SEC CHARGES ATTORNEY AND CLIENTS IN SCHEME TO UNLAWFULLY SELL BILLIONS OF PENNY-STOCK SHARES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 1, 2012
On April 30, 2012, the Securities and Exchange Commission charged a mother-and-daughter pair and their attorney with a scheme to unlawfully acquire and sell billions of shares of penny stock that were never registered for sale to the public.

The SEC charged Florida attorney Cameron H. Linton, Esq., his clients, Christel S. Scucci and her mother Karen S. Beach, and their companies, Protégé Enterprises, LLC, and Capital Edge Enterprises, LLC with a scheme to unlawfully sell large quantities of stock in violation of Section 5 of the Securities Act of 1933, which generally requires that securities transactions be registered with the SEC, unless exempt. According to the SEC, over an approximately 20-month period ending in October 2011, Scucci and her mother sold about 3.3 billion shares of purportedly unrestricted stock that they acquired through so-called debt conversion “wrap around” transactions, reaping proceeds of more than $1.5 million from the sales. The SEC alleges that Scucci and Beach were able to sell most of this stock only because Linton issued baseless legal opinions for them stating that the stock could be issued without a warning on the stock certificate limiting the transfer or sale of the security, which is commonly referred to as a “restrictive legend.” The opinion concluded that their resale was exempt from the federal registration requirements.

According to the SEC’s complaint filed in federal court in Orlando, FL, the transactions involved notes issued by microcap companies representing debts supposedly owed to affiliates or others often closely associated with the companies. Under the wrap around agreements, the affiliates assigned the right to collect the debts from the issuers to Protégé or Capital Edge. The wrap around agreements also purported to amend the initial debt agreements thereby allowing Protégé and Capital Edge to convert the money owed to them into shares of the issuers’ common stock at a deep discount to the prevailing market price. Protégé and Capital Edge almost always elected to receive stock from the issuers shortly after execution of the wrap around agreements, and regularly sold the stock into the public market, often for large profits, within days or weeks of acquiring it. None of the sales were registered with the SEC.

The complaint alleges that Protégé and Capital Edge paid Linton to write attorney opinion letters for them stating that the stock acquired under these wrap around agreements lawfully could be issued to them by the transfer agent without a restrictive legend and immediately sold to the public. According to the SEC, Linton lacked any basis for the opinions he issued, which were premised on the notion that through the wrap around agreements and debt conversion, Protégé and Capital Edge could rely on a safe harbor for resale of securities held for at least one year by “tacking” the 12-month period that the affiliates claimed to have held the original debt before transferring it to Protégé and Capital Edge. However, the complaint alleges that when Linton wrote the opinion letters, he lacked an understanding of the applicable legal principles and failed to substantiate the factual predicate for his opinions. Furthermore, the complaint alleges that in mid-2010, Linton became aware of an injunction issued in SEC v. K&L Enterprises, Inc., involving a similar scheme in which his letters were used to effectuate unregistered sales. But for Linton’s opinion letters, transfer agents would not have issued the stock to Protégé and Capital Edge so that they could quickly turn around and sell it into the public market.

The SEC’s complaint alleges that Protégé, Capital Edge, Scucci and Beach violated Section 5 of the Securities Act. The complaint further alleges that Linton violated, or aided and abetted the violation of, Section 5 of the Securities Act. The SEC is seeking to have the defendants return their ill-gotten gains, pay penalties, be subject to injunctions, and be barred from participating in future penny-stock offerings.

SEC FILES CHARGES AGAINST FORMER ATTORNEY FOR MUTUAL BENEFITS

FROM:  U.S SECURITIES AND EXCHANGE COMMISSION  
April 30, 2012
The Securities and Exchange Commission announced today that it filed a complaint against Defendant Michael J. McNerney, charging him with violations of the federal securities laws arising from his involvement in Mutual Benefits Corp.’s (“MBC”) offering fraud which raised more than $1 billion from approximately 29,000 investors. From 1995 through at least May 2004, McNerney served as primary securities regulatory counsel for MBC. The complaint alleges thatin this role, he helped conceal the fraud, met with investors, and supervised the filing of false reports with state regulators. The Commission’s complaint charges McNerney with aiding and abetting MBC’s violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Commission seeks permanent injunctive relief against McNerney, who has consented to the entry of Final Judgment providing for full injunctive relief.

