COURT ENTERS FINAL JUDGEMENT IN DAY TRADING BUSINESS AND PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 29, 2012
Securities and Exchange Commission v. New Futures Trading International Corporation and Henry Roche (United States District Court for the District of New Hampshire, Civil Action No. 11-CV-532-JL, Complaint Filed November 16, 2011)
Court Enters Final Judgments Against New Hampshire Futures Day-Trading Business and Canadian Resident In Ponzi Scheme Case

The Securities and Exchange Commission announced today that, on May 24, 2012, the U.S. District Court for the District of New Hampshire entered final judgments by default against New Futures Trading International Corporation (“New Futures”), a New Hampshire business and Henry Roche, a Canadian resident who directed New Futures, in a Ponzi scheme action the Commission filed in November 2011.  Among other things, the court ordered the parties to pay a total of over $2.8 million.

In its complaint, filed on November 16, 2011, the Commission alleged that Roche, through New Futures, had been engaged in an ongoing unregistered offering of securities in the United States through operations in New Hampshire and Ontario, Canada. The Commission alleged that, since December 2010, Roche had raised over $1.3 million from at least 14 investors in nine states through the offer and sale of high yield promissory notes purportedly yielding either 5-10% per month, or a 200% return within 14 months.

According to the Commission’s complaint, Roche represented to some investors that funds supplied would be invested in bonds, Treasury notes and/or 10-year Treasury note futures contracts, and to others that the funds would be invested directly in New Futures, purportedly an on-line futures day-trading training business Roche was operating from Canada. The complaint alleged that, instead of using the funds for either purpose, Roche used approximately $937,000 provided by New Futures investors to make Ponzi “interest” payments to investors in prior Roche-controlled entities.  According to the Commission’s complaint, Roche also misappropriated at least another $359,000 to support his lifestyle, to operate a horse breeding venture, and to buy horses.  At the time the action was originally filed by the Commission, the court issued a temporary restraining order (later converted to a preliminary injunction) that, among other things, froze the assets of New Futures and Roche and prohibited them from continuing to solicit or accept investor funds.

The court, acting on the Commission’s motion for default judgments, entered final judgments: (1) imposing permanent injunctions against both New Futures and Roche enjoining them from future violations of 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; (2) ordering them each to pay disgorgement of their ill-gotten gains in the amount of $1,242,972 plus prejudgment interest of $40,917.47; and (3) ordering Roche to pay a monetary penalty in the amount of $150,000 and New Futures to pay a monetary penalty in the amount of $150,000.

MIAMI-BASED HEDGE FUND MAMAGER ACCUSED OF DECEIVING INVESTORS REGARDING EXECUTIVES INVESTMENT'S

Photo:  Miami Beach.  Credit:  Wikimedia.
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2012 – The Securities and Exchange Commission today charged a Miami-based hedge fund adviser for deceiving investors about whether its executives had personally invested in a Latin America-focused hedge fund.

The SEC’s investigation found that Quantek Asset Management LLC made various misrepresentations about fund managers having “skin in the game” along with investors in the $1 billion Quantek Opportunity Fund. In fact, Quantek’s executives never invested their own money in the fund. The SEC’s investigation also found that Quantek misled investors about the investment process of the funds it managed as well as certain related-party transactions involving its lead executive Javier Guerra and its former parent company Bulltick Capital Markets Holdings LP.

Bulltick, Guerra, and former Quantek operations director Ralph Patino are charged along with Quantek in the SEC’s enforcement action. They agreed to pay more than $3.1 million in total disgorgement and penalties to settle the charges, and Guerra and Patino agreed to securities industry bars.

“When making an investment decision, private fund investors are entitled to the unvarnished truth about material information such as management’s skin in the game or the adviser’s handling of related-party transactions,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Quantek’s investors deserved better than the misleading information they received in marketing materials, side letters, and other fund documents.”

