SEC CHARGES PALM BEACH HEDGE FUND ADVISORY FIRM AND FOUNDER WITH FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a West Palm Beach, Fla.-based hedge fund advisory firm and its founder with fraudulently shifting money from one investment to another without informing investors.  The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.

The SEC alleges that Weston Capital Asset Management LLC and its founder and president Albert Hallac illegally drained more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc.  The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before.  Weston Capital’s former general counsel Keith Wellner assisted the activities.

The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000 in payments from Swartz IP.  Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.  The court will determine monetary sanctions for Weston Capital and Hallac at a later date.  Wellner and Jeffrey Hallac each agreed to pay $120,000 in disgorgement.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately $230 million.  One of the funds managed by the firm was Wimbledon Fund SPC, which was segregated into five separate classes of investment portfolios.  The Class TT Segregated Portfolio was required to invest all of its investor money in a diversified multi-billion hedge fund called Tewksbury Investment Fund Ltd., that invested in short-term, low risk interest bearing accounts and U.S. Treasury Bills.

The SEC alleges that in violation of its stated investment strategy, Weston Capital and Hallac redeemed TT Portfolio’s entire investment in the Tewksbury hedge fund and transferred the money to Swartz IP.  The transaction was not disclosed to investors and Weston Capital and Hallac solicited and received investments for the TT Portfolio during this time while knowing the funds would not be invested in Tewksbury. As soon as Swartz IP received the money transfers, it disbursed the funds primarily to a special purpose entity created to support and finance varying medically related business ventures.

The SEC’s complaint alleges that Weston and Hallac violated federal anti-fraud laws and rules as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Wellner aided and abetted these violations.  Without admitting or denying the allegations, Weston Capital, Hallac, and Wellner consented to the entry of a judgment enjoining them from future violations of these provisions.  

The SEC’s investigation was conducted by Julie M. Russo and Karaz S. Zaki under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office and was assisted by Victor M. Pedroso III, Jean M. Cabot, and John C. Mattimore of the Miami office examination program.  The SEC’s litigation is being led by Russell Koonin.

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FINAL JUDGMENTS ENTERED IN INSIDER TRADING CASE INVOLVING MERGERS, DRUG APPROVAL, EARNINGS REPORTS

FROM:  US. SECURITIES AND EXCHANGE COMMISSION 

Court Enters Final Judgments by Consent Against Michael Pendolino, Lawrence D. Grum, and Michael L. Castelli

The Securities and Exchange Commission announced that on June 12, 2014, in SEC v. Lazorchak et al., Civ. Act. No. 12-07164 KSH-PS, the Honorable Katharine S. Hayden, United States District Court Judge for the District of New Jersey, entered final judgments by consent against Defendants Michael Pendolino (Pendolino), of Nashua, New Hampshire; Lawrence D. Grum (Grum), of Livingston, New Jersey; and Michael L. Castelli (Castelli), of Morris Plains, New Jersey. The judgments permanently enjoin Pendolino, Grum, and Castelli from future violations of antifraud provisions of the federal securities laws and order them to pay disgorgement and prejudgment interest.

The SEC's complaint, filed on November 19, 2012, alleged an insider-trading scheme spanning five years and involving illegal tipping by insiders at three public companies: Celgene Corp. (Celgene), Sanofi-Aventis Corporation (Sanofi); and (3) Stryker Corp. (Stryker), and at least eleven material events, including mergers, a drug approval application, and quarterly earnings information. The SEC further alleged that the insiders tipped material nonpublic information about each of these corporate events to Grum and Castelli who, in turn, traded on the basis of, and tipped that information to others. As alleged, the Celgene insider also tipped material nonpublic information about two of the events to his high school friend, Pendolino, who traded on the basis of, and tipped that information to others.

The judgments permanently enjoin Pendolino, Grum, and Foldy from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and order them to pay combined disgorgement and prejudgment interest as follows: Pendolino, $68,862.12; Grum, $838,758.75; Castelli, $716,208.90.

Pendolino, Grum, and Castelli were criminally charged in a parallel criminal action in federal district court in the District of New Jersey. They have since pled guilty to charges of conspiracy to commit securities fraud and/or securities fraud and have been sentenced: Pendolino to probation of one year, and Grum and Castelli to prison terms of a year and a day, and nine months, respectively. United States v. Pendolino, 2:13-00657-KSH; United States v. Grum, 2:13-00737-KSH; United States v. Castelli, 2:13-00738-KSH.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

COURT ORDERS $44 MILLION IN SANCTIONS FOR COMMODITY POOL FRAUD AND MISAPPROPRIATION

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Federal Court in Utah Imposes over $44 Million in Sanctions against Robert Andres and His Company, Winsome Investment Trust, and Robert Holloway and His Company, US Ventures, for Commodity Pool Fraud and Misappropriation

The U.S. Attorney’s Office for the District of Utah Filed Parallel Criminal Actions against Andres and Holloway

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court Order requiring Defendants Robert J. Andres of Houston, Texas, his company, Winsome Investment Trust (Winsome), Robert L. Holloway of San Diego, California, and his company US Ventures LC (USV), to pay a civil monetary penalty of $32,370,000 and restitution for defrauded customers totaling $12 million. The court’s Order also imposes permanent trading and registration bans against Andres, Winsome, Holloway, and USV and prohibits them from violating provisions of the Commodity Exchange Act, as charged.

