SEC OBTAINS JUDGEMENT AGAINST DEFENDANTS IN SECURITIES FRAUD CASE

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23114 / October 15, 2014

Securities and Exchange Commission v. Stephen D. Ferrone, et al., Civil Action No. 1:11-cv-05223, USDC, N.D.Ill.

SEC Obtains Summary Judgment Against Defendants in Securities Fraud Involving Biopharmaceutical Company

The Securities and Exchange Commission announced that on October 10, 2014, the Honorable Elaine E. Bucklo of the United States District Court for the Northern District of Illinois granted the SEC's motion for summary judgment and for partial summary judgment, respectively, against Defendants Douglas McClain, Sr. ("McClain Sr."), of Fair Oaks, Texas, and Douglas McClain Jr. ("McClain Jr."), formerly of Savannah, Georgia. The Court found that McClain Sr. violated the antifraud provisions of the federal securities laws by making misrepresentations and omissions and that McClain Sr. and McClain Jr. engaged in insider trading.

The SEC filed this action against the defendants in August 2011, alleging that McClain Sr., McClain Jr., Immunosyn Corporation ("Immunosyn") Argyll Biotechnologies, LLC ("Argyll"), Stephen D. Ferrone, and James T. Miceli ("Miceli") committed securities fraud in connection with materially misleading statements during 2006-2010 regarding the status of regulatory approvals for Immunosyn's sole product, a drug derived from goat blood referred to as "SF-1019." The SEC also charged Argyll, McClain, Jr., McClain, Sr., Miceli, Argyll Equities, LLC ("Argyll Equities"), and Padmore Holdings, Ltd. with insider trading.

The SEC's complaint, filed in federal court in Chicago, alleged, among other things, that the defendants misleadingly stated in public filings with the SEC and in oral presentations that Argyll, Immunosyn's controlling shareholder, planned to commence the regulatory approval process for human clinical trials for SF-1019 in the U.S. or that regulatory approval was underway. The complaint alleges that these statements misled investors because the statements omitted to disclose that the U.S. Food and Drug Administration ("FDA") had already twice issued clinical holds on drug applications for SF-1019, which prohibited clinical trials involving SF-1019 from occurring.

After completion of discovery, the SEC moved for summary judgment, and for partial summary judgment, respectively, against McClain Sr. and McClain Jr. In granting the SEC's motion for summary judgment, the Court found that McClain Sr. committed securities fraud by taking money from investors and failing to deliver Immunosyn shares and by telling investors that Immunosyn would secure approval for SF-1019 from the FDA in about a year and that the U.S. Department of Defense had purchased SF-1019. The Court also found that McClain Sr. and McClain Jr. engaged in insider trading by selling their Immunosyn stock based on the material, non-public information that the FDA had issued clinical holds on drug applications for SF-1019. The Court found that McClain Sr. and McClain Jr. violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

The Court will determine the appropriate remedies against McClain Sr. and McClain Jr. at a later date.

FACT SHEET: Safeguarding Consumers’ Financial Security | The White House

FACT SHEET: Safeguarding Consumers’ Financial Security | The White House

SEC ANNOUNCES JURY FINDS FORMER CHAIRMAN FAILED START-UP, LIABLE FOR SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23112 / October 15, 2014

Securities and Exchange Commission v. iShopNoMarkup.com, Inc., et al., Civil Action No. 04-CV-4057 (E.D.N.Y.)

Jury Finds Anthony M. Knight, Former Chairman of a Failed Internet Startup, Liable for Securities Fraud and Illegal Sale of Unregistered Securities

On Tuesday, October 14, 2014, a jury in federal court in Central Islip, New York returned a verdict in favor of the U.S. Securities and Exchange Commission. The jury found the former Chairman of failed Long Island-based internet startup, iShopNoMarkup.com, Inc., liable for securities fraud and illegally selling unregistered securities. The defendant, Anthony M. Knight co-founded iShop, and was formerly the Chairman of iShop's Board of Directors. He also served at various times as iShop's Secretary and Chief Executive Officer. The Commission had charged that from the fall of 1999 until the summer of 2000, iShop, Knight and others conducted a fraudulent securities offering scheme that defrauded over 350 investors who invested approximately $2.3 million. iShop also failed to file any registration statement with the Commission as to the securities sold.

United States District Judge Denis R. Hurley, who presided over the trial, will determine the remedies and sanctions to be imposed against the defendant. The Commission is seeking a judgment requiring the defendant to pay disgorgement of ill-gotten gains plus prejudgment interest, as well as civil monetary penalties, an injunction, and an officer and director bar.

Anthony Knight, age 48, was at the time of the conduct a resident of Great Neck, New York, and is currently a resident of San Diego, California.

The Commission charged that from the fall of 1999 until the summer of 2000, iShop conducted a fraudulent and unregistered securities offering. iShop distributed offering memoranda and other documents to investors that misrepresented, and failed to disclose, material information concerning iShop's business operations. Knight and others also made oral misrepresentations to investors to persuade them to invest in iShop stock. Knight also supervised Scott W. Brockop, iShop's former Vice President of Sales and Marketing, who oversaw an operation at iShop through which employees cold-called potential investors, and made material misrepresentations to induce them to purchase iShop stock. Through the offering, iShop sold nearly 6.75 million shares of stock to over 350 investors, and obtained proceeds of approximately $2.3 million. iShop did not file a registration statement for the sale of these securities, and there was no registration statement otherwise in effect.

The Commission also charged iShop, Brockop, and Moussa Yeroushalmi a/k/a Mike Yeroush, iShop's former President. On October 26, 2006, the District Court entered a final judgment by default against Brockop, and on February 15, 2007, a Commission administrative law judge entered an order by default against Brockop barring him from association with any broker or dealer. On January 21, 2011, the District Court entered a final judgment by consent against Yeroush. On April 30, 2014, the District Court entered a final judgment by consent against iShop, leaving Knight as the sole remaining defendant in the litigation.

The jury found that defendant Knight violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Judge Hurley will make the determination as to the final relief that should be imposed against the defendant. The Commission seeks an order permanently enjoining the defendant from violations of the above provisions of the federal securities laws, requiring disgorgement of ill-gotten gains, plus prejudgment interest thereon, and imposing civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. The Commission also seeks an order barring the defendant from acting as an officer or director of a public company under Section 21(d)(2) of the Exchange Act.

FORMER WELLS FARGO EMPLOYEE ACCUSED BY SEC OF ALTERING A DOCUMENT

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced an enforcement action against a former Wells Fargo Advisors compliance officer who allegedly altered a document before it was provided to the SEC during an investigation.

According to the SEC’s order instituting an administrative proceeding against Judy K. Wolf, she was responsible for identifying potentially suspicious trading by Wells Fargo personnel or the firm’s customers and clients and then analyzing whether the trades may have been based on material nonpublic information.  Wolf created a document in September 2010 to summarize her review of a particular Wells Fargo broker’s trading, and she closed her review with no findings.  The SEC Enforcement Division alleges that Wolf altered that document in December 2012 after the SEC charged the broker with insider trading.  By altering the document, Wolf made it appear that she performed a more thorough review in 2010 than she actually had.  After Wells Fargo provided the document to the SEC as part of its continuing investigation, SEC enforcement staff spotted the alteration and questioned Wolf specifically about the document.  At first she unequivocally denied altering the document after September 2010, but in later testimony she testified that she had done so.

The SEC previously charged Wells Fargo in the case, and the firm agreed to pay $5 million to settle these and other violations of the securities laws.  Prior to the enforcement action, Wells Fargo placed Wolf on administrative leave and ultimately terminated her employment.

“We allege that Wolf intentionally altered a trading review document after she knew that the SEC had charged a Wells Fargo employee with insider trading based on facts related to her review,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Regardless of her motivation, her conduct was inconsistent with what the SEC expects of compliance professionals and what the law requires.”

The SEC Enforcement Division alleges that Wolf, who lives in St. Louis, willfully aided and abetted and caused Wells Fargo to violate Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(j) as well as Rule 204(a) under the Investment Advisers Act of 1940.  

The SEC Enforcement Division’s investigation was conducted by Megan Bergstrom and David S. Brown of the Market Abuse Unit.  The case was supervised by Mr. Hawke, Robert A. Cohen, and Diana Tani.  The litigation will be led by Donald Searles.

COURT ORDERS MAN AND COMPANY TO PAY $2.5 MILLION FOR ILLEGAL, OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders Florida Resident Richard Morello and His Florida Company, Vertical Integration Group LLC, to Pay over $2.5 Million in Monetary Sanctions for Engaging in Illegal, Off-Exchange Precious Metals Transactions

Junior Alexis, Florida Resident and Vertical Integration Group, LLC Employee, ordered to pay over $700,000 in monetary sanctions for his role in the unlawful venture

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Beth Bloom of the U.S. District Court for the Southern District of Florida entered an Order of Default Judgment against Vertical Integration Group LLC (Vertical) of Lake Worth, Florida, and its Managing Members, Richard V. Morello of Lake Worth, Florida, and Junior Alexis of Boynton Beach, Florida, for engaging in illegal, off-exchange precious metals transactions.

