SEC CHARGES BROKERAGE FIRM, FOUNDER WITH VIOLATING NET CAPITAL REQUIREMENTS SAND FALSIFYING BOOKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a New York-based brokerage firm and its founder for allegedly violating net capital requirements and falsifying books and records to conceal the capital deficiencies.

The SEC’s Division of Enforcement alleges that Charles “Chuck” Moore and Crucible Capital Group attempted to disguise the firm’s extensive and repeated net capital insufficiency by improperly off-loading its liabilities onto the books of an affiliated firm and improperly treating non-marketable stock as an allowable asset.  Moore went so far as to try to hide Crucible’s true financial condition from SEC examiners by providing them doctored invoices that sought to mask the extent of those liabilities.  But SEC examiners and investigators successfully detected that the documents had been fabricated, and referred the matter to criminal authorities for prosecution.

The U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Moore for obstructing the SEC’s examination.

“Moore attempted to mislead SEC examiners by giving them documents he intentionally falsified in an effort to hide Crucible’s severe capital insufficiency,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to work with our law enforcement partners to pursue parties that try to obstruct or delay the SEC’s critical work in overseeing broker-dealers and other regulated entities.”

According to the SEC’s order instituting administrative proceedings against Crucible and Moore, Crucible entered into an expense-sharing agreement with another firm called Angelic Holdings that also was wholly owned by Moore.  Under the agreement, Angelic was obligated to pay Crucible’s expenses, so Moore had Crucible’s vendors bill Angelic for the services they performed for Crucible.  When SEC examiners asked for documents concerning Angelic’s liabilities, Moore arranged to provide the examiners with copies of invoices that had been doctored to eliminate significant past due amounts. 

The SEC’s Division of Enforcement alleges that Moore knew that the expense-sharing agreement was illegitimate because Angelic did not have the resources to pay the debts to the vendors.  And Moore knew that if those liabilities were properly attributed to Crucible, then SEC examiners would learn that Crucible had failed to meet its required minimum net capital over a 10-month period from December 2012 to September 2013

“The net capital rule is a principal tool by which the SEC monitors the financial health of brokerage firms,” said Amelia A. Cottrell, an associate director in the SEC’s New York Regional Office.  “It is therefore crucial that SEC examiners have prompt access to accurate and complete information about a firm’s financial condition.”

The SEC’s Division of Enforcement alleges that Crucible violated the net capital rule: Section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-1.  Crucible also allegedly violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(11), 17a-4(b)(3), 17a-4(j),17a-5(a), and 17a-11(b)(1) by failing to maintain and keep accurate records of its aggregate indebtedness and net capital, notify the SEC of its net capital deficiency, file accurate Financial and Operational Combined Uniform Single (FOCUS) reports, and provide the examiners with accurate copies of records evidencing its expenses.  Moore is alleged to have aided and abetted and caused each of these violations.  The administrative proceedings will determine what, if any, remedial action or financial penalties are appropriate in the public interest against Crucible and Moore.

The SEC’s examination of Crucible was conducted by Christine Bove, William Ostrow, Yvette Panetta, and Linda Lettieri in the New York office’s broker-dealer inspection program.  The investigation was conducted by Leslie Kazon and John O. Enright, and supervised by Ms. Cottrell.  The Enforcement Division’s litigation will be led by Kevin McGrath and Mr. Enright.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.

Statement on Jury Verdict in Florida Federal Court Following Trial Against Orchestrator of Pump-and-Dump Scheme

Statement on Jury Verdict in Florida Federal Court Following Trial Against Orchestrator of Pump-and-Dump Scheme

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