FROM: SECURITIES AND EXCHANGE COMMISSION
SEC Charges Fund Manager in Scheme Involving Risky Mortgage-Related Investment
The Securities and Exchange Commission today announced charges against an investment fund manager with offices in California and Arizona who is allegedly deceiving investors about the safety and performance of their investments, which involve risky collateralized mortgage obligations (CMOs).
The SEC alleges that George Charles Cody Price of La Jolla, Calif., raised $18 million for three investment funds through his firm ABS Manager LLC, and he promised investors that their money was secured by government-backed bonds yielding extraordinary double-digit returns as high as 18 percent per year. Price used the tagline "Your Flight to Safety" in marketing one of those funds. However, Price was actually investing in one the riskiest tranches of CMOs on the market, and the investments failed to achieve the returns that Price promised and sometimes even lost money. Price concealed the actual performance of these risky bonds by providing fake monthly statements to investors that inflated the value of the investments.
The SEC further alleges that Price, who regularly co-hosted a radio show in the San Diego area called "The Wealth Weekend Hour" and recommended that listeners invest in one of his funds, also stole a half-million dollars of fund assets in the form of purported fees, and grossly inflated the assets under his management to misrepresent his prominence as an investment manager as he solicited investors.
The SEC's complaint charges Price and ABS Manager with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-8(a) thereunder. Price's three investment funds (ABS Fund, LLC [Arizona], ABS Fund, LLC [California], and Capital Access, LLC) are named as relief defendants along with his company Cavan Private Equity Holdings LLC and his wife's company Lucky Star Events LLC because they hold cash or other assets acquired from the fund assets.
Concurrent with filing the complaint, the SEC also sought a temporary restraining order, asset freeze, receiver, order prohibiting the destruction of documents, and an accounting. The SEC sought to file the action under seal. In an Order dated February 11, 2013, United States District Court Judge Gonzalo Curiel denied the requests at this time.
The SEC's investigation was conducted by Morgan B. Ward Doran, Janet Weissman, and Carol Shau of the Los Angeles Regional Office. Sam Puathasnanon and Lynn Dean will lead the litigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Executives to be Permanently Enjoined, to Pay Civil Penalties and Disgorgement, and to Reimburse Company Pursuant to Section 304 of Sarbanes-Oxley; Former CEO/Chairman also to be Barred for Five Years from Serving as an Officer and Director of any Public Company
The Securities and Exchange Commission today settled civil fraud charges against Amnon Landan, the former Chairman and Chief Executive Officer of Mercury Interactive, LLC (Mercury), and Douglas Smith, a former Chief Financial Officer of Mercury, arising from an alleged scheme to backdate stock option grants and from other alleged misconduct.
On May 31, 2007, the Commission charged Landan, Smith, and two other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint also alleges that during this period Landan and certain other executives backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.
Without admitting or denying the allegations in the Commission's complaint, Landan consented to the entry of a final judgment permanently enjoining him from violating and/or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as the financial reporting, record-keeping, internal controls, false statements to auditors, and proxy provisions of the federal securities laws. Landan also agreed to be barred from serving as an officer or director of any public company for five years. Landan will pay $1,252,822 in disgorgement and prejudgment interest, representing the "in-the-money" benefit from his exercise of backdated option grants, and a $1,000,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Landan will also reimburse Mercury, or the parent company that acquired it after the alleged misconduct (Hewlett-Packard Company), $5,064,678 for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, Landan's Section 304 reimbursement would be deemed partially satisfied by his prior return to Mercury of $2,817,500 in vested options.
Without admitting or denying the allegations in the Commission's complaint, Smith consented to the entry of a final judgment permanently enjoining him from violating Section 17(a)(2) and (a)(3) of the Securities Act of 1933. He will disgorge $451,200, representing the "in-the-money" benefit from his exercise of backdated option grants, and pay a $100,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Smith will also reimburse Mercury or its parent company $2,814,687 for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, all of Smith's disgorgement and all but $250,000 of his Section 304 reimbursement would be deemed satisfied by his prior repayment to Mercury of $451,200 and his foregoing of his right to exercise vested options with a value of $2,113,487.
The settlements are subject to the approval of the United States District Court for the Northern District of California.
The Commission previously filed settled charges in this matter against Mercury and three former outside directors of Mercury. On May 31, 2007, the Commission filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. See Litigation Release No. 20136 (May 31, 2007). On September 17, 2008, the Commission filed settled charges against three former outside directors of Mercury alleging that they recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company's stock option grants and company expenses. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. See Litigation Release No. 20724 (Sept. 17, 2008). Mercury and the outside directors settled the charges without admitting or denying the allegations in the Commission's complaint. The Commission also previously settled with one of the four senior officers its contested action. On March 20, 2009, the Commission settled with former Mercury CFO Sharlene Abrams by which she agreed to entry of a permanent injunction against the antifraud and certain other securities law provisions, to pay $2,287,914 in disgorgement which was deemed partially satisfied by payment to Mercury, to pay a $425,000 civil penalty, to be permanently barred from serving as an officer and director of any public company, and to a Commission order barring her from appearing or practicing before the Commission as an accountant. See Litigation Release No. 20964 (March 20, 2009). Abrams settled without admitting or denying the allegations in the Commission's complaint.
The Commission's litigation against one remaining Mercury officer, former general counsel Susan Skaer, is continuing.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.
The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.
In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.
"Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information," said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen."
The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.
The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.
The SEC’s expedited investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles Regional Office with substantial assistance from Charles Riely, Market Abuse Unit member in the New York Regional Office who will handle the SEC’s litigation. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority (ORSA).
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Enskilda Futures Limited to Pay a $125,000 Civil Monetary Penalty for Failing to Meet Minimum Capital Requirements Due to Margin Errors
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Enskilda Futures Limited (EFL), a London-based Futures Commission Merchant (FCM), for failing to meet the minimum capital requirements as set forth in Section 4f(b) of the Commodity Exchange Act (CEA) and CFTC Regulation 1.17. The failure to meet the minimum capital requirements was a result of EFL’s failure to call for sufficient margin collateral on an intra-month basis from its ultimate parent, Skandinaviska Enskilda Banken, AB (SEB), which holds an omnibus account at EFL, the Order finds. The CFTC Order requires EFL to pay a $125,000 civil monetary penalty and to maintain the remedial measures adopted following discovery of the error.
The CFTC Order finds that during the period of July 14 to August 2, 2011 (the Relevant Period), EFL collected only net margin collateral from SEB on an intra-month basis and not gross margin collateral as required. At month end, EFL and SEB settled up and EFL called for gross margin; thus, there was no effect on EFL’s monthly capital. However, because EFL failed to collect adequate margin collateral on an intra-month basis from SEB, EFL incurred charges to its adjusted net capital. As a result of these charges, EFL failed to meet the minimum capital requirements on 11 days in violation of Section 4f(b) of the CEA, 7 U.S.C. § 6f(b) (2006), and CFTC regulation 1.17, 17 C.F.R. § 1.17 (2011), according to the Order.
The error was discovered during a routine risk-based audit conducted by CME Group, Inc. (CME) on or about November 8, 2011, the Order finds. On November 9, 2011, EFL filed notice with the CFTC, the National Futures Association, and the CME, pursuant to CFTC regulation 1.12(a) and (f)(3), 17 C.F.R. §1.12(a) and (f)(3) (2011), advising of its failure to meet the net capital requirements during the relevant period. EFL immediately undertook measures to revise its policies and procedures and collect adequate margin collateral from its customer, the Order further finds.
EFL has cooperated fully with CFTC staff, according to the Order. Further, it appears that at all times during the Relevant Period, SEB possessed ample funds to satisfy any intra-month collateral call from EFL. EFL need only have collected such funds to have remained in compliance with CFTC regulations, the Order finds.
The CFTC thanks the CME for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Allison Baker Shealy, Timothy J. Mulreany and Joan Manley, with assistance from CFTC Division of Swap Dealer and Intermediary Oversight staff Kevin Piccoli, Robert Laverty, Ronald Carletta, and Linda Santiago.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22619 / February 15, 2013
District Court Grants Securities and Exchange Commission's Motions for Default Judgment against a Nationally Known Psychic and his Corporate Entities in Multi-Million Dollar Offering Fraud
The Securities and Exchange Commission (Commission) announced today that on February 11, 2013 the U.S. District Court for the Southern District of New York entered default judgments against Sean David Morton (Morton), a nationally-recognized psychic who bills himself as "America's Prophet," his wife, relief defendant Melissa Morton, and corporate shell entities co-owned by the Mortons. In addition to ordering permanent injunctions from violating antifraud and registration statutes and rule, each defendant was ordered to disgorge, jointly and severally, $5,181,135.82, along with prejudgment interest of $1,171,110.54, and pay a penalty of $5,181,135.82 for a total of $11,533,382.18. Relief defendants Melissa Morton and the Prophecy Research Institute, the Mortons' nonprofit religious organization, were ordered to disgorge $468,281 plus prejudgment interest of $105,847.23, for a total of $574,128.23.
On March 4, 2010, the Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Morton and his corporate shell entities for engaging in a multi-million offering fraud. According to the Commission's complaint, Morton fraudulently raised more than $5 million from more than 100 investors for his investment group, which he called the Delphi Associates Investment Group (Delphi Investment Group).
Beginning in or around the summer of 2006, the complaint alleged, Morton solicited individuals to invest in one of several companies he and Melissa Morton controlled under the umbrella of the Delphi Investment Group. According to the Commission's complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his alleged psychic expertise in predicting the securities markets, and to solicit investors for the Delphi Investment Group. During these solicitations, Morton made numerous materially false representations. For example, Morton falsely told potential investors that he has called all the highs and lows of the stock market, on their exact dates, over a fourteen year period. Morton further falsely asserted that the alleged profits in the accounts were audited and certified by PricewaterhouseCoopers LLP (PWC) who he claimed certified that the accounts had profited by 117%. Morton also falsely asserted that the investor funds would be used exclusively for foreign currency investments, and that any other use of the funds would be considered a criminal act. Morton further falsely claimed that he would use the pooled funds to trade in foreign currencies and distribute pro rata the trading profits among the investors. In private one-on-one correspondence with potential investors, Morton was even more aggressive in his solicitation. For example, Morton wrote to a potential investor urging he invest more money in the Delphi Investment Group "RIGHT NOW…[Because] [o]nce the DOLLAR starts to DROP, which will happen soon, we are set to make a FORTUNE!"
However, the complaint alleged, Morton lied to investors about his past successes, and about key aspects of the Delphi Investment Group, including the use of investor funds and the liquidity of the funds. According to the complaint, Morton did not have the successful track record picking stocks in which he claimed, and that he in fact was simply wrong in many of his securities predictions. Further, PWC never audited the Delphi Investment Group, let alone certify any profits. Also, unbeknownst to the investors, instead of investing all of the funds into foreign currency trading firms, the Mortons diverted some of the investor funds, including nearly half a million dollars to themselves through their own shell entities.
The defendants never properly answered the allegations in the complaint. Instead, the Mortons filed dozens of papers with the Court claiming, for instance, that the Commission is a private entity that has no jurisdiction over them, and that the staff attorneys working on the case do not exist.
On February 11, 2013, United States District Judge Forrest issued default judgments against all of the defendants and relief defendants. With the entry of the default judgments, the Commission received full relief requested in its complaint. The complaint charged each of the defendants with 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 complaint further charged that the relief defendants were unjustly enriched by receiving investor funds. The complaint sought a final judgment permanently restraining and enjoining the defendants from future violations of the above provisions of the federal securities laws.
The SEC's litigation team was led by Bennett Ellenbogen, Alexander Vasilescu, Todd Brody, Elzbieta Wraga, and Roshonda Ledbetter. Amelia Cottrell, Stephen Johnson, Jacqueline Fine, and Elizabeth Baier assisted during the investigation.
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