FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.
The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.
In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.
"Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information," said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen."
The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.
The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.
The SEC’s expedited investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles Regional Office with substantial assistance from Charles Riely, Market Abuse Unit member in the New York Regional Office who will handle the SEC’s litigation. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority (ORSA).
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Enskilda Futures Limited to Pay a $125,000 Civil Monetary Penalty for Failing to Meet Minimum Capital Requirements Due to Margin Errors
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Enskilda Futures Limited (EFL), a London-based Futures Commission Merchant (FCM), for failing to meet the minimum capital requirements as set forth in Section 4f(b) of the Commodity Exchange Act (CEA) and CFTC Regulation 1.17. The failure to meet the minimum capital requirements was a result of EFL’s failure to call for sufficient margin collateral on an intra-month basis from its ultimate parent, Skandinaviska Enskilda Banken, AB (SEB), which holds an omnibus account at EFL, the Order finds. The CFTC Order requires EFL to pay a $125,000 civil monetary penalty and to maintain the remedial measures adopted following discovery of the error.
The CFTC Order finds that during the period of July 14 to August 2, 2011 (the Relevant Period), EFL collected only net margin collateral from SEB on an intra-month basis and not gross margin collateral as required. At month end, EFL and SEB settled up and EFL called for gross margin; thus, there was no effect on EFL’s monthly capital. However, because EFL failed to collect adequate margin collateral on an intra-month basis from SEB, EFL incurred charges to its adjusted net capital. As a result of these charges, EFL failed to meet the minimum capital requirements on 11 days in violation of Section 4f(b) of the CEA, 7 U.S.C. § 6f(b) (2006), and CFTC regulation 1.17, 17 C.F.R. § 1.17 (2011), according to the Order.
The error was discovered during a routine risk-based audit conducted by CME Group, Inc. (CME) on or about November 8, 2011, the Order finds. On November 9, 2011, EFL filed notice with the CFTC, the National Futures Association, and the CME, pursuant to CFTC regulation 1.12(a) and (f)(3), 17 C.F.R. §1.12(a) and (f)(3) (2011), advising of its failure to meet the net capital requirements during the relevant period. EFL immediately undertook measures to revise its policies and procedures and collect adequate margin collateral from its customer, the Order further finds.
EFL has cooperated fully with CFTC staff, according to the Order. Further, it appears that at all times during the Relevant Period, SEB possessed ample funds to satisfy any intra-month collateral call from EFL. EFL need only have collected such funds to have remained in compliance with CFTC regulations, the Order finds.
The CFTC thanks the CME for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Allison Baker Shealy, Timothy J. Mulreany and Joan Manley, with assistance from CFTC Division of Swap Dealer and Intermediary Oversight staff Kevin Piccoli, Robert Laverty, Ronald Carletta, and Linda Santiago.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22619 / February 15, 2013
District Court Grants Securities and Exchange Commission's Motions for Default Judgment against a Nationally Known Psychic and his Corporate Entities in Multi-Million Dollar Offering Fraud
The Securities and Exchange Commission (Commission) announced today that on February 11, 2013 the U.S. District Court for the Southern District of New York entered default judgments against Sean David Morton (Morton), a nationally-recognized psychic who bills himself as "America's Prophet," his wife, relief defendant Melissa Morton, and corporate shell entities co-owned by the Mortons. In addition to ordering permanent injunctions from violating antifraud and registration statutes and rule, each defendant was ordered to disgorge, jointly and severally, $5,181,135.82, along with prejudgment interest of $1,171,110.54, and pay a penalty of $5,181,135.82 for a total of $11,533,382.18. Relief defendants Melissa Morton and the Prophecy Research Institute, the Mortons' nonprofit religious organization, were ordered to disgorge $468,281 plus prejudgment interest of $105,847.23, for a total of $574,128.23.
On March 4, 2010, the Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Morton and his corporate shell entities for engaging in a multi-million offering fraud. According to the Commission's complaint, Morton fraudulently raised more than $5 million from more than 100 investors for his investment group, which he called the Delphi Associates Investment Group (Delphi Investment Group).
Beginning in or around the summer of 2006, the complaint alleged, Morton solicited individuals to invest in one of several companies he and Melissa Morton controlled under the umbrella of the Delphi Investment Group. According to the Commission's complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his alleged psychic expertise in predicting the securities markets, and to solicit investors for the Delphi Investment Group. During these solicitations, Morton made numerous materially false representations. For example, Morton falsely told potential investors that he has called all the highs and lows of the stock market, on their exact dates, over a fourteen year period. Morton further falsely asserted that the alleged profits in the accounts were audited and certified by PricewaterhouseCoopers LLP (PWC) who he claimed certified that the accounts had profited by 117%. Morton also falsely asserted that the investor funds would be used exclusively for foreign currency investments, and that any other use of the funds would be considered a criminal act. Morton further falsely claimed that he would use the pooled funds to trade in foreign currencies and distribute pro rata the trading profits among the investors. In private one-on-one correspondence with potential investors, Morton was even more aggressive in his solicitation. For example, Morton wrote to a potential investor urging he invest more money in the Delphi Investment Group "RIGHT NOW…[Because] [o]nce the DOLLAR starts to DROP, which will happen soon, we are set to make a FORTUNE!"
However, the complaint alleged, Morton lied to investors about his past successes, and about key aspects of the Delphi Investment Group, including the use of investor funds and the liquidity of the funds. According to the complaint, Morton did not have the successful track record picking stocks in which he claimed, and that he in fact was simply wrong in many of his securities predictions. Further, PWC never audited the Delphi Investment Group, let alone certify any profits. Also, unbeknownst to the investors, instead of investing all of the funds into foreign currency trading firms, the Mortons diverted some of the investor funds, including nearly half a million dollars to themselves through their own shell entities.
The defendants never properly answered the allegations in the complaint. Instead, the Mortons filed dozens of papers with the Court claiming, for instance, that the Commission is a private entity that has no jurisdiction over them, and that the staff attorneys working on the case do not exist.
On February 11, 2013, United States District Judge Forrest issued default judgments against all of the defendants and relief defendants. With the entry of the default judgments, the Commission received full relief requested in its complaint. The complaint charged each of the defendants with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint further charged that the relief defendants were unjustly enriched by receiving investor funds. The complaint sought a final judgment permanently restraining and enjoining the defendants from future violations of the above provisions of the federal securities laws.
The SEC's litigation team was led by Bennett Ellenbogen, Alexander Vasilescu, Todd Brody, Elzbieta Wraga, and Roshonda Ledbetter. Amelia Cottrell, Stephen Johnson, Jacqueline Fine, and Elizabeth Baier assisted during the investigation.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Nebraska Orders Omaha Resident Michael J. Welke to Pay $387,000 to Settle Commodity Pool Fraud Charges
Welke permanently barred from the commodities industry
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring Defendant Michael J. Welke, of Omaha, Neb., to pay $257,000 in disgorgement and a $130,000 civil monetary penalty to settle CFTC charges of fraud, failure to register with the CFTC, and failure to comply with disclosure and reporting requirements. The Consent Order of permanent injunction, entered on February 12, 2013, by Chief Judge Laurie Smith Camp of the U.S. District Court for the District of Nebraska, also imposes permanent trading and registration bans against Welke and prohibits him from violating provisions of the Commodity Exchange Act and CFTC Regulations, as charged.
The Order stems from a CFTC Complaint filed on May 23, 2011, against Welke, along with Defendants Jonathan W. Arrington, Michael B. Kratville, and their companies, Elite Management Holdings Corp. (Elite Management) and MJM Enterprises LLC (MJM) (see CFTC Press Release 6045-11). The CFTC Complaint alleged that from approximately August 2005 until at least July 2008, Welke and the other Defendants operated a fraudulent scheme that solicited at least $4.7 million from more than 130 commodity pool participants, mostly from the Omaha area, to trade commodity futures contracts and off-exchange foreign currency contracts. The CFTC Complaint further charged that Welke acted as a reference to prospective pool participants without disclosing his status as an owner and officer of Elite Management and MJM and that Welke, along with the other Defendants, misappropriated more than $1.5 million of pool participants’ funds, made false representations of material facts, and issued false statements to the pool participants regarding the profitability and value of their accounts.
The CFTC has previously obtained entries of default against Arrington, Elite Management, and MJM. The CFTC’s litigation continues against Kratville.
CFTC Division of Enforcement staff members responsible for this case are Christopher Reed, Margaret Aisenbrey, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today announced fraud charges against a New York-based brokerage firm and two brokers who allegedly used misleading sales tactics to steer investors toward risky investments in a purported clean energy company so the firm could earn lucrative commissions.
The SEC’s Division of Enforcement alleges that Gregg Lorenzo, the founder of Charles Vista LLC, teamed with an investment banker named Frank Lorenzo and made a litany of false, misleading, and unfounded statements to create the impression that speculative debt securities issued by Waste2Energy Holdings Inc., which were convertible into stock, were risk-free and likely to result in enormous investment returns. The Lorenzos are not related. While Gregg Lorenzo was touting the profitability of investing in Waste2Energy, which purported to possess technology for converting waste into clean energy, the company was struggling in reality. Waste2Energy eventually filed for bankruptcy.
"Charles Vista customers were told a false tale of a safe and conservative investment with an explosive upside, but the risky downside was downplayed in the story," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "Brokerage customers deserve unbiased and fair recommendations about the risks of potential investments, not misleading boiler room sales tactics."
According to the SEC’s order instituting administrative proceedings against Charles Vista and the Lorenzos, investors were solicited to purchase the Waste2Energy convertible debentures in 2009 and 2010. An e-mail that Charles Vista sent customers made various false claims, such as Waste2Energy possessing "over $10 million in confirmed assets" to provide investors with protection against losses. In reality, the company had written its assets down to less than $1 million.
The SEC’s Division of Enforcement alleges that Gregg Lorenzo, who lives in Staten Island, made verbal sales pitches to investors that misrepresented Waste2Energy’s financial condition and business prospects. He made the debentures’ stock conversion feature appear valuable by making baseless predictions about the future of the company’s stock. Lorenzo told at least one investor that he believed Waste2Energy "will be a NASDAQ trading stock within 12 months. I believe they will meet the listing requirements." Frank Lorenzo was the head of investment banking at Charles Vista until he left the firm in 2010. He sent e-mails to Charles Vista customers that contained false or misleading claims about Waste2Energy’s assets and alleged contracts.
According to the SEC’s order, Charles Vista was the exclusive placement agent for the issuance of these Waste2Energy securities, and the firm’s financial interest in the offering was considerable. Documents attached to some of Waste2Energy’s SEC filings indicate that Charles Vista had arranged to receive a 10 percent "commission" on the gross proceeds of all debentures sales, a consulting fee of $10,000 per month for 12 months, and various other commissions and fees.
The SEC’s Division of Enforcement alleges that Charles Vista and the Lorenzos willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Charles Vista also allegedly violated Exchange Act Section 15(c) and Rule 10b-3. The administrative proceedings will determine what, if any, remedial action or financial penalties are appropriate in the public interest against Charles Vista and the Lorenzos.
The SEC’s investigation was conducted by Peter Pizzani, Melissa Coppola, Michael Osnato, and Jack Kaufman in the New York Regional Office. The SEC’s litigation will be led by Mr. Kaufman and Joseph Boryshansky.
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