SEC ANNOUNCES CHARGES AGAINST OPERATORS OF WORLD-WIDE PYRAMID SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced charges and asset freezes against the operators and promoters of a worldwide pyramid scheme that falsely promises exponential, risk-free returns to investors in a venture that purportedly sells Internet-based children’s educational courses.

The SEC alleges that five entities based in Hong Kong, Canada, and the British Virgin Islands that collectively operate under business names “CKB” and “CKB168” are at the center of the scheme.  Through the efforts of three CKB executives who live overseas and several promoters living in the U.S., the scheme has ensnared at least 400 investors in New York, California, and other areas with large Asian-American communities.  These promoters have raised more than $20 million from U.S. investors, and millions of dollars more from investors in Canada, Taiwan, Hong Kong, and other countries in Asia.

According to the SEC’s complaint unsealed late yesterday in U.S. District Court for the Eastern District of New York, the scheme’s promotional efforts seek to exploit close connections among members of the Asian-American community.  The scheme’s operators and promoters use Internet videos, promotional materials, and seminars to create the appearance of a legitimate enterprise.  But in reality, CKB has little or no real-world retail consumer sales to generate the extraordinary returns promised to investors.  In fact, CKB has no apparent source of revenue other than money received from new investors.  Bank records show that the bulk of the money raised has been paid out to accounts controlled by CKB executives and as commissions to promoters of the pyramid scheme.

The court has granted the SEC’s request for an asset freeze against the CKB entities and the operators and promoters charged in the SEC’s complaint.

“CKB’s operators and promoters profited by abusing relationships of trust within the Asian-American community and promising investors they can earn more money by recruiting other investors instead of selling actual products,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement.  “What CKB really sells is the false promise of easy wealth.”

SEC ANNOUNCES DEFAULT JUDGEMENT AGAINST PETER MADOFF

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Commission announced that, on October 11, 2013, the Honorable Laura Taylor Swain, United States District Court for the Southern District of New York, entered a default judgment against Peter Madoff, former chief compliance officer and senior managing director at Bernard L. Madoff Investment Securities LLC (BMIS) from 1969 to 2008.

The Commission’s complaint alleged that Peter Madoff created stacks of compliance documents setting out supposedly robust policies and procedures over BMIS’s investment advisory operations. However, no policies and procedures were ever implemented, and none of the reviews were actually performed even though Peter Madoff represented that he personally completed the reviews.

The SEC’s complaint also alleged that in addition to creating false compliance materials, Peter Madoff created false broker-dealer and investment advisor registration applications filed by BMIS. He also failed to implement and review required policies and procedures, and falsified the firm’s books and records. Peter Madoff was richly rewarded for his misconduct, pocketing tens of millions of dollars through salary and bonuses, fake trades, sham loans, and direct, undocumented transfers of investor funds to himself from the bank account that BMIS used to perpetrate the Ponzi scheme.

Peter Madoff failed to answer, move or otherwise respond to the Commission’s complaint. The default judgment permanently enjoins Peter Madoff from violating or aiding and abetting violations of Sections 10(b), 15(b)(1), 15(c) and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-3, 10b-5, 15b3-1 and 17a-3 thereunder, and Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act of 1940 and Rules 204-2 and 206(4)-7 thereunder. The default judgment orders no monetary relief in light of Peter Madoff’s criminal conviction and the $143 billion in restitution ordered in the parallel criminal proceeding United States v. Peter Madoff, 10 Crim. 228 (S.D.N.Y.) (LTS).

WISCONSIN RESIDENT CHARGED BY SEC WITH OPERATING A PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Menomonee Falls, Wisconsin Resident with Operating a Ponzi Scheme

On October 10, 2013, the Securities and Exchange Commission charged Michael R. Enea of Menomonee Falls, Wisconsin with violations of the federal securities laws for conducting fraudulent, unregistered offerings of securities and misappropriating investor funds to pay his personal expenses.

The Commission's complaint alleged that, from July 2006 through May 2013, Enea operated a Ponzi scheme through the fraudulent and unregistered offer and sale of securities to 18 investors totaling approximately $2.1 million. Enea represented to the investors that he would combine his funds with funds contributed by each investor and use the money to invest in a "credit card portfolio." Credit card portfolios, according to Enea, consisted of a group of retail merchants who pay fees to a third party credit card processor each time one of the merchants' customers makes a credit card transaction. Enea told investors that by investing in credit card portfolios the investor would receive monthly or quarterly payments. The payments to investors were purportedly generated by the payment of the transaction fees by the merchants to the credit card processors. In reality, Enea never purchased any credit card portfolios and instead used approximately $1.35 million of the investors' funds to make the monthly or quarterly payments to prior investors. Enea used the remaining approximately $760,000 he raised from investors to pay his personal and business expenses. Enea never told investors that he used their funds to make payments to previous investors or to pay his personal and business expenses. The complaint also alleged that Enea acted as an unregistered broker.

