SEC CHARGES INDIVIDUAL IN ALLEGED STOCK MISAPPROPRIATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
June 1, 2012
SEC Charges Controlling Person of Transfer Agent for Misappropriating Share Certificates and Illegally Selling Stock
On May 31, 2012, the Securities and Exchange Commission filed a settled civil action in the United States District Court for the Southern District of Texas, Houston Division, against Steven H. Bethke. In its complaint, the Commission alleges that, from January 2009 through May 2010, Bethke misappropriated share certificates from Bederra Corporation (now known as Zicix Corporation) while he controlled Bederra’s stock transfer agent, First National Trust Company. Bethke used the stolen certificates, which had been pre-printed with the signatures of Bederra officers and directors, to secretly issue over a billion Bederra shares, which he then sold in exchange for payments into his personal bank account of over $350,000. Among other things, Bethke signed purchase agreements falsely warranting that he had good title to the shares and that they were “freely tradable” when, in fact, he had orchestrated the misappropriation of the shares, and the sales were not eligible for any exemption from registration under the securities laws. To carry out his scheme, Bethke forged the signature of Bederra’s chief executive officer on certifications claiming that Bederra was aware of the sales when the company knew nothing about the transactions. Bethke also prepared letters falsely stating that he had obtained the shares from the company more than a year before, and that the sales were therefore exempt from registration under the securities laws.

Without admitting or denying the allegations in the Commission’s complaint, Bethke consented to a final judgment enjoining him from 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; barring him from serving as an officer or director of a public company; barring him from participating in the offering or sale of a penny stock; and ordering disgorgement plus prejudgment interest, but waiving payment and not imposing a civil penalty based on Bethke’s financial condition. The judgment is subject to court approval. Bethke also consented, with respect to a related SEC administrative proceeding, to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical organization.

SEC CHARGES TWO FEEDERS FOR ONE OF SOUTH FLORIDA’S LARGEST-EVER PONZI SCHEMES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 31, 2012
On May 22, 2012, The Securities and Exchange Commission 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.

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, 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 charges Levin and Preve with violating Section 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC is seeking 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 Office of the United States Attorney for the Southern District of Florida, the Federal Bureau of Investigation, and the Internal Revenue Service.

SEC DEFINES DEPOSITORY TRUST COMPANY "CHILLS" AND "FREEZES"

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the effects of chills and freezes on an investor’s ability to hold and trade securities. A “chill” is a limitation of certain services available for a security on deposit at The Depository Trust Company (“DTC”). A “freeze,” formally referred to as a “global lock,” is a complete restriction on all DTC services for a particular security on deposit at DTC. 

What is DTC and what does it do? 

DTC was created by the securities industry to improve efficiencies and reduce risk in the clearance and settlement of securities transactions. Today, DTC is the largest securities depository in the world. Including securities issued in the U.S. and 121 other countries, DTC has on deposit 3.6 million securities worth about $35 trillion. 

As a clearing agency registered with the SEC, DTC provides security custody and book-entry transfer services for securities transactions in the U.S. market involving equities, corporate and municipal debt, money market instruments, American depositary receipts, and exchange-traded funds. In accordance with its rules, DTC accepts deposits of securities from its participants (i.e., broker-dealers and banks), credits those securities to the depositing participants’ accounts, and effects book-entry movements of those securities. 

Most large U.S. broker-dealers and banks are DTC participants, meaning that they deposit and hold securities at DTC. DTC appears in an issuer’s stock records as the sole registered owner of securities deposited at DTC. DTC holds the deposited securities in “fungible bulk,” meaning that there are no specifically identifiable shares directly owned by DTC participants. Rather, each participant owns a pro rata interest in the aggregate number of shares of a particular issuer held at DTC. Correspondingly, each customer of a DTC participant, such as an individual investor, owns a pro rata interest in the shares in which the DTC participant has an interest. 

Because the securities held by DTC are for the benefit of its participants and their customers (i.e., investors holding their securities at a broker-dealer), frequently the issuer and its transfer agent must interact with DTC in order to facilitate the distribution of dividend payments to investors, to facilitate corporate actions (i.e., mergers, splits, etc.), to effect the transfer of securities, and to accurately record the number of shares actually owned by DTC at all times. 

