SEC ALLEGES FUND MANAGERS & FIRM DIVERTED INVESTOR MONEY TO HELP SIDE BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against three fund managers and their New York-based firm accused of secretly diverting investor money for their own benefit to prop up a fledgling side business.

The SEC Enforcement Division alleges that VERO Capital Management’s president Robert Geiger, general counsel George Barbaresi, and chief financial officer Steven Downey managed a pair of funds whose offering documents indicated they would aim to achieve attractive returns by investing primarily in mortgage-backed securities.  After deciding to wind down the funds, instead of returning all of the cash to investors as the funds liquidated their investments, the three officers diverted $4.4 million by causing the funds to make undocumented “bridge loans” to an affiliated company purportedly in the risk management business.  The Enforcement Division alleges that VERO Capital and the officers never disclosed to investors or the funds’ director that they were making unauthorized loans to their other company out of investor funds.  In fact, in one instance they even lied to the funds’ custodial bank to withdraw $800,000 from the funds’ bank account to divert to the other company.

“VERO Capital and its officers allegedly misled their investors about the funds’ investment activities and funneled money to their side project while winding down the funds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the order instituting an administrative proceeding against VERO Capital, Geiger, Barbaresi, and Downey, the SEC Enforcement Division additionally alleges that although VERO Capital had custody of client assets, the firm failed to have the funds audited by independent auditors for 2012 or 2013.  The firm also failed to arrange for a surprise examination to be performed as required.

The SEC Enforcement Division further alleges that VERO Capital and the three officers caused the funds to purchase three notes worth a total of $7 million from an affiliate of the firm, which constituted principal transactions that require written notice to a client as well as the client’s consent before completing the transaction.  However, they allegedly made no efforts to provide the required notice to the funds or obtain the required consents for these three transactions.

The SEC Enforcement Division alleges that VERO Capital, Geiger, Barbaresi, and Downey willfully violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  The Enforcement Division further alleges that VERO Capital willfully violated Advisers Act Sections 206(3) and 206(4) as well as Rule 206(4)-2, and Geiger, Barbaresi, and Downey aided and abetted and caused these violations.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC Enforcement Division’s investigation was conducted by Matthew Watkins, John Lehmann, Jacqueline Fine, Nancy Brown, and Thomas P. Smith Jr. of the New York Regional Office.  The case was supervised by Amelia A. Cottrell, and the Enforcement Division’s litigation will be led by Kevin McGrath.

COMMODITY POOL OPERATOR TO PAY $5.6 MILLION IN RESTITUTION AND PENALTIES

FROM:  U.S. COMMODITY FUTURES TRADING C

Federal Court Orders Commodity Pool Operator and Commodity Trading Advisor AlphaMetrix, LLC to Pay $5.6 Million in Restitution and Penalties

Court Also Orders AlphaMetrix’s Parent Company, AlphaMetrix Group, LLC, to Pay $2.8 Million in Disgorgement

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that on December 16, 2014, Judge Joan H. Lefkow of the U.S. District Court for the Northern District of Illinois entered a Consent Order for permanent injunction against AlphaMetrix, LLC (AlphaMetrix), a Chicago-based Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA), and its parent company AlphaMetrix Group, LLC (AlphaMetrix Group). The Order requires AlphaMetrix to pay restitution of $2.8 million and a civil monetary penalty of $2.8 million and requires AlphaMetrix Group to pay disgorgement of $2.8 million. The Order also prohibits AlphaMetrix from further violating anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.

The Order stems from CFTC charges that AlphaMetrix failed to pay at least $2.8 million in rebates owed to some of its commodity pool participants by investing the rebate funds in the pools and instead transferred the funds to its parent company, which had no entitlement to the funds. Nevertheless, AlphaMetrix sent these pool participants account statements that included the rebate funds as if they had been reinvested in the pools, even though they were not (see CFTC Press Release 6767-13, November 6, 2013).

A civil action filed by the court-appointed receiver (see Deborah Thorne, not individually but as Court-Appointed Receiver of AlphaMetrix, LLC and AlphaMetrix Group, LLC v. Kins et al., Case No. 14-2472) remains pending in the U.S. District Court for the Northern District of Illinois. In that action, the receiver seeks to recover funds from former officers of AlphaMetrix and AlphaMetrix Group.

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 Stephanie Reinhart, David Terrell, Joseph Patrick, Scott Williamson, and Rosemary Hollinger. The Division thanks the CFTC’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

INJUNCTIVE ACTON FILED TO HALT COMMON STOCK MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23157 / December 15, 2014

Securities and Exchange Commission v. Douglas Furth, Civil Action No. 14 Civ.7254 (LDW) (E.D.N.Y.)

SEC Charges Stock Promoter with Market Manipulation

The Securities and Exchange Commission ("Commission") filed a civil injunctive action on December 12, 2014, in the United States District Court for the Eastern District of New York, charging Douglas Furth, a stock promoter who resides in Solon, Ohio, with manipulating the common stock of SearchPath HCS, Inc. ("SearchPath").

The Commission's complaint alleges that from at least September to December 2010, Furth engaged in a fraudulent broker bribery scheme designed to manipulate the market for SearchPath stock through matched trades. The complaint also alleges that Furth entered into a kickback arrangement with an individual ("Individual A") who claimed to represent a group of registered representatives with trading discretion over the accounts of wealthy customers. Furth promised to pay a 30% kickback to Individual A and the registered representatives he represented in exchange for the purchase of up to $10-30 million of SearchPath stock.

