OHIO RESIDENT CHARGED BY CFTC WITH COMMODITY POOL FRAUD

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Ohio Resident Glen Galemmo with Commodity Pool Fraud in a Multi-Million Dollar Ponzi Scheme

CFTC alleges that Galemmo solicited at least $116 million from pool participants and only deposited approximately $4.7 million of the funds into futures accounts

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement Complaint against Defendant Glen Galemmo of Cincinnati, Ohio, charging him with operating a multi-million dollar Ponzi scheme through his firm, QFC, LLC, from February 18, 2010 through at least July 17, 2013.

According to the Complaint filed on September 15, 2014, Galemmo, among other things, made material misrepresentations to commodity pool participants, including the misrepresentation that the pool generated returns of 17 percent to 40 percent from 2008 through 2012. The Complaint also alleges that Galemmo failed to disclose that he failed to trade pool participants’ funds from at least 2003 through May 2011. As alleged, beginning in April 2011, Galemmo only deposited approximately $4.7 million of over $116 million solicited from pool participants into futures accounts that he controlled and sustained total trading losses of approximately $1.2 million. Galemmo also allegedly withdrew or caused to be withdrawn $2.7 million in pool participants’ funds from these futures accounts.

The Complaint further alleges that Galemmo misappropriated pool participant funds for personal and other business uses, and to conceal his fraudulent scheme and misappropriation, Galemmo issued or caused to be issued false account statements to pool participants.

The Complaint also notes that on January 15, 2014, Galemmo formally pleaded guilty in a related criminal case. See United States v. Glen Galemmo, Case No. 1:13-cr-00141-HJW (S.D. Ohio).

In its continuing litigation, the CFTC seeks a return of ill-gotten gains, restitution, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Eugene Smith, Peter M. Haas, Dmitriy Vilenskiy, and Paul G. Hayeck.

SEC OBTAINS ASSET FREEZE AGAINST COMPANY BEHIND PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Asset Freeze Against Company in Turks and Caicos Islands Behind South Florida-Based Ponzi Scheme

09/16/2014 04:30 PM EDT

The Securities and Exchange Commission announced an emergency asset freeze against a company located in Turks and Caicos Islands in connection with its operation of a South Florida-based Ponzi scheme.

The SEC’s request for the emergency asset freeze against Abatement Corp. Holding Company Limited was granted in the U.S. District Court for the Southern District of Florida last week.  The SEC’s complaint alleged that Abatement Corp. and its now-deceased principal Joseph Laurer – who commonly used the name Dr. Josef V. Laurer – falsely promised investors safe, guaranteed returns while engaging in an offering fraud and Ponzi scheme from November 2004 until Laurer’s death on May 15, 2014.

The SEC’s complaint also names Laurer’s widow Brenda Davis and another Laurer-controlled company International Balanced Fund as relief defendants because they received investor funds.

“Unknowing investors were led to believe that Abatement Corp. and Laurer were watching out for their financial best interests when, in fact, they were callously stealing their hard-earned money,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

The SEC’s complaint alleges that Laurer, through Abatement Corp., raised more than $4.6 million from approximately 50 investors residing primarily in South Florida.  Laurer, who was a member of the City of Homestead’s General Employee Pension Board and president of the South Dade chapter of AARP, convinced investors to give him money through false claims that he would put their money into Abatement Corp.’s purported bond fund that invested in triple-A rated corporate and government bonds.  Laurer also told investors that the fund would pay a guaranteed fixed return, with no risk to principal because of insurance from either or both the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation.

The SEC alleges that by at least 2007, Laurer was operating a full-fledged Ponzi scheme and putting virtually no new investor money into securities, instead using investor funds to pay returns to investors, fund investor withdrawals, and pay personal expenses.  At the time of Laurer’s death, approximately $900,000 remained in Abatement Corp.’s bank account in the Turks and Caicos Islands, and another $82,000 remains in a domestic bank account held by International Balanced Fund.  The SEC further alleges that Laurer used investor funds for the benefit of his wife, including paying premiums with investor funds on a half million dollar life insurance policy she received upon his death.

The court order issued on September 12 temporarily freezes the assets of Abatement Corp. and International Balanced Fund and sets a hearing for September 22.  Davis agreed to a temporary freeze of certain assets of hers until November 6, pending a determination of the SEC’s claim against Davis for disgorgement.  If the SEC and Davis have not resolved the claims against her or agreed to an extension of the temporary asset freeze by October 22, then the court will hold a hearing on the SEC’s motion against Davis on October 24.

The SEC’s complaint charges Abatement Corp. with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  In addition to seeking an asset freeze, the SEC also seeks an order directing Abatement Corp. and the relief defendants to pay disgorgement with prejudgment interest and provide a sworn accounting of all proceeds received and an order directing repatriation of any funds held at any offshore bank or other financial institution not subject to the jurisdiction of the court.

The SEC’s investigation was conducted by Terence M. Tennant and Mark S. Dee under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office.  They were assisted by Anson Kwong, Debra E. Williamson, George Franceschini, Nicholas A. Monaco and John C. Mattimore of the Miami office’s examination program.  The SEC’s litigation is being led by Andrew Schiff.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Turks and Caicos Islands Financial Services Commission.

