SEC CHARGES FORMER EXECUTIVE OF MASSACHUSETTS-BASED COMPANY WITH INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Former Executive of Massachusetts-Based Company with Insider Trading

The Securities and Exchange Commission charged Joseph M. Tocci, a former executive of Massachusetts-based American Superconductor Corporation, with insider trading ahead of an April 5, 2011 company announcement that caused the company's stock price to tumble 42% and reaped Tocci over $80,000 in profits. Tocci has agreed to settle the charges by, among other things, paying a total of over $170,000 in disgorgement of ill-gotten gains, prejudgment interest, and a civil penalty.

In a Complaint filed on August 12, 2013, in the U.S. District Court for the District of Massachusetts in Boston, the SEC alleges that Tocci, age 59, of Belmont, Massachusetts, used confidential information he obtained as the assistant treasurer of American Superconductor to purchase option contracts through which Tocci essentially bet that the company's stock price would soon decrease on the release of negative news. According to the SEC's Complaint, on or about March 31, 2011, Tocci learned through communications with American Superconductor's chief financial officer ("CFO") that the company's largest customer, Sinovel Wind Group Co. Ltd., had refused to accept shipments scheduled for delivery by the close of the company's fiscal year on March 31, 2011, and had failed to pay past due amounts for earlier shipments. These developments, the CFO said, would likely require a public announcement from American Superconductor within the next few days. The CFO instructed Tocci to keep this information confidential. On April 1, 2011, the Complaint alleges, Tocci improperly used this material, nonpublic information to purchase 100 put option contracts, which increased in value as American Superconductor's stock price decreased. On April 5, 2011, after the close of trading, the company announced that its financial results for its fourth quarter and fiscal year ended March 31, 2011 would be lower than expected due to a deteriorating relationship with Sinovel. The next day, American Superconductor's stock price plummeted 42%. By then selling his 100 put option contracts, Tocci earned illegal profits of approximately $82,439.

Tocci has agreed to settle this case by consenting to a judgment enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay disgorgement of $82,439 (representing his ill-gotten gains) plus prejudgment interest of $6,109 and a civil penalty of $82,439. Tocci also agreed to plead guilty in a parallel criminal case brought by the U.S. Attorney's Office for the District of Massachusetts in connection with the same conduct.

The SEC's investigation was conducted by Asita Obeyesekere, Michael Foster, and Kevin Kelcourse in the SEC's Boston Regional Office. The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the District of Massachusetts and the Federal Bureau of Investigation's Boston Field Office. The Commission also thanks the Options Regulatory Surveillance Authority and the Financial Industry Regulatory Authority for their assistance.

MAN WHO ORCHESTRATED $72 MILLION PONZI SCHEME RECEIVES 15 YEAR PRISON TERM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

15 Year Prison Term for Gregory Mcknight, Orchestrator of $72 Million Ponzi Scheme

The Securities and Exchange Commission announced that on August 6, 2013, the Honorable Mark A. Goldsmith of the United States District Court for the Eastern District of Michigan sentenced Gregory N. McKnight to 188 months (15 years and 8 months) in prison, followed by supervised release of 3 years, and ordered McKnight to pay $48,969,560 in restitution to his victims. McKnight, 53, of Swartz Creek, Michigan, had previously pled guilty to one count of wire fraud for his role in orchestrating a $72 million Ponzi scheme involving at least 3,000 investors. The U.S. Attorney’s Office for the Eastern District of Michigan filed criminal charges against McKnight on February 14, 2012. McKnight was taken into custody immediately after the sentencing hearing.

The criminal charges arose out of the same facts that were the subject of an emergency action that the Commission filed against McKnight and others on May 5, 2008. On that same day, the Court issued orders freezing McKnight’s assets and those of several companies he controlled, and appointed a Receiver. The Commission’s complaint alleged that, from December 2005 through November 2007, McKnight, through his company Legisi Holdings, conducted a fraudulent, unregistered offering of securities in which he raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries. According to the Commission's complaint, McKnight represented that he would invest the offering proceeds in various investment vehicles and pay interest of as much as 15 percent per month from the resulting profits. The complaint charged that McKnight invested less than half of the offering proceeds and that these investments resulted in millions of dollars in losses. The Commission's complaint further charged that McKnight used investor funds to make Ponzi payments to investors and for his own use. The Commission’s complaint charged McKnight with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

On July 6, 2011, the Court entered a final judgment against McKnight in the Commission’s action, and ordered McKnight to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties totaling approximately $6.5 million. The court also issued orders permanently enjoining McKnight from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. On July 9, 2013, McKnight's associate Matthew J. Gagnon was sentenced to five years in prison for his role in promoting Legisi.

SEC.gov | Opening Statement

SEC.gov | Opening Statement

STOCK PROMOTERS CHARGED BY SEC IN MARKET MANIPULATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Stock Promoters with Market Manipulation

The Securities and Exchange Commission announced that it filed a civil injunctive action against Cort Poyner ("Poyner") and Mohammad Dolah ("Dolah"), alleging that they engaged in a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Resource Group International, Inc. ("Resource Group") and Gold Rock Resources Inc. ("Gold Rock").

The complaint, filed on July 31, 2013 in federal court in Brooklyn, New York, alleges that Poyner, a recidivist securities violator, and Dolah engaged in an undisclosed kickback arrangement with an individual ("Individual A") whom they believed represented a group of registered representatives that solicited customer purchases of stock in exchange for undisclosed kickbacks. Poyner and Dolah promised to pay between 25% - 35% in kickbacks to Individual A and the registered representatives he represented in exchange for the purchase of up to $2 million of Resource Group stock and $1 million in Gold Rock stock through the customers' accounts.

The complaint further alleges that between December 11, 2008 and May 11, 2009, Poyner and Dolah instructed Individual A to purchase 800,000 shares of Resource Group stock for a total of $50,000, and Dolah instructed Individual A to purchase 20,000 shares of Gold Rock stock for a total of $20,400. Thereafter, Poyner and Dolah paid Individual A cash bribes totaling $14,000 for those purchases.

The complaint charges Poyner and Dolah with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, and civil penalties from Poyner and Dolah, a judgment prohibiting Dolah from participating in any offering of penny stock, and an order prohibiting Poyner from acquiring, disposing or promoting any penny stock.

SEC OBTAINS EMERGENCY COURT ORDER TO STOP HEDGE FUND FROM DEFRAUDING MILITARY PERSONNEL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
Washington D.C., Aug. 6, 2013 

The Securities and Exchange Commission obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs.  He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.  In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent.

“Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn’t have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”

According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.

The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

The SEC’s investigation was conducted by John J. Sikora, Jr. and Jason A. Howard, and the litigation will be led by Jonathan S. Polish.

SEC CAUTIONS EXCHANGES TO MONITOR FOR COMPLIANCE COMPOSITION OF INDICES USED IN OFFERING FINANCIAL INSTRUMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
FOR IMMEDIATE RELEASE
2013-150
Washington D.C., Aug. 8, 2013 —

The Securities and Exchange Commission today issued a report cautioning exchanges and investment professionals to monitor the composition of indices used in offering financial instruments to determine if they are security futures products and ensure they are complying with the federal securities laws.

The SEC’s report of investigation stems from an inquiry into a foreign derivatives exchange that was offering and selling futures to U.S. customers on what was initially a broad-based index not subject to the registration requirements of the federal securities laws.  The index later transitioned to a narrow-based security index, leaving it without a valid exemption from the securities laws.  The SEC’s report reminds exchanges and investment professionals to establish policies and procedures to consistently monitor the composition of indices on which futures are based to establish whether or not they are offering security futures products.

“As the compositions of exchange indices fluctuate, it is critically important for exchanges to have policies and procedures in place to effectively monitor the composition of their indices and  ensure that they are appropriately offering securities based on those indices to U.S. investors,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “It is equally important for investment professionals to be mindful of the highly analogous situation involving security-based swaps, and the failure to appropriately monitor the characteristics of such financial instruments risks violating the federal securities laws.”

The SEC’s investigation into Eurex Deutschland revealed that the exchange began offering and selling futures on its Euro STOXX Banks Index to U.S. customers more than 10 years ago pursuant to a Commodity Futures Trading Commission (CFTC) no-action letter obtained in part through Eurex’s representation that it was a broad-based index subject to the CFTC’s exclusive jurisdiction.  In October 2011, Eurex reviewed the index for the first time in response to a request by the CFTC to confirm it was still broad-based.  During the review, Eurex discovered and self-reported to the SEC and CFTC that the index had transitioned in April 2010 from a broad-based to a narrow-based security index as defined by Section 3(a)(55)(B) of the Securites Exchange Act of 1934.   From April 2010 to October 2011, Eurex sold 6 million contracts on the index through approximately 79 foreign-based broker-dealers, some of which offered direct market access to the index through trading terminals in the U.S.  Other orders were facilitated through omnibus customer accounts carried by foreign-based intermediaries on behalf U.S. investors.

According to the SEC’s report, Eurex did not comply with Section 6(h)(1) of the Exchange Act by effecting transactions in security futures that were not listed on a national securities exchange or national securities association for U.S. investors.  Eurex also failed to comply with Section 5 of the Exchange Act by not registering as a national securities exchange, and by offering and selling security futures in the U.S without registering the transactions or having a valid exemption from registration.  The Commission has decided to issue this report and forego an enforcement action against Eurex in part because of its substantial and timely cooperation with the investigation and its prompt remediation efforts.  After self-reporting the findings of its review, Eurex extensively cooperated with the SEC staff and voluntarily provided updates and documents.  Eurex has since implemented comprehensive policies and procedures that now require monthly, and in some instances daily, compliance monitoring of indices on which it offers futures contracts in the U.S.

The SEC’s report notes that in analogous situations involving security-based swaps, investment professionals who engage in swap transactions are responsible for ascertaining the swap’s characteristics.  When the swaps are securities-based, they must ensure that they are following the registration requirements of the federal securities laws and appropriately offering these financial instruments to U.S. investors.

The SEC’s investigation was conducted by Kay B. Lee of the Enforcement Division’s Market Abuse Unit in Philadelphia, and was supervised by Mr. Hawke.