The Commission's complaint further alleges that on October 13-15 and December 6-10, in accordance with the illicit arrangement, Furth instructed Individual A to purchase approximately 52 million shares of SearchPath stock for a total of approximately $80,000. Furth gave Individual A detailed instructions concerning the size, price and timing of the orders. Thereafter, Furth paid Individual A bribes of approximately $24,000 for those purchases.

The complaint charges Furth with violating Section 17(a)(1) of the Securities Act of 1933 and Sections 9(a)(1) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. The Commission seeks permanent injunctive relief from Furth, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, civil penalties, and a penny stock bar.

The Commission acknowledges assistance provided by the U.S. Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter.

Investor Bulletin: How Harmed Investors May Recover Money

Investor Bulletin: How Harmed Investors May Recover Money

CFTC ORDERS DEUTSCHE BANK TO PAY $3 MILION TO SETTLE VIOLATION CHARGES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

December 22, 2014

CFTC Orders Deutsche Bank Securities Inc. to Pay $3 Million to Settle Charges of Improper Investment of Customer Segregated Funds, Reporting and Recordkeeping Violations, and Supervision Failures

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and simultaneously settling charges against Deutsche Bank Securities Inc. (DBSI), a registered Futures Commission Merchant (FCM) based in New York, N.Y., for failing to properly invest customer segregated funds, failing to prepare and file accurate financial reports, failing to maintain required books and records, and for related supervisory failures. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires DBSI to pay a $3 million civil monetary penalty and to cease and desist from violating the CFTC Regulations, as charged. DBSI is an indirect, wholly-owned subsidiary of the parent company, Deutsche Bank AG.

Specifically, the CFTC’s Order finds that, for the period June 18, 2012 through August 15, 2012, DBSI failed to accurately compute the amount of customer funds on deposit. As a result of these miscalculations, DBSI’s investment of customer funds in certain money market mutual funds during that period exceeded the 50% asset-based concentration limit for such investments in violation of CFTC Regulation 1.25(b)(3)(i)(F).

The Order also finds that on at least six occasions between June 2011 and March 2013, DBSI failed to file accurate financial statements with the CFTC in a timely manner in violation of CFTC Regulation 1.10. According to the Order, DBSI did not have automated processes in place designed to ensure the accuracy of the firm’s financial reporting. Consequently, DBSI filed six amended FOCUS Reports as a result of the errors, the Order finds. The CFTC Order further finds that DBSI failed to create and maintain complete and systematic records, such as order tickets, for a number of block trades it executed at various times throughout October 1, 2009 and March 16, 2012 in violation of CFTC Regulation 1.35.

The CFTC Order finds that each of these violations was a result of DBSI’s failure to maintain adequate controls and systems, reflecting a lack of supervision over its business as a CFTC registrant in violation of CFTC Regulation 166.3.

CFTC Director of the Division of Enforcement, Aitan Goelman, said, “This case demonstrates that the Commission takes the sufficiency of its registrants’ internal controls very seriously, and expects that these internal controls will both address known issues and identify regulatory risks to minimize the possibility of violations like this.”

The Order recognizes DBSI’s cooperation and corrective action it undertook after its deficiencies were discovered.

The CFTC’s Enforcement Division thanks Jerry Nudge, Kevin Piccoli, Mortimer Rollins and Robert Laverty of the CFTC’s Division of Swap Dealer and Intermediary Oversight for their assistance in this matter.

CFTC Division of Enforcement staff members responsible for this matter are Susan Gradman, Brigitte Weyls, Lindsay Evans, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

SEC CHARGES EQUITY RESEARCH FIRM OWNER WITH MANIPULATING MARKET FOR PUBLICLY TRADED STOCK

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a Phoenix-based equity research firm owner who allegedly manipulated the market for a publicly traded stock he was soliciting investors to purchase.

 The SEC Enforcement Division alleges that after a company hired his firm to assist in two private placement offerings, Paul Pollack repeatedly engaged in wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership of the stock.  According to the order instituting an administrative proceeding, Pollack conducted approximately 100 wash trades where the buy or sell orders came within 90 seconds of each other at prices and quantities that were virtually identical.  The wash trades are alleged to have occurred during a nearly one-year period and created the false and misleading appearance of consistent active trading in the otherwise thinly traded stock.

 The SEC Enforcement Division further alleges that Pollack and his firm Montgomery Street Research LLC violated federal securities laws by acting as brokers on behalf of the company without first registering with the SEC.

 Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock,” said Thomas J. Krysa, Associate Director of Enforcement in the SEC’s Denver Regional Office.  “In this case, we allege that Pollack engaged in this type of trading, and he and his firm acted as unregistered brokers outside the boundaries of the law by effecting transactions in securities and avoiding SEC oversight and examinations that protect the interests of investors.”

The SEC Enforcement Division alleges that Pollack and Montgomery Street Research raised more than $2.5 million from 11 investors after being hired by the company to raise money and make introductions to potential investors in its stock.  Among other things, they identified and solicited potential investors, provided financial information regarding the issuer, fielded investor inquiries, and in some instances received transaction-based compensation.

The SEC Enforcement Division alleges that Pollack and Montgomery Street willfully violated Section 15(a)(1) of the Securities and Exchange Act of 1934 and that Pollack willfully violated Section 9(a)(1) and Section 10(b) of the Exchange Act of 1934, and Rules 10b-5(a) and 10b-5(c).  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC Enforcement Division’s investigation was conducted by Kurt L. Gottschall and Marc D. Ricchiute in the Denver Regional Office with assistance from staff in the Enforcement Division’s Center for Risk and Quantitative Analytics.  The Enforcement Division’s litigation will be led by Mr. Ricchiute and Gregory A. Kasper.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.