In addition to the civil action against McNerney, the Commission simultaneously issued an Order pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice forthwith suspending McNerney from appearing or practicing before the Commission based on the entries of a felony conviction against him. On August 26, 2011, the Honorable Adalberto Jordan, United States District Judge for the Southern District of Florida, sentenced McNerney to 5 years in prison, followed by three years of supervised release, and ordered him to pay restitution, along with his co-conspirators, in the amount of $826,839,642.

On May 3, 2004, the Commission first halted the on-going fraud at MBC when it filed a contested emergency civil enforcement action against MBC and its principals. In its complaint, the Commission alleged that the defendants raised over $1 billion from thousands of investors through a fraudulent, unregistered offering of securities in the form of fractionalized interests in viatical and life settlements. The Commission obtained a restraining order to halt the alleged fraud at MBC, and thereafter the United States District Court for the Southern District of Florida appointed a receiver to identify and trace the assets of MBC.

The Commission’s actions regarding MBC have resulted in nine injunctions and other relief against nine defendants and eight relief defendants, and orders to pay disgorgement and civil penalties totaling $30 million. In addition, the United States Attorney’s Office for the Southern District of Florida has charged 12 defendants in criminal actions for their roles in the fraud.

The SEC acknowledges the work of the United States Attorney’s Office for the Southern District of Florida, the Federal Bureau of Investigation, Miami Field Office, and the Internal Revenue Service, Criminal Investigation Division in this matter.

SEC ALLEGES FLORIDA MAN SOLD STOCK TO CAPITALIZE ON EARTHQUAKE IN HAITI

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 2, 2012 — The Securities and Exchange Commission today charged a Florida man and 10 cohorts involved in two separate schemes to illegally sell stock, including one that sought to capitalize on circumstances in Haiti following the earthquake that destroyed much of the country's infrastructure in January 2010.

The SEC alleges that Kevin Sepe of Miami masterminded the schemes involving two microcap companies — Recycle Tech and HydroGenetics — with the help of three licensed attorneys and several others who collectively reaped illegal profits of more than $3.5 million. Aventura, Fla.-based attorneyRonny Halperin assisted Sepe in both schemes. The Recycle Tech scheme involved a promotional campaign to pump the price and volume of the purported home container building company's stock in the wake of the Haiti earthquake. The HydroGenetics scheme took millions of unregistered shares of the company — purportedly in the business of acquiring emerging alternative energy companies — and improperly converted its debt into free-trading shares that were dumped on the investing public.

Six of the 11 individuals involved have agreed to settlements ordering them and companies they own to collectively pay more than $3.2 million.

"Sepe, Halperin, and others chose to ignore the laws governing stock sales and play by their own set of rules," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Some of these individuals were attorneys and corporate officers who should have known better, and we will continue to crack down on any such gatekeepers who put investors at risk with their harmful activities to manipulate the markets."

According to the SEC's complaint filed in federal court in Miami, Sepe and Halperin evaded registration requirements by converting backdated and fabricated promissory notes into unrestricted stock of Recycle Tech, quoted on the Pink Sheets. With help from Recycle Tech's CEO and president Ryan Gonzalez, they conducted a pump-and-dump scheme from January to March 2010 by enlisting the help of two promoters — Anthony Thompson andJay Fung — who touted Recycle Tech in their newsletters. David Rees, a Utah-based attorney, became involved in the scheme when he drafted an improper legal opinion letter authorizing the issuance of unrestricted Recycle Tech shares.