The default judgment Order stems from a CFTC civil enforcement action filed on January 24, 2011, that charged the Defendants with fraud in the operation of a commodity futures pool (see CFTC Press Release 5976-11). The Order (see Related Link) was entered by the Honorable Bruce S. Jenkins of the U.S. District Court for the District of Utah on June 6, 2014.

Specifically, the Order finds that:

• From at least May 2005 through November 2008, Andres and Winsome fraudulently solicited and accepted at least $50.2 million from at least 243 individuals to invest in a commodity futures pool operated by Holloway and USV.  In their solicitations, Andres and Winsome falsely claimed a successful track record and guaranteed the return of participants’ principal and profits; however, contrary to Andres’s and Winsome’s claims of consistently profitable trading, USV’s and Holloway’s futures trading was not successful, sustaining overall net losses of approximately $10.7 million.

• The Defendants allegedly traded only a portion of Winsome’s pool’s funds and misappropriated the majority of participant funds to pay purported “profits” to pool participants in a manner akin to a Ponzi scheme, to provide money to Andres’ wife, and to invest in various unrelated and undisclosed businesses, including using $4.2 million of participant funds to purchase an aerospace consulting business.

• Holloway used participant funds to pay personal and unrelated business expenses, and to pay for houses, cars, home furnishings, jewelry, lawn and maid services, and credit card bills in the name of his wife.  Holloway also used participant funds to finance his wife’s eBay business, Alcoy Enterprises, LLC.

• Andres and Holloway attempted to conceal the fraud by directing employees to falsify participants’ account records and by providing e-mailed account statements to participants falsely representing that Holloway profitably traded pool funds -– sustaining virtually no losses during the relevant period.

In a parallel criminal actions brought by the U.S. Attorney’s Office for the District of Utah, Andres was indicted on five counts of wire fraud, and Holloway was indicted on four counts of wire fraud and one count of making and filing a false income tax return. Holloway’s trial date is currently set for July 8, 2014. Andres pleaded guilty to one count of wire fraud, and he is scheduled to be sentenced on August 20, 2014.

The CFTC appreciates the assistance of the Comisión Nacional del Mercado de Valores (Spain), the Dubai Financial Services Authority, and the British Virgin Islands Financial Services Commission.

CFTC Division of Enforcement staff members responsible for this case are Alan Edelman, Kevin S. Webb, Michelle S. Bougas, Heather Johnson, Kara Mucha, James H. Holl III, and Gretchen L. Lowe.

4 CHARGED IN $12 MILLION INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Four California Residents in $12 Million Insider Trading Scheme

The Securities and Exchange Commission today charged four Northern California residents with insider trading in Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.

The SEC alleges that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif. Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results. Besides trading in his own brokerage account, Khan traded in his brother-in-law’s account as well as an account belonging to another acquaintance. Khan also tipped his work colleagues Ranjan Mendonsa and Ammar Akbari so they too could trade in Ross stock options based on the nonpublic information. The insider trading resulted in collective profits of more than $12 million.

The SEC further alleges that at the outset of the scheme, Chaganlal gave $17,000 to Khan for the purpose of insider trading in Ross securities using the brother-in-law’s account. They attempted to disguise the exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of a different surname. Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries. For example, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife. Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly-built home.

According to the SEC’s complaint filed in federal court in San Francisco, Khan separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation ahead of its 2012 acquisition by Oracle Corporation. Khan began purchasing large numbers of options in Taleo six days before the merger announcement based on nonpublic information he received from an insider he knew at Oracle. Khan had never previously traded in Taleo securities.

The SEC alleges that the serial insider trading involving Ross securities began in August 2009 and continued until December 2012, when Chaganlal was terminated by the company. He had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees. Chaganlal regularly communicated the confidential details to Khan so he could trade ahead of impending monthly sales announcements by Ross. Khan generated $5.4 million in profits in his own account, and $6 million in profits in his brother-in-law’s account. Khan’s supervisor Mendonsa made approximately $800,000 in insider trading profits based on the nonpublic information that Khan in turn tipped to him. Akbari made approximately $2,000 by insider trading on Khan’s illegal tips.

The SEC’s complaint names two relief defendants - Khan’s acquaintance Michael Koza and Khan’s brother-in-law Shahid Khan - for the purposes of recovering insider trading profits in their brokerage accounts through trades conducted by Khan. They each have agreed to settle the matter by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.

The SEC’s complaint charges Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties. The complaint also seeks an officer-and-director bar against Chaganlal.

The SEC’s investigation, which is continuing, has been conducted by Victor Hong and Elena Ro. The case has been supervised by Steven Buchholz and Jina L. Choi of the Market Abuse Unit and San Francisco Regional Office as well as Joseph G. Sansone of the Market Abuse Unit. The SEC’s litigation will be led by Aaron Arnzen. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority.