SEC FILES SUIT AGAINST COMPANY, OWNER ALLEGING FRAUD AGAINST INVESTORS THROUGH OIL AND GAS WELL DEALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

Litigation Release No. 23231 / April 6, 2015

Securities and Exchange Commission v. GC Resources, LLC and Brian J. Polito, Civil Action No. 3:15-CV-0104-B, (NDTX, filed April 6, 2015)

SEC Charges Oil and Gas Company and Founder with Fraud

The Securities and Exchange Commission ("Commission") filed suit against GC Resources, LLC and Brian J. Polito in the United States District Court for the Northern District of Texas, Dallas Division, for defrauding investors through the sale of interests in oil and gas wells the company never owned.

The Commission alleges that GC Resources, through its owner and sole operator, Brian J. Polito, raised approximately $11.8 million by creating a fake agreement with a well-known oil company that purported to give GC Resources the right to sell interests in certain oil wells. Polito forged signatures on the false contract and used it to lure investors to purchase interests in the wells GC Resources claimed to own. Polito then used investor money for Ponzi-type payments back to investors and to purchase luxury cars, designer watches, and exotic vacations for himself.

The Commission's complaint charges both defendants with securities fraud under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint also alleges that Polito violated Section 15(a) of the Exchange Act by acting as an unregistered broker-dealer. The Commission's complaint seeks permanent injunctions, civil penalties, disgorgement plus prejudgment interest, and other relief against both of the defendants.

In a parallel action, the U.S. Attorney's Office for the Northern District of Texas, Dallas Division also filed criminal charges against Polito.

The SEC's investigation was conducted by Rebecca Fike and supervised by Jim Etri of the Fort Worth Regional Office. The litigation will be led by Jennifer Brandt. The Commission appreciates the assistance of the U.S. Attorney's Office in Dallas and the Federal Bureau of Investigation.

SEC CHARGES COMPANY AND OWNER WITH FRAUD IN RELATED TO SALE OF "LIFE SETTLEMENT" INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

04/07/2015 04:30 PM EDT

The Securities and Exchange Commission charged Los Angeles-based Pacific West Capital Group Inc. and its owner Andrew B. Calhoun IV with fraud in the sale of “life settlement” investments.

Life settlements are securities structured around when life insurance policies “mature” after the insured individual dies and benefits are paid.  Life settlement investors purchase an interest in a life insurance policy and in exchange receive a share of the death benefit.

The SEC’s complaint alleges that since 2004, Pacific West and Calhoun, a Beverly Hills-based life insurance agent, have raised nearly $100 million from life settlement investors.  Since at least 2012, Pacific West and Calhoun allegedly defrauded investors by using proceeds from the sale of new life settlements to continue funding life settlement investments sold years earlier.  Pacific West and Calhoun did not disclose this practice to investors and undertook it to make life settlement investments appear successful when, in fact, Pacific West had used up the primary reserves to pay premiums on those policies.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Pacific West and Calhoun made false and misleading statements about the risks of investing in life settlements, including the risk of investors having to make increased premium payments as insured individuals lived longer than Pacific West and Calhoun anticipated.  Pacific West and Calhoun also allegedly misled investors about annual returns and have falsely represented to investors that their investments had nothing to do with Pacific West’s efforts and fortunes.

“Investors are entitled to fair disclosures about the risks associated with their investments,” said Michele Wein Layne, Director of SEC’s Los Angeles Regional Office.  “We allege that Pacific West and Calhoun did the opposite here by hiding and minimizing those risks in order to sell more life settlements.”

The SEC’s complaint charges Pacific West and Calhoun with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws.  Also named as defendants are Ohio-based PWCG Trust, which held and serviced the insurance policies, and five sales agents of Pacific West: Brenda C. Barry of Issaquah, Wash., and her company BAK West, Andrew B. Calhoun Jr. of Anderson, S.C., Eric C. Cannon of Lakewood, Calif., and his company Century Point, and Michael W. Dotta and Caleb A. Moody, both of Los Angeles.

PWCG Trust and the sales agents are charged with violating the securities registration provisions, and the sales agents also are charged with broker-dealer registration violations.  The SEC’s complaint seeks permanent injunctions against all defendants and the return of allegedly ill-gotten gains with interest and penalties from Pacific West, Calhoun, and the sales agents.