The SEC alleges that the participants collectively made more than $1 million in illegal profits through the scheme, which touted that Recycle Tech signed a binding letter of intent to build up to 50 container homes in Haiti following the earthquake. However, Recycle Tech failed to disclose to investors that it had no funds, no finished container homes, and minimal operations. Sepe orchestrated, coordinated, and funded the scheme and sold Recycle Tech stock along with Halperin and Rees without any exemption from registering those securities with the SEC. Gonzalez, who lives in Miami, made the scheme possible by incorporating a sham private company, turning the public shell of that company into Recycle Tech through a reverse merger, and signing various fraudulent documents to authorize the issuance of Recycle Tech securities. Gonzalez also drafted and issued false press releases used to hype Recycle Tech stock. Thompson and Fung — through their firms OTC Solutions LLC and Pudong LLC — touted Recycle Tech in their newsletters without disclosing that they were selling shares or adequately disclosing the compensation they received for their touts.

According to the SEC's other complaint filed in Miami, Sepe and Halperin schemed with Miami-based attorney Melissa Rice and others to illegally issue and liquidate 90 million unregistered shares of HydroGenetics from April 2008 until at least June 2009. Sepe headed a group that purchased convertible debt of a South Florida publicly-held company. He then formed HydroGenetics and parsed out portions of the convertible debt to friends, family, and others who converted the debt to stock that they then sold publicly. Sepe sold HydroGenetics stock without any exemption from registration the securities with the SEC. Halperin was the HydroGenetics CEO and a director. He executed corporate resolutions to help issue millions of shares of HydroGenetics stock, including 11 million shares to his daughter who he told to sell it and funnel a portion of the illegal proceeds back to him. Rice assisted Sepe in converting convertible debt to unrestricted HydroGenetics shares, and wrote four opinion letters improperly opining that the Rule 144 safe harbor was applicable and the debt could be converted to unrestricted HydroGenetics shares. Rice also sold her shares of HydroGenetics stock.

The SEC alleges that three other Miami residents also received illegal profits in the HydroGenetics scheme: Luz Rodriguez, who worked as an office administrator and assistant to Sepe; Howard Ettelman, a provider of accounting services to various companies owned by Sepe and Rice; and Seth Eber, a self-employed jeweler who was on the list of individuals that Sepe provided Rice to assign shares.

The SEC further alleges that Charles Hansen III of Lighthouse Point, Fla., succeeded Halperin as HydroGenetics CEO in April 2009 and signed five corporate resolutions authorizing HydroGenetics to illegally issue stock that Rice then used along with her opinion letter to facilitate the scheme.

The individuals agreeing to settle the SEC's charges in the complaints without admitting or denying the allegations are Sepe, Halperin, Rees, Rice, Ettelman, and Hansen.

Sepe agreed to disgorgement of $1,416,466.16, prejudgment interest of $126,761.86, and penalties of $185,000 as well as a permanent bar from participating in an offer or sale of penny stocks.
Halperin agreed to disgorgement of $427,609.95, prejudgment interest of $33,595.33, and a penalty of $100,000 as well as a permanent penny stock bar and a five-year officer and director bar. He also agreed to surrender 1.97 million shares of HydroGenetics stock.

Rees agreed to disgorgement of $5,982, prejudgment interest of $406.25, and a penalty of $7,500 as well as a one-year prohibition from providing professional legal services connected to the offer or sale of securities.

Rice agreed to disgorgement of $422,445, prejudgment interest of $39,239.18, and a penalty of $60,000 as well as a five-year penny stock bar and three-year prohibition from providing professional legal services connected to the offer or sale of securities.

Ettelman agreed to disgorgement of $32,667, prejudgment interest of $3,093.27, and a penalty of $25,000 as well as a five-year penny stock bar and the surrender of 300,000 shares of HydroGenetics stock.
Hansen agreed to a $37,500 penalty.

Two companies — Charter Consulting Group (owned and controlled by Sepe) and West Coast Investments Enterprises (owned by Rice) — were named as relief defendants in the SEC's complaints because they received a portion of the illegal trading profits in the schemes. They each settled the case, with Charter agreeing to disgorgement of $150,000 and prejudgment interest of $9,125 and West Coast agreeing to disgorgement of $125,000 and prejudgment interest of $11,262.71.

