FROM: U.S. JUSTICE DEPARTMENT
Thursday, May 23, 2013
Owner of Investment Company Pleads Guilty to Engaging in a Fradulent Investment Scheme
The owner of an investment company pleaded guilty today for his role in an investment scheme involving false promises, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, U.S. Attorney for the Eastern District of Virginia Neil H. MacBride, and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office.
David Eugene Howard II, 34, of Queens Village, N.Y., pleaded guilty before U.S. District Judge T. S. Ellis III in the Eastern District of Virginia to one count of mail fraud.
According to the plea documents, from in or about March 2008 through in or about April 2009, Howard falsely represented to investors that his company, Flatiron Systems LLC, traded pooled equity accounts using a proprietary trading system called "Pathfinder." Through distributing false and misleading letters, operating agreements, account statements and other materials, he caused investors to send investments of at least $5,000, which were deposited into an account that he exclusively controlled and which he later misappropriated for his own benefit and the benefit of others.
Over the course of his scheme, Howard directly misappropriated approximately $373,000 of $1.8 million in investor funds. Howard’s misappropriation included approximately $86,000 in transfers to his personal bank account, cash withdrawals and personal expenditures made with his company debit card, to include approximately $34,500 in charges at a night club and approximately $3,600 in charges towards the purchase of a Tiffany necklace for Howard’s girlfriend at the time.
According to court documents, in December 2008, Howard falsely informed investors that trading had been voluntarily halted so that an independent audit could be performed. Nonetheless, Howard continued to transfer approximately $26,500 in investor funds to his personal bank account, along with additional cash withdrawals and personal expenditures over the course of the following four months. Howard followed up with another letter which falsely advised investors of prolonged audit and tax procedures, which his nonexistent attorneys and accountants were purportedly diligently working on.
At sentencing, Howard faces a maximum penalty of 20 years in prison, a fine of $250,000 or twice the gross gain or loss, and full restitution. Sentencing is scheduled for Sept. 20, 2013.
In a related action, the U.S. Securities and Exchange Commission (SEC) filed a civil enforcement action against Howard on March 21, 2011.
This prosecution is the result of an investigation by the FBI’s Washington Field Office, along with a parallel investigation by the SEC. The case is being prosecuted by Trial Attorneys Mark Grider, N. Nathan Dimock, and Luke B. Marsh of the Justice Department Criminal Division’s Fraud Section, and by Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia.
FROM: U.S. SECURITY AND EXCHANGE COMMISSION
SEC Charges Atlanta-Area Registered Representative and Registered Investment Adviser Representative with Securities Fraud
On May 23, the Securities and Exchange Commission filed an emergency action seeking a temporary restraining order and other emergency relief in federal court in the Northern District of Georgia, charging Blake Richards (Richards), a Buford, Georgia resident with violations of the federal securities laws for misappropriating investor funds.
The Honorable Julie E. Carnes, the Chief Judge of the Northern District of Georgia, granted the Commission’s request for emergency relief, issuing an order that temporarily restrained Richards from further securities laws violations, froze Richards’s assets, prevented the destruction of documents and expedited discovery. The Court also set a hearing date of June 6 for the Commission’s request for a preliminary injunction. The Commission’s complaint also seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Those claims will be adjudicated at a later date.
The Commission’s complaint alleges that, since at least 2008, Richards, a registered representative of a broker dealer, misappropriated at least $2 million from at least seven investors. The majority of the misappropriated funds constituted retirement savings and/or life insurance proceeds from deceased spouses.
In its complaint, the Commission alleges that Richards instructed investors to write out checks to entities under his control with the understanding that Richards would invest their funds in fixed income assets, variable annuities and/or common stock. The complaint alleges that none of these investments were ever made. None of the investments appeared on the client’s brokerage account statements, and Richards received no commission income from these investments. The complaint further alleges that Richards siphoned off the funds entrusted to him for personal use.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 24, 2013 — The Securities and Exchange Commission today announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.
The SEC alleges that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.
"Bergin betrayed the trust of his clients by secretly using information about their trades to gain an unfair trading advantage and reap massive profits for himself," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit.
According to the SEC's complaint filed yesterday in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin is the trader primarily responsible for managing price exposures related to client orders for equity trades.
"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.
According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.
According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.
The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.
In order to halt Bergin's ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and Zaun.
The SEC's complaint alleges that Bergin violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(j) of the Investment Company Act of 1940 and Rule 17j-1. The complaint seeks disgorgement, prejudgment interest, and a penalty as well as a permanent injunction against Bergin.
The SEC's investigation was conducted in the Fort Worth Regional Office by Frank Goodrich and Barbara Gunn of the Asset Management Unit. The litigation will be led by Jennifer Brandt and Mr. Goodrich. The examination that led to the investigation was conducted by Mary Walters, Anthony McNeal, Charles Amsler, Brandon Whitaker, Carol Hahn, Dennis Rogers, and Kim Shaw of the Fort Worth office.
The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Texas and the Federal Bureau of Investigation.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Spencer Montgomery, Brian Reynolds, Arjent Capital Markets LLC, and Chicago Trading Managers LLC to Pay More than $1.8 Million for Commodity Pool Fraud
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Defendants Spencer Montgomery and Brian Reynolds, and a default judgment and permanent injunction Order against Defendants Arjent Capital Markets LLC (Arjent) and Chicago Trading Managers LLC (CT Managers), for defrauding pool participants by knowingly issuing or causing to be issued false account statements for commodity pools. The Orders require Montgomery and Reynolds each to pay a $140,000 civil monetary penalty, Arjent and CT Managers jointly to pay a $1.4 million civil monetary penalty, and Arjent to pay an additional $140,000 civil monetary penalty. The Orders further impose permanent trading and registration bans on all the Defendants and prohibit them from violating the Commodity Exchange Act (CEA), as charged.
