SEC CHARGES STOCK PROMOTER WITH FRAUD IN PURPORTED PURCHASE OF FACEBOOK, TWITTER SHARES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a stock promoter based in Santa Barbara, Calif., with fraudulently raising nearly $3.5 million from investors purportedly to purchase Facebook and Twitter shares prior to their initial public offerings (IPOs).

The SEC alleges that instead of purchasing the shares in the secondary market as promised, Efstratios “Elias” Argyropoulos and his firm Prima Capital Group misappropriated investor funds.  They used the money primarily for day trading of stocks and options as well as to pay off certain investors who complained when they didn’t receive the promised Facebook or Twitter shares.

Argyropoulos agreed to settle the SEC’s charges and be barred from working for an investment adviser or broker-dealer, and financial penalties will be determined at a later date.

“Argyropoulos capitalized on the high demand for pre-IPO Facebook and Twitter shares to steal investor money and secretly fund his own day trading,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint charges Argyropoulos and Prima Capital with violating the antifraud provisions and broker-dealer registration provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Argyropoulos and Prima Capital agreed to settle the charges without admitting or denying the allegations, and the settlement is subject to court approval.

The SEC separately announced an administrative proceeding against Khaled A. Eldaher, a registered representative living in Austin, Texas.  The SEC Enforcement Division alleges that while working for a registered broker-dealer, Eldaher reached a side agreement with Argyropoulos to solicit investors and receive 50 percent of the mark-up on Facebook shares he sold.  Eldaher sold $362,887.50 worth of Facebook shares and was paid $15,478 by Prima Capital.  He was later terminated by the broker-dealer for selling securities other than through the firm.  The Enforcement Division alleges that Eldaher’s sales of unregistered securities violated Section 15(a)(1) of the Exchange Act.  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’s investigation was conducted by Tony Regenstreif and supervised by Victoria A. Levin of the Los Angeles Regional Office.  The Enforcement Division’s litigation against Eldaher will be led by Karen Matteson.

SEC HAS CHARGED F-SQUARED WITH MAKING FALSE STATEMENTS TO INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23166 / December 22, 2014

Securities and Exchange Commission v. Howard B. Present, Civil Action No. 14-CV-14692 (District of Massachusetts, filed December 22, 2014)

SEC Charges Investment Manager F-Squared and Former CEO with Making False Performance Claims

The Securities and Exchange Commission ("SEC") announced that investment management firm F-Squared Investments has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product.

The SEC separately charged the firm's co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared.

According to the SEC's order instituting a settled administrative proceeding against Massachusetts-based F-Squared, which is the largest marketer of index products using exchange-traded funds (ETFs), the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment. The signals were based on an algorithm, and F-Squared and Present used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed. They named the new product "AlphaSector" and launched the first index a month later. AlphaSector's indexes quickly became the firm's largest revenue source, and F-Squared went from losing money to becoming a highly profitable investment manager.

The SEC alleges that while marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients. In reality, the algorithm was not even in existence during the seven years of purported performance success. The data used in F-Squared's advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and Present specifically advertised the investment strategy as "not backtested." Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

According to the SEC's complaint against Present filed in federal court in Boston, he was responsible for F-Squared's advertising materials that were often posted on the company website and sent to clients and prospective clients. Present also was responsible for the descriptions of AlphaSector in its filings with the SEC, and he certified the accuracy of those filings. F-Squared and Present made the false and misleading statements about AlphaSector from September 2008 to September 2013. The SEC alleges that they claimed AlphaSector was based on an investment strategy that had been used to invest client assets since April 2001. Yet Present knew that the algorithm was not finalized until late summer 2008 when he devised rules for turning the signals into a model ETF portfolio and directed an assistant to calculate hypothetical returns for the portfolio going back to April 2001.

The SEC further alleges that the F-Squared analyst who calculated the backtested AlphaSector performance inadvertently applied the buy/sell signals to the week preceding any ETF price change that the signals were based on. The mistake carried the model portfolio's backtested buy and sell decisions back in time one week, enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell. The SEC alleges that the analyst tried to explain this possible calculation error to Present in late September 2008, yet F-Squared went on to advertise the inflated data for the next five years and overstated that AlphaSector significantly outperformed the S&P 500 from April 2001 to September 2008.

F-Squared consented to the entry of the order finding that it violated Sections 204, 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8. The order also finds that F-Squared aided and abetted and caused certain mutual funds sub-advised by F-Squared to violation Section 34(b) of the Investment Company Act of 1940. F-Squared acknowledged that its conduct violated federal securities laws, and agreed to cease and desist from committing or causing violations of these provisions. F-Squared agreed to retain an independent compliance consultant and pay disgorgement of $30 million and a penalty of $5 million.

The SEC's complaint against Present alleges that he violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The SEC's investigation, which is continuing, is being conducted by Bill Donahue, Robert Baker, Jose Santillan, and John Farinacci of the Asset Management Unit as well as Rachel Hershfang, Frank Huntington, Mayeti Gametchu, Jennifer Cardello, and Rory Alex of the Boston Regional Office. The case has been supervised by Kevin Kelcourse. The SEC's litigation against Present will be led by Mr. Huntington and Ms. Hershfang.

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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.