SEC HALTS ALLEGED OIL AND GAS PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Texas-Based Oil and Gas Investment Scheme

The Securities and Exchange Commission today announced charges and an emergency asset freeze against the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects.

The SEC alleges that Robert A. Helms and Janniece S. Kaelin, who work out of an office in Austin, misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests. Despite representations that nearly all of the money they raised would be used to make oil and gas investments, Helms and Kaelin actually used only a fraction of the offering proceeds for that purpose. Instead, the vast majority of investor funds were used to make Ponzi payments and cover various personal and business expenses.

The SEC's complaint unsealed late yesterday in U.S. District Court for the Western District of Texas also charges Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., with illegally selling investments for Helms and Kaelin without being registered with the SEC. They also allegedly misled investors about the sales commissions and referral fees they were receiving.

According to the SEC's complaint, Helms and Kaelin began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control. They have since attracted at least 80 investors in more than a dozen states while promising in offering documents that they would use more than 99 percent of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests. The offering documents were fraudulent as Helms and Kaelin invested only 10 percent of the proceeds, and the oil and gas projects in which they actually did invest generated only minuscule returns.

The SEC alleges that Helms and Kaelin directed Vendetta Royalty Partners to make approximately $5.9 million in so-called partnership income distributions to investors. They used money from newer investors to make the distributions to earlier investors. Helms and Kaelin created the illusion that Vendetta Royalty Partners was a profitable enterprise when, in fact, it was a fraudulent Ponzi scheme. Some offering documents touted Helms to have extensive oil-and-gas experience, misrepresenting that he had "worked with various mineral companies over the last 10 years advising management on issues involving the acquisition and management of royalty interests, mineral properties and related legal and financial issues." In fact, Helms's oil-and-gas experience came almost entirely from operating Vendetta Royalty Partners and its affiliated or predecessor companies.

The SEC alleges that Helms and Kaelin misled investors about other important matters besides their business background and industry reputation. They failed to disclose the existence of litigation against them and companies they control. They misrepresented the performance of the limited oil-and-gas royalty investments actually under their management. And they failed to inform investors that Vendetta Royalty Partners was behind on its line of credit. The company ultimately defaulted.

According to the SEC's complaint, Helms and Kaelin along with Sellers and Barrera told potential investors that any commissions or finder's fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.

At the SEC's request, the court entered an order temporarily restraining the defendants from further violations of the federal securities laws, freezing their assets, prohibiting the destruction of documents, requiring them to provide an accounting, and authorizing expedited discovery.

The SEC's complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint further alleges that Sellers and Barrera acted as unregistered brokers in violation of Section 15(a) of the Exchange Act. The complaint requests permanent injunctions and the disgorgement of ill-gotten gains plus prejudgment interest and penalties.

The SEC's investigation was conducted by Chris Davis, Carol Hahn, and Joann Harris of the Fort Worth Regional Office. The SEC's litigation will be led by Timothy McCole. The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Secret Service, and Texas State Securities Board.

U.S. DISTRICT COURT ISSUES FINAL JUDGEMENT AGAINST INVESTMENT ADVISER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Massachusetts-Based Broker and Investment Adviser

The Securities and Exchange Commission announced today that on December 4, 2013, the U.S. District Court for the District of Massachusetts entered final judgments against Arnett L. Waters of Milton, Massachusetts, and two entities that he controlled, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, who are defendants in an enforcement action filed by the Commission in May 2012. The Commission filed its action on an emergency basis in order to halt the defendants' fraudulent sales of fictitious investment-related partnerships. The final judgment, to which the defendants consented, enjoins them from violating the antifraud provisions of the federal securities laws. The Court also found the defendants jointly and severally liable for $839,000 in disgorgement, which has been deemed satisfied by a restitution order of over $9 million in a parallel criminal proceeding.

The Commission's enforcement action filed May 1, 2012 alleged that from at least 2009-2012, Waters, A.L. Waters Capital and Moneta Management engaged in a fraudulent scheme through which they raised at least $780,000 from at least 8 investors, including $500,000 from Waters' church, by promising to use investor funds to purchase a portfolio of securities, when they instead misappropriated the money and spent it on personal and business expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze the defendants' assets, as well as those of two relief defendants, one of whom was Waters' wife, and required them to provide an accounting of all their assets to the Commission.

On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction and asset freeze order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Commission on December 3, 2012 barred Waters from the securities industry based on his guilty plea in the criminal contempt action.

The U.S. Attorney for the District of Massachusetts charged Waters with an array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice arising out of both the conduct that is the subject of the Commission's civil action and a criminal scheme through which Waters defrauded clients of his rare coin business out of as much as $7.8 million. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to obstruction of justice in connection with multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. As a result of his guilty plea to this criminal conduct, Waters was sentenced on April 26, 2013 to 17 years in federal prison and three years of supervised release, and was ordered to pay $9,025,691 in restitution and forfeiture.

The final judgment in the Commission's enforcement action enjoins the defendants from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933, and also enjoins Waters and Moneta Management from violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. On November 18, 2013, the Court entered the parties' stipulation of dismissal against relief defendant Port Huron Partners, LLP, an unregistered entity owned by Waters. The Commission's case remains pending against relief defendant Janet Waters, Arnett Waters' wife.

The Commission acknowledges the assistance of the United States Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation and FINRA in this matter.

FIFTH THIRD BANK AND FORMER CFO CHARGED BY SEC WITH IMPROPER ACCOUNTING OF COMMERCIAL REAL ESTATE LOANS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.

Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.

Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.

