SEC SETTLES REAL ESTATE INVESTMENT FUND ALLEGED FRAUD CLAIMS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

San Francisco Bay Area Real Estate Fund Managers Settle Fraud Claims

The Securities and Exchange Commission today announced that Kelly Ng and Walter Ng, their affiliated investment advisory firm The Mortgage Fund, LLC, and Bruce Horwitz agreed to resolve fraud charges against them, which fully resolves the Commission's litigation. In the settlement, Kelly Ng, Horwitz, and The Mortgage Fund, LLC will pay a total of $5,205,367 and Kelly Ng and Walter Ng will be barred from the securities industry. The SEC filed a complaint against the Ngs, Horwitz and the firm in federal court in Oakland, California in 2013, alleging that they defrauded investors in their real estate fund called Mortgage Fund '08 LLC (MF08) by secretly using its assets to rescue an older, rapidly collapsing fund called R.E. Loans, LLC.

According to the SEC's complaint, the Ngs and Horwitz promoted MF08 in the midst of the 2008 financial crisis as a new opportunity to invest in conservatively underwritten commercial real estate loans secured by deeds of trust. But the Ngs and their advisory firm, The Mortgage Fund LLC, immediately began transferring money raised by MF08 to R.E. Loans so that they could afford distributions to investors in that fund. From December 2007 to March 2008, the Ngs transferred almost $39 million from MF08 to R.E. Loans. They later attempted to justify the transfers by claiming MF08 had purchased three loans from R.E. Loans that totaled around $39 million.

The SEC further alleged that both the Ngs and Horwitz lured investors into MF08 by making false claims about its performance and the R.E. Loans fund's performance. What investors did not know was that both R.E. Loans and MF08 began to experience significant and dramatic borrower defaults in 2008. Despite the funds' rapidly disintegrating portfolios, the Ngs and Horwitz repeatedly assured investors that R.E. Loans and MF08 were performing well and the underlying loans were safe and secure.

Walter Ng, Kelly Ng, Horwitz, and The Mortgage Fund, LLC, without admitting or denying the SEC's allegations, all consented to the entry of final judgments, which the court entered on August 1, 2014. Under the terms of the settlements, Kelly Ng and the Ngs' firm will pay a total of $4,480,025 in disgorgement, prejudgment interest, and civil monetary penalties and Horwitz will pay $725,342. The Commission intends to ask the Court to authorize the transfer of any disgorgement, interest, and penalty payments collected to the MF08 Liquidating Trustee for distribution to MF08 investors. All four agreed to be permanently enjoined from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Kelly Ng, Walter Ng, and The Mortgage Fund further agreed to be permanently enjoined from violating Sections 206(1) and (2) of the Investment Advisers Act of 1940.

Walter Ng and Kelly Ng further agreed to be barred from the securities industry, including association with any brokerage firm or investment adviser. Kelly Ng currently is incarcerated and serving an 18 month sentence after he pled guilty to twenty counts of structuring cash transactions to avoid bank reporting requirements.

SEC CHARGES FORMER BROKER-DEALER CEO WITH DECEIVING CUSTOMERS WITH HIDDEN TRANSACTION FEES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the former chief executive officer of a broker-dealer subsidiary of ConvergEx Group LLC for deceiving brokerage customers with hidden fees to buy and sell securities. 

The SEC’s complaint alleges that the former CEO, Anthony G. Blumberg, engaged in a scheme that entailed concealing the practice of routing orders to an offshore affiliate in Bermuda to add mark-ups or mark-downs.  The hidden fees known as “trading profits” or “TP” were in addition to and often much higher than the commissions paid by customers to have their orders executed. 

The charges against Blumberg follow those announced in December by the SEC against three ConvergEx subsidiaries that agreed to pay more than $107 million and admit wrongdoing to settle the matter.  Two former employees also settled charges with the SEC. 

According to the SEC’s complaint filed against Blumberg in federal court in Newark, N.J., one university customer paid about $93,000 in disclosed commissions and about $543,000 in undisclosed TP.  In another case, $1.6 million in fees allegedly went undetected.  The SEC alleges that Blumberg engaged in deceptive practices to conceal the additional fees, and he encouraged traders under his management to do the same.