According to the SEC’s order instituting settled administrative proceedings, fund investors frequently inquire about the extent of the manager’s personal investment during their due diligence process, and many require it in fund selection. Quantek, particularly Patino, misrepresented to investors from 2006 to 2008 that management had skin in the game. These misstatements were made when responding to specific questions posed in due diligence questionnaires that were used to market the funds to new investors. Quantek made similar misrepresentations in side letter agreements executed by Guerra with two sought-after institutional investors.

The SEC’s order also found that Quantek misled investors about certain related-party loans made by the fund to affiliates of Guerra and Bulltick. Because the fund permitted related-party transactions with Bulltick and other Quantek affiliates, investors were wary of deals that were not properly disclosed. In 2006 and 2007, Quantek caused the fund to make related-party loans to affiliates of Guerra and Bulltick that were not properly documented or secured at the outset. Quantek and Bulltick employees later re-created the missing related-party loan documents, but misstated key terms of the loans and backdated the materials to give the appearance that the loans had been sufficiently documented and secured at all times. Quantek and Guerra provided this misleading loan information to the fund’s investors.

“The related-party transactions were problematic to begin with, and the false deal documents left investors in the dark about the adviser’s conflicts of interest,” said Scott Weisman, Assistant Director in the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s order, Quantek also repeatedly failed to follow the robust investment approval process it had described to investors in the fund. Quantek concealed this deficiency by providing investors with backdated and misleading investment approval memoranda signed by Guerra and other Quantek principals.

Quantek, Guerra, Bulltick, and Patino settled the charges without admitting or denying the findings. Quantek and Guerra agreed jointly to pay more than $2.2 million in disgorgement and pre-judgment interest, and to pay financial penalties of $375,000 and $150,000 respectively. Bulltick agreed to pay a penalty of $300,000, and Patino agreed to a penalty of $50,000. Guerra consented to a five-year securities industry bar, and Patino consented to a securities industry bar of one year. Quantek and Bulltick agreed to censures. They all consented to orders that they cease and desist from committing or causing violations of certain antifraud, compliance, and recordkeeping provisions of the Investment Advisers Act of 1940 and the Securities Act of 1933.

The SEC’s investigation was conducted by Matthew Rossi in the Enforcement Division’s Asset Management Unit under the supervision of Mr. Weisman.

SEC CHARGES NORTHERN CALIFORNIA FUND MANAGER IN $60 MILLION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 24, 2012
On May 24, 2012, the Securities and Exchange Commission charged an investment adviser in Scotts Valley, Calif., with running a $60 million investment fund like a Ponzi scheme and defrauding investors by touting imaginary trading profits instead of reporting the actual trading losses he had incurred.

The SEC alleges that John A. Geringer, who managed the GLR Growth Fund (Fund), used false and misleading marketing materials to lure investors into believing that the Fund was earning double-digit annual returns by investing 75% of its assets in investments tied to well-known stock indices like the S&P 500, NASDAQ, and Dow Jones. In reality, Geringer’s trading generated consistent losses and he eventually stopped trading entirely. To mask his fraud, Geringer paid millions of dollars in “returns” to investors largely by using money received from newer investors. He also sent investors periodic account statements showing fictitious growth in their investments.

According to the SEC’s complaint filed in federal court in San Jose, Geringer raised more than $60 million since 2005, mostly from investors in the Santa Cruz area. Geringer used fraudulent marketing materials claiming that the Fund had between 17 and 25 percent annual returns in every year of the Fund’s operation through investments tied to major stock indices. Although the Fund was started in 2003, marketing materials claimed 25 percent returns in 2001 and 2002 – before the Fund even existed. The marketing materials also falsely indicated a nearly 24 percent return in 2008 from investing mainly in publicly traded securities, options, and commodities, while the S&P 500 Index lost 38.5 percent.
The SEC alleges that Geringer’s actual securities trading was unsuccessful, and by mid-2009 the Fund did not invest in publicly traded securities at all. Instead, the Fund invested heavily in illiquid investments in two private startup technology companies. The rest of the money was paid to investors in Ponzi-like fashion and to three entities Geringer controlled that also are charged in the SEC’s complaint.