What are “chills” and “freezes” and why does DTC impose them?

Occasionally a problem may arise with a company or its securities on deposit at DTC. In some of those cases DTC may impose a “chill” or a “freeze” on all the company’s securities. A “chill” is a restriction placed by DTC on one or more of DTC’s services, such as limiting a DTC participant’s ability to make a deposit or withdrawal of the security at DTC. A chill may remain imposed on a security for just a few days or for an extended period of time depending upon the reasons for the chill and whether the issuer or transfer agent corrects the problem. A “freeze” is a discontinuation of all services at DTC. Freezes may last a few days or an extended period of time, depending on the reason for the freeze. If the reasons for the freeze cannot be rectified, then the security will generally be removed from DTC, and securities transactions in that security will no longer be eligible to be cleared at any registered clearing agency.

DTC imposes chills and freezes on securities for various reasons. For example, DTC may impose a chill on a security because the issuer no longer has a transfer agent to facilitate the transfer of the security or the transfer agent is not complying with DTC rules in its interactions with DTC in transferring the security. Often this type of situation is resolved within a short period of time.

Chills and freezes can be imposed on securities for more complicated reasons, such as when DTC determines that there may be a legal, regulatory, or operational problem with the issuance of the security, or the trading or clearing of transactions involving the security. For example, DTC may chill or freeze a security when DTC becomes aware or is informed by the issuer, its transfer agent, federal or state regulators, or federal or state law enforcement officials that an issuance of some or all of the issuer’s securities or transfer in those securities is in violation of state or federal law. If DTC suspects that all or a portion of its holdings of a security may not be freely transferable as is required for DTC services, it may decide to chill one or more of its services or place a freeze on all services for the security. When there is a corporate reorganization, DTC will temporarily chill the security for book-entry activities.

When DTC chills or freezes a security, it will issue a “Participant Notice” to its participants. These notices are publicly available on DTC’s website athttp://www.dtcc.com/legal/imp_notices. When securities are frozen, DTC also provides optional automated notifications to its participants. These processes provide participants the ability to update their systems to automatically block future trading of affected securities, in addition to alerting participant compliance departments. DTC has information regarding these processes on its website.

What can investors do?

Prior to investing in a security, investors can ask their broker-dealer if there are or ever have been any DTC restrictions placed on any security they are considering buying or selling. This information may affect your decision to purchase or sell the security. The broker-dealer or the broker-dealer’s compliance department should be able to address the inquiry by checking with its back office or by calling its account manager at DTC. Given that DTC does not always disclose the reason for a chill or freeze, a broker-dealer may not be able to provide its customer with information as to why the freeze was imposed or if or when it will be lifted. Investors should also thoroughly research the company and its transfer agent prior to investing in the security.

SEC CHARGES TWO INDIVUDUALS IN FRAUDULENT OFFERING OF INVESTMENTS IN DOMINICAN REPUBLIC RESORTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 31, 2012
The Securities and Exchange Commission charged James B. Catledge and Derek F.C. Elliott, and certain of their related entities, with making material misrepresentations to investors in connection with the unregistered sale of interests in two resorts in the Dominican Republic.

The SEC alleges that Catledge, a Nevada resident, and Elliott, a Canadian citizen and resident of the Toronto area, raised more than $163 million from approximately 1,200 investors between the fall of 2004 and 2009. The securities offered, called “Residence” and “Passport” investments, represented timeshare and ownership interests, respectively, in the Cofresi and Juan Dolio resorts in the Dominican Republic

The complaint alleges that Catledge and Elliott promised investors a secure return of 8% to 12% annually on the Residence investment and 5% on the Passport investment. Investors were assured that their principal was safe, and that they would share in the projected appreciation in the value of the resorts. According to the SEC’s complaint, investor funds were not used to construct the properties, as had been represented, but instead were largely used for other purposes, including the payment of exorbitant undisclosed commissions and promised returns to earlier investors. The SEC alleges that, of the nearly $164 million raised from investors, approximately $59 million (36%) was used to pay commissions to Catledge, Elliott and several of their related entities, among others.

