SEC CHARGES MAN WITH HAVING A REAL ESTATE INVESTMENT PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., May 17, 2012 – The Securities and Exchange Commission today charged a New Jersey man with operating a Ponzi-like scheme involving a series of investment vehicles formed for the purported purpose of purchasing and managing rental apartment buildings in New Jersey and Pennsylvania.

The SEC alleges that David M. Connolly induced investors to buy shares in real estate investment vehicles he created through his firm Connolly Properties Inc. He promised investors monthly dividends based on cash-flow profits from rental income at the apartment buildings as well as the growth of their principal from the appreciation of the property. However, the real estate investments did not produce the projected dividends, and Connolly instead made Ponzi-like dividend payments to earlier investors using money from new investors. Connolly, who lives in Watchung, N.J., also siphoned off at least $2 million in investor funds for his personal use.

“David Connolly presented himself to investors as a successful real estate investment manager with a track record of paying consistent, high returns,” said George S. Canellos, Director of the SEC’s New York Regional Office. “In truth, Connolly’s operation was essentially a shell game intended to raise additional funds from new or existing investors in order to perpetuate his fraudulent scheme.”

The U.S. Attorney’s Office for the District of New Jersey, which conducted a parallel investigation of the matter, today announced that Connolly was indicted on one count of securities fraud among other criminal charges.

According to the SEC’s complaint filed in federal court in New Jersey, none of Connolly’s securities offerings in the investment vehicles were registered with the SEC as required under the federal securities laws. He began offering the investments in 1996 and ultimately raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles. However, beginning in at least 2006, Connolly misrepresented to investors that their funds would be used exclusively for the property related to the particular vehicle in which they invested. Connolly instead commingled the funds in bank accounts that he alone controlled and used for a variety of purposes that weren’t disclosed to investors, including $2 million in payments he made to himself that vastly exceeded any dividends to which he would be entitled through his ownership stake. Between 2007 and 2010, Connolly also wrote checks to “cash” in excess of $2.5 million. Even after Connolly stopped making dividend payments to investors in April 2009, he still continued to pay himself dividends as well as a $250,000 “salary” out of investor funds.

The SEC alleges that Connolly lacked sufficient revenues from rental income at the apartment buildings, so he continued to raise millions of dollars for new investment vehicles. He used the funds to pay purported monthly cash-flow dividends in excess of 10 percent to investors in older investment vehicles. Connolly refinanced properties and improperly used the cash proceeds to continue the scheme, which ultimately collapsed in 2009 when new investor funds dried up and rental income was insufficient to support payments on the mortgages. The properties owned by the investment vehicles were forced into foreclosure, wiping out the equity of the investors.

The SEC’s complaint charges Connolly with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC’s complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Justin Smith and William Edwards in the New York Regional Office. Jack Kaufman will lead the litigation.

The SEC thanks the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, 

and the Internal Revenue Service for their assistance in this matter.

COURT ENTERS FINAL JUDGMENT AGAINST GLOBAL DEVELOPMENT & ENVIRONMENTAL RESOURCES, INC.

FROM:  SEC
May 11, 2012
The Commission announced that on April 23, 2012, the United States District Court for the Middle District of Florida entered a Final Judgment against Defendants Philip Pritchard, Pietro Cimino, and Global Development & Environmental Resources, Inc. The Final Judgment orders Pritchard, Cimino, and Global to pay, jointly and severally, disgorgement in the amount of $2,122,625, plus $523,173.27 in prejudgment interest. The Final Judgment also orders Pritchard and Cimino to each pay a civil penalty of $130,000.
The Commission commenced this action by filing its complaint on May 22, 2008. The complaint alleged defendants participated in a fraudulent "pump and dump" scheme to evade the registration provisions of the federal securities laws and then sell purportedly unrestricted Global shares during a fraudulent promotional campaign.

The Commission previously announced on March 8, 2010 that following a five day trial, a seven member jury in the U.S. District Court in Tampa, Florida found Darko S. Mrakuzic liable for violating the anti-fraud and registration provisions of the federal securities laws in connection with the above scheme that netted Mrakuzic more than $6 million in profits in violation of Sections 5(a) and (c) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. On February 7, 2011, the Court ordered Mrakuzic to pay a total of $9,135,089 which included disgorgement of $6,568,568, pre-judgment interest of $2,306,521 and a civil penalty of $260,000.

