COURT ORDERS $22.8 MILLION IN SANCTIONS AND RESTITTION IN INVESTMENT FRAUD CASE

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Florida Imposes over $22.8 Million in a Monetary Sanction and Restitution against Floridian David Merrick and His Company, Trader’s International Return Network

In a parallel criminal action, Merrick was convicted on fraud charges and sentenced to 97 months imprisonment

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Charlene Edwards Honeywell of the U.S. District Court for the Middle District of Florida entered an order requiring defendants David Merrick, previously of Apopka, Fla., and his company, Trader’s International Return Network (TIRN), to jointly pay a civil monetary penalty of over $11.4 million for fraud in connection with a foreign currency trading program that victimized more than 700 customers. The order also requires TIRN, a Panamanian corporation, to pay restitution of $11,437,573 to defrauded customers.

The CFTC order, entered on January 22, 2013, stems from a complaint filed by the CFTC in 2009, charging the defendants with solicitation fraud and misappropriation of customer funds involving at least $22.5 million. The complaint alleged that the defendants provided customers and prospective customers with written and/or electronic documents that contained materially false and misleading statements and omissions regarding the actual investment of customer funds, the risks of trading, and profits achieved (see CFTC Press Release 5733-09, October 15, 2009).

The court previously entered consent orders of permanent injunction against Merrick on April 22, 2010 and TIRN on September 8, 2010, finding that they violated the anti-fraud provisions of the Commodity Exchange Act, as charged. Both orders reserved the issue of monetary sanctions for future order.

In a related criminal case, United States v. David Merrick, No. 10-cr-00109-MSS-DAB (M.D. Fla.), on January 19, 2012, Merrick was found guilty of one count of conspiracy to commit wire fraud, money laundering, and securities fraud and one count of money laundering. He was sentenced to 97 months imprisonment and ordered to pay $11,437,573.15 in restitution to 735 customer-victims.

The CFTC thanks the U.S. Attorney’s Office for the Middle District of Florida, the Federal Bureau of Investigation, and the Securities and Exchange Commission for their assistance in this matter.

CFTC staff members are responsible for the action are William P. Janulis, Barry R. Blankfield, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

SEC SUES TO HALT HOUSTON-AREA INVESTMENT SCHEME TARGETING LEBANESE AND DRUZE COMMUNITIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today charged a day trader in Sugar Land, Texas, with defrauding investors in his supposed high-frequency trading program and providing them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that Firas Hamdan particularly targeted fellow members of the Houston-area Lebanese and Druze communities, raising more than $6 million over a five-year period from at least 33 investors. Hamdan told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. Hamdan promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it was a dismal failure, generating $1.5 million in losses. As he failed to deliver the promised profits, Hamdan told investors that his funds were tied up in the Greek debt crisis and the MF Global bankruptcy among other phony excuses.

According to the SEC's complaint filed in federal court in Houston, Hamdan is well-known in the Lebanese and Druze communities in the Houston area and is a former treasurer of the Houston branch of the American Druze Society. Hamdan found investors for his trading program by talking with his friends and family in these communities. As word spread about his purported trading success, he asked existing investors to solicit their friends for investments.

The SEC alleges that Hamdan misrepresented to investors that he generated positive returns in 59 of 60 months between 2007 and 2012. He showed them phony documentation to support his false claims. For instance, a purported brokerage statement he provided investors for the first quarter of 2010 showed an opening balance of more than $2.3 million with quarterly trading gains of $2.7 million for a closing balance above $5.1 million. An actual brokerage statement obtained by SEC investigators for Hamdan's account during that same period shows the opening balance at just $27,970.76 and the closing balance at $148,210.02, with quarterly trading losses of $7,452.80.

According to the SEC's complaint, Hamdan made several other false claims to potential investors. For instance, he lied about the existence of a cash reserve account that secured their investments. Hamdan falsely stated that investments were further secured by a $5 million "key-man" insurance policy. He also falsely claimed that a well-known hedge-fund manager in the Dallas area had made a million-dollar investment with him and promised to invest more based on Hamdan's continuing success.

The SEC's complaint charges Hamdan with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking various relief including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

HUSBAND AND WIFE ACCUSED OF DEFRAUDING SENIOR CITIZENS BY SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Feb. 4, 2013 — The Securities and Exchange Commission today charged a husband and wife who raised millions of dollars selling investments for a purported charitable organization in Tallahassee, Fla., while defrauding senior citizens and significantly exaggerating the amount of contributions actually made to charity.

The SEC alleges that after Richard K. Olive and Susan L. Olive were hired at We The People Inc., the organization obtained $75 million from more than 400 investors in Florida, Colorado, and Texas among more than 30 states across the country by selling an investment product they described as a charitable gift annuity (CGA). However, the CGAs issued by We The People differed in several ways from CGAs issued legitimately, namely that they were issued primarily to benefit the Olives and other third-party promoters and consultants. Only a small amount of the money raised was actually directed to charitable services. Meanwhile the Olives received more than $1.1 million in salary and commissions, and they also siphoned away investor funds for their personal use.

The SEC further alleges that the Olives lured elderly investors with limited investing experience into the scheme by making a number of false representations about the purported value and financial benefits of We The People’s CGAs. The Olives also lied about the safety and security of the investments.

"The Olives raised millions from senior citizens by claiming that We The People’s so-called CGAs provided attractive financial benefits and were re-insured and backed by assets held in trust," said Julie Lutz, Associate Director of the SEC’s Denver Regional Office. "Investors were not given the full story about the true value and security of their investments."

According to the SEC’s complaint against the Olives filed in U.S. District Court for the Southern District of Florida, investors were coaxed to transfer assets including stocks, annuities, real estate, and cash to We The People in exchange for a CGA. We The People claimed to operate as a non-profit organization while it was offering the CGAs from June 2008 to April 2012. However, We The People was not operating as a charity but instead for the primary purpose of issuing CGAs and using the proceeds to pay substantial sums to the Olives, third-party promoters, and consultants. On rare occasions when We The People did actually direct money raised toward charitable services, it was insignificant. For instance, the organization made public statements that it donated $21.8 million in relief aid to AIDS orphans in Zambia, but in fact the supplies were donated by others and We The People merely made a small payment to the third party that was shipping the supplies.

The SEC alleges that We The People’s marketing and promotional materials for the CGA offering contained misrepresentations and omissions including:
False statements that the CGAs were worth the "full" accumulated value of the assets transferred by investors to We The People. Investors were not told in advance of transferring their assets that the value of the CGA as calculated by We The People was always substantially less than the "full" accumulated value of those assets because We The People took a significant percentage of the asset’s value and kept it as a purported "charitable gift."

False statements about the safety and security of the CGA program including that We The People held in trust a reserve equal to 110 percent of its liabilities and that it "reinsured" its products through "highly rated" commercial insurance companies. We The People did not in fact have any restricted-access trust accounts let alone maintain a reserve in them, and it did not purchase reinsurance from any insurance company to cover its potential liabilities under the CGAs.
Omissions of the previous indictments and regulatory sanctions against Richard and Susan Olive when they previously sold similar products.
Omissions of the sizable commissions that We The People paid to third-party promoters and the Olives on the sale of the CGAs, hiding from investors that these commissions totaled several million dollars.
The SEC’s complaint charges the Olives with violations, or aiding and abetting violations, of the antifraud provisions of the federal securities laws as well as violations of the securities and broker-dealer registration provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus pre- and post-judgment interest and financial penalties against the Olives.

The SEC also filed separate complaints today against We The People as well as the company’s in-house counsel William G. Reeves. They both agreed to settle the charges without admitting or denying the allegations. The settlements are subject to court approval.

We The People consented to a final judgment that will enable the appointment of a receiver to protect more than $60 million of investor assets still held by the company. The final judgment also provides for disgorgement of ill-gotten gains and provides injunctive relief under the antifraud and registration provisions of the federal securities laws.

Reeves entered into a cooperation agreement with the SEC, and the terms of his settlement reflect his assistance in the SEC’s investigation and anticipated cooperation in its pending action against the Olives. Reeves agreed to be suspended from appearing or practicing before the SEC for at least five years, and consented to a final judgment providing injunctive relief under the provisions of the federal securities laws that he violated. The court will determine at a later date whether a financial penalty should be imposed against Reeves.

The SEC’s investigation was conducted by Michael Cates and Ian Karpel in the Denver Regional Office. The SEC’s litigation against the Olives will be led by Nicholas Heinke and Dugan Bliss.

JUSTICE SUES S&P FOR FRAUD STEMMING FROM INVESTIGATION CODE-NAMED "ALCHEMY"

FROM: U.S. DEPARTMENT OF JUSTICE

Tuesday, February 5, 2013
Department of Justice Sues Standard & Poor’s for Fraud in Rating Mortgage-Backed Securities in the Years Leading Up to the Financial Crisis

Complaint Alleges that S&P Lied About its Objectivity and Independence And Issued Inflated Ratings for Certain Structured Debt Securities.
Attorney General Eric Holder announced today that the Department of Justice has filed a civil lawsuit against the credit rating agency Standard & Poor’s Ratings Services alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.

"Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis," said Attorney General Holder. "Today’s action is an important step forward in our ongoing efforts to investigate – and – punish the conduct that is believed to have contributed to the worst economic crisis in recent history. It is just the latest example of the critical work that the President’s Financial Fraud Enforcement Task Force is making possible."

Attorney General Eric Holder was joined in announcing the filing of the civil complaint by Acting Associate Attorney General Tony West, Principal Deputy Assistant Attorney General for the Civil Division Stuart F. Delery, and U.S. Attorney for the Central District of California André Birotte Jr. Also joining the Department of Justice in making this announcement were the attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or will file civil fraud lawsuits against S&P alleging similar misconduct in the rating of structured financial products. Additional state attorneys general are expected to make similar filings today.

"Many investors, financial analysts and the general public expected S&P to be a fair and impartial umpire in issuing credit ratings, but the evidence we have uncovered tells a different story," said Acting Associate Attorney General West. "Our investigation revealed that, despite their representations to the contrary, S&P’s concerns about market share, revenues and profits drove them to issue inflated ratings, thereby misleading the public and defrauding investors. In so doing, we believe that S&P played an important role in helping to bring our economy to the brink of collapse."

Today’s action was filed in the Central District of California, home to the now defunct Western Federal Corporate Credit Union (WesCorp), which was the largest corporate credit union in the country. Following the 2008 financial crisis, WesCorp collapsed after suffering massive losses on RMBS and CDOs rated by S&P.

"Significant harm was caused by S&P’s alleged conduct in the Central District of California," said U.S. Attorney for the Central District of California Birotte. "Across the seven counties in my district, we had huge numbers of homeowners who took out subprime mortgage loans, many of which were made by some of the country’s most aggressive lenders only because they later could be securitized into debt instruments that were given flawed ‘AAA’ ratings by S&P. This led to an untold number of foreclosures in my district. In addition, institutional investors located in my district, such as WesCorp, suffered massive losses after putting billions of dollars into RMBS and CDOs that received flawed and inflated ratings from S&P."

The complaint, which names McGraw-Hill Companies, Inc. and its subsidiary, Standard & Poor’s Financial Services LLC (collectively S&P) as defendants, seeks civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on three forms of alleged fraud by S&P: (1) mail fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1341; (2) wire fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1343; and (3) financial institution fraud in violation of 18 U.S.C. § 1344. FIRREA authorizes the Attorney General to seek civil penalties up to the amount of the losses suffered as a result of the alleged violations. To date, the government has identified more than $5 billion in losses suffered by federally insured financial institutions in connection with the failure of CDOs rated by S&P from March to October 2007.

"The fraud underpinning the crisis took many different forms, and for that reason, so must our response," said Stuart F. Delery, Principal Deputy Assistant Attorney General for the Department’s Civil Division. "As today’s filing demonstrates, the Department of Justice is committed to using every available legal tool to bring to justice those responsible for the financial crisis."

According to the complaint, S&P publicly represented that its ratings of RMBS and CDOs were objective, independent and uninfluenced by the potential conflict of interest posed by S&P being selected to rate securities by the investment banks that sold those securities. Contrary to these representations, from 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDOs. According to the complaint, S&P weakened those criteria and models from what S&P’s own analysts believed was necessary to make them more accurate. The complaint also alleges that, from at least March to October 2007, and because of this same desire to increase market share and profits, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs. At the time, according to the allegations in the complaint, S&P knew that the quality of non-prime RMBS was severely impaired, and that the ratings on those mortgage bonds would not hold. The government alleges that S&P failed to account for this impairment in the CDO ratings it was assigning on a daily basis. As a result, nearly every CDO rated by S&P during this time period failed, causing investors to lose billions of dollars.

The underlying federal investigation, code-named "Alchemy," that led to the filing of this complaint was initiated in November 2009 in connection with the President’s Financial Fraud Enforcement Task Force.

ALLEGED SHAM COMPANY SCHEME LEADS TO SANCTIONS AND MONEY JUDGEMENTS AGAINST INDIVIDUAL

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Yitzchak Zigdon Settles SEC Fraud Charges

On January 23, 2013, the U.S. District Court for the Southern District of Florida entered a final judgment by consent against Yitzchak Zigdon in the SEC's enforcement action against seven defendants concerning the common stock of CO2 Tech Ltd. The final judgment enjoins Zigdon 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. The Court also ordered Zigdon to pay disgorgement of $260,000, prejudgment interest of $74,516 and a civil penalty in the amount of $130,000 for a total of $464,516 in monetary sanctions. In addition, the Court barred Zigdon from participating in an offering of penny stock. Zigdon consented to the entry of the final judgment without admitting or denying any of the allegations of the Commission's Complaint.

According to the Commission's complaint filed in February of 2011, the defendants' coordinated misconduct enabled them to sell CO2 Tech stock at artificially inflated prices, resulting in profits of over $7 million. In the complaint, the Commission alleged that CO2 Tech Ltd. was a sham company without significant assets or operations whose stock prices were quoted in the Pink Sheets. According to the complaint, among other things, Zigdon provided the paper work necessary to establish the account that was used to dump the shares of CO2 Tech on to the market. The complaint also stated that he caused materially false and misleading information about CO2 Tech to be disseminated in press releases and on its website. In particular, the complaint alleged that CO2 Tech falsely touted business relationships that the company had not formed, including a relationship with the Boeing Company when, in fact, there had been no communications, correspondence or understandings between CO2 Tech and Boeing.

DAY TRADER CHARGED BY SEC WITH DEFRUADING INVESTORS IN ALLEGED HIGH-FREQUENCY TRADING PROGRAM

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Jan 29, 2013 — The Securities and Exchange Commission today charged a day trader in Sugar Land, Texas, with defrauding investors in his supposed high-frequency trading program and providing them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that Firas Hamdan particularly targeted fellow members of the Houston-area Lebanese and Druze communities, raising more than $6 million during a five-year period from at least 33 investors. Hamdan told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. Hamdan promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it was a dismal failure, generating $1.5 million in losses. As he failed to deliver the promised profits, Hamdan told investors that his funds were tied up in the Greek debt crisis and the MF Global bankruptcy among other phony excuses.

The SEC is seeking an emergency court order to halt the scheme and freeze Hamdan’s assets and those of his firm, FAH Capital Partners.

"Hamdan’s affinity scam preyed upon people’s tendency to trust those who share common backgrounds and beliefs," said David R. Woodcock, Director of the SEC’s Fort Worth Regional Office. "Hamdan raised money by creating the aura of a successful day trader among friends and family in his community, and he continued to mislead them and hide the truth while trading losses mounted."

According to the SEC’s complaint filed in federal court in Houston, Hamdan is well-known in the Lebanese and Druze communities in the Houston area and is a former treasurer of the Houston branch of the American Druze Society. Hamdan found investors for his trading program by talking with his friends and family in these communities. As word spread about his purported trading success, he asked existing investors to solicit their friends for investments.

The SEC alleges that Hamdan misrepresented to investors that he generated positive returns in 59 of 60 months between 2007 and 2012. He showed them phony documentation to support his false claims. For instance, a purported brokerage statement he provided investors for the first quarter of 2010 showed an opening balance of more than $2.3 million with quarterly trading gains of $2.7 million for a closing balance above $5.1 million. An actual brokerage statement obtained by SEC investigators for Hamdan’s account during that same period shows the opening balance at just $27,970.76 and the closing balance at $148,210.02, with quarterly trading losses of $7,452.80.

According to the SEC’s complaint, Hamdan made several other false claims to potential investors. For instance, he lied about the existence of a cash reserve account that secured their investments. Hamdan falsely stated that investments were further secured by a $5 million "key-man" insurance policy. He also falsely claimed that a well-known hedge fund manager in the Dallas area made a million-dollar investment with him and promised to invest more based on Hamdan’s continuing success.

The SEC’s complaint alleges that Hamdan violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks various relief including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Jonathan Scott, Timothy Evans, and Mark Pittman of the Fort Worth Regional Office. Bret Helmer will lead the SEC’s litigation.