CFTC SETTLES ACTIONS AGAINST DOUGLAS ELSWORTH WILSON AND THREE COMPANIES

FROM: U.S.COMMOITY FUTURES TRADING COMMISSION
CFTC Settles Action against Douglas Elsworth Wilson and Three California Companies for Solicitation Fraud, Misappropriating Customer Funds, and Issuing False Statements in Commodity Futures and Forex Scheme Federal court orders defendants to pay over $5.4 million in restitution and civil monetary penalties

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that on August 9, 2012, a federal court in California entered a consent order that requires defendants Douglas Elsworth Wilson of Poway, Calif., and three companies he controls and manages, Elsworth Berg Capital Management LLC (EBCM), Elsworth Berg Inc., and Elsworth Berg FX LLC (collectively, Elsworth Berg) jointly and severally to pay $3,965,670.71 in restitution to customers as well as a $1.5 million civil monetary penalty. The order also imposes permanent trading and registration bans and permanent injunctions against further violations of federal commodities law, as alleged.

The order follows a CFTC civil complaint filed on July 27, 2011, in the U.S. District Court for the Southern District of California . The order finds that the defendants solicited over $4.4 million from over 60 customers to trade commodity futures contracts and foreign currency (forex). According to the order, the defendants misappropriated customer funds, committed solicitation fraud, and issued false statements in the commodity futures and forex scheme.

Specifically, the order finds that defendants misrepresented to customers and prospective customers that regardless of Elsworth Berg’s commodity futures or forex trading results, the return of customers’ investment principal was guaranteed at the end of a five-year period through use of a purportedly innovative "Collateral Reserve" structure, which owned life insurance policies on third parties.

The order further finds that Wilson and EBCM issued false statements to some customers that overstated the value of their investments. Wilson and EBCM misappropriated approximately $72,000 in customer funds and used the money for purposes other than trading, according to the order.

The CFTC appreciates the assistance of the California Department of Corporations and the United Kingdom Financial Services Authority (FSA).

The CFTC Division of Enforcement staff members responsible for this case are Theodore Z. Polley III, Melissa Glasbrenner, William P. Janulis, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

SEC CHARGES INDIVIDUALS AND ENTITIES IN BOILER ROOM SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Participants in $5 Million Boiler Room Scheme

The Securities and Exchange Commission announced today that it has charged Edward M. Laborio and others for their roles in a boiler room scheme that used high-pressure sales tactics to raise up to $5.7 million from approximately 150 investors through the fraudulent sale of five unregistered securities offerings involving a group of related entities. The scheme ran from approximately December 2006 to August 2009. Laborio, formerly of Boston, Massachusetts, is now a resident of Boca Raton, Florida. The SEC also charged Jonathan Fraiman of Lantana, Florida; Matthew K. Lazar of Westerville, Ohio; and seven entities controlled by Laborio: Envit Capital Group, Inc. (“Envit Group”); Envit Capital, LLC (“Envit LLC”); Envit Capital Holdings, Inc. (“Envit Holdings”); Envit Capital Private Wealth Management, LLC (“Envit Wealth”); Envit Capital Multi Strategy Mixed Investment Fund I LP (“Envit Fund”); Aetius Group PLC (“Aetius PLC”); and Aetius Group LLC (“Aetius LLC”) (collectively, the “Envit Companies”).

According to the Commission’s complaint, filed in the United States District Court for the District of Massachusetts, Laborio and Fraiman made multiple misrepresentations and misleading statements to investors about the Envit Companies’ businesses, revenues, financial projections, uses of investor funds, and historical returns generated by Envit Fund, a purported hedge fund that in reality never conducted any operations. According to the complaint, Laborio also created scripts with sales pitches containing fabricated information. For example, one of Laborio’s scripts allegedly included unfounded claims that investors would receive quarterly dividends and “2-3x return on money.” Laborio also allegedly used investor proceeds to cover gambling losses, to make direct payments to himself, and to cover personal expenses. Fraiman allegedly represented to an investor that Envit Fund, the purported hedge fund, returned 42.9% in 2006 and 43.7% in 2007, even though the hedge fund was not launched until mid-2007 and never conducted any operations. The complaint further alleges that Lazar raised $585,000 from approximately 10 investors through the sale of a PIPE (private investment in public equity) in Envit Group (one of the five unregistered securities offerings) by misrepresenting that the PIPE guaranteed an annual 8.5% dividend, and that it was safe, like a fixed annuity or a CD.

As a result of the conduct described in the complaint, the Commission alleges that all defendants violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder; that Laborio, Fraiman, Lazar and Envit Wealth violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”); that Laborio, Fraiman, and Envit Wealth violated Advisers Act Section 206(4) and Rule 206(4)-8 thereunder; that Laborio, Fraiman, and Lazar violated Exchange Act Section 15(a)(1); that Laborio, Envit LLC, Envit Group, Envit Holdings, and Aetius PLC violated Securities Act Sections 5(a) and 5(c); that Laborio violated Exchange Act Section 16(a) and Rule 16a-3 thereunder; and that Envit Fund and Aetius LLC violated Section 7(a) of the Investment Company Act of 1940. The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, penny stock bars against Laborio, Fraiman, and Lazar, and an officer and director bar against Laborio.

The Commission previously suspended trading in the securities of Envit Group in May 2009 and subsequently revoked the registration of the securities of Envit Group in September 2009.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation, and the State of Florida Office of Financial Regulation.

For further information, see Exchange Act Release No. 34-59900 (May 12, 2009) [Order suspending trading in Envit Group securities]; Initial Decision Release No. 385 (August 13, 2009) [Initial decision revoking registration of Envit Group securities]; Exchange Act Release No. 60658 (September 11, 2009) [Notice of final decision revoking registration of Envit Group securities].

CHARGES BROUGHT AGAINST INVESTMENT MANAGER FOR FAILURE TO TURN OVER RECORDS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Aug. 10, 2012 – The Securities and Exchange Commission today charged a Florida-based investment manager and his firm for failing to provide SEC examiners with records of a mutual fund advisory business that invested in NASCAR-related stocks.

The SEC examiners sought records from David W. Dube and Peak Wealth Opportunities LLC while examining a mutual fund they advised called the Stock Car Stock Index Fund. Despite repeated requests, Dube and Peak Wealth failed to furnish certain records to the SEC.

"After promising multiple times to provide the requested records, Dube failed to live up to his regulatory obligations and turn over the records," said Bruce Karpati, Chief of the Enforcement Division’s Asset Management Unit. "When financial professionals fail to cooperate with SEC exams, they force the agency to expend greater resources to pursue investigations."

According to an SEC order initiating administrative proceedings, Peak Wealth was the adviser to the Stock Car Stock Index fund from 2008 to June 2010. SEC examination staff requested records from Peak Wealth and Dube in 2010 while examining Peak Wealth’s advisory business and the operations of the fund.

The SEC further alleges that Dube and Peak Wealth:
Failed to make and keep certain required financial records.
Failed to withdraw Peak Wealth’s registration with the SEC and make other required filings.
Failed to provide the fund’s board of directors with information reasonably necessary to assess Peak Wealth’s advisory fees.

Simultaneously with the SEC’s examination in 2010, the fund’s board requested information from Peak Wealth and Dube as part of the fund’s required annual evaluation of its advisory agreements. The annual evaluations are required under Section 15(c) of the Investment Company Act of 1940, which also requires advisers to provide their boards with information reasonably necessary to conduct those evaluations. Despite requesting additional time to respond to the board, Peak Wealth and Dube failed to provide any of the requested documents. The board subsequently terminated Peak Wealth’s advisory agreement and liquidated the fund by returning the money to investors.

"A fully-informed board is crucial to the advisory fee setting process, yet Dube failed to provide the board with the most basic of information," said Chad Alan Earnst, an Assistant Regional Director in the Enforcement Division’s Asset Management Unit.

Under the relevant rules, the SEC could seek to permanently bar Dube from association with an SEC registered investment adviser or broker dealer. The SEC alleges that Peak Wealth willfully violated Sections 203A and 204 of the Advisers Act of 1940 and Rules 203A-1(b)(2), 204-1(a)(1), 204-2(a)(1), (2), (4), (5), and (6) thereunder, and Section 15(c) of the Investment Company Act. The SEC charged Dube with willfully aiding and abetting and causing Peak Wealth’s violations.

The SEC’s investigation was handled by Chad Alan Earnst and Christine Lynch, members of the Asset Management Unit in the SEC’s Miami Regional Office. The related examination was conducted by John Mattimore, Faye Chin, Roda Johnson, Luisa Lipins, and Victor Pedroso. Robert Levenson is leading the SEC’s litigation.

Investor Bulletin: Exchange-Traded Funds (ETFs)

Investor Bulletin: Exchange-Traded Funds (ETFs)

FORMER DELOITTE PARTNER PLEADS GUILTY TO CRIME

FROM: U.S. JUSTICE DEPARTMENT
Former Deloitte Partner Pleads Guilty to Insider Trading
The Securities and Exchange Commission announced that on August 8, 2012, Thomas P. Flanagan, a former Deloitte and Touche LLP partner, pleaded guilty to one count of criminal securities fraud for engaging in insider trading after he obtained material, nonpublic information about several Deloitte clients. Flanagan, 64, of Chicago, used that information himself and shared it with a relative to make illegal trading profits. The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against Flanagan on July 11, 2012 in the U.S. District Court for the Northern District of Illinois. Flanagan is scheduled to be sentenced on October 25, 2012.

The criminal charges arose out of the same facts that were the subject of a civil action that the SEC filed against Flanagan and his son, Patrick T. Flanagan, on August 4, 2010. The SEC’s complaint alleged that Thomas Flanagan, a certified public accountant, worked at Deloitte for 38 years and rose to the level of Vice Chairman of Clients and Markets. The complaint alleged that Flanagan traded on nine occasions between 2005 and 2008 in the securities of multiple Deloitte clients and a company acquired by a Deloitte client while in possession of nonpublic information that he learned through his duties as a Deloitte partner. The information had not yet been disclosed to the public and concerned material, market-moving events such as earnings results, earnings guidance, and acquisitions. Thomas Flanagan’s illegal trading resulted in profits of over $430,000. On four occasions, Thomas Flanagan relayed the nonpublic information to his son Patrick Flanagan who then traded based on that information. Patrick Flanagan realized profits of more than $57,000.

The SEC also instituted related administrative and cease-and-desist proceedings on August 4, 2010, finding that Flanagan violated the SEC’s auditor independence rules on 71 occasions between 2003 and 2008 by trading in the securities of nine Deloitte audit clients. The SEC’s settled administrative order found that during the time Flanagan owned or controlled these securities, Deloitte issued audit reports to the nine audit clients in which it stated that the financial statements contained in the reports had been audited by an independent auditor. However, due to Flanagan’s ownership of the audit clients’ securities, Deloitte was not independent. The companies then filed with the SEC annual reports and proxy statements which included the false audit reports. As a result, the SEC’s administrative order found that Flanagan caused and willfully aided and abetted Deloitte’s violations of the SEC’s auditor independence rules under Regulation S-X and also caused and willfully aided and abetted the companies’ violations of the reporting and proxy provisions of the Securities Exchange Act of 1934.

As alleged in the SEC’s complaint, Thomas Flanagan concealed his trades in the securities of Deloitte’s clients and circumvented Deloitte’s independence controls. According to the SEC’s complaint, he failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte’s personal income tax preparers about the identity of the companies whose securities he traded.

As a result of their conduct, the SEC’s complaint charged Thomas and Patrick Flanagan with violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3. The SEC’s administrative action found that Thomas Flanagan caused and willfully aided and abetted Deloitte’s violations of Rule 2-02(b)(1) of Regulation S-X, and caused and willfully aided and abetted the clients’ violations of Sections 13(a) and 14(a) of the Exchange Act, and Rules 13a-1, 13a-13, and 14a-3 thereunder. Without admitting or denying the SEC’s allegations in the complaint and the findings in the administrative order, Thomas Flanagan consented to the entry of an order of permanent injunction, to pay disgorgement with prejudgment interest and civil penalties totaling $1,051,042, and to a denial of the privilege of appearing or practicing before the SEC as an accountant. Without admitting or denying the SEC’s allegations in the complaint, Patrick Flanagan consented to the entry of an order of permanent injunction and to pay disgorgement with prejudgment interest and a civil penalty totaling $123,270.

SEC FREEZES AN ADDITIONAL $6 MILLION IN NEXEN INSIDER TRADING CASE

FROM: U.S. SECURITIES AND EXCHANGE COIMMISSIOIN
On August 6, 2012, the Securities and Exchange Commission obtained an emergency court order in the United States District Court for the Southern District of New York to freeze more than $6 million in assets of additional unknown traders who made approximately $2.3 million in illegal profits by trading in advance of the July 23, 2012 announcement that China-based CNOOC Ltd. had agreed to acquire Canada-based Nexen Inc. for approximately $15.1 billion.

On Friday, July 27, 2012, just days after the acquisition announcement, the SEC filed an initial complaint in federal district court in Manhattan alleging that Hong Kong-based Well Advantage Limited and other unknown traders had traded Nexen stock based on nonpublic information about CNOOC’s impending acquisition of Nexen and reaped a total of more than $13 million in illicit trading profits. That same day, the SEC obtained a court order freezing the assets of the initial defendants valued at more than $38 million.

One week later, on Friday, August 3, 2012, the SEC filed an amended complaint adding allegations that additional unknown traders in possession of material nonpublic information purchased Nexen stock in the days leading up to the public announcement of its acquisition. According to the SEC’s First Amended Complaint, the additional unknown traders opened a U.S. brokerage account through Hong Kong-based CSI Capital Management Limited only one week before the announcement and purchased 250,000 shares of Nexen stock during the following two days at a cost of approximately $4.2 million. Immediately following the announcement, the unknown traders sold these shares for nearly $6.5 million, reaping approximately $2.3 million in illegal profits. In connection with filing the First Amended Complaint, the SEC obtained another emergency court order freezing nearly $6.5 million in the assets of these additional traders, bringing the total value of assets frozen in this case to more than $44 million.

The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to the emergency relief, the Commission is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest and pay financial penalties, and permanently barring them from future violations.