As a result of his conduct, the Commission's complaint charged Enea with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Enea has agreed to settle the charges against him. Specifically, Enea consented to the entry of a final judgment that, without admitting or denying the Commission's allegations against him, permanently enjoins him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and requires him to pay disgorgement of $763,803, the amount of his ill-gotten gains, plus prejudgment interest of $79,317.

FRAUD CHARGES FILED BY SEC IN STOCK MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Files Fraud Charges Against Lee Chi Ling and Perfect Genius Limited for Their Roles in a Wide-Ranging Stock Manipulation Scheme

The Securities and Exchange Commission filed an action related to an elaborate stock manipulation scheme involving shares of China Energy Savings Technology, Inc. against Lee Chi Ling, as a defendant, and Perfect Genius Limited, as a relief defendant. The fraudulent scheme was orchestrated by Chiu Wing Chui, Lai Fun Sim, Jun Tang Zhao (together, the Chiu Group), Lee, and others acting in concert. As discussed below, Chiu, Sim, Zhao, and others were previously charged and found liable for fraud for their roles in the scheme.

The Commission's complaint, filed on September 26, 2013 in the Eastern District of New York, alleges that Lee played a crucial role in the illegal scheme. According to the Complaint, Lee or entities that she controlled, including Perfect Genius, furthered the fraud by: (i) receiving shares of China Energy directed to her by the Chiu Group; (ii) selling some of those shares to profit from artificially high prices created by transactions directed by the Chiu Group and their dissemination of false and misleading information about China Energy to investors and the public; and (iii) acting as nominees, along with a number of other entities, which concealed the illegal trading in the shares of China Energy and masked the Chiu Group's control of China Energy.

In its complaint, the Commission alleges that Lee violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder, and Sections 17(a)(1) and (3) of the Securities Act of 1933; and seeks disgorgement and prejudgment interest. The Commission also names Perfect Genius as a relief defendant, seeking the return of ill-gotten gains from the sales of China Energy securities in an account that Lee opened in the name of that entity for the purpose of furthering the scheme and holding the resulting illicit proceeds.

SEC v. Lee is the latest in a series of enforcement actions brought by the Commission concerning the China Energy fraud:

On December 4, 2006, the Commission filed a fraud complaint against China Energy, Chiu Wing Chiu, who was the undisclosed control person of China Energy, and several of Chiu's associates. SEC v. China Energy 06-CV-6402 (EDNY). (Press Release 2006-200; Lit. Rel. 19933; Complaint) The Commission also obtained an emergency order freezing $3.9 million in assets held in four U.S. brokerage accounts by nominees of Chiu Wing Chiu.

On December 6, 2006, the Commission issued an order revoking China Energy's stock registration statements (Admin. Proc. 34-54881). The Commission had previously issued orders suspending trading in China Energy securities on May 19, 2006 (Lit. Rel. 34-53839) and September 26, 2006 (Lit. Rel. 34-54503A).
On March 27, 2009, the Commission obtained final judgments in SEC v. China Energy against Chiu, Lai Fun "Stella" Sim, Jun Tang Zhao, Sun Li, and New Solomon Consultants, finding them liable for fraud, and ordering them to pay over $34 million in disgorgement, prejudgment interest, and civil penalties. The court also imposed officer-and-director bars against Chiu, Sim, Zhao, and Li.
On July 31, 2009, the Commission obtained final judgments SEC v. China Energy against the relief defendant nominees of Chiu, ordering that the $3.9 million held in the relief defendants' U.S. brokerage accounts be turned over to the Court as proceeds of the fraud.

The Commission also obtained a final judgment against Jason Genet, finding him liable for fraud; permanently enjoining him from future violations of Sections 5 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; ordering Genet to pay $2,527,745 in disgorgement, prejudgment interest and penalties; and barring him from participation in any offering of a penny stock for five years from the date of the judgment. (Lit. Rel. 34-21232)

On December 20, 2010, the Commission also issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Moore Stephens Wurth Frazer & Torbet LLP (MSWFT) and Kerry Dean Yamagata (Admin. Proc. 3-14167/33-9166).