The SEC’s investigation was conducted by Beth Groves, Paul Harley, Jonathan Jacobs, and Jim Blenko.  The SEC appreciates the assistance of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

COURT ORDERS COMPANY AND PRINCIPALS TO PAY OVER $22 MILLION FOR ROLES IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
December 4, 2013

Federal Court Orders Defendants Arista LLC, Abdul Sultan Walji, and Reniero Francisco, All of Southern California, to Pay over $22 Million in Restitution and Fines for Commodity Pool Fraud and Making False Statements to the CFTC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Arista LLC (Arista), a registered Commodity Pool Operator with its principal place of business in Newport Coast, California, and against Arista’s principals, Abdul Sultan Walji (a/k/a Abdul Sultan Valji) of San Juan Capistrano, California, and Reniero Francisco of Coastal Oak, California, for carrying out a fraudulent scheme to misappropriate millions of dollars from investors in commodity futures and options, making false statements to the CFTC, and filing false quarterly reports with the National Futures Association (NFA).

The Order, entered on December 3, 2013, requires the Defendants to pay more than $8.25 million in restitution for the losses of defrauded investors.  In addition, the Order imposes civil monetary penalties of $6.45 million on Walji, $5.925 million on Francisco, and $1.54 million on Arista.  The Order further imposes permanent trading and registration bans on the Defendants and prohibits them from violating provisions of the Commodity Exchange Act (CEA) and a CFTC regulation, as charged.

The Court’s Order stems from a CFTC Complaint filed on December 12, 2012 and amended on May 28, 2013 (Complaint), which charged the Defendants with violating anti-fraud provisions of the CEA, making false statements to the CFTC, and filing false reports with the NFA (see CFTC Press Releases 6460-12 and 6600-13).

In the Order, the Defendants admit to all of the Order’s findings and all of the allegations in the CFTC’s Complaint.  The Order finds that, from at least February 2010 through January 2012, the Defendants collected funds from 39 investors totaling more than $9.5 million, of which the Defendants paid themselves $4.125 million in purported fees and lost more than $4.8 million trading in futures and options.  The Defendants also provided false quarterly statements to the investors, violated the CEA’s registration requirements, and, after subsequently registering, provided false reports to the NFA.  Further, in September 2011, the Defendants misrepresented certain account balances, asset values, and fee calculations in a letter sent in response to requests for information from the CFTC’s Division of Enforcement.  The Order enforces the false statements provision of the CEA, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In a related criminal proceeding, Walji and Francisco each pled guilty to conspiracy and fraud charges and were sentenced, respectively, to 151 months and 97 months of imprisonment.

The CFTC appreciates the assistance of the U.S. Department of Justice, the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the NFA.

CFTC Division of Enforcement staff members responsible for this case are Michael P. Geiser, Laura A. Martin, Douglas K. Yatter, Philip D. Rix, Lenel Hickson, and Manal M. Sultan.

SEC INJUNCTION BANS PENNY STOCK FRAUD OPERATOR FOR DOING BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
District Court Enters Final Judgment of Permanent Injunction and Orders a Penny Stock and Officer-And-Director Bar Against Defendant Thomas Gaffney

The Commission announced that on November 20, 2013, the United States District Court for the Southern District of Florida entered a Final Judgment of Permanent Injunction and Other Relief by consent against Defendant Thomas Gaffney, enjoining him from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5(a).

In addition, United States District Judge Robert N. Scola, Jr., permanently barred Gaffney from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock. The Court also permanently barred him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

The Commission commenced this action by filing its Complaint on August 14, 2013, against Gaffney and Health Sciences Group, Inc. ("HESG"). The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks.

SEC ANNOUNCES BOILER ROOM BROKER BARRED FROM PENNY-STOCK OFFERINGS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION   
Ohio-Based Broker Barred from Penny-Stock Offerings

The Securities and Exchange Commission announced today that on November 27, 2013, the United States District Court in Massachusetts entered judgment against Matthew K. Lazar, of Columbus, Ohio, in a case arising from his alleged participation in a boiler room operated by Edward M. Laborio, of Boston, Massachusetts and Boca Raton, Florida.  Lazar consented to the entry of the judgment.

On August 10, 2012, the Commission charged Laborio, Lazar and others with raising up to $5.7 million from more than 150 investors through the fraudulent sale of five unregistered offerings.  As to Lazar in particular, the Complaint charged that from October through December 2008, Lazar raised $585,000 from 10 investors through the sale of a PIPE (private investment in a public equity) by misrepresenting that the PIPE guaranteed an annual 8.5% dividend and that it was safe, like a fixed annuity or a certificate of deposit.  The Complaint alleged that Laborio hired Lazar in September 2008 to open an Ohio branch office operating under the name Envit Capital Private Wealth Management, LLC.  Along with Laborio and Lazar, the Complaint charged Jonathan Fraiman, of Boston, Massachusetts and Lantana, Florida, along with seven entities, most with the name “Envit,” that were owned and controlled by Laborio, including a non-existent hedge fund.

On November 27, 2013, the Court entered a final judgment against Lazar:  (i) permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 (Securities Act); Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act); (ii) barring him for three years from participating in any offering of penny stock; (iii) finding him liable for disgorgement of $16,820.99 and prejudgment interest of $2,917.65, for a total of $19,738.64; and (iv) waiving payment of the disgorgement and prejudgment interest, and not imposing a civil penalty, based upon the representations in Lazar’s sworn statement of financial condition.  Lazar agreed to settle the Commission’s charges without admitting or denying the allegations in the Complaint.

The Court previously entered a final judgment by consent against Jonathan Fraiman on October 8, 2013.  In related administrative proceedings instituted by the Commission on October 11, 2013, Fraiman consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after ten years.  The Commission’s civil injunctive action against Laborio and the Envit Companies, SEC v Laborio et al., 1:12-cv-11489-MBB (D. Mass., Aug. 10, 2012), is still pending.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation, the State of Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority (FINRA).