COURT ORDERS COMPANY AND PRINCIPALS TO PAY OVER $22 MILLION FOR ROLES IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
December 4, 2013

Federal Court Orders Defendants Arista LLC, Abdul Sultan Walji, and Reniero Francisco, All of Southern California, to Pay over $22 Million in Restitution and Fines for Commodity Pool Fraud and Making False Statements to the CFTC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Arista LLC (Arista), a registered Commodity Pool Operator with its principal place of business in Newport Coast, California, and against Arista’s principals, Abdul Sultan Walji (a/k/a Abdul Sultan Valji) of San Juan Capistrano, California, and Reniero Francisco of Coastal Oak, California, for carrying out a fraudulent scheme to misappropriate millions of dollars from investors in commodity futures and options, making false statements to the CFTC, and filing false quarterly reports with the National Futures Association (NFA).

The Order, entered on December 3, 2013, requires the Defendants to pay more than $8.25 million in restitution for the losses of defrauded investors.  In addition, the Order imposes civil monetary penalties of $6.45 million on Walji, $5.925 million on Francisco, and $1.54 million on Arista.  The Order further imposes permanent trading and registration bans on the Defendants and prohibits them from violating provisions of the Commodity Exchange Act (CEA) and a CFTC regulation, as charged.

The Court’s Order stems from a CFTC Complaint filed on December 12, 2012 and amended on May 28, 2013 (Complaint), which charged the Defendants with violating anti-fraud provisions of the CEA, making false statements to the CFTC, and filing false reports with the NFA (see CFTC Press Releases 6460-12 and 6600-13).

In the Order, the Defendants admit to all of the Order’s findings and all of the allegations in the CFTC’s Complaint.  The Order finds that, from at least February 2010 through January 2012, the Defendants collected funds from 39 investors totaling more than $9.5 million, of which the Defendants paid themselves $4.125 million in purported fees and lost more than $4.8 million trading in futures and options.  The Defendants also provided false quarterly statements to the investors, violated the CEA’s registration requirements, and, after subsequently registering, provided false reports to the NFA.  Further, in September 2011, the Defendants misrepresented certain account balances, asset values, and fee calculations in a letter sent in response to requests for information from the CFTC’s Division of Enforcement.  The Order enforces the false statements provision of the CEA, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In a related criminal proceeding, Walji and Francisco each pled guilty to conspiracy and fraud charges and were sentenced, respectively, to 151 months and 97 months of imprisonment.

The CFTC appreciates the assistance of the U.S. Department of Justice, the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the NFA.

CFTC Division of Enforcement staff members responsible for this case are Michael P. Geiser, Laura A. Martin, Douglas K. Yatter, Philip D. Rix, Lenel Hickson, and Manal M. Sultan.

SEC INJUNCTION BANS PENNY STOCK FRAUD OPERATOR FOR DOING BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
District Court Enters Final Judgment of Permanent Injunction and Orders a Penny Stock and Officer-And-Director Bar Against Defendant Thomas Gaffney

The Commission announced that on November 20, 2013, the United States District Court for the Southern District of Florida entered a Final Judgment of Permanent Injunction and Other Relief by consent against Defendant Thomas Gaffney, enjoining him from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5(a).

In addition, United States District Judge Robert N. Scola, Jr., permanently barred Gaffney from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock. The Court also permanently barred him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

The Commission commenced this action by filing its Complaint on August 14, 2013, against Gaffney and Health Sciences Group, Inc. ("HESG"). The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks.

SEC ANNOUNCES BOILER ROOM BROKER BARRED FROM PENNY-STOCK OFFERINGS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION   
Ohio-Based Broker Barred from Penny-Stock Offerings

The Securities and Exchange Commission announced today that on November 27, 2013, the United States District Court in Massachusetts entered judgment against Matthew K. Lazar, of Columbus, Ohio, in a case arising from his alleged participation in a boiler room operated by Edward M. Laborio, of Boston, Massachusetts and Boca Raton, Florida.  Lazar consented to the entry of the judgment.

On August 10, 2012, the Commission charged Laborio, Lazar and others with raising up to $5.7 million from more than 150 investors through the fraudulent sale of five unregistered offerings.  As to Lazar in particular, the Complaint charged that from October through December 2008, Lazar raised $585,000 from 10 investors through the sale of a PIPE (private investment in a public equity) by misrepresenting that the PIPE guaranteed an annual 8.5% dividend and that it was safe, like a fixed annuity or a certificate of deposit.  The Complaint alleged that Laborio hired Lazar in September 2008 to open an Ohio branch office operating under the name Envit Capital Private Wealth Management, LLC.  Along with Laborio and Lazar, the Complaint charged Jonathan Fraiman, of Boston, Massachusetts and Lantana, Florida, along with seven entities, most with the name “Envit,” that were owned and controlled by Laborio, including a non-existent hedge fund.

On November 27, 2013, the Court entered a final judgment against Lazar:  (i) permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 (Securities Act); Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act); (ii) barring him for three years from participating in any offering of penny stock; (iii) finding him liable for disgorgement of $16,820.99 and prejudgment interest of $2,917.65, for a total of $19,738.64; and (iv) waiving payment of the disgorgement and prejudgment interest, and not imposing a civil penalty, based upon the representations in Lazar’s sworn statement of financial condition.  Lazar agreed to settle the Commission’s charges without admitting or denying the allegations in the Complaint.

