TERMINALLY ILL PATIENT VARIABLE ANNUITIES ARCHETECH BARRED FROM SECURITIES INDUSTRY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that the architect of a variable annuities scheme designed to profit from the imminent deaths of the terminally ill has agreed to settle charges brought against him earlier this year by paying more than $850,000, admitting wrongdoing, and being barred from the securities industry.

The SEC’s Enforcement Division previously charged Michael A. Horowitz and several others he recruited into his scheme to identify terminally ill patients in nursing homes and hospice care in southern California and Chicago.  Horowitz, a broker who lives in Los Angeles, sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and designated the terminally ill patients as annuitants whose death would trigger a benefit payout.  Anticipating the patients would soon die, Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.

The SEC’s Enforcement Division alleged that Horowitz enlisted another broker, Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities and generate hefty sales commissions.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews, causing some insurance companies to unwittingly issue variable annuities they may not have sold otherwise.

Among the admissions made by Horowitz in the settlement, he knew that if the “stranger annuitants” did not die within a matter of months, his customers would be locked into unsuitable, highly illiquid long-term investment vehicles that they would be able to exit only by paying substantial surrender charges.  He also submitted at least 14 trade tickets containing materially false statements concerning how long his clients intended to hold their annuities while knowing that his broker-dealer would not have approved his annuities sales if he had provided truthful timing information concerning his customers’ intention to use the annuities as short-term investment vehicles.

“Horowitz devised a scheme in which he used terminally ill patients’ private information for personal gain, and misled his brokerage firm into approving the variable annuity sales,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “The settlement ensures that he will never work in the securities industry again, and he must pay back his ill-gotten sales commissions from the scheme plus interest and an additional penalty.”

The SEC’s order finds that Horowitz willfully violated Section 17(a) of the Securities Act of 1933 as well as Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  The order finds that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rules 17a-3(a)(6) and (17).  Horowitz is required to cease-and-desist from violating those provisions.  He is ordered to pay disgorgement of $347,724, prejudgment interest of $103,025.21, and a penalty of $400,000.  The order also bars Horowitz from association with a broker, dealer, or investment adviser among others, and bars him from participating in any penny stock offering.

The SEC’s investigation was conducted by Peter Haggerty, Marilyn Ampolsk, Jeremiah Williams, and Anthony Kelly of the Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation, which continues against Cohen, is being led by Mr. Haggerty and Dean M. Conway.

COURT ENTERS JUDGEMENT AGAINST BROKER FOR SELLING UNREGISTERED STOCK IN ALZHEIMER'S TREATMENT COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Court Enters Judgment Against Unregistered Broker for Role in Investment Scheme Involving Purported Alzheimer's Treatment

The Securities and Exchange Commission announced that on July 31, 2014, a California federal court entered a final judgment against Kenneth Gross, of Porter Ranch, California, who was named as a defendant in an action filed by the Commission in June 2013. The Commission charged Gross with selling unregistered stock in Your Best Memories International Inc. without being registered as a broker-dealer as required by the federal securities laws. Your Best Memories was a California company purportedly raising money for a Massachusetts-based company in the business of developing products intended to improve memory function in individuals suffering from Alzheimer's disease and other conditions. Gross consented to the entry of this judgment.

The final judgment entered by the United States District Court for the Central District of California holds Gross liable for disgorgement of $269,000, representing money he was paid for the sale of unregistered securities, plus prejudgment interest of $10,897.81, but waives payment of the disgorgement and interest and does not impose a civil penalty based on Gross's financial condition. Previously, the court entered a partial judgment on March 14, 2014, based on Gross's consent, which enjoined him from violating Sections 5(a) and (c) of the Securities Act of 1933 (the securities registration provisions of the Securities Act) and Section 15(a) of the Securities Exchange Act of 1934 (the broker-dealer registration provisions of the Exchange Act). The Commission also issued an Order against Gross on June 6, 2014, permanently barring him from the securities industry.

On June 10, 2014, the Court entered final judgments by default against the other Defendants in the action, Your Best Memories, its president, Robert Hurd, and Smokey Canyon Financial Inc., another company controlled by Hurd. The Commission charged Your Best Memories and Hurd with misleading investors about how their funds would be used and making misleading statements that one of the products touted to investors had received approval from the U.S. Food and Drug Administration as a treatment for Alzheimer's disease. The final judgments imposed permanent injunctions prohibiting Your Best Memories and Hurd from future violations of the antifraud and registration provisions of the federal securities laws, ordered Your Best Memories, Hurd, and Smokey Canyon to pay $963,000 in disgorgement plus prejudgment interest of $34,170, and ordered Your Best Memories and Hurd to pay a civil penalty of $963,000.