The SEC’s investigation was conducted by Todd Brilliant, Dora Zaldivar, Kelly Bowers, and Robert Conrrad.  The SEC’s litigation will be led by John Bulgozdy and Kristin Escalante.

SEC CHARGES BROKERAGE FOR UNDERWRITING COMPANY WITH POSSIBLE MISLEADING OFFERING MATERIALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

03/27/2015 10:00 AM EDT

The Securities and Exchange Commission announced charges against a New York-based brokerage firm responsible for underwriting a public offering despite obtaining a due diligence report indicating that the China-based company’s offering materials contained false information.

Macquarie Capital (USA) Inc., a wholly owned subsidiary of global financial services firm Macquarie Group Limited, has agreed to settle the SEC’s charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal.  The SEC previously charged the Puda Coal executives behind the offering fraud at the company, which is no longer in business.

“Underwriters are critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Macquarie Capital proceeded with this offering despite a due diligence process that exposed a false claim by Puda Coal, and investors suffered massive losses when the truth publicly came to light.”

The SEC also charged former Macquarie Capital managing director Aaron Black and former investment banker William Fang for failing to exercise appropriate care in their due diligence review.  Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges.

According to the SEC’s complaint filed in federal court in Manhattan, Macquarie Capital was the lead underwriter on a secondary public stock offering in 2010 by Puda Coal, which traded on the New York Stock Exchange at the time and purported to own a coal company in the People’s Republic of China (PRC).  In the offering documents, Puda Coal falsely told investors that it held a 90-percent ownership stake in the Chinese coal company.  Macquarie Capital repeated those statements in its marketing materials for the offering despite obtaining a report from Kroll Associates showing that Puda Coal did not own any part of the coal company.  According to corporate registry filings in the PRC that Kroll accessed in its due diligence review, Puda Coal’s chairman had transferred ownership of the coal company to himself and then sold nearly half of his interest to the largest state-owned investment firm in the PRC.  As a result, Puda Coal no longer had any ownership stake or source of revenue.

According to the SEC’s complaint, Kroll provided its report to Fang, who read it but failed to act on the information revealing that Puda Coal no longer owned the coal company.  Instead, Fang circulated the report to other members of the Puda Coal deal team and stated in the e-mail that “no red flags were identified.”  Black, who served as one of the transaction directors on the Puda Coal deal, received the report from Fang and read portions stating that Puda Coal’s chairman owned 50 percent of the coal company of which Puda Coal was claiming to own 90 percent.  Black likewise failed to act on the information.  

The SEC alleges that Macquarie Capital made a net profit of $4.17 million as lead underwriter on the Puda Coal offering, which sold stock to investors at a price of $12 per share.  When reports about Puda Coal’s false claim appeared on the Internet based on the same PRC filings that Kroll Associates accessed for its report, Puda Coal’s stock price plunged as low as pennies per share.

The SEC’s complaint charges Macquarie Capital, Black, and Fang with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  They agreed to settle the charges and accept permanent injunctions without admitting or denying the allegations.  The settlement is subject to court approval.  In addition to the monetary penalties, Black has agreed to be barred from supervisory positions in the securities industry and Fang has agreed to be barred from the securities industry, both for at least five years.

The SEC’s investigation was conducted by Charu A. Chandrasekhar, George N. Stepaniuk, David Stoelting, and Sheldon Pollock of the SEC’s New York Regional Office.  The case was supervised by Sanjay Wadhwa.

SEC.gov | Updated Investor Alert: Beware of Companies Using the SEC Seal

SEC.gov | Updated Investor Alert: Beware of Companies Using the SEC Seal

SEC ANNOUNCES COURT IMPOSED JUDGEMENT OF $55 MILLION AGAINST INVESTMENT ADVISER CEO

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23228 / April 2, 2015

Securities and Exchange Commission v. Charles R. Kokesh, Civil Action No. 6:09-cv-1021

Federal Court Imposes $55 Million Final Judgment Against Investment Adviser CEO

On March 30, 2015, the United States District Court for the District of New Mexico entered a final judgment against Charles R. Kokesh, permanently enjoining him from violating federal securities laws and ordering him to pay a civil penalty of $2,354,593 as well as disgorgement and prejudgment interest totaling $53,004,432. The final judgment follows a five-day trial in November 2014, in which the jury found that Kokesh had committed securities fraud by misappropriating and misusing tens of millions of dollars at two registered investment advisers he controlled.

From at least 1995 through July 2007, Kokesh controlled two registered investment-adviser firms, though which he controlled and provided investment advice to four business-development companies ("BDCs"). Together, the BDCs had approximately 21,000 investors located throughout the United States. Through his control over the investment advisers, Kokesh was able to misappropriate investor funds by causing the BDCs to pay illegal distributions, performance fees, bonuses, and expense reimbursements to the investment advisers, which Kokesh then used for his own benefit. Kokesh tried to hide his scheme by directing the investment advisers to distribute misleading proxy statements to investors, and to have the BDCs file false reports with the Commission.

After short deliberations, the jury found that Kokesh had violated Section 37 of the Investment Company Act of 1940. The jury also found that Kokesh had aided and abetted violations of Sections 205, 206(1), and 206(2) of the Investment Advisers Act of 1940, and Sections 13(a) and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder.

The case was tried by David Reece, Jennifer Brandt, and Timothy McCole of the Commission's Fort Worth Regional Office. An examination by Kyle Holmberg of the Fort Worth Regional Office and Curtis Kolinek of the San Francisco Regional Office uncovered the misconduct.

SEC BRINGS CHARGES IN CASE INVOLVING ALLEGED MISAPPROPRIATION OF MONEY FROM AN INVESTMENT FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

Litigation Release No. 23207 / February 26, 2015

Securities and Exchange Commission v. Daniel Thibeault et al., Civil Action No. 1:15-cv-10050 (D. MA)

CEO of Massachusetts-Based Investment Advisory Companies Indicted On Charges of Fraud, Obstruction of Justice

The Securities and Exchange Commission announced that on February 25, 2015, Daniel Thibeault, the CEO of a group of Massachusetts-based investment advisory companies, was criminally charged by a grand jury in the United States District Court for the District of Massachusetts in connection with the alleged misappropriation of more than $15 million from an investment fund. The SEC previously filed a civil enforcement action against Thibeault and others in January 2015. The criminal indictment charges Thibeault with securities fraud, wire fraud, and aggravated identity theft. The indictment also charges Thibeault with obstruction of justice, alleging that Thibeault sought to obstruct the SEC's prior investigation by intentionally misleading SEC examiners.

The allegations in the criminal indictment stem from the same misconduct underlying the SEC's pending civil enforcement action against Thibeault and the associated entities concerning the alleged misappropriation of money from an investment fund. In a complaint filed in federal court on January 9, 2015, the SEC named Thibeault as a defendant, along with the following entities, all believed to be controlled by Thibeault: Graduate Leverage, LLC; GL Capital Partners, LLC; GL Investment Services, LLC; and Taft Financial Services, LLC. The SEC also charged two other parties as relief defendants based on their alleged receipt of investor funds: GL Advisor Solutions, Inc., a corporation based in the Philippines that is controlled by Graduate Leverage, LLC and Thibeault; and Shawnet Thibeault, who is Daniel Thibeault's wife.

The SEC's complaint alleges that GL Capital Partners, LLC and its principal, Daniel Thibeault, were the investment advisers to a fund called the GL Beyond Income Fund, and that they misappropriated money that belonged to this fund. The GL Beyond Income Fund's assets consisted primarily of individual variable rate consumer loans. The SEC alleges that beginning in 2013 or earlier, Thibeault and the other defendants engaged in a scheme to divert investor money from the GL Beyond Income Fund by creating fake loans and reporting those fake loans as assets of the GL Beyond Income Fund, using the names and personal information of individuals who were unaware that loans were being originated. The complaint further alleges that the GL Beyond Income Fund disbursed millions of dollars to fund these fictitious loans, but the borrowed money did not go to the purported borrowers whose names appeared on the documentation; instead, the SEC alleges, it was transferred to Thibeault and the other defendants who used the money for personal expenses and to run businesses other than the GL Beyond Income Fund, and used it to conceal and perpetuate the scheme by making "interest payments" on fake loans.

Thibeault was originally charged by a criminal complaint and was arrested on December 11, 2014. The SEC's action against Thibeault and the other defendants, which is pending, seeks disgorgement of ill-gotten gains plus pre-judgment interest and penalties and permanent injunctions against further violations of the securities laws. On January 21, 2015, the United States District Court for the District of Massachusetts imposed an asset freeze against Thibeault and the other defendants and relief defendants and ordered certain other preliminary relief.

For further information, see Litigation Release No. 23171 (January 9, 2015) [Civil Complaint]; Litigation Release No. 23178 (January 22, 2015).