The Court previously entered a final judgment by consent against Jonathan Fraiman on October 8, 2013.  In related administrative proceedings instituted by the Commission on October 11, 2013, Fraiman consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after ten years.  The Commission’s civil injunctive action against Laborio and the Envit Companies, SEC v Laborio et al., 1:12-cv-11489-MBB (D. Mass., Aug. 10, 2012), is still pending.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation, the State of Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority (FINRA).

CPA CHARGED BY SEC WITH VIOLATING SUSPENSION ORDER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Certified Public Accountant with Violating Commission Suspension Order

Seeks Disgorgement of Illicit Compensation Received During Suspending Period

The Securities and Exchange Commission today announced that it filed a complaint in U.S. District Court for the District of Utah against certified public accountant R. Gordon Jones. Securities and Exchange Commission v. R. Gordon Jones, C.P.A., 1:13-cv-00163-BSJ (D. Utah). Jones is a resident of Farmington, Utah, and has been licensed as a certified public accountant by the State of Utah since June 1980.

The Commission alleged in its complaint that Jones violated a May 4, 2001 Commission Order issued under Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice (the "2001 Order") that suspended Jones from appearing or practicing before the Commission as an accountant. In The Matter of R. Gordon Jones, CPA and Mark F. Jensen, CPA, Securities Exchange Act of 1934 Rel. No. 44265, Accounting and Auditing Enforcement Rel. No. 1390, Administrative Proceeding File No. 3-10210 (May 4, 2001). According to the complaint, beginning in 2001 through the present, Jones provided accounting and financial statement preparation work for public companies. The complaint alleges that Jones, through his company J&J Consultants, LLC, has, among other things, created, compiled, and edited financial statements, information and data incorporated into Forms 10-K, 10-Q and 8-K; drafted and edited footnotes to financial statements; drafted and edited Management Discussion and Analysis sections relating to financial information of public filings; drafted and edited responses to Commission comment letters relating to financial information on public filings; and provided issuers with accounting advice that was subsequently reflected in financial statements filed with the Commission. The complaint further alleges that Jones supervised the financial statement preparation work for public company clients performed by J&J employees, and was intrinsically involved in and had the final sign off on the work of the other J&J employees. Through these actions, Jones violated the 2001 Order.

The SEC's complaint seeks a district court order enforcing its 2001 Order suspending Jones from appearing or practicing before the Commission as an accountant, and asks that the court order Jones to pay disgorgement, representing illicit compensation gained as a result of his engaging in work that was proscribed by the 2001 Order, together with prejudgment interest.

The Commission's investigation was conducted by Kimberly Greer, Ian Karpel, and Donna Walker in the Denver Regional Office. The Commission's litigation will be led by Polly Atkinson.

FUTURES TRADER TO PAY OVER $3 MILLION IN CFTC ACTION AND PLEADS GUILTY IN CRIMINAL CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
November 26, 2013

Federal Court in Connecticut Orders Feisal Sharif to Pay over $3 Million to Settle Fraud Charges in CFTC Action

In a related criminal action, Sharif pled guilty to criminal violations of the Commodity Exchange Act

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against defendant Feisal Sharif of Branford, Connecticut, requiring him to pay restitution of $2,230,000 to defrauded customers and a $900,000 civil monetary penalty, as well as permanent trading and registration bans against Sharif for violations of the Commodity Exchange Act (CEA).

The Order, entered on November 21, 2013, by the Honorable Stefan R. Underhill of the U.S. District Court for the District of Connecticut, stems from a CFTC Complaint filed on November 26, 2012, charging Sharif with fraudulent solicitation, misappropriation, and registration violations (see CFTC Press Release 6424-12).

The Order finds that, between January 2007 and September 2012, Sharif, by and through the commodity pool First Financial LLC, fraudulently solicited and accepted over $5.4 million from at least 50 members of the general public to trade commodity futures contracts through a pool. The Order further finds that Sharif traded only a portion of the pool participant funds in proprietary accounts and sustained overall and significant losses. Sharif misappropriated the majority of the pool participant funds to make so-called returns to participants in payments that he claimed were the profitable proceeds of their trading, the Order finds. Sharif also misappropriated pool participant funds for personal use, according to the Order.

Sharif concealed his fraud and trading losses from pool participants by issuing false account statements reflecting profits, the Order finds. Sharif also made excuses regarding the safety of pool participants’ investments.

The Order also finds that Sharif failed to register with the CFTC as a Commodity Pool Operator as required by the CEA.

In a related criminal action, Sharif pled guilty to criminal violations of the CEA. Sharif is scheduled to be sentenced in January 2014 (see USA v. Sharif No. 3:13-cr-00172-SRU-1).

The CFTC thanks the Securities and Business Investments Division of the State of Connecticut Department of Banking, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the District of Connecticut for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Amanda Harding, James Deacon, Jessica Harris, Kenneth McCracken, Rick Glaser, and Richard Wagner.

2 HOUSTON-BASED INVESTMENT ADVISORY FIRMS CHARGED BY SEC FOR MAKING TRANSACTIONS WITHOUT NOTIFYING CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions

The Securities and Exchange Commission today announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.

In a principal transaction, an investment adviser acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They must also obtain the client’s consent.

The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.

“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions.

According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions.

The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors.

According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.

The SEC’s investigation was conducted by R. Joann Harris and Asset Management Unit member Barbara L. Gunn of the Fort Worth Regional Office.  The SEC’s litigation will be led by Jennifer Brandt.