FUND EMPLOYEE INDICTED FOR INSIDE TRADING IN MARVEL STOCK PRIOR TO DISNEY ACQUISITION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Former Investment Fund Employee Criminally Indicted On Federal Charges for Insider Trading in Marvel Stock Prior to Disney Deal

On August 11, 2011, the SEC charged Toby G. Scammell, age 28, with insider trading in a complaint filed in the United States District Court for the Central District of California. The complaint alleged that Scammell spent less than $5,500 on highly speculative call options in Marvel Entertainment, Inc. and reaped illegal profits of over $192,000 less than a month later when it was publicly announced that Marvel was being acquired by the Walt Disney Company. The SEC alleged that Scammell illegally traded on non-public information he misappropriated from his girlfriend, a Disney intern who worked on the acquisition. On June 6, 2012, Scammell consented to the entry of judgment against him and on June 15, 2012, the district court imposed a permanent injunction against Scammell and ordered him to pay disgorgement, prejudgment interest, and civil penalties in amounts to be determined by the court.

In a separate action on October 8, 2013, a federal grand jury returned a criminal indictment charging Scammell with one count of securities fraud and one count of wire fraud based upon his trading in Marvel.

SEC LAUNCHES NEW MARKET STRUCTURE WEBSITE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today unveiled a dynamic new website to provide investors and others with the ability to interactively explore a range of new market metrics and access empirical research and analyses that further inform the broader public debate on market structure.

The new website located at www.sec.gov/marketstructure will serve as a central location for the SEC to publicly share evolving data, research, and analysis as the agency continues its review of the equity of market structure.  The data and related observations address the nature and quality of displayed liquidity across the full range of U.S.-listed equities – from the lifetime of quotes and the speed of the market to the nature of order cancellations.

“We are launching what we believe to be a game changer that focuses the market structure debate as never before on data and analysis rather than anecdote,” said SEC Chair Mary Jo White, who unveiled the website at an SEC news conference.  She was joined by officials from the agency’s Division of Trading and Markets and its Division of Economic and Risk Analysis.

“We’ve made great strides here at the SEC transforming how we take in market data, store it, and share it throughout the agency,” Chair White said.  “By also making this information publicly accessible, two great things should happen.  It should increase efficiency so people don’t have to struggle to find this information.  And it should spur innovation by unlocking the power of data and research to unlock a wealth of ideas from investors, market participants, and academics.”

Earlier this year, the SEC launched its internal Market Information Data Analytics System (MIDAS), which for the first time provided the SEC with data about every displayed order posted on national exchanges.  Every day, MIDAS collects one billion records time-stamped to the microsecond.  The information comes from the consolidated tapes and proprietary feeds of each exchange and includes posted orders and quotes, modifications and cancellations, and trade executions both on- and off-exchange.

Typically, only sophisticated market participants have had access to all of this data, and even fewer have had the ability to process it.  Through MIDAS, experts at the SEC have been extensively studying this data, and their research already has produced important results to help inform the agency’s thinking on market structure.

The next step in this market structure initiative is to disseminate the aggregated data and related observations drawn from MIDAS to the public.  The SEC’s new website allows users to explore key market metrics and trends based on aggregate analyses of tens of billions of MIDAS records over the last year. With the click of a mouse, results are available in clear, easy-to-read charts and graphs.

Among the MIDAS-collected data that is generally unavailable on the public consolidated tape that the SEC’s new website will be making available broadly:

Ratios related to the number and volume of orders that are canceled instead of traded.

Percentage of on-exchange trades and volume that are not disseminated on the public tape (odd-lot trades).

Percentage of on-exchange trades and volume that are the result of hidden orders.
Quarterly distributions analyzing the lifetime of quotes ranging from one millionth of a second to one day.

The new website contains an interactive charting tool that allows users to compare and contrast data series according to the type of security, market capitalization, volatility, price, and turnover.  Users also can explore detailed quote-life distributions, and download data series and quote-life distributions to perform their own analyses.  Methodology documents that detail all calculations are provided.

The new website also features staff research papers based on a variety of data sources, and staff reviews that identify and assemble information from the expanding economic literature on market structure topics.  One paper using order audit trail data on off-exchange trading provides key metrics describing the underlying nature of off-exchange trading by the 44 alternative trading systems that trade equity securities. The primary observation of SEC staff is that ATS trading looks very similar in many respects to exchange trading.  Another paper summarizes current studies that address market fragmentation – both visible and dark.

The new website is just the beginning of this initiative with more studies and analyses to come.  SEC staff is looking forward to receiving feedback about the website and its implications.

Joining Chair White to announce the launch of the SEC’s market structure data and analysis website were Division of Trading and Markets Acting Director John Ramsay, Division of Economic and Risk Analysis Director Craig Lewis, and Office of Analytics and Research Associate Director Gregg Berman.