ATTORNEY SETTLES CLAIMS HE MADE FALSE AND MISLEADING STATEMENTS TO INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Claims Against Attorney Retained by Funds Involved in Fraudulent Investment Scheme

The United States District Court for the District of Oregon has entered final judgment against Oregon attorney Robert Custis pursuant to a settlement resolving claims brought by the Securities and Exchange Commission.  The Commission’s complaint alleged that Mr. Custis was retained to perform work for investment funds run by Yusaf Jawed and that he made false and misleading statements to the funds’ investors.

The Commission’s previously-filed complaint alleged that Mr. Jawed and two entities he controlled, Grifphon Asset Management, LLC and Grifphon Holdings, LLC, defrauded more than 100 investors in the Pacific Northwest and across the country as part of a long-running Ponzi scheme that raised more than $37 million.  The complaint alleged that Mr. Custis was retained in 2009 and began sending updates to Mr. Jawed’s investors regarding the status of a purported purchase of the funds’ assets that would allow investors to redeem their shares of the funds for a profit.  The complaint alleges that the statements regarding the asset purchase were false and that the investors were never paid.

Mr. Custis agreed to settle the Commission’s charges without admitting or denying the allegations.  The District Court entered final judgment on February 13, 2014, permanently enjoining Mr. Custis from violating Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(4) and Rule 206(4)-8 of the Investment Advisers Act of 1940.    

On February 27, 2014, pursuant to an offer of settlement submitted by Mr. Custis, the Commission issued an order prohibiting Mr. Custis from appearing or practicing before the Commission as an attorney under Rule 102(e) of the Commission’s Rules of Practice.

SEC BRINGS CHARGES IN MISALLOCATION OF EXPENSES SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.

The SEC Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants.  CEC and Brittenham did not disclose any such payment arrangement in fund offering documents.  When the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.

“Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”

According to the SEC’s order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses.  Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself.  The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.

According to the SEC’s order, the expense misallocation scheme shrank the funds’ cash reserves.  So CEC and Brittenham made unauthorized “loans” to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets.  The loans jeopardized the funds because Brittenham had pledged fund assets as collateral.  CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money.  Brittenham also lied to a fund investor about his “skin in the game.”  Brittenham claimed that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.

The SEC’s order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.

The SEC’s investigation was conducted by Payam Danialypour and C. Dabney O’Riordan of the Asset Management Unit in the Los Angeles Regional Office and accountant Deborah Russell in Washington D.C.  The SEC’s litigation will be led by Amy Longo, Lynn Dean, and Mr. Danialypour.  The SEC examination that led to the investigation was conducted by Ryan Hinson, Ernest Tang, Daniel Jung, and Thomas Mackin of the Los Angeles office’s investment adviser/investment company examination program.

CLAIMS SETTLED AGAINST TWO EXECUTIVES ACCUSED OF INFLATION OF REVENUES

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Claims Against Two Former Employees of Hansen Medical, Inc. Relating to Fraudulent Sales Scheme

The United States District Court for the Northern District of California has approved settlements resolving claims by the Securities and Exchange Commission against two former sales executives of Hansen Medical, Inc., a Mountain View, California medical equipment company. The SEC's complaint alleged the former sales executives participated in fraudulent sales transactions to inflate the company's reported revenues.

The SEC's complaint alleged that Christopher Sells, Hansen Medical's former Vice President of Commercial Operations, and Timothy Murawski, a former Vice President of Sales, took steps to complete improper sales transactions in 2008 and 2009. According to the Complaint, Mr. Sells and Mr. Murawski engaged in a scheme to provide false information to Hansen Medical's finance department, resulting in publicly-disclosed financial statements that reported overstated revenue and sales numbers.

Without admitting or denying the allegations, Mr. Sells agreed to pay a civil money penalty of $85,000. The final judgment, entered by the District Court on February 21, 2014, permanently enjoins Mr. Sells from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The judgment also prohibits Mr. Sells from acting as an officer or director of a public company under the Exchange Act for five years.

Without admitting or denying the allegations, Mr. Murawski agreed to pay a civil money penalty of $35,000. The final judgment, entered by the District Court on November 6, 2013, permanently enjoins Mr. Murawski from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a), 10b-5(c), and 13b2-1 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.