Separately, the SEC issued orders to suspend trading in the securities of Recycle Tech and HydroGenetics and to institute administrative proceedings against each company to determine whether the registration of their securities should be revoked or suspended based on their failure to file required periodic reports.

The SEC also instituted separate settled administrative proceedings against HydroGenetics in which the company, without admitting or denying the findings, consented to an order requiring it to cease and desist from committing or causing violations of the registration provisions of the federal securities laws.

The SEC's investigations were conducted by staff in its Miami Regional Office. Accountant Kathleen Strandell was involved in the Recycle Tech investigation under the supervision of Thierry Olivier Desmet, and James Carlson is leading the litigation. Special Investigations Counsel Gary Miller and accountants Karaz Zaki and Timothy Galdencio were involved in the HydroGenetics investigation under the supervision of Elisha Frank, and Amie Riggle Berlin is leading the litigation.

The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in these cases.

CFTC CHARGES TWO UTAH RESIDENTS WITH FRAUD AND MISAPPROPRIATION

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Charges Utah Residents Christopher Hales, Eric Richardson and their Company, Bentley Equities, LLC, with Fraud and Misappropriation
CFTC seeks an emergency restraining order freezing defendants’ assets
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a federal court action in Utah charging Bentley Equities, LLC (Bentley), a Delaware corporation, and its principals, Christopher D. Hales and Eric A. Richardson, with fraud and misappropriation in connection with commodity futures trading. Richardson resides in Cedar Hills, Utah, and Hales is currently an inmate at the Florence, Colo., Federal Correction Complex. None of the defendants has ever been registered with the CFTC.

The CFTC’s complaint, filed May 2, 2012, in the U.S. District Court for the District of Utah, alleges that from at least April 2009 through August 2010, the defendants fraudulently solicited and accepted more than $1.1 million from approximately 38 pool participants and clients to trade commodity futures in a commodity pool account and in individual managed accounts.

The CFTC seeks an emergency restraining order freezing the defendants’ assets and prohibiting the destruction or alteration of the defendants’ books and records.

Specifically, according to the CFTC’s complaint, Bentley, Hales, and Richardson misrepresented to customers that their trading was profitable, and that they actively managed more than $1 million in commodity futures accounts. In reality, the complaint charges, the defendants were not successful commodity futures traders and never managed more than $480,000 in commodity futures trading accounts at one time. In fact, the defendants lost approximately $1,296,600 of the Bentley participants’ and managed clients’ funds trading commodity futures contracts, according to the complaint.

The complaint further charges that the defendants misappropriated at least $628,000 of customer funds for personal use, including food, clothing, auto expenses, and utility and credit card payments. The defendants also allegedly used misappropriated funds to make payments to existing participants and clients, as is typical of a Ponzi scheme.

To conceal their trading losses and misappropriation, defendants allegedly issued false account statements to participants and clients by altering trading statements that they received from the futures commission merchant carrying the Bentley pool account. These doctored statements falsely showed inflated account balances and profitable commodity futures trading returns, when, in fact, the defendants’ futures trading for their participants and clients “consistently lost money,” according to the complaint.

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

In November 2011, Hales was sentenced to more than seven years imprisonment and ordered to pay $12,719,236 in criminal restitution in connection with a judgment entered against him in a related criminal matter for the conduct alleged in the CFTC’s case, as well as mortgage fraud. United States v. Christopher D. Hales,No. 2:10-CR-183-TS-SA-1 (D. Utah, Sept. 2, 2010).

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the District of Utah, the U.S. Department of Housing and Urban Development —Office of Inspector General, the U.S. Postal Inspection Service, and the Federal Bureau of Investigation.

COMPANY TO PAY $140,000 FOR ACTING AS UNREGISTERED RETAIL FOREX DEALER

FROM:  COMMODITY FUTURES TRADING COMMISSION
May 1, 2012
Federal Court in Illinois Orders Trading Point of Financial Instruments Ltd. to Pay $140,000 Penalty for Acting as Unregistered Retail Forex Dealer

Trading Point also ordered to cease soliciting U.S. customers and to modify website
Action part of CFTC’s second nationwide sweep against forex firms for failure to register under the 2008 Farm Bill, the Dodd-Frank Act, and CFTC regulations

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent order requiring Trading Point of Financial Instruments Ltd. (Trading Point), of Limassol, Cyprus, to pay a $140,000 civil monetary penalty to settle CFTC charges. The order finds that Trading Point unlawfully solicited U.S. customers to engage in foreign currency (forex) transactions and operated as a Retail Foreign Exchange Dealer (RFED) without being registered with the CFTC.

The consent order, entered April 25, 2012, by Judge John W. Darrah of the U.S. District Court for the Northern District of Illinois, permanently bars Trading Point from engaging in any conduct that violates the Commodity Exchange Act (CEA) and CFTC regulations, as charged. The order also requires Trading Point to close all U.S. customer accounts and to return each U.S. customer all funds in the customer’s account. It also directs Trading Point to publish a prominently displayed notice on its website, stating that Trading Point does not provide services for U.S. customers.

The order finds that between November 2010 and September 2011, Trading Point solicited orders from low net worth U.S. customers to open leveraged forex trading accounts through its website. The order finds that Trading Point acted as an RFED by offering to be, and acting as, a counterparty buying and selling forex contracts with U.S. customers without being registered as an RFED.

The order settles CFTC charges brought against Trading Point as part of the CFTC’s second “sweep” against forex firms for unlawfully soliciting U.S. customers to engage in forex transactions and operating as RFEDs without being registered with the CFTC (see CFTC Press Release 6108-11, September 8, 2011).

In the forex market, RFEDs and some registered commodity futures brokers may buy forex contracts from, or sell forex contracts to, individual investors who possess sufficient net worth to qualify as eligible contract participants (ECPs). Firms that market forex contracts to customers who are not eligible ECPs are required to register with the CFTC and abide by rules and regulations designed for investor protection, including those relating to minimum capital requirements, recordkeeping, and compliance.
CFTC Division of Enforcement staff members responsible for this case are Jon J. Kramer, Elizabeth M. Streit, Joy McCormack, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.

CFTC SETTLES FRAUD CHARGES WITH MAN SELLING SOFTWARE TRADING SYSTEM

FROM:  COMMODITY FUTURE TRADING COMMISSION

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed and simultaneously settled charges that Ghassan Tawachi of Coral Gables, Fla., defrauded customers through sales of his software trading systems by falsely claiming expertise as a successful professional trader and by misappropriating $40,000 from one customer.  Tawachi is a registered Commodity Trading Advisor.

The CFTC order requires Tawachi to pay a $140,000 civil monetary penalty and restitution of $140,839.70.  The order also imposes permanent trading and registration bans against Tawachi.

According to the order, from July 2010 until at least September 30, 2011, Tawachi marketed the “Bentley Automated Trading Systems” and the “Avanti Automated Trading System” through two Internet websites.  In his marketing for both systems, Tawachi claimed that he formulated his trading software based upon his purported substantial professional trading experience, the order finds. 

On both websites, Tawachi maintained that as a “Professional trader,” he had developed his trading systems based upon “more than 10 years of professional experience.”  Instead, the order finds that Tawachi had no professional trading experience, and his trading background was limited to a single personal futures account opened three years earlier, through which he had conducted limited and unsuccessful trading.

The order further finds that Tawachi accepted $40,000 directly from one of his software customers to be traded in his personal futures account pursuant to his trading system, and that he claimed to have made up to $100,000 as a result of his successful trading.  The order further finds that Tawachi guaranteed the customer a 20 percent monthly return if the customer committed to a 90-day investment period.  The order finds that Tawachi subsequently failed to return any of the customer’s funds, and account records demonstrated that none of the customer’s funds were deposited into Tawachi’s futures trading accounts.