SEC CHARGES FORMER HEDGE FUND MANAGER WITH TAKING EXCESSIVE FEES TO REMODEL HOME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a former hedge fund manager accused of fraudulently taking excess management fees from the accounts of fund clients and using their money to remodel his multi-million dollar home and buy a Porsche.

An SEC Enforcement Division investigation found that Sean C. Cooper improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm WestEnd Capital Management LLC.  While WestEnd disclosed to clients the withdrawal of annual management fees of 1.5 percent of each investor’s capital account balance, Cooper actually withdrew amounts that far exceeded that percentage.  He then transferred the money to personal bank accounts so he could spend it freely.  Cooper’s misconduct occurred for a two-year period until he ceased misappropriating fund assets when the SEC began an examination of WestEnd in April 2012.

WestEnd, which expelled Cooper and reimbursed the hedge fund once it became aware of his scheme, is being charged separately by the SEC for failing to effectively supervise him.  The firm agreed to pay a $150,000 penalty to settle the SEC’s charges.

“Cooper betrayed the hedge fund’s investors by lining his own pockets with fund assets that he had not earned,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “His fraud went undetected because WestEnd had no internal controls to limit Cooper’s ability to withdraw excessive amounts from the fund.”

According to the SEC’s order instituting a litigated administrative proceeding against Cooper, he began indiscriminately withdrawing money from the hedge fund – WestEnd Partners L.P. – in March 2010.  Cooper mischaracterized the withdrawals as management fees in the fund’s books and records, but they bore no relation to the actual amount of fees that WestEnd had earned.  The SEC Enforcement Division alleges that, in reality, Cooper simply was using the hedge fund as his own private bank.  He had sole authority to transfer money out of the fund, and there were no controls in place at the firm to prevent him from making improper withdrawals.  Once he routed the money into his personal accounts, Cooper purchased a $187,000 Porsche amid other lavish spending.

The SEC Enforcement Division alleges that Cooper, a resident of New Orleans, willfully violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Cooper is charged with aiding, abetting and causing WestEnd’s violations of Section 206(4) and Rule 206(4)-7.

According to the SEC’s order instituting a settled administrative proceeding against WestEnd, Cooper operated the hedge fund with little to no supervision from others at WestEnd, and he had sole discretion to calculate and wire out money that he claimed the fund owed to WestEnd.  Besides its failure to adopt any policies or procedures that imposed the necessary internal controls, WestEnd also failed to maintain several required books and records relating to its finances, including the management fees it collected from the fund.  

WestEnd consented to the entry of the order finding that it violated Sections 204, 206(4), and 207 of the Advisers Act and Rules 204-2(a)(1), (2), (6), and (7) and 206(4)-7.  The order also finds that WestEnd failed to reasonably supervise Cooper within the meaning of Section 203(e)(6) of the Advisers Act.  In addition to the financial penalty, WestEnd agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings.  The settlement also requires the firm to retain a compliance consultant.

The SEC’s investigation was conducted by Eric Brooks and Erin E. Schneider of the Asset Management Unit in the San Francisco Regional Office.  The SEC’s litigation against Cooper will be led by Sheila O’Callaghan and Mr. Brooks.  The SEC examination that led to the investigation was conducted by Ed Haddad, John Chee, Karah To, and Arturo Hurtado of the San Francisco office’s investment adviser/investment company examination program.

SEC CHARGES HIGH FREQUENCY TRADING FIRM WITH VIOLATING NET CAPITAL RULE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

09/17/2014 10:00 AM EDT

The Securities and Exchange Commission charged a New York-based high frequency trading firm with violating the net capital rule that requires all broker-dealers to maintain minimum levels of net liquid assets or net capital.  The firm’s former chief operating officer is charged with causing the extensive violations.

An SEC investigation found that Latour Trading LLC operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period, and the firm missed the mark by large amounts ranging from $2 million to $28 million.  During this period, Latour’s trading at times accounted for as much as 9 percent of the trading volume in equity securities for the entire U.S. market.

To settle the SEC’s charges, Latour agreed to pay a $16 million penalty, the largest ever for violations of the net capital rule.  The previous high was $400,000 in an enforcement action in 2004.  Nicolas Niquet, Latour’s chief operating officer when the series of violations began, agreed to pay a $150,000 penalty to settle the charges against him.

“This record sanction reflects the seriousness of Latour’s violations of the net capital rule, which is a critical broker-dealer financial responsibility requirement,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “We also will aggressively pursue executives who cause the violations.”

According to the SEC’s order instituting a settled administrative proceeding, a crucial step for a broker-dealer when calculating its net capital is to take percentage deductions referred to as “haircuts” from the firm’s proprietary securities and other positions.  The purpose of these haircut deductions as prescribed in the net capital rule is to account for the market risk inherent in a firm’s positions and create a buffer of liquidity to protect against other risks associated with the securities business.  A failure to calculate proper haircuts can inflate a broker-dealer’s net capital.

The SEC’s order finds that Latour repeatedly miscalculated its net capital amounts in 2010 and 2011 by failing to make proper haircut deductions from the market value of its proprietary securities positions and other positions.  Latour incorrectly used hypothetical positions that the firm did not actually hold to create hedges and capitalize qualified stock baskets.  Latour also used inaccurate index composition data for certain international exchange-traded funds that the firm traded.  Latour’s combined use of hypothetical positions and inaccurate index composition data resulted in haircuts that were generally far too low when calculating the firm’s net capital.  Latour also failed to calculate minimum capital charges on all of its futures positions, and excluded some positions from taking any haircut at all due to a computer programming error.  Niquet designed the processing code that facilitated Latour’s haircut calculations and caused its net capital violations.

According to the SEC’s order, Latour’s net capital violations also resulted in violations of the books and records and financial reporting provisions of the federal securities laws.

The SEC’s order finds that Latour violated Sections 15(c)(3) and 17(a)(1) of the Securities Exchange Act of 1934 and Rules 15c3-1, 17a-3(a)(11), 17a-4(f), and 17a-5(a).  The order finds that Niquet caused Latour’s violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-3(a)(11), and 17a-5(a).  The order censures Latour.  Without admitting or denying the findings, Latour and Niquet agreed to pay the financial penalties as well as cease and desist from committing or causing any future violations of the securities laws.

The SEC’s investigation, which is continuing, has been conducted by Leslie Kazon, Alexander Vasilescu, Osman Nawaz, and Christopher Mele.  The examination of the firm that led to the investigation was conducted by Ashok Ginde, Tamara Heller, Ilan Felix, Ronald Sukhu, and Jennifer Grumbrecht.  The Enforcement Division collaborated with the SEC’s Division of Trading and Markets as well as Ms. Heller, Mr. Ginde, and Michael Fioribello of the National Exam Program.

SEC CHARGES 8 INDIVIDUALS FOR ROLES IN PUMP-AND-DUMP SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a ring of eight individuals for their roles in an alleged pump-and-dump scheme involving a penny stock company based in California that has repeatedly changed its name and purported line of business over the past several years.

The SEC alleges that the scheme was orchestrated by Izak Zirk de Maison, who was named Izak Zirk Engelbrecht before taking the surname of his wife Angelique de Maison.  Both de Maisons are charged by the SEC in the case along with others enlisted to buy, sell, or promote stock in the company now called Gepco Ltd.  Zirk de Maison installed some of these associates as officers and directors of Gepco while he secretly ran the company behind the scenes.  Collectively, they amassed large blocks of shares of Gepco common stock while the de Maisons manipulated the market to create the appearance of genuine investor demand, allowing an associate to sell his stock at inflated prices to make hundreds of thousands of dollars in illicit profits.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Ohio and the Cleveland Division of the Federal Bureau of Investigation today announced criminal charges against Zirk de Maison.

The SEC has obtained an emergency court order to freeze the assets of the de Maisons and others who profited illegally through the alleged scheme.

“Microcap fraud is a scourge on our markets, and we are aggressively pursuing scurrilous penny stock schemers who make their living by preying upon innocent investors,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Zirk de Maison has secretly controlled the shell company now known as Gepco since its incorporation in 2008 under a different name.  During the next five years, he caused the company to enter into a number of reverse mergers and its reported business evolved from equipment leasing to prepaid stored value cards related to electronic devices until the company eventually became known as WikiFamilies and claimed to own and operate a social media website.  The company name changed to Gepco in 2013, and after a failed attempt to merge it into a private mixed martial arts company, de Maison created his own private company purportedly in the high-end diamond business and merged Gepco into it.

“Zirk de Maison concocted an array of reverse mergers and company name changes on his way to gaining control of the vast majority of Gepco stock in order to conduct a multi-faceted manipulation scheme,” said Amelia A. Cottrell, an Associate Director in the SEC’s New York Regional Office.  “To help avoid the pitfalls of microcap fraud, it’s important to check the histories of companies and determine their legitimacy before deciding whether to invest in them.”

The SEC alleges that the de Maisons, who reside in Redlands, Calif., brought at least six others into the fold to coordinate various components of the scheme.  They each are charged in the SEC’s complaint:

Jason Cope of Gates Mills, Ohio, is a longtime associate of Zirk de Maison and has a past record of securities fraud with a court judgment against him in a previous SEC enforcement action.  On Cope’s behalf, Louis Mastromatteo of Bay Village, Ohio, allegedly dumped more than 2.5 million shares of Gepco stock through a nominee into the public market for hundreds of thousands of dollars in illicit profits that were kicked back to Cope.