The SEC’s complaint seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctive relief against Catledge, Elliott, Sun Village Juan Dolio, Inc., EMI Sun Village, Inc. and EMI Resorts (S.V.G.), Inc. to enjoin them from future violations of the federal securities laws. As to Catledge and Elliott only, it also seeks an injunction against acting as an unregistered broker-dealer. The complaint also names D.R.C.I. Trust, which was beneficially owned by Catledge, as a relief defendant in this matter.
The SEC’s investigation was conducted by staff attorney Alison J. Okinaka and senior staff accountant Norman J. Korb in the Commission’s Salt Lake Regional Office. Senior trial counsel Thomas M. Melton is leading the litigation.

The SEC acknowledges the assistance of the Ontario Securities Commission, the U.S. Attorney’s Office for the Northern District of California and the Federal Bureau of Investigation.

CFTC FILES CLAIM IN MF GLOBAL LIQUIDATION

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Files a General Creditor Claim in the Liquidation of MF Global
Washington, DC – On June 1, 2012, the Commodity Futures Trading Commission (Commission) filed a general creditor claim in the liquidation of MF Global, Inc., No. 11-02790 (Bankr. S.D.N.Y.). The Commission took this action in relation to the Division of Enforcement’s ongoing investigation related to the failure of MF Global, Inc. If that investigation results in an enforcement action against MF Global, Inc., the Commission could pursue a restitution award for the benefit of commodity customers, which in turn could be the basis for a Commission claim as a general creditor against the MF Global, Inc. estate.  The Commission’s claim as a general creditor would not have priority over customer claims.  It has been filed solely to preserve all possible options for recovering funds for the benefit of commodity customers.

ALLEGED INVESTMENT ADVISER CONFLICT OF INTEREST

FROM: U.S.  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 30, 2012 – The Securities and Exchange Commission today charged a Phoenix-based investment adviser and his firm for recommending investments without telling clients about his personal stake and exploiting a client who was buying an ownership share in the firm.

The SEC’s Enforcement Division alleges that Walter J. Clarke advised clients at Oxford Investment Partners LLC to invest in two businesses without disclosing the conflicts of interest that he co-owned one of them and had financial ties to the owners of the other. Both investments later failed. And when Clarke’s own financial problems prompted him to sell a stake in Oxford to a client, he fraudulently inflated the value of his firm by at least $1.5 million to make the client overpay by at least $112,000.

“Investment advisers have a fiduciary duty to be forthcoming with their clients and act in their best interests,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “Clarke breached that duty by deliberately overvaluing the firm and staying mum on his personal ties to the recommended investments.”

According to the SEC’s order instituting administrative proceedings against Clarke and Oxford, Clarke convinced three clients in late 2007 and early 2008 to fund more than $300,000 in loans originated by Cornerstone Funding Group, a company co-owned by Clarke. However, the clients were never told that Clarke was a co-owner and would personally profit from successfully originated loans. Within months of the loans being funded, the underlying borrowers defaulted, causing the clients to lose their investments. In November 2008, Clarke convinced four clients to invest approximately $40,000 in HotStix, a privately-held company. The clients were not informed that the owners of HotStix were also co-owners and paid consultants of Oxford. Shortly after the clients made these investments, HotStix sought bankruptcy protection and the clients lost their money.

The SEC’s investigation further found that amid financial woes, Clarke sold a client 7.5 percent of his ownership interest in Oxford in March 2008. The client paid $750,000 based on Clarke’s valuation of Oxford at $10 million. However, Clarke used several ploys to fraudulently inflate Oxford’s value. First, Clarke applied an excessive and baseless multiple to Oxford’s 2007 annual revenue. Second, Clarke calculated Oxford’s 2007 revenue by quadrupling Oxford’s revenue in the fourth quarter of 2007 – its most profitable quarter that year – and ignoring Oxford’s lower revenue in the previous three quarters. Third, Clarke added a baseless $1 million “premium” to Oxford’s valuation.

According to the SEC’s order, Oxford and Clarke willfully violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.

The SEC’s investigation was conducted by Paris A. Wynn and Mr. Sprung, who work in the Los Angeles Regional Office and are members of the Enforcement Division’s Asset Management Unit. Securities compliance examiner Ryan Hinson conducted the related examination under the supervision of Daniel C. Jung. The SEC’s litigation will be led by Mr. Wynn and David Van Havermaat.