The court’s Orders, entered March 19, 2013 and May 15, 2013, respectively, stem from a CFTC Complaint filed on March 13, 2012, that charged the Defendants with violating the CEA’s anti-fraud provisions.
The Orders find that from at least June 2008 through at least November 2009, Arjent, CT Managers, Montgomery, and Reynolds defrauded commodity pool investors, who had invested approximately $10.5 million. CT Managers, Montgomery, and Reynolds knowingly issued and/or causing to be issued false account statements for two commodity pools, which Arjent aided and abetted, while Arjent, Montgomery, and Reynolds knowingly issued or caused to be issued a false account statement for a third commodity pool, the Orders find. Additionally, the Orders find that the Defendants knew that certain debits were being held in the same account as the commodity pools’ assets and that those debits depleted the commodity pools’ assets. Nonetheless, the Orders find that Arjent, CT Managers, Montgomery, and Reynolds issued or caused to be issued account statements that did not reflect the dilution of the commodity pools’ assets by these debits.
The CFTC thanks the National Futures Association, the Chicago Board Options Exchange, the U.S. Securities and Exchange Commission, and the Financial Services Authority (UK) for their assistance.
CFTC staff members responsible for this case are Laura Martin, Janine Gargiulo, Candice Aloisi, Michael Geiser, Judith Slowly, David Acevedo, Manal Sultan, Lenel Hickson, Lisa Hazel, Annette Vitale, Ronald Carletta, Stephen Obie, and Vincent McGonagle.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Director's Brother, and His Friend and His Relative, with Insider Trading in Shares of a Medical Professional Liability Insurer
The Securities and Exchange Commission charged the brother of a director, his friend, and his sister-in-law with insider trading in the securities of an East Lansing, Mich.-based holding company for a medical professional liability insurer.
The SEC alleges that John A. Stilwell misappropriated confidential information from his brother, an American Physicians Capital, Inc., (ACAP) director, about the anticipated acquisition of ACAP by another insurance company. Stilwell in turn shared this nonpublic information with his friend, Dr. Michael C. Moore, and his sister-in-law, Jillian M. Murphy. Moore and Murphy each tipped another person who purchased ACAP shares. The four tippees purchased ACAP stock based on confidential information about the impending sale in the months leading up to a public announcement. Collectively, they made nearly $62,000 in illegal profits on their ACAP stock following the announcement.
Stilwell and his tippees agreed to pay a combined total of about $167,000 to settle the SEC's charges.
According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, Stilwell, a resident of New York, worked as an employee of his brother's investment firm while his brother was serving as a member of ACAP's board of directors. At a meeting on March 12, 2010, ACAP's board confidentially discussed whether it should consider a potential sale of ACAP, instructed company management to evaluate whether or not to continue as an independent, stand-alone company, and authorized ACAP's CEO and Stilwell's brother to determine potential strategic partners and contact them on a preliminary basis in order to determine their interest in acquiring ACAP.
The SEC alleges that, as Stilwell's brother and ACAP's CEO continued taking definite steps toward a sale, Stilwell misappropriated material nonpublic information from his brother and disclosed it to his friend, Moore, and sister-in-law, Murphy. Between April 16 and 30, 2010, Moore, Murphy, and two individuals that they tipped illegally purchased 8,200 shares of ACAP stock based on the confidential information Stilwell tipped. On July 8, the acquisition of ACAP by Napa, Calif.-based insurer The Doctors Company was publicly announced, and ACAP shares closed approximately 28 percent higher than the previous day's closing price.
Without admitting or denying the allegations in the SEC's complaint, Stilwell, Moore, and Murphy consented to the entry of final judgments ordering them to pay disgorgement, prejudgment interest, and financial penalties, and permanently enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Specifically, Stilwell agreed to pay approximately $41,500; Moore, a resident of Colorado, agreed to pay approximately $113,000; and Murphy, also a resident of Colorado, agreed to pay approximately $12,000. The proposed settlement is subject to court approval.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 22, 2013 — The Securities and Exchange Commission today charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.
An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.
South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.
"South Miami's fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments," said Elaine C. Greenberg, Chief of the SEC Enforcement Division's Municipal Securities and Public Pensions Unit. "The tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption."
Eric I. Bustillo, Director of the SEC's Miami Regional Office, added, "Municipalities in South Florida and elsewhere cannot rely on a lack of internal procedures or experience in debt offerings to excuse fraudulent disclosures made to investors."
According to the SEC's order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer's limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.
According to the SEC's order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city's lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city's then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.
However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering's proceeds and the altered terms of the parking garage lease.
According to the SEC's order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds' tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city's settlement and payments, bondholders were not financially harmed and they're not required to include any interest from the bonds in their gross incomes.
The SEC's order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city's policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant's determinations and implement all recommendations. South Miami neither admitted nor denied the SEC's findings. A full description of the undertakings can be found in the SEC's order.
This SEC's investigation was conducted in the Miami Regional Office by Senior Counsel Sean M. O'Neill under the supervision of Assistant Regional Director Jason R. Berkowitz, both members of the Municipal Securities and Public Pensions Unit.
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