Trish Malone, who lives in Santee, Calif., serves as Gepco’s president, CFO, and secretary.  She allegedly used Gepco to issue stock to Zirk de Maison and others so that they could conduct two unregistered and illegal distributions of the securities.

Peter Voutsas, who lives in Santa Monica, Calif., and owns a jewelry store in Beverly Hills, serves as Gepco’s CEO and chief investment officer even though Zirk de Maison runs the company behind the scenes.  Along with Angelique de Maison, Voutsas allegedly made a materially misleading statement about Gepco to the public while the de Maisons manipulated the market for Gepco’s stock.
Ronald Loshin of San Anselmo, Calif., served as Gepco’s chief creative officer and allegedly failed to make required regulatory filings to report his transactions in Gepco stock as an insider.  Furthermore, Loshin enabled de Maison to deceptively hide his own trading by allowing him to use a brokerage account held in Loshin’s name.

Kieran Kuhn of Port Washington, N.Y., allegedly promoted Gepco stock through his firm Small Cap Resource Corp. and inflated the stock value to help the scheme succeed.  He then conducted one of the unregistered and illegal distributions of Gepco-related securities for Zirk de Maison’s benefit.
According to the SEC’s complaint, Zirk de Maison exchanged e-mails and text messages with many of his co-conspirators as they openly discussed coordinating their promotional activities and manipulative trading in Gepco’s stock in order to create a false impression of market activity.  They stood to earn exponentially more illicit profits given that they continue to beneficially own tens of millions of shares of Gepco stock, so the SEC today suspended trading in Gepco securities in order to prevent any further manipulation or dumping of the stock.

The SEC’s complaint, which additionally charges several companies connected to the scheme, alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 9 and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks a permanent injunction and disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and penny stock bars.  The SEC also seeks officer-and-director bars against the de Maisons and Malone.

The SEC’s investigation, which is continuing, has been conducted by John O. Enright, James E. Burt IV, Thomas Feretic, and Leslie Kazon.  The case was supervised by Amelia A. Cottrell, and the litigation will be led by Howard Fischer and Mr. Enright.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Ohio, the Cleveland Division of the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC FILES CIVIL ACTIONS AGAINST PERSONS INVOLVED IN BOILER ROOM SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Ddbo Consulting, Inc., Calpacific Equity Group, LLC, and Principals with Fraud and Registration Violations

The Securities and Exchange Commission (Commission) announced that on July 24, 2014, it filed civil actions in U.S. District Court against individuals and companies behind a boiler room scheme that hyped a company whose new technology was purportedly to be used in the Super Bowl. The SEC previously charged the operators of the scheme based in the South Florida and Los Angeles areas. Seniors and other investors were pressured into purchasing stock in Thought Development Inc. (TDI), an unaffiliated Miami Beach-based company that stated its signature invention is a laser-line system that generates a green line on a football field for a first-down marker visible not only on television but also to players, officials, and fans in the stadium.

The SEC charged four executives who helped make the scheme possible and three companies they operate - DDBO Consulting, Inc., DBBG Consulting, Inc., and CalPacific Equity Group, LLC. Approximately $1.7 million was raised through these companies from more than 110 investors who were told that an initial public offering (IPO) in TDI was imminent and that their money would be used to develop the ground-breaking technology. Instead, the SEC alleges that the IPO was not forthcoming as promised, and at least 50 percent of the offering proceeds were merely retained by these companies or paid to sales agents through undisclosed commissions and fees. Certain executives, their sales agents and their companies lured investors by misrepresenting that TDI's technology was about to be used by the National Football League (NFL). One investor even made an additional $75,000 investment on top of an initial $2,500 investment after being told that NFL Commissioner Roger Goodell purchased TDI's technology for use in the 2013 Super Bowl. In fact, there was no such arrangement.

In addition to the their companies, the SEC's complaints charge brothers Dean R. Baker of Coral Springs, Fla., and Daniel R. Baker of Valley Village, Calif., along with Bret A. Grove of Delray Beach, Fla., and Demosthenes Dritsas of Newhall, Calif. The SEC's complaints allege violations of Sections 5(a), 5(c) and 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 defendants all agreed to settle the SEC's charges. In parallel actions, the U.S. Attorney's Office for the Central District of California announced criminal charges against Daniel Baker and Dritsas, and the U.S. Attorney's Office for the Southern District of Florida announced criminal charges against Dean Baker and Grove.

Statement at Open Meeting Regarding Money Market Fund Reform

Statement at Open Meeting Regarding Money Market Fund Reform

Remarks to the Practicing Law Institute, Hedge Fund Management Seminar 2014

Remarks to the Practising Law Institute, Hedge Fund Management Seminar 2014