CFTC CHARGES MAN AND BUSINESS WITH OPERATION OF ILLEGAL PRECIOUS METALS SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Florida-Based Southern Trust Metals, Inc. and Robert Escobio, and His BVI-Based Entity Loreley Overseas Corp., with Operating an Illegal Precious Metals Scheme, among other Violations

Defendants Solicited over $3.5 Million from Customers in the Precious Metals Scheme and in a Separate Unlawful Commodity Futures and Options Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement Complaint in the U.S. District Court for the Southern District of Florida against Defendants Southern Trust Metals, Inc. (ST Metals) and Robert Escobio, both of Coral Gables, Florida, and Loreley Overseas Corp. (Loreley), a British Virgin Island entity that Escobio incorporated in 2004. The CFTC Complaint charges that, from at least July 16, 2011 to May 1, 2013, the Defendants operated a scheme that defrauded retail customers in connection with illegal, off-exchange, financed precious metals transactions. In operating the precious metals scheme, the Defendants received more than $2.6 million from at least 135 customers, who collectively lost $600,000 of the funds invested with ST Metals, according to the Complaint.

In a separate unlawful scheme, the Defendants, between February 2011 and May 2013, solicited and accepted more than $900,000 from customers for the purchase or sale of commodity futures and options, without registering with the CFTC as a Futures Commission Merchant, according to the Complaint.

ST Metals solicited retail customers to engage in off-exchange leveraged, margined, or financed precious metals transactions. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), these transactions are illegal unless they result in actual delivery of metal within 28 days. The Complaint alleges that metals were never actually delivered in connection with these precious metals transactions. Instead, the Complaint alleges, ST Metals engaged in a series of transactions that ended with over-the-counter derivative trades in margin trading accounts in the name of Loreley with two U.K.-based trading firms. Additionally, according to the Complaint, ST Metals told customers that it was making loans to purchase precious metals in connection with these transactions, but in fact, no loans were made, no metals were purchased, and the transactions were illegal commodity transactions under the Dodd-Frank Act.

In its continuing litigation against ST Metals, Loreley, and Escobio, the CFTC seeks disgorgement of ill-gotten gains, restitution for the benefit of customers, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the Commodity Exchange Act, as charged.

The CFTC thanks the U.K. Financial Conduct Authority for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this action are Carlin Metzger, Heather Johnson, Joseph Konizeski, Scott Williamson, and Rosemary Hollinger.

GEORGIA MINISTER CHARGED WITH FRAUD BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges a Self-Proclaimed Ordained Minister in Georgia and His Company with a Fraudulent Offering of Securities.

The Securities and Exchange Commission filed fraud charges and sought emergency relief on July 31, 2014, against Thomas J. Lawler, a resident of Snellville, Georgia and a self-proclaimed minister, and his company, Freedom Foundation USA LLC for fraudulently offering and selling fictitious securities.  

The SEC's complaint filed in U.S. District Court for the Northern District of Georgia alleges that, since as early as 2004, the defendants  Lawler and Freedom Foundation have offered investors the opportunity to eliminate their debts and collect lucrative profits through the purchase of so called “administrative remedies” (“ARs”).  Defendants have told potential investors, according to the complaint, that every individual had funds established for them in an account at birth -- where, by whom, and in what amount the supposed account is established are details Lawler does not provide.  Defendants further told potential investors that the investors therefore did not owe their creditors for mortgage and other debts, and that Freedom Foundation would use its unique and proprietary process to create the ARs, which would eliminate the investors’ debt and provide a lucrative financial return.  The complaint alleges that defendants told potential investors that a $1,000 AR would cancel the investor’s debt and return $325,000 to the investor, while a $10,000 investment would supposedly entitle the investor to receive $1 million when the AR funded.  According to the complaint, Freedom Foundation claimed it would fund the ARs through a mysterious process involving a Papal decree.

The complaint alleges that Lawler has sold approximately 2,000 ARs over ten years to investors throughout the country and that he is actively soliciting additional investors.  Although the defendants continue to tell investors that funding of the ARs is “imminent,” the complaint alleges that not one investor in this scheme has received any of the promised returns. 