Global, Pritchard, Cimino, and Defendants Carmine J. Bua, Anthony M. Cimini, Sr., and Dante M. Panella, all previously settled the Commission’s anti-fraud and securities registration charges against them by consenting, without admitting or denying the Commission’s allegations, to permanent injunctions. All the individuals consented to penny stock bars, and Cimini, Pritchard, and Cimino consented to officer-and-director bars. The Court also previously ordered disgorgement and civil penalties against Cimini, Bua, and Panella. The Commission’s claim for a civil penalty against Global Development has been voluntarily dismissed.

SEC BRINGS ENFORCEMENT ACTION AGAINST SHANGHAI-BASED DELOITTE TOUCHE TOHMATSU CPA LTD.

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 9, 2012 — The Securities and Exchange Commission today announced an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for its refusal to provide the agency with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.

According to the SEC’s order instituting administrative proceedings against D&T Shanghai, the agency has been making extensive efforts for more than two years to obtain documents related to the firm’s work for the company, which issues U.S. securities registered with the SEC. The firm is charged with violating the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. D&T Shanghai has nonetheless failed to provide the documents, citing Chinese law as the reason for its refusal.

“As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors.”
Scott Friestad, Associate Director of the SEC’s Division of Enforcement, added, “Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors.”

In a separate matter last year, the SEC filed a subpoena enforcement action against D&T Shanghai in federal court after the firm failed to produce documents in response to a subpoena related to an SEC investigation into possible fraud by one of its longtime clients, Longtop Financial Technologies Limited. The SEC later filed charges against Longtop for alleged reporting failures.

According to the SEC’s order in this latest enforcement action, D&T Shanghai is a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB). In April 2010, SEC staff began seeking D&T Shanghai’s audit work papers related to its independent audit work for the client involved in an SEC investigation. The SEC served Deloitte LLP, the U.S. member firm, with a subpoena requesting various related documents. Counsel for Deloitte LLP informed the staff that the U.S. firm did not perform any audit work for the client and therefore did not possess the documents related to the subpoena.

According to the SEC’s order, in the SEC staff’s continuing quest for the audit work papers in D&T Shanghai’s possession, they were later informed by counsel for Deloitte’s global firm that the agency’s request for audit work papers had been specifically communicated to D&T Shanghai. Subsequently, the staff served D&T Shanghai with a request through Deloitte LLP for the audit work papers pursuant to Section 106 of the Sarbanes-Oxley Act. D&T Shanghai would not produce the relevant audit work papers because of its interpretation that it is prevented from doing so by Chinese law. SEC staff also has sought to obtain the relevant audit work papers through international sharing mechanisms, yet these efforts have been unsuccessful.

This is the first time the Commission has brought an enforcement action against a foreign audit firm failing to comply with a Section 106 request.

In the SEC’s order, the Enforcement Division alleges that D&T Shanghai willfully violated the Sarbanes-Oxley Act and the Securities Exchange Act of 1934 by failing to provide the SEC with the audit work papers. The administrative proceeding will be assigned to an Administrative Law Judge at the agency. The judge would determine the appropriate remedial sanctions if the judge finds in favor of the SEC staff.

JUDGEMENT RENDERED ON OFF-EXCHANGE FOREX SCAM

FROM:  CFTC

CFTC Obtains Default Judgment against Former Florida Resident Juvenal E. Machado and His Company, Invers Forex, LLC, for Off-Exchange Forex Scam

Court orders defendants to pay more than $4 million in customer restitution and penalty and permanently bars them from the commodities industry

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Marcia G. Cook, of the U.S. District Court for the Southern District of Florida, entered an order of default judgment and permanent injunction against Juvenal Eduardo Machado (Machado) (aka Juvenal Eduardo Machado Bogadi, Edward Kaufman, and Eduardo Machado), whose last known address in the United States is Miami, Fla., and his company, Invers Forex, LLC. Neither defendant has ever been registered with the CFTC.

The order stems from a CFTC enforcement action filed on June 23, 2011, that charged the defendants with defrauding customers in an off-exchange foreign currency (forex) scam and with misappropriating customer funds (see CFTC Press Release 6057-11).

The order requires Machado and Invers Forex jointly and severally to pay a $3.92 million civil monetary penalty and restitution of $201,613. The order also imposes permanent trading and registration bans against the defendants and prohibits them from violating the Commodity Exchange Act, as charged.

The order finds that beginning in December 2008, and continuing to at least March 2010, Machado and Invers Forex fraudulently solicited least $717,100 from at least 28 persons, including Machado’s friends, neighbors, and church members, to trade forex on their behalf. According to the order, many of Machado’s prospective customers attended prayer meetings in his home, where Machado touted his forex trading experience and ability. The order finds that Machado told customers and prospective customers that God had put him on the earth to help people financially, or words to that effect, and that by trading forex contracts for them, he could give them financial freedom for the rest of their lives.

The order also finds that as part of his solicitation, Machado offered prospective customers guaranteed “interest” (i.e., profits) on their investments of five percent or more per month and falsely represented to at least one prospective customer that he had never lost money trading forex.

Of the $717,100 that customers provided to the defendants to trade forex, the defendants lost $120,117 trading forex, returned $395,370 to customers as purported profits, and misappropriated the remaining $201,613, the order finds.

In May or June 2010, without returning all of the customers’ remaining funds, Machado moved from his home in Miami, Fla., to Ontario, Canada, and his customers have not been able to contact him, according to the order.

The CFTC appreciates the assistance of the United Kingdom’s Financial Services Authority.

The CFTC Division of Enforcement staff members responsible for this case are Matthew Elkan, Michael Loconte, Erica Bodin, Dan Jordan, Rick Glaser, and Richard Wagner.

FINAL JUDGEMENT ENTERED AGAINST MARKET TIMERS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
May 8, 2012
Court Enters Final Judgments Against Defendants in Market Timing Case
The Commission announced that a Massachusetts federal court entered final judgments by consent against James Tambone and Robert Hussey, defendants in a case filed by the Commission on May 19, 2006. The Commission alleged in its complaint that from 1998 through 2003, Tambone and Hussey, two senior executives at Columbia Funds Distributor, Inc., the underwriter for the Columbia complex of mutual funds, allowed certain preferred customers to engage in frequent short-term trading in certain Columbia mutual funds in contravention of the prospectuses that represented that the funds did not permit, or were otherwise hostile to, market timing or other short-term or excessive trading.

Without admitting or denying the allegations in the Commission’s complaint, Hussey consented to a final judgment entered by the Court on April 13, 2012 and Tambone consented to a final judgment entered by the Court on May 7, 2012. The final judgment ordered Hussey to pay disgorgement in the amount of $37,500, plus prejudgment interest in the amount of $20,980, and a civil penalty of $75,000, for a total amount of $133,480. The final judgment ordered Tambone to pay disgorgement in the amount of $26,687, plus prejudgment interest in the amount of $15,344.38, and a civil penalty of $75,000, for a total amount of $117,031.38.

On March 19, 2012, the parties stipulated to dismiss the claim in the complaint alleging that Tambone and Hussey aided and abetted violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The claim in the complaint alleging direct violations of Section 10(b) and Rule 10b-5 was dismissed earlier in the litigation.

SEC OBTAINS FINAL JUDGEMENT IN ILLEGAL TIPPING OF HEDGE FUND CASE

FROM:  SEC
 May 8, 2012
SEC Obtains Final Judgment on Consent Against James Fleishman
The SEC announced that, on May 7, 2012, the Honorable Jed S. Rakoff, United States District Judge, United States District Court for the Southern District of New York, entered a Final Judgment on consent as to James Fleishman in the SEC’s insider trading case, entitled SEC v. Mark Anthony Longoria, et al., 11-CV-0753 (SDNY) (JSR).

This case alleges insider trading by ten individuals and one investment adviser entity, all of whom are consultants, employees, or clients of the so-called “expert network” firm, Primary Global Research LLC (“PGR”). The SEC filed its Complaint on February 3, 2011, charging two PGR employees and four consultants with insider trading for illegally tipping hedge funds and other investors. On February 8, 2011, the SEC filed an Amended Complaint, charging a New York-based hedge fund and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from technology company employees moonlighting as expert network consultants. The scheme netted more than $30 million from trades based on material, nonpublic information about such companies as Advanced Micro Devices, Seagate Technology and Western Digital. The charges were the first against traders in the SEC's ongoing investigation of insider trading involving expert networks.

The SEC alleged that Fleishman was a vice president of sales at PGR who facilitated the transfer of material nonpublic information from PGR consultants to PGR clients and, in certain instances, acted as a conduit by receiving material nonpublic information from PGR consultants and passing that information directly to PGR clients.

The Final Judgment entered against Fleishman permanently enjoins him from violations of Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rule 10b-5 and orders him liable for disgorgement of ill-gotten gains of $49,150, which is to be deemed satisfied by the order of forfeiture of $49,150 entered against Fleishman in a parallel criminal action against him. In the parallel criminal action, Fleishman was also sentenced to a 30-month term of imprisonment, which he is currently serving. In light of this, the Commission did not seek a civil penalty from Fleishman in this settlement.

Separately, Fleishman has also consented to the entry of an order by the SEC instituting administrative proceedings pursuant to Section 15(b) of the Exchange Act barring Fleishman from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock.