FROM: U.S SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced today that the U.S. District Court for the District of Columbia, on March 21, 2013, entered a settled Final Judgment as to defendant Joseph Grendys, in Securities and Exchange Commission v. Joseph Grendys et al., Civil Action No. 07-120 (D.D.C. filed Jan. 18, 2007). The Commission's complaint alleged, among other things, that Grendys aided and abetting violations of the periodic reporting, books and records, and internal controls provisions of the federal securities laws by Royal Ahold (Koninklijke Ahold N.V.), by signing a materially false audit confirmation letter and sending it to the company's independent auditors. At the time, Royal Ahold was the parent company of U.S. Foodservice, Inc. Grendys owns a vendor, Koch Poultry, which supplied U.S. Foodservice with certain products.
The Commission's complaint alleges that Grendys signed the audit confirmation letter only after a U.S. Foodservice executive signed a private side letter that contradicted the audit confirmation letter. The audit confirmation letter was used in connection with the independent auditors' annual audit of the financial statements of U.S. Foodservice.
Without admitting or denying the allegations in the Commission's complaint, Grendys agreed to settle the action against him by consenting to a Final Judgment permanently enjoining him from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rule 13b2-1 and imposing a $25,000 civil penalty. Grendys' three co-defendants settled with the Commission previously.
The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, and the New York Office of the Federal Bureau of Investigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., March 22, 2013 — The Securities and Exchange Commission today announced charges against a Houston-based hedge fund manager and his firm accused of defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO who also is charged in the SEC’s case.
An investigation by the SEC’s Enforcement Division found that George R. Jarkesy Jr., worked closely with Thomas Belesis to launch two hedge funds that raised $30 million from investors. Jarkesy and his firm John Thomas Capital Management (since renamed Patriot28 LLC) inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased. Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds’ auditor and prime broker. Meanwhile, although they shared the same "John Thomas" brand name, Jarkesy’s firm and Belesis’ firm John Thomas Financial were portrayed as wholly independent. Jarkesy led investors to believe that as manager of the funds, he was solely responsible for all investment decisions. However, Belesis sometimes supplanted Jarkesy as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested. Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.
"Jarkesy disregarded the basic standards to which all fund managers are held," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions."
According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis, and their firms, Jarkesy launched the two hedge funds in 2007 and 2009, and they were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II. The funds invested in three asset classes: bridge loans to start-up companies, equity investments principally in microcap companies, and life settlement policies. Jarkesy mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.
According to the SEC’s order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.
According to the SEC’s order, Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial. This only incited further demands by Belesis. For example, in February 2009, Belesis angrily complained via e-mail that Jarkesy was not steering enough money to John Thomas Financial, and Jarkesy responded that "we will always try to get you as much as possible, Everytime [sic] without exception!" On another occasion, Jarkesy reassured Belesis that "[n]obody gets access to Tommy until they make us money!!!!!"
The SEC’s order charges that Jarkesy and John Thomas Capital Management violated and aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8. The SEC’s order further charges that Belesis and John Thomas Financial aided and abetted and caused Jarkesy’s and John Thomas Capital Management’s violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8. The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial including disgorgement and financial penalties.
The SEC’s investigation was conducted by Igor Rozenblit, Kathy Murdocco, and Michael Osnato in the New York Regional Office. The SEC’s litigation will be led by Todd Brody. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., March 21, 2013 — The Securities and Exchange Commission today charged Rajarengan "Rengan" Rajaratnam for his role in the massive insider trading scheme spearheaded by his older brother Raj Rajaratnam and hedge fund advisory firm Galleon Management.
The SEC alleges that from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.
"Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion," said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Rengan Rajaratnam profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated."
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rengan Rajaratnam.
According to the SEC’s complaint filed in federal court in Manhattan, Rengan Rajaratnam repeatedly received valuable insider tips from his brother that he used for illegal trading in the securities of Polycom, Hilton Hotels, Clearwire Corporation, Akamai Technologies, and AMD. For example, in July 2007, he made substantial profits trading Hilton stock in his personal account based on a timely insider trading tip from Raj Rajaratnam that Hilton was about to be taken private. Rengan Rajaratnam quickly loaded up on Hilton stock, and the price of Hilton shares jumped more than 25 percent after the news became public. Rengan Rajaratnam cashed in his recently acquired position for an illicit profit of more than $675,000.
According to the SEC’s complaint, after Raj Rajaratnam tipped him about an upcoming transaction involving Clearwire Corporation in March 2008, Rengan Rajaratnam complained to his brother that certain nonpublic information they had used to begin accumulating a position in Clearwire stock was about to be reported by the media before they could establish a larger position. Rengan Rajaratnam nevertheless profited by more than $100,000 in his personal brokerage account and more than $230,000 for Galleon hedge funds based on trades in Clearwire securities.
The SEC’s complaint charges Rengan Rajaratnam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently enjoining Rajaratnam from future violations of these provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay financial penalties.
The SEC’s investigation, which is continuing, has been conducted by John Henderson and Joseph Sansone — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Diego Brucculeri, and James D’Avino of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
The SEC has now charged 33 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders located throughout the country. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.
FROM: COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Oregon-based System Capital, LLC and its President Joshua Wallace to Pay $840,000 for Solicitation Fraud and Making False Statements to the National Futures Association
In a related criminal action, Wallace pled guilty to criminal commodities fraud
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York entered a default judgment and permanent injunction Order against Defendants System Capital, LLC (System Capital) and its founder and president, Joshua Wallace, both of Lake Oswego, Oregon. The Order requires System Capital and Wallace to each pay a $420,000 civil monetary penalty, imposes permanent trading and registration bans against them, and prohibits them from violating the Commodity Exchange Act, as charged.
The court’s Order stems from a CFTC Complaint filed on November 23, 2010, charging the defendants with solicitation fraud regarding the trading of E-Mini S&P 500 futures contracts and making false statements to the National Futures Association (NFA). The case is U.S. Commodity Futures Trading Commission v. System Capital, LLC, et al., Case No.10 Civ. 8850 (KBF).
The Order finds that the Defendants, among other things, falsely represented to prospective and actual clients that the Defendants had a successful history of trading futures contracts and that System Capital had assets of at least $29 million under management. As a result of these fraudulent solicitations, System Capital and Wallace retained at least 17 clients, managed approximately $3.5 million of client funds, and directed the trading of clients’ commodity futures accounts, the Order finds.
The Order also finds that Wallace, on behalf of System Capital and himself, knowingly provided false information and documents to the NFA. In April or May 2010, Wallace sent a Disclosure Document to the NFA containing false information. During an NFA audit in May 2010, Wallace repeatedly made false statements to NFA’s auditors regarding the Disclosure Document, System Capital’s promotional materials, a forged report purportedly authored by a major accounting firm regarding defendants’ trading history, and other documents used to solicit clients, according to the Order.
On November 27, 2012, Wallace pled guilty to criminal commodities fraud in connection with the fraudulent scheme described above and to other, unrelated charges (United States v. Joshua Wallace, No. S1 11 Cr. 124 (LTS) (S.D.N.Y.)). Sentencing in the criminal case is scheduled for April 18, 2013.
The CFTC thanks the NFA, the Federal Bureau of Investigation, and the U. S. Attorney’s Office for the Southern District of New York for their assistance.
CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, and Stephen J. Obie.
FROM: SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today announced that it has obtained Final Judgments against defendants Matthew Dale Proudfoot ("Matthew") and Laurie Anne Vrvilo ("Laurie") in district court litigation in which the SEC alleged they participated in a gold mine investment scheme. According to the SEC's Complaint, Matthew and Laurie falsely promised investors whopping returns from a gold mining operation while investors' money was actually spent on family cars, jewelry, vacations, and vitamin supplements.
On July 17, 2012, the SEC filed a Complaint alleging that Harry Dean Proudfoot III of Mt. Vernon, Ohio, and his children Matthew of Colbert, Wash., and Laurie of Tigard, Ore., raised $2.7 million from approximately 140 investors in 23 states through their Portland, Oregon-based company 3 Eagles Research & Development LLC (3 Eagles).
The SEC's complaint charged 3 Eagles, Harry Proudfoot, Matthew Proudfoot and Laurie Vrvilo 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 (Exchange Act) and Rule 10b-5(a), (b) or (c) thereunder. The complaint also charges Bukantis with violating Section 15(a)(1) of the Exchange Act by selling securities as a unregistered broker. The complaint seeks permanent injunctions, disgorgement with prejudgment interest and civil monetary penalties.
In their Consents to the Final Judgments, Matthew and Laurie agreed, without admitting or denying the Complaint's allegations to the entry of permanent injunctions prohibiting their future violations of Sections 5(a), 5(c) and 17 (a) of the Securities Act and of Section 10(b) of the Exchange Act and Rule 10b-5(a), (b) or (c) thereunder. Matthew and Laurie also agreed to be jointly and severally liable for the disgorgement of the approximately $2.72 million raised from 3 Eagles investors between September 2009 and October 2011, plus prejudgment interest on that amount. Based upon the financial information submitted by Matthew and Laurie to the Commission, the Final Judgment does not impose any civil monetary penalties against them.
The SEC's case is still pending against 3 Eagles, which has defaulted in the litigation, and against Harry Proudfoot and Dennis Bukantis, who have filed answers in the litigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
BRITISH TWIN BROTHERS AGREE TO PAY $175,000 TO SETTLE MICROCAP PUMP-AND-DUMP CHARGES
The Securities and Exchange Commission announced today that brothers Alexander John Hunter and Thomas Edward Hunter, both of Great Britain, have agreed to settle the Commission's pending civil action against them. The Commission's complaint, filed April 20, 2012 in the United States District Court for the Southern District of New York, alleges that the Hunters were just 16 years old when they began disseminating subscription-based e-mail newsletters through a pair of websites they created to tout stocks selected by a "stock picking robot," which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Some investors paid an additional fee for the "home version" of the robot software.
The Commission’s complaint also alleges that the brothers separately created a third website where they marketed their newsletter subscriber list to penny stock promoters and boasted, "One email to this list of people rockets a stock price." The Hunters were in turn paid to send selected penny stock ticker symbols to their subscribers, who were misled to believe that the stock "picks" were the product of the robot. The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors in most cases with shares worth less than they had purchased them for earlier in the day.
According to the SEC’s complaint, the Hunters also offered subscribers a downloadable version of the stock picking robot for an additional fee of $97. Rather than performing the analysis advertised, the software was actually designed to deliver users a stock pick supplied by the brothers.
The Commission’s complaint alleges that by virtue of the conduct described above, the Defendants violated the antifraud provisions of the federal securities laws.
Under today's announced settlement, the Hunter brothers, without admitting or denying the allegations in the Commission’s complaint, consented to the entry of a judgment requiring Alex Hunter to pay a $100,000 penalty, requiring Tom Hunter to pay a $75,000 penalty, and enjoining both brothers individually from future 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 thereunder.
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