The Order, entered on September 29, 2014, requires Vertical and Morello, jointly and severally, to pay restitution of $893,859 and Alexis, jointly and severally with Morello and Vertical, to pay restitution of $563,131; requires Vertical and Morello, jointly and severally, to pay a civil monetary penalty of $1,663,698, and Alexis to pay a civil monetary penalty of $140,000; imposes permanent trading, solicitation, and registration bans against all of the Defendants; and prohibits them from engaging in illegal, off-exchange retail commodity transactions, as charged.

The Court’s Order stems from a CFTC Complaint filed on January 13, 2014, that charged the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis (see CFTC Press Release and Complaint 6824-14). The Complaint further charged and the Order found that Morello, as controlling person for Vertical, is liable for Vertical’s violations of the Commodity Exchange Act.

The Order provides that Melanie Damian, Esq. is responsible for collecting restitution and making any distributions to Vertical’s customers. Ms. Damian was appointed by the U.S. District Court for the Southern District of Florida as Special Monitor, Corporate Manager, and Equity Receiver in the CFTC’s enforcement action against, among others, Hunter Wise Commodities LLC (Hunter Wise) and certain of its associated entities (see CFTC Press Releases 6447-12, December 12, 2012 and 6935-14, May 22, 2014).

The Order further finds that, since at least July 16, 2011 and continuing through at least February 2013, Vertical, by and through its employees, including Morello and Alexis, solicited retail customers to engage in off-exchange leveraged, margined, or financed precious metals (including gold, silver, platinum and palladium) transactions that were executed through Hunter Wise. During that period, according to the Order, approximately 39 of Vertical’s customers paid $1,008,583 to Vertical in connection with these precious metals transactions. The Order finds that these customers lost $893,859 of their funds to trading losses, commissions, fees, and other charges by Vertical and other companies, and that Vertical received commissions and fees totaling $554,566 in connection with these precious metals transactions.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions, such as those conducted by Vertical, are illegal off-exchange transactions unless they result in actual delivery of the commodity involved within 28 days. The Order finds that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of Vertical’s customers.

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 action are Michelle Bougas, Alan Edelman, Michael Solinsky, and Charles D. Marvine

SEC ANNOUNCES THAT PENNY STOCK PROMOTER TO PAY $700,000 IN FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23107 / October 8, 2014

Securities and Exchange Commission v. Geoffrey J. Eiten and National Financial Communications Corp., Civil Action No. 1:11-CV-12185 (District of Massachusetts, December 12, 2011)

Massachusetts-based Penny Stock Promoter Ordered to Pay Over $700,000 in SEC Fraud Case

The Securities and Exchange Commission announced that on October 7, 2014, the U.S. District Court for the District of Massachusetts entered a final judgment against stock promoter Geoffrey J. Eiten, a Massachusetts resident.  Eiten is a defendant in an action filed by the Commission in December 2011, alleging that Eiten and his company, National Financial Communications, Inc. (“NFC”), made material misrepresentations and omissions in penny stock publications they issued.  Among other things, the judgment orders Eiten to pay a total of $727,029.

The Commission’s complaint, file on December 12, 20122, alleged that Eiten and NFC issued a penny stock promotional publication called the “OTC Special Situations Reports.”  According to the complaint, the defendants promoted penny stocks in this publication on behalf of clients in order to increase the price per share and/or volume of trading in the market for the securities of penny stock companies.  The complaint alleged that Eiten and NFC made misrepresentations in these reports about the penny stock companies they promoted.  The Commission’s complaint alleged that in four reports, Eiten and NFC made material misrepresentations and omissions, concerning, among other things, the companies’ financial condition, future revenue projections, intellectual property rights, and Eiten’s interaction with company management as a basis for his statements.  According to the complaint, Eiten and NFC were hired to issue the above reports and used false information provided by their clients, without checking the accuracy of the information with the companies in question or otherwise ensuring that the statements they were making in the OTC Special Situations Reports were true.

The judgment enjoins Eiten from further violations of the antifraud provisions of the federal securities laws (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) and from certain specified activities related to penny stocks, including the promotion of a penny stock or deriving compensation from the promotion of a penny stock.  The judgment also imposed a penny stock bar against Eiten, which permanently bars him from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for the purpose of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock.  The judgment orders Eiten to pay disgorgement of $605,262, representing ill-gotten gains, plus prejudgment interest of $71,767 and a civil penalty of $50,000.

In a previous default judgment against NFC on July 24, 2013, the Court ordered NFC to pay over $1.6 million.