in disgorgement and prejudgment interest. Pursuant to his final judgment, Opper consented, without admitting or denying the allegations in the Commission’s complaint, to full injunctive relief and agreed to pay $10,906 in disgorgement and prejudgment interest. In the related DOJ criminal action, both O’Brien and Opper pled guilty to obstruction of justice in connection with the Commission’s investigation by providing false information to CSK’s counsel, knowing that the results of CSK’s internal investigation would be disclosed to the Commission staff, in violation of 18 U.S.C. § 1505. On November 10, 2011, both O’Brien and Opper were sentenced to three years’ probation, and ordered to pay a $10,000 and $2,500 fine, respectively.

PENNY STOCK PROMOTERS ENJOINED AND BARRED

FROM:  SEC

The United States Securities and Exchange Commission (Commission) announced that on April 10, 2012, the Honorable Sidney A. Fitzwater of the United States District Court for the Northern District of Texas enjoined Ryan M. Reynolds of Dallas, TX, Timothy T. Page of Malibu, CA, Steven Fischer of Bonita Springs, FL, Phillip W. Offill, Jr., a Dallas attorney, RSMR Capital Group Inc. (RSMR), Page Properties LP, and ATN Enterprises LLC from violating Section 5 of the Securities Act of 1933. 

The Commission’s complaint alleged that these individuals and entities violated the securities laws by acting as underwriters engaged in a scheme to evade the securities registration requirements by offering and selling the securities of one or more of six companies when no registration statements were filed or in effect to provide information to public investors. The six companies issued penny stocks, which are defined as equity securities trading at a price of less than five dollars per share, and the defendants initiated public trading in the over-the-counter market under the following trading symbols: American Television & Film Company (ATFT), Ecogate, Inc. (ECGT), Media International Concepts, Inc. (MEIC), Vanquish Productions, Inc. (VQPI), Auction Mills, Inc. (AUML), and Custom Designed Compressor Systems, Inc. (CUPY). The court also barred Reynolds, Page, Fischer, RSMR, Page, and Page Properties for seven years, and Offill permanently, from participating in the offer or sale of penny stocks. In addition, the court enjoined Reynolds, RSMR, Page, and Page Properties from violating Section 15(a) of the Securities Exchange Act of 1934 by engaging in the securities transaction without registering as brokers or dealers with the Commission.

 The court also ordered the defendants to pay disgorgement totaling $12,219,468 of profits from their unregistered securities sales plus prejudgment interest, and civil penalties of $120,000 each. In addition, the court ordered relief defendants Timothy Barham and his company Ballad Enterprises, Inc. of Henderson, Tennessee, and Bellatalia LP, a company owned by Reynolds, to disgorge funds they received from the defendants’ illegal stock sales. The Commission’s claims for remedies against Shane Mullholand and his company Dissemination Services LLC remain to be resolved. The court previously enjoined Arizona attorney, David Stocker and his company Curtis-Case Inc. for their violations of Section 5 of the Securities Act, and barred them from participating in penny stock sales.

Brian J. Smart

Brian J. Smart