“We will continue to hold individuals accountable, including senior officials at broker-dealers, when they engage in fraudulent schemes to mislead customers,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

The U.S. Department of Justice today announced parallel criminal charges against Blumberg.  In the prior parallel criminal proceeding announced in December, ConvergEx Group and its Bermuda broker-dealer agreed to pay $43.8 million, and the two former employees named in the SEC case pleaded guilty in the criminal case.

ConvergEx has since shut down trading operations at the Bermuda broker-dealer subsidiary ConvergEx Global Markets Limited.  Blumberg was CEO of ConvergEx Global Markets Limited and ConvergEx Global Markets, which included a unit of U.S. broker G-Trade Services LLC.

The SEC’s complaint alleges that Blumberg directed employees to suspend the taking of TP when customers were monitoring execution prices.  Blumberg made false and misleading statements to a brokerage customer and authorized employees to falsify trading data for customers who inquired about the details of their securities transactions.

“During his tenure, Blumberg directed a culture of deception and greed that systematically harmed investors,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.  “He had the power to put an end to this fraud, but instead used his power to encourage and perpetuate it.”

The SEC’s complaint alleges that Blumberg violated the antifraud provisions of the federal securities laws and an SEC antifraud rule.  The complaint further alleges liability as a control person and aiding and abetting violations by certain ConvergEx subsidiaries and former employees.  The SEC is seeking disgorgement of any ill-gotten gains with interest, a financial penalty, and permanent injunctive relief.

The SEC’s investigation, which is continuing, has been conducted by Sarah L. Allgeier, Richard E. Johnston, and Thomas D. Manganello under the supervision of Jennifer S. Leete.  The litigation will be led by Cheryl L. Crumpton and Kyle M. DeYoung.  The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.

SEC CHARGES SHI SHAILENDRA WITH DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges M. "Shi" Shailendra with Defrauding Investors

On July 31, 2014, the Securities and Exchange Commission charged M. “Shi” Shailendra with making false representations to investors, misappropriating money, and acting as an unregistered broker. 

According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, Shailendra solicited investments and sold securities in Interstate North 5 Acres, LLC f/k/a Shi Investments Six, LLC (“Shi Six”) through oral and written misrepresentations.  Shailendra touted Shi Six as a real estate investment vehicle that would invest in newly acquired distressed real estate.  Among other things, Shailendra failed to fund his equity interests in the limited liability company but nonetheless allocated ownership to himself as if he had done so, misappropriated investor cash for himself, and used investor money to support his pre-existing, affiliated deals. 

Without admitting or denying the SEC’s allegations, Shailendra agreed to settle the case.  The settlement is pending final approval by the court.  Specifically, Shailendra consented to the entry of a final judgment (1) permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder; (2) permanently enjoining him from participating in the issuance, purchase, offer, or sale of any security, including, but not limited to, engaging in activities for purposes of inducing or attempting to induce the purchase or sale of any security; (3) finding him liable for disgorgement of $2,086,0935, the amount of his ill-gotten gains, plus prejudgment interest of $443,359, but waiving that amount and not ordering a monetary penalty based on Shailendra’s inability to pay; (4) ordering Shailendra to relinquish any purported claims he has in or against Shi Six; and (5) requiring him to resign as Manager of Shi Six. 

As part of the settlement, and following the entry of the proposed final judgment, Shailendra, without admitting or denying the Commission’s findings, has consented to the entry of a Commission order, pursuant to Exchange Act Section 15(b)(6), permanently barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating in any offering of a penny stock.

The SEC’s investigation was conducted by Corey A. Schuster, Donato Furlano, and Charles D. Stodghill, and was supervised by Amy L. Friedman and Scott W. Friestad.  The SEC appreciates the assistance of the Department of the Treasury’s Office of Inspector General.

Statement on the Matter of John W. Lawton

Statement on the Matter of John W. Lawton

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.