According to the SEC’s complaint, Geringer further lied to investors on account statements that falsely claimed “MEMBER NASD AND SEC APPROVED.” The SEC does not “approve” funds or investments in funds, nor was the Fund (or any related entity) a member of the NASD (now called the Financial Industry Regulatory Authority – FINRA). Geringer also falsely claimed that the Fund’s financial statements were audited annually by an independent accountant. No such audits were performed.

The SEC’s complaint alleges Geringer and three related entities violated or aided and abetted violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Section 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint also alleges the defendants violated or aided and abetted violations of Section 26 of the Exchange Act, which bars persons from claiming the SEC has passed on the merits of a particular investment. The SEC’s complaint names the Fund as a relief defendant. The complaint seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains, civil monetary penalties, and other relief. Geringer, the Fund, and two of the GLR entities consented to the entry of a preliminary injunction and a freeze on the Fund’s bank account.

The SEC’s investigation, which is continuing, has been conducted by Robert J. Durham and Robert S. Leach of the San Francisco Regional Office. The SEC’s litigation will be led by Sheila O’Callaghan of the San Francisco Regional Office.
The SEC thanks the U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, and FINRA for their assistance in this matter.

FORMER SEC ASSOCIATE DISTRICT DIRECTOR BANNED FROM PRACTICING BEFORE COMMISSION FOR ONE YEAR

FROM:  SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C., May 24, 2012 – The Securities and Exchange Commission today announced that it has barred Spencer Barasch, a former enforcement official in the Commission’s Fort Worth office, from appearing and practicing before the Commission for one year for violating federal conflict of interest rules.

The bar was imposed in an order instituting an administrative proceeding and resolves allegations involving Barasch’s representation of Stanford Group Company after Barasch went into private practice. Barasch consented to the Commission’s action without admitting or denying the Commission’s allegations.

Earlier this year, Barasch agreed to pay a $50,000 civil fine to the U.S. Justice Department for the same conduct.

Barasch, a Dallas resident, was the Associate District Director for the Division of Enforcement in the Commission’s Fort Worth office from June 1998 to April 2005. According to the Commission’s order, while at the Commission, Barasch took part “personally and substantially” in decisions involving allegations of securities law violations by entities associated with Robert Allen Stanford, including Stanford Group Company.

According to the Commission’s order, when Barasch joined a private law firm in 2005, he contacted the Commission’s Ethics Office about whether he could represent Stanford Group Company before the Commission and was told that he was permanently barred from doing so with respect to any matters on which he had participated while at the Commission. The order finds that Barasch declined to represent Stanford Group Company then, but that in the fall of 2006, he accepted an engagement from the Stanford entity and billed it for 12 hours of legal work related to Stanford matters Barasch had participated in while at the Commission.

During this representation, in violation of 18 U.S.C. § 207(a)(1), Barasch tried to obtain information about the Commission’s Stanford investigation from Commission staff in Fort Worth, but a staff attorney questioned whether Barasch could represent the firm. The staff attorney declined to have any substantive discussions with Barasch and suggested that Barasch contact the Commission’s Ethics Office on the matter. The order finds that Barasch did so and was again told that he was permanently barred from representing Stanford Group Company in the matter, prompting him to end his representation.

U.S. laws prohibit former federal officers and employees from knowingly seeking to influence or appear before any agency on a matter in which they had “participated personally and substantially” during their federal employment. The Commission’s order finds that Barasch violated this conflict of interest rule, which constitutes “improper professional conduct” under Rule 102(e) of the Commission’s rules of practice.

Before Barasch can resume appearing and practicing before the Commission, the Commission must determine that Barasch has truthfully sworn that he has satisfied several conditions that reflect on his character and fitness to practice before the Commission.

“This action shows that the Commission takes seriously ethical lapses by attorneys who appear and practice before it, and that such violations will result in serious disciplinary action,” said SEC Associate General Counsel Richard M. Humes.

The Commission’s case was investigated by Thomas J. Karr, Karen J. Shimp and Sarah E. Hancur of the Office of the General Counsel, following an investigation and report on the Stanford matter by the Commission’s Office of the Inspector General. The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of Texas.

MICHIGAN MAN AND INVESTMENT CLUB MANAGER GETS 12 YEARS FOR FRAUD

FROM:  U.S. JUSTICE DEPARTMENT
Wednesday, May 23, 2012
Investment Club Manager Sentenced in Virginia to 12 Years in Prison for $40 Million Fraud
WASHINGTON – Alan James Watson, 47, of Clinton Township, Mich., was sentenced today to 12 years in prison for fraudulently soliciting and accepting $40 million from more than 900 members of his investment club, Cash Flow Financial LLC (CFF).  Watson subsequently lost nearly all of the investors’ money through non-disclosed, high-risk investments.  Victims were located in Virginia and nationwide.  Watson was also ordered to forfeit $36,615,344.

U.S. District Judge Gerald Bruce Lee in the Eastern District of Virginia also sentenced Watson to three years of supervised release.  Watson pleaded guilty to one count of wire fraud on Sept. 22, 2011.

The sentencing was announced by Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney for the Eastern District of Virginia Neil H. MacBride; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Postal Inspector in Charge of Criminal Investigations Gerald O’Farrell of the U.S. Postal Inspection Service (USPIS).

“Mr. Watson deceived members of his investment club from early on and drove his scheme deeper and deeper while investors remained none the wiser,” said Assistant Attorney General Breuer.  “His lies destroyed lives, and today’s sentence ensures he will pay for his destructive actions.  The 12-year prison sentence handed down today is a signal to fraudsters that criminal deception born from greed will not be tolerated.”
“The pitch Mr. Watson made to investors was a big fat lie, and he kept lying until his scheme collapsed and investors lost nearly everything,” said U.S. Attorney MacBride.  “Based on these lies, investors recommended Mr. Watson’s club to their friends and family, and the damage to these relationships was just as harmful as the financial devastation itself.”

“More than 900 unwitting victims thought they had done their homework and calculated their investment wisely; instead, they were met with false documentation that yielded no return on their investment,” said FBI Assistant Director in Charge McJunkin.  “Investigating white collar crime has been and will continue to be a priority for the FBI and our law enforcement partners, as demonstrated by this case and today’s sentence.”
According to court documents, Watson created CFF in 2004 and served as the club’s chief executive officer.  From 2006 to 2009, Watson received almost $40 million from investors.  Watson purported that the money would be invested through an equities-trading system developed by an expert consultant, Trade LLC, with a promised return on investment of 10 percent per month.  In reality, Watson admitted that only $6 million of the $40 million was ever invested in Trade LLC, while the remaining $34 million was secretly invested in miscellaneous, high-risk ventures without the consent of investment club members.  These high-risk investments resulted in a near complete loss of the $34 million.

According to court documents, despite the losses for the investors, Watson continued to create false monthly account statements showing net gains from their investments.  In addition, Watson included “bonus” items on the account statements that appeared as trading profits, the result of a Ponzi scheme he orchestrated to use new investor funds to pay off earlier investors.

In March of 2009, Watson ceased investing in Trade LLC and re-deposited those funds in separate unauthorized ventures.  In 2010, nearly a year after he had fully withdrawn finances from Trade LLC, Watson informed investment club members that he had not invested their money as promised, and that none of the reported returns had ever materialized.  This resulted in a combined $40 million loss for investment club members.
The Commodity Futures Trading Commission (CFTC) has filed a related civil case in the Eastern District of Michigan.

This case was investigated by the FBI’s Washington Field Office, USPIS, the CFTC and the U.S. Securities and Exchange Commission.  The department thanks these agencies for their substantial assistance in this matter.

Trial Attorney Kevin B. Muhlendorf of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Mark D. Lytle of the Eastern District of Virginia are prosecuting the case on behalf of the United States.

The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia.  The task force is an investigative arm of the President’s Financial Fraud Enforcement Task Force, an interagency national task force.

President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

SEC CHARGES TWO FLORIDA RESIDENTS WITH ALLEGED RUNNING A $157 MILLION PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 22, 2012 — The Securities and Exchange Commission today charged two individuals who provided the biggest influx of investor funds into one of the largest-ever Ponzi schemes in South Florida.

The SEC alleges that George Levin and Frank Preve, who live in the Fort Lauderdale area, raised more than $157 million from 173 investors in less than two years by issuing promissory notes from Levin's company and interests in a private investment fund they operated. They used investor funds to purchase discounted legal settlements from former Florida attorney Scott Rothstein through his prominent law firm Rothstein Rosenfeldt and Adler PA. However, the settlements Rothstein sold were not real and the supposed plaintiffs and defendants did not exist. Rothstein simply used the funds in classic Ponzi scheme fashion to make payments due other investors and support his lavish lifestyle. Rothstein's Ponzi scheme collapsed in October 2009, and he is currently serving a 50-year prison sentence.

The SEC alleges that Levin and Preve misrepresented to investors that they had procedural safeguards in place to protect investor money when in fact they often purchased settlements without first seeing any legal documents or doing anything to verify that the settlement proceeds were actually in Rothstein's bank accounts. Moreover, as the Ponzi scheme was collapsing and Rothstein stopped making payments on prior investments, Levin and Preve sought new investor money while falsely touting the continued success of their investment strategy. With their fate tied to Rothstein, Levin and Preve's settlement purchasing business collapsed along with the Ponzi scheme.

"Levin and Preve fueled Rothstein's Ponzi scheme with the false sense of security they gave investors," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "They promised to safeguard investors' assets, but gave Rothstein money with nothing to show for it."

According to the SEC's complaint filed in federal court in Miami, Levin and Preve began raising money to purchase Rothstein settlements in 2007 by offering investors short-term promissory notes issued by Levin's company - Banyon 1030-32 LLC. In 2009, seeking additional funds from investors, they formed a private investment fund called Banyon Income Fund LP that invested exclusively in Rothstein's settlements. Banyon 1030-32 served as the general partner of the fund, and its profit was generated from the amount by which the settlement discounts obtained from Rothstein exceeded the rate of return promised to investors.

The SEC alleges that the offering materials for the promissory notes and the private fund contained material misrepresentations and omissions. They misrepresented to investors that prior to any settlement purchase, Banyon 1030-32 would obtain certain documentation about the settlements to ensure the safety of the investments. Levin and Preve, however, knew or were reckless in not knowing that Banyon 1030-32 often purchased settlements from Rothstein without obtaining any documentation whatsoever.

Furthermore, the SEC alleges that Banyon Income Fund's private placement memorandum misrepresented that the fund would be a continuation of a successful business strategy pursued by Banyon 1030-32 during the prior two-and-a-half years. Levin and Preve failed to disclose that by the time the Banyon Income Fund offering began in May 2009, Rothstein had already ceased making payments on a majority of the prior settlements Levin and his entities had purchased. They also failed to inform investors that Levin's ability to recover his prior investments from Rothstein was contingent on his ability to raise at least $100 million of additional funding to purchase more settlements from Rothstein.

The SEC's complaint seeks disgorgement of ill gotten gains, financial penalties, and permanent injunctive relief against Levin and Preve to enjoin them from future violations of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by senior counsels D. Corey Lawson and Steven J. Meiner and staff accountant Tonya T. Tullis under the supervision of Assistant Regional Director Chad Alan Earnst. Senior trial counsels James M. Carlson and C. Ian Anderson are leading the litigation.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of Florida, the Federal Bureau of Investigation, and the Internal Revenue Service.