LAW FIRM IT EMPLOYEE CHARGED WITH INSIDER TRADING AHEAD OF MERGER ANNOUNCEMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges IT Employee at Law Firm With Insider Trading Ahead of Merger Announcements

09/16/2014 01:40 PM EDT

The Securities and Exchange Commission today charged an employee in an international law firm’s IT department with insider trading ahead of several mergers and acquisitions involving firm clients being advised on the deals.

The SEC alleges that Dimitry Braverman, a senior information technology professional at Wilson Sonsini Goodrich & Rosati, had access to nonpublic information in the firm’s client-related databases and garnered more than $300,000 in illicit profits by trading in advance of merger announcements.  Braverman began by insider trading in accounts in his own name, but shifted course when a lawyer at his firm was charged by the SEC and criminal authorities in an entirely separate insider trading scheme.  After immediately liquidating the remaining securities that he had purchased on the basis of nonpublic information, Braverman waited about 18 months and then continued his insider trading in a brokerage account held in the name of a relative living in Russia.  His concealment efforts failed, however, when SEC investigators were able to dissect a suspicious pattern of trades and trace them back to Braverman.

“Insider trading by employees of law firms and other professional organizations is an important enforcement focus for us,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “We’ve enhanced our detection capabilities and we’re refining our investigative approaches to enable us to more easily identify those who abuse their positions of trust and confidence.”

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

According to the SEC’s complaint filed in federal court in Manhattan, Braverman began his scheme in 2010 by using nonpublic information to trade the stock or stock options in one of the companies involved in an upcoming merger or acquisition.  He typically sold his stock or exercised his options shortly after the deals were made public.  In advance of two deals, Braverman tipped his brother, who consequently made approximately $1,800 in profits.

The SEC alleges that Braverman conducted insider trading in four companies prior to the separate insider trading charges against the Wilson Sonsini lawyer in 2011, and four more companies after he opened a brokerage account in late 2012 in the name of Vitaly Pupynin, a relative who that summer had visited Braverman’s home in San Mateo, Calif., during a trip to the U.S. from Russia.  The e-mail address associated with the account was same one that Braverman had used twice before to open other brokerage accounts.  However, Braverman later created a new e-mail address using Pupynin’s first name and changed the e-mail address associated with the brokerage account to that address instead.  After Pupynin left the U.S. in October 2012, Braverman used the account to continue insider trading and profiting on the basis of material nonpublic information that he obtained.  Braverman continued his insider trading through 2013.

“Believing he could conceal his trades by hiding them in a relative’s account, Braverman abused Wilson Sonsini’s trust by repeatedly using confidential information about the law firm’s clients to reap insider trading profits,” said Joseph G. Sansone, Co-Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit.  “SEC staff methodically identified the trades and traced a trail of evidence back to Braverman, who must now face the consequences of his actions.”          

The SEC’s complaint charges Braverman with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 14(e) of the Exchange Act and Rule 14e-3.  Pupynin is named as a relief defendant in the SEC’s complaint for the purposes of recovering Braverman’s ill-gotten gains in the trading account held in Pupynin’s name.

The SEC’s investigation, which is continuing, has been conducted by Charu A. Chandrasekhar and John Rymas of the Market Abuse Unit and Jordan Baker and Thomas P. Smith Jr. of the New York Regional Office.  The case has been supervised by Mr. Hawke and Mr. Sansone, and the litigation will be led by Preethi Krishnamurthy and Ms. Chandrasekhar.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

FEED COMPANY SETTLES ACCOUNTING FRAUD CASE AND WILL PAY $18 MILLION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Tennessee-Based Animal Feed Company Agrees to Pay $18 Million to Settle Accounting Fraud Case

09/15/2014 03:35 PM EDT

The Securities and Exchange Commission today announced that a Tennessee-based animal feed company has agreed to pay back $18 million in illicit profits from an accounting fraud that resulted in an SEC enforcement action earlier this year.

AgFeed Industries, which is currently in Chapter 11 bankruptcy, was charged by the SEC in March along with top company executives for repeatedly reporting fake revenues from the company’s China operations in order to meet financial targets and prop up AgFeed’s stock price.  The company obtained illicit gains in stock offerings to investors at the inflated prices resulting from the accounting scheme.  The SEC also alleged that U.S. managers learned of the accounting fraud, but failed to take adequate steps to investigate and disclose it to investors.

The $18 million to be paid by AgFeed to settle the SEC’s case will be distributed to victims of the company’s fraud.  Details of the settlement were presented to the bankruptcy court in Delaware earlier today, and the settlement is subject to court approval by the bankruptcy court as well as the district court in Tennessee where the case was filed.

The SEC’s case continues against five former company executives and a former audit committee chair.

“This settlement holds AgFeed accountable for its accounting fraud and deprives the company of ill-gotten gains,” said Julie Lutz, Director of the SEC’s Denver Regional Office.  “This provides the most expedient and effective way to provide a substantial recovery to victims of AgFeed’s fraud while the company remains in bankruptcy.”

Under the proposed settlement, AgFeed also agrees to the entry of a permanent injunction enjoining it from the antifraud, periodic reporting, and recordkeeping and internal control provisions of the federal securities laws.  AgFeed neither admits nor denies the charges in the settlement.

The SEC’s investigation has been conducted by Michael Cates, Donna Walker, and Ian Karpel of the Denver Regional Office.  The court litigation is being led by Gregory Kasper and Nancy Ferguson while the bankruptcy aspects of the case are being handled by Alistaire Bambach, Patricia Schrage, and Neal Jacobson of the New York Regional Office.

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.