RESTITUTION ORDER FORCES CALIFORNIA MAN TO PAY $1.75 MILLION TO SETTLE FRAUD CHARGES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
November 13, 2013

Federal Court in California Orders Thomas B. Breen, a Principal of National Equity Holdings, Inc., to Pay $1.75 million to Settle Fraud Charges in CFTC Action

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against a principal of National Equity Holdings, Inc. (National Equity), Thomas B. Breen, of Orange County, California, requiring Breen to jointly pay restitution to defrauded customers in accordance with a restitution Order set in a related criminal action of $1,059,096, and imposes a civil monetary penalty of $700,000 against Breen, as well as permanent trading and registration bans.

The Order, entered on November 5, 2013 by the Honorable James Selna of the U.S. District Court for the Central District of California, stems from a CFTC Complaint filed on November 8, 2011, against Defendants National Equity, Robert J. Cannone, Francis Franco, and Breen, charging them with fraudulent solicitation, misappropriation, and registration violations (see CFTC Press Release 6142-11).

The Order finds, and Breen acknowledges, that from at least June 2009 to May 2010, Breen, by and through National Equity, fraudulently solicited and accepted over $1.4 million to trade commodity futures contracts through a pool. In their solicitations, Breen, by and through National Equity, (1) falsely claimed to have a successful and experienced trader (Franco) for the pool, (2) misrepresented the likelihood of profits and the risks associated with trading commodity futures, (3) failed to disclose that they were not properly registered with the CFTC to operate a pool, and (4) failed to disclose their intended uses of pool participant funds.

The Order further finds that Breen and National Equity traded only a portion of the pool participant funds in proprietary accounts, and sustained overall and significant losses. Breen and National Equity concealed their fraud and trading losses from the pool participants by issuing false account statements reflecting profits. Approximately one year later, they claimed that participants’ fund were all lost in trading, but promised to return their funds.

The CFTC’s litigation continues against Defendant Francis Franco to determine the appropriate amount of a civil monetary penalty to be imposed and whether a personal trading ban should be imposed. However, on April 11, 2013, the court entered a consent Order of permanent injunction against Defendants National Equity and Cannone, requiring them to pay over $3.6 million of restitution and monetary penalties, among other sanctions, to settle the CFTC action (see CFTC Press Release 6567-13).

In related actions, Cannone, as well as the other Defendant Francis Franco, pled guilty to criminal violations of the Commodity Exchange Act, as amended. Cannone was sentenced to 27 months in federal prison, and ordered to pay the $1.05 million in restitution, jointly and severally with the other defendants. Franco was sentenced to 25 months, while Breen was sentenced to 40 months.

The CFTC thanks the Federal Bureau of Investigation, Orange County Office, and the U.S. Attorney’s Office for the Central District of California, Santa Ana Office, for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Michelle S. Bougas, Heather Johnson, James H. Holl, III, and Gretchen L. Lowe.

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SEC ANNOUNCES DEFERRED PROSECUTION AGREEMENT FOR INDIVIDUAL WHO PROVIDED INFORMATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced a deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.

Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation.  In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.

According to the SEC’s DPA with Scott Herckis – the agency’s first with an individual – he served as administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld.  With voluntary and significant cooperation from Herckis, the SEC filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.  The SEC’s action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors.  Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.

“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”

According to the DPA, Herckis served as the fund’s administrator from December 2010 to September 2012, when he resigned and contacted government authorities with his concerns about Hochfeld’s conduct and certain discrepancies in Heppelwhite’s accounting records.  Herckis voluntarily produced voluminous documents and described to the SEC how Hochfeld was able to perpetrate his fraud.  As a result, the SEC was able to file the emergency action within weeks.

Under the terms of the DPA, which states that Herckis aided and abetted Hochfeld’s securities law violations, Herckis must comply with certain prohibitions and undertakings.  Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.  The DPA requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors.  A second round of distributions from the Fair Fund is expected after additional money is collected for harmed investors through the sale of Hochfeld’s personal assets, including a collection of antiques he paid for with stolen funds.

The SEC’s investigation was conducted by Brian Vann, Stacy Fresch, and Brian O. Quinn.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

JUDGEMENT ENTERED AGAINST OFFSHORE BOILER ROOM DEFENDANTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Defendants Charged with Perpetrating $35 Million International Boiler Room Scheme

The Securities and Exchange Commission announced that the United States District Court for the Central District of California entered a final, settled judgment against defendants Nicholas Louis Geranio, The Good One, Inc., and Kaleidoscope Real Estate, Inc. for their roles in a $35 million scheme to manipulate the market and to profit from the issuance and sale of certain U.S. companies' stock through offshore boiler rooms.

Pursuant to the judgment issued on November 1, 2013, the court ordered Geranio, The Good One and Kaleidoscope jointly and severally to pay disgorgement of $2,135,000, prejudgment interest thereon of $427,270, and a civil penalty of $500,000, barred them from participating in any offering of penny stock, and permanently enjoined them from violations of the antifraud provisions of the federal securities laws. The judgment also barred Geranio from acting as an officer or director of any public company and ordered him to pay an additional $279,000 in disgorgement plus prejudgment interest thereon of $55,835, representing monies received by another defendant, Keith Field, provided that the SEC shall not obtain double recovery from Geranio and Field. Finally, the judgment ordered relief defendant BWRE Hawaii, LLC to pay, jointly and severally with Geranio, The Good One, and Kaleidoscope, an additional $240,000 in disgorgement plus prejudgment interest thereon of $55,295.

The SEC's complaint, filed on May 16, 2012, alleged that defendants' scheme worked as follows:

From approximately April 2007 to October 2009, Geranio organized eight U.S. companies: Green Energy Live, Inc.; Spectrum Acquisition Holdings, Inc.; United States Oil & Gas Corp.; Mundus Group, Inc.; Blu Vu Deep Oil & Gas Exploration, Inc.; Wyncrest Group, Inc.; Microresearch Corp.; and Power Nanotech, Inc. (the "Issuers"), installed management, and entered into consulting agreements with them through his alter-ego entities The Good One and Kaleidoscope.
Geranio then set up a common system to raise money through the Issuers' sale of Regulation S shares to investors by offshore boiler rooms that Geranio recruited, and also directed traders to engage in matched orders and manipulative trades to establish artificially high prices for at least five of the Issuers' stock.
The boiler rooms used high-pressure sales tactics and materially false statements and omissions to induce the investors, many of them elderly and from the United Kingdom, to buy the Regulation S stock. The boiler rooms received 60% to 75% of investors' funds as undisclosed sales markups, while Geranio received $2,135,000 through The Good One and Kaleidoscope and BWRE Hawaii received $240,000. Defendant Keith M. Field remains a defendant in the case.

SEC ANNOUNCES SANCTIONS AGAINST AUDIT FIRM, FOUNDER, TWO PARTNERS AND AUDIT MANAGER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced sanctions against a New York-based audit firm, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies publicly traded in the U.S.

An SEC investigation found that Sherb & Co. LLP and its auditors falsely represented in audit reports that they had conducted the audits in accordance with U.S. auditing standards when it fact they were riddled with failures and improper professional conduct.  One of the companies they audited – China Sky One Medical Inc. – has since been charged by the SEC with financial fraud.

To settle the SEC’s charges, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.  The firm agreed to pay a $75,000 penalty.

“Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.

According to the SEC’s order instituting settled administrative proceedings, the flawed audits involved China Sky One Medical, China Education Alliance Inc., and Wowjoint Holdings Ltd.  The individuals responsible for the audits were the firm’s founder Steven J. Sherb, fellow partners Christopher A. Valleau and Mark Mycio, and audit manager Steven N. Epstein.  They failed to properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances.  They ignored clear red flags and failed to exercise professional skepticism and due care.  They also failed to maintain complete audit work papers.

According to the SEC’s order, Sherb engaged in improper professional conduct as the concurring partner for the China Sky audit and as concurring partner and engagement quality review (EQR) partner for the Wowjoint audits.  Valleau engaged in improper professional conduct as the engagement partner for the China Sky audit and four of five Wowjoint audits, and as the EQR for the China Education audit.  Mycio engaged in improper professional conduct as the engagement partner for the China Education audit and one of the Wowjoint audits.  Epstein engaged in improper professional conduct as the senior audit manager on the China Sky audit, China Education audit, and four of five Wowjoint audits.

The SEC order finds that Sherb & Co., Sherb, Valleau, Mycio, and Epstein violated Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and Section 4(C) of the Securities Exchange Act of 1934.  The SEC’s order also finds that Sherb & Co. and Mycio violated Exchange Act Section 10A(b)(1).  Sherb & Co. and Mycio are ordered to cease and desist from committing or causing any violations of Section 10A(b)(1) of the Exchange Act.  Sherb, Valleau, and Mycio are prohibited from practicing before the SEC as an accountant for at least five years, and Epstein is barred for at least three years.

The SEC’s investigation has been conducted by Rhoda Chang, Junling Ma, C. Dabney O’Riordan, Kam Lee, Osman Handoo, Yuri Zelinsky, Neil Welch, and Gregory Faragasso.

CFTC CHAIRMAN GENSLER'S STATEMENT ON AGGREGATION PROVISIONS FOR LIMITS ON SPECULATIVE POSITONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Statement of Support by Chairman Gary Gensler: Aggregation Provisions for Limits on Speculative Positions

November 5, 2013

I support the proposed rule that would modify the CFTC’s aggregation provisions for limits on speculative positions.

As we move forward on position limits for futures and swaps, it is important to concurrently implement reforms to the Commission’s current regulations regarding which positions are totaled up as being owned or controlled by a particular entity. These total, aggregated positions under common control are then subject to the speculative position limits, taking into consideration any relevant exemptions.

We live in a time when companies often have numerous affiliated entities, sometimes measured in the hundreds or thousands. Thus, it is appropriate to look at how speculative position limits apply across the enterprise. When Lehman Brothers failed, it had 3,300 legal entities within its corporate family. The question is – do you count all those 3,300 legal entities that Lehman Brothers once controlled, or do you apply a limit for each and every one of the 3,300? If we chose the second, that would be, in practice, a loophole around congressional intent. That's why this issue of aggregation comes into play.

The proposal generally provides for aggregation when various entities are under common control. For instance, if the ownership interest is greater than 50 percent, it will be presumed to be aggregated and part of the group.

The proposal provides for certain exemptions from aggregation for the following reasons:

Where sharing of information would violate or create reasonable risk of violating a federal, state or foreign jurisdiction law or regulation;
Where an ownership interest is less than 50 percent and trading is independently controlled;
Where an ownership interest is greater than 50 percent in a non-consolidated entity whose trading is independently controlled, and an applicant certifies that such entity’s positions either qualify as bona fide hedging positions or do not exceed 20 percent of any position limit; or
Where ownership of less than 50 percent results from broker-dealer activities in the normal course of business.
Last Updated: November 9, 2013