In response to the SEC's request for emergency relief, U.S. District Court Judge Amy Totenberg issued a temporary restraining order and imposed an asset freeze to preserve assets, among other things.  A hearing on the SEC's motion for a preliminary injunction has been scheduled for Friday, August 8th.   

The complaint alleges that defendants violated the registration and antifraud provisions of the federal securities laws, Sections 5(a), (c) 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. 

The SEC's investigation and litigation have been conducted by Gregory F. Smolar, Karaz S. Zaki, Pat Huddleston, M. Graham Loomis and William P. Hicks of the Atlanta Regional Office.   The SEC acknowledges the assistance from the United States Attorney’s Office for the Northern District of Georgia. 

INVESTMENT ADVISER RECEIVES 21 YEAR PRISON SENTENCES FOR DEFRAUDING CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Pennsylvania-Based Investment Adviser Charged in SEC and Criminal Actions Receives Prison Sentence

A Pennsylvania-based investment adviser who was charged with fraud in an SEC enforcement action and later by criminal authorities has received a prison sentence of more than 21 years.

Robert G. Bard of Warfordsburg, Pa., was sentenced on July 31 by Sylvia H. Rambo of the U.S. District Court for the Middle District of Pennsylvania. Bard had been found guilty by a jury and convicted of 21 counts of securities fraud, mail fraud, wire fraud, bank fraud, and making false statements for defrauding his investment advisory clients between December 2004 and August 2009. Judge Rambo sentenced Bard to 262 months imprisonment and ordered him to pay $4.2 million in restitution to 66 victims.

The criminal case, filed by the U.S. Attorney's Office for the Middle District of Pennsylvania on July 18, 2012, arose out of the same facts that were the subject of a civil injunctive action filed by the SEC on July 30, 2009. The Commission's complaint alleged that defendant Bard, an investment adviser, and his solely-owned company Vision Specialist Group LLC had violated the federal securities laws through fraudulent misrepresentations regarding client investments, account performance and advisory fees, and by Bard's creation of false client account statements, and forgery of client documents. On May 23, 2012, after granting summary judgment for the Commission, the U.S. District Court for the Middle District of Pennsylvania entered a final judgment against Bard and Vision Specialist Group finding both violated § 17(a) of the Securities Act of 1933, § 10(b) of the Exchange Act of 1934, and Rule 10b-5 thereunder, and §§ 206(1) and 206(2) of the Investment Advisers Act of 1940. In that judgment, the court also entered permanent injunctions for violations of those provisions, and held Bard and Vision Specialist Group jointly and severally liable for disgorgement, prejudgment interest, and civil penalties totaling $3,003,039.

SEC CHARGES BROKER WITH DEFRAUDING THE ELDERLY AND BLIND

FROM:  THE U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission charged a broker based in Roanoke, Va., with defrauding elderly customers, including some who are legally blind, by stealing their funds for her personal use and falsifying their account statements to cover up her fraud.

According to the SEC’s complaint filed in U.S. District Court for the Western District of Virginia, Donna Jessee Tucker siphoned $730,289 from elderly customers and used the money to pay for such personal expenses as vacations, vehicles, clothes, and country club membership.  Tucker ensured that the customers received their monthly account statements electronically, knowing that they were unable or unwilling to access their statements in that format.  The SEC further alleges that Tucker engaged in unauthorized trading and other financial transactions while making misrepresentations to customers about their investment accounts and forging brokerage, banking, and other documents. 

The SEC’s investigation resulted from a broker-dealer examination of the firm where Tucker worked that was conducted by the SEC’s Philadelphia Regional Office.

“Tucker befriended her customers and gained their trust, only to be stealing their money behind their backs and giving them phony documents to hide it,” said Sharon Binger, director of the SEC’s Philadelphia office.

In a parallel action, the U.S. Attorney’s Office for the Western District of Virginia announced criminal charges against Tucker.

Tucker has agreed to settle the SEC’s charges and disgorge the $730,289 in ill-gotten gains either in the criminal case or the civil case.  She consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The settlement is subject to court approval.

The SEC’s investigation was conducted by Brendan P. McGlynn, Lisa M. Candera, and Daniel L. Koster of the Philadelphia Regional Office, with assistance from Christopher R. Kelly.  The examination that led to the investigation was conducted by James A. O’Leary, Calvin N. Inge, and William McIntyre under the supervision of Diane J. Hagy.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Virginia, Federal Bureau of Investigation, Secret Service, and Internal Revenue Service.