CFTC SEEKS REVOKING OF REGISTRATION OF INTRODUCING BROKER

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Seeks to Revoke Registration of Introducing Broker iFinix Futures, Inc.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a Notice of Intent (Notice) to revoke the registration of iFinix Futures, Inc. (iFinix), a registered independent Introducing Broker based in Plainview, New York. iFinix has also done business under the name Pro-Active Futures.

The CFTC’s Notice alleges that iFinix is subject to statutory disqualification from CFTC registration based on a default judgment and permanent injunction Order entered by the U.S. District Court for the Eastern District of New York on September 16, 2013 (see CFTC News Release 6711-13). The Order found, in relevant part, that iFinix and its senior executive officer, Connecticut resident Benhope Marlon Munroe, willfully made materially false statements to the National Futures Association (NFA), the futures industry self-regulatory organization. Among other things, the Order permanently prohibits iFinix from making any false, fictitious, or fraudulent statements or representations, as charged, and from applying for registration or claiming exemption from registration with the CFTC. The Order also prohibits iFinix from trading on, or subject to the rules of, any registered entity. The Order required iFinix and Munroe to pay a $1,260,000 civil monetary penalty.

The CFTC thanks the NFA for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Lara Turcik, Douglas K. Yatter, Christopher Giglio, Lenel Hickson, Jr., and Manal M. Sultan.

SEC WILL LOOK AT INVESTMENT ADVISERS WHO WERE NEVER-BEFORE EXAMINED

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Initiative Directed at Never-Before Examined Registered Investment Advisers
  FOR IMMEDIATE RELEASE

2014-35 Washington D.C., Feb. 20, 2014 — The Securities and Exchange Commission today announced that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years.  OCIE previously announced that examining these advisers is a priority in 2014.
As part of the initiative, OCIE will conduct examinations of a significant percentage of advisers that have not been examined since they registered with the SEC.  These examinations will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets.  Additional details on the examinations are available here.

“Our examinations will focus on areas most important to protecting investors,” said Jane Jarcho, national associate director of OCIE’s Investment Adviser/Investment Company examination program. “We will also promote compliance by engaging with these advisers through outreach efforts.”

Starting later this year, OCIE will invite SEC-registered investment advisers who have yet to be examined to attend regional meetings where they can learn more about the examination process.  Advisers also can find information regarding their obligations under the Investment Advisers Act of 1940 and other useful guidance on the SEC’s website.

CFTC REVOKES REGISTRATIONS OF CONVICTED FRAUDSTER AND COMPANY

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Revokes Registrations of Oregon Resident Joshua W. Wallace and His Company, System Capital, LLC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the revocation of the registrations of Joshua W. Wallace, a resident of Oregon, and his Oregon-based company, System Capital, LLC (System Capital). System Capital was registered with the CFTC as a Commodity Trading Advisor and Wallace was registered as an Associated Person of System Capital. Wallace is the sole principal and president of System Capital.

The CFTC filed a civil Complaint against Defendants Wallace and System Capital on November 23, 2010, charging them with solicitation fraud and making false statements to the National Futures Association (NFA) (see CFTC Press Release 5940-10). Subsequently, on March 14, 2013, the U.S. District Court for the Southern District of New York entered an Order of permanent injunction against the Defendants that imposes permanent trading and registration bans against them and prohibits them from violating the Commodity Exchange Act, as charged. The court’s Order also required Wallace and System Capital each to pay a $420,000 civil monetary penalty.

On December 23, 2013, the CFTC Judgment Officer issued a Decision against Wallace and System Capital, finding that they were statutorily disqualified from CFTC registration based on both the Order of permanent injunction and on the criminal conviction of Wallace on May 21, 2013, in which Wallace pleaded guilty to commodities fraud and was sentenced to serve 27 months in prison (U.S. v. Wallace, 11 crim 124-01 (LTS) (S.D.N.Y.)). The Judgment Officer’s Decision became a final Order of the CFTC on January 22, 2014.

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

CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, and Manal M. Sultan.