CFTC ORDERS ORDERS PRECIOUS METALS TRADING COMPAMY AND OWNERS TO PAY $2.9 MILLION

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders S.J. Woods, Inc., Peter Blanco, and Paul Proscia to Pay over $2.9 Million in Restitution and Permanently Bars Them from the Commodities Industry

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order filing and settling charges against S.J. Woods, Inc. (SJW) and its owners, Peter Blanco and Paul Proscia (together Respondents), involving their participation in illegal, off-exchange financed transactions in precious metals with retail customers. The Order requires Respondents jointly to pay restitution totaling $2,971,992.23 to their customers, imposes permanent trading bans against them, and prohibits them from violating the Commodity Exchange Act, as charged. SJW’s principal place of business is Holbrook, New York. Blanco is a resident of Brightwaters, New York, and Proscia is a resident of Sayville, New York.

The Illegal Transactions

The CFTC Order finds that from July 2011 through February 2013, Respondents solicited retail customers, generally by telephone, to buy and sell physical precious metals, such as gold and silver, in off-exchange, leveraged transactions. According to the Order, customers paid as little as 25 percent of the purchase price for the metals, and Respondents purportedly financed the remainder of the purchase price, while charging customers interest on the amount borrowed.

The CFTC Order states that financed, off-exchange transactions with retail customers have been illegal since July 16, 2011, when certain amendments of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 became effective. As explained in the Order, financed transactions in commodities with retail customers like those engaged in by Respondents must be executed on, or subject to, the rules of a CFTC-approved board of trade. Since Respondents’ transactions were done off-exchange, with customers who were not eligible contract participants, they were illegal, the Order finds.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this matter are Boaz Green, Kara Mucha, James H. Holl, III, and Rick Glaser.

SEC CHARGES MAN OF TRADING AHEAD OF NEWS ANNOUNCEMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23074 / August 26, 2014

Securities and Exchange Commission v. Michael Anthony Dupre Lucarelli, Civil Action No. 14-Civ-6933 (NRB) (S.D.N.Y.)

The U.S. Securities and Exchange Commission charged a director of market intelligence at a Manhattan-based investor relations firm with insider trading ahead of impending news announcements by more than a dozen clients. The charges were filed against Michael Anthony Dupre Lucarelli, who garnered nearly $1 million in illicit profits.

An SEC investigation and ongoing forensic analysis of Lucarelli's work computers uncovered that he repeatedly accessed clients' draft press releases stored on his firm's computer network prior to public announcements. The SEC alleges that Lucarelli, who had no legitimate work-related reason to access the draft press releases, routinely purchased stock or call options in advance of favorable news and sold short or bought put options ahead of unfavorable news.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Lucarelli.

According to the SEC's complaint filed in federal court in Manhattan, Lucarelli traded in securities belonging to companies that his firm was advising in advance of announcing their earnings or other significant events such as a merger or clinical drug trial result. Lucarelli began taking a position in a client's securities in the days immediately preceding the announcement, although in a few instances he began making his purchases weeks in advance. Lucarelli started divesting himself of his position immediately after the announcement in order to reap instant profits.

The SEC further alleges that Lucarelli attempted to hide his illicit behavior by lying to brokerage firms where he set up his trading accounts. Lucarelli purposely omitted listing his investor relations firm employment on account-opening applications and instead falsely stated that he was self-employed or retired.

The SEC's complaint charges Lucarelli, who lives in Manhattan, with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 14(e) of the Exchange Act and Rule 14e-3.

SEC OBTAINS FINAL JUDGEMENT IN PENNY STOCK REGISTRATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Final Consent Judgments Against Four Individuals and Certain Entity Defendants in Securities Registration Case

The Securities and Exchange Commission announced today that on August 12, 2014, the Honorable Shira A. Scheindlin of the United States District Court for the Southern District of New York approved settlements and entered final judgments against all the individual defendants, Danny Garber, Michael Manis, Kenneth Yellin, Jordan Feinstein, and certain entity defendants in SEC v. Garber et al., 12-cv-9339 (SAS) (S.D.N.Y.). The SEC's Second Amended Complaint alleges that the defendants violated Section 5 of the Securities Act of 1933, from at least 2007 through 2010, by purchasing over a billion unregistered shares in dozens of penny stock companies and reselling the shares to the investing public without complying with the registration provisions of the securities laws.

Without admitting or denying the allegations, Garber, Manis, Yellin and Feinstein have each agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act and require them to pay a $25,000 civil penalty. The final judgment against Garber also includes a permanent penny stock bar, permanently enjoins him from participating in unregistered offerings and requires him to pay disgorgement of $862,000 plus prejudgment interest of $113,000. The final judgments against Manis, Yellin and Feinstein permanently enjoin them from participating in any offering made pursuant to Rule 504 of Regulation D, require Manis to pay disgorgement of $862,000 plus prejudgment interest of $113,000, and require Yellin and Feinstein to each pay disgorgement of $314,550 plus prejudgment interest of $41,419. The entity defendants Coastal Group Holdings, Inc., the OGP Group LLC, Rio Sterling Holdings LLC, Slow Train Holdings LLC, and Spartan Group Holdings LLC have agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act.

CFTC ORDERS MAN TO PAY $344,000 FOR ROLE IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders New York Resident Jacob N. Stein to Pay More than $344,000 in Restitution and Civil Monetary Penalty for Commodity Pool Fraud and Misappropriation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Jacob N. Stein of Hankins, New York, individually and doing business as TEPdesign, Inc., to pay restitution of $244,400 to defrauded customers and a $100,000 civil monetary penalty, for committing fraud and misappropriation in connection with a commodity pool that traded leveraged or margined off-exchange foreign currency contracts (forex). Neither Stein nor TEPdesign, Inc. has ever been registered with the CFTC.

According to the CFTC’s Order, from about January 2010 through September 2012, Stein, without registering with the CFTC as a Commodity Pool Operator, solicited and obtained approximately $524,000 from at least 17 investors (Pool Participants) to participate in a commodity pool for the purpose of trading leveraged or margined forex. Stein used approximately $83,000 of the funds solicited to trade forex, of which over $80,000 was lost in forex trading, the Order states. Instead of reporting these losses to the Pool Participants, Stein created and distributed to the Pool Participants false account statements indicating that Stein was earning profits for the Pool Participants through forex trading. The Order also finds that the remaining funds, approximately $441,000, were misappropriated by Stein to pay fabricated “profits” and returns of principal to Pool Participants and for Stein’s personal expenses, such as car payments and retail purchases. Ten Pool Participants are still owed approximately $244,400 in principal, the Order finds.

In addition to ordering restitution and imposing a civil monetary penalty, the CFTC Order also requires Stein to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and imposes permanent bans on Stein’s trading, registration, and certain other CFTC-regulated activities.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this case are Patrick Daly, Xavier Romeu-Matta, Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

SEC CHARGES HOUSTON ADVISORY FIRM WITH FRAUD FOR NOT DISCLOSING CONFLICT OF INTEREST TO CLIENTS

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges against a Houston-based investment advisory firm accused of recommending that clients invest in particular mutual funds without disclosing a key conflict of interest: the firm was in turn receiving compensation from the broker offering the funds.

An SEC Enforcement Division investigation found that Robare Group Ltd. received a percentage of every dollar that its clients invested in certain mutual funds through an undisclosed compensation agreement with the brokerage firm.  Therefore, unbeknownst to investors, Robare Group and its co-owners Mark L. Robare and Jack L. Jones Jr. had an incentive to recommend these funds to clients over other investment opportunities and generate additional revenue for the firm.  Robare Group ultimately received approximately $440,000 in such payments from the brokerage firm during an eight-year period.    

“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”

The Asset Management Unit has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.  For example, the SEC previously charged an Oregon-based investment adviser for failing to disclose revenue sharing payments and other conflicts of interest to clients.

According to the SEC’s order instituting administrative proceedings against Robare Group and its co-owners, the firm revised its Form ADV in December 2011 to disclose the compensation agreement, but this and later disclosures falsely stated that the firm did not receive any economic benefit from a non-client for providing investment advice.  The disclosures also were inadequate because they stated that Robare Group may receive compensation from the broker when in fact the firm was definitively receiving payments.

The SEC Enforcement Division further alleges that Robare Group and the broker entered into a new agreement in late 2012 that provided similar payments.  But it wasn’t until June 2013 that the firm disclosed the conflict of interest associated with its arrangement with the broker, and even then it failed to disclose the incentive to recommend buying and holding certain mutual funds through the broker’s platform or the magnitude of the conflict.  Robare reviewed and approved the Forms ADV, and Jones reviewed and signed all but one of the filings.

The SEC’s Enforcement Division alleges that Robare Group and Robare willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Jones aided and abetted these violations.  The Enforcement Division further alleges that Robare Group, Robare, and Jones each willfully violated Section 207 of the Advisers Act.     

The SEC’s investigation was conducted by Catherine Floyd and Barbara Gunn of the Fort Worth Regional Office along with John Farinacci.  Ms. Gunn and Mr. Farinacci are members of the Asset Management Unit.  The SEC’s litigation will be led by Janie Frank.

VERDICT RETURNED AGAINST INVESTMENT ADVISER IN FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Jury Returns Verdict Against Massachusetts Investment Adviser in SEC Fraud Case

The Securities and Exchange Commission announced that, on August 13, 2014, a federal court jury in Boston, Massachusetts, returned a verdict against registered investment adviser Sage Advisory Group, LLC, and its principal, Benjamin Lee Grant, both of Boston, MA, in a fraud case filed by the SEC.

In its complaint, filed on September 29, 2010, the Commission alleged that starting on or about October 4, 2005, Grant engaged in a scheme to induce his former brokerage customers to transfer their assets to Sage, his new advisory firm.

The Commission's complaint further alleged that prior to October 2005, Grant was a registered representative of broker-dealer Wedbush Morgan Securities and had customer accounts representing approximately $100 million in assets, virtually all of which were managed by California-based investment adviser First Wilshire Securities Management. According to the complaint, Grant resigned from Wedbush on September 30, 2005 so that he could operate Sage, his own investment advisory firm. In a letter dated October 4, 2005, Grant told his former Wedbush customers that, at the suggestion of First Wilshire, their accounts were being moved from Wedbush to a discount broker and that Sage had been formed to handle their investments. The complaint alleged that the letter told Grant's customers that the charge for their accounts was changing from a 1% management fee paid to First Wilshire plus Wedbush's brokerage commissions to a 2% "wrap fee" paid to Sage, and that First Wilshire had indicated that the wrap fee had been historically less expensive than the previous arrangement. According to the complaint, the letter also told Grant's customers that if they wanted to avoid any disruption in First Wilshire's management of their assets, they had to sign and return the new advisory and custodial account documents as soon as possible. According to the complaint, in subsequent communication with customers, Grant told them that First Wilshire was no longer willing to manage their assets at Wedbush and that they had to transfer to the discount broker and sign up with Sage.

The Commission contended that these statements were materially false and misleading because First Wilshire had not required a transfer from Wedbush, had not refused to continue managing the customers' assets at Wedbush, and had not authorized Grant's statements. Moreover, Grant's wrap fee statements were without factual basis. The complaint further alleged that Grant failed to disclose that the switch from Wedbush to the discount broker would result in significant savings that would flow to Grant and Sage rather than to the advisory clients and that, as a result, Grant and Sage's compensation would be substantially increased. Indeed, once Grant's customers transferred their accounts from Wedbush to Sage, Grant more than doubled his own compensation.

After a trial that began on August 4, 2014, the jury deliberated for approximately two hours before rendering its verdict of liability against both defendants under Sections 204A and 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rules 204A-1 and 206(4)-7 thereunder. The Court will later determine whether and what relief to impose against the defendants. The case was tried by Marc Jones and J.R. Drabick, with assistance from Stephanie DeSisto and Frank Huntington, of the Commission's Boston Regional Office.

For further information, see Litigation Release No. 21672 (September 29, 2010).

On September 1, 2011, the Commission filed a separate civil injunctive action against Sage, Benjamin Lee Grant, and his father Jack Grant alleging that Jack Grant, a lawyer and former stockbroker, had violated a Commission bar from association with investment advisers by associating with his son Benjamin Lee Grant's investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleged that Jack Grant, Benjamin Lee Grant and Sage fraudulently failed to disclose Jack Grant's barred status and disciplinary history to Sage's advisory clients. On May 30, 2013, Jack Grant consented to settle the charges, but the action against Sage and Lee Grant is still pending and a trial date is to be determined. For further information, see Litigation Release No. 22081 (September 1, 2011) (SEC Charges Massachusetts-Based Attorney for Violating an Investment Adviser Bar and his Son for Failing to Disclose his Father's Bar to Advisory Clients); and Litigation Release No. 22708 (May 30, 2013) (SEC Obtains Final Judgment and Issues Administrative Orders against John A. ("Jack") Grant).