PROSECUTORS CHARGE ALLEGED PONZI SCHEMER WITH VIOLATING SEC OBTAINED COURT ORDERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Federal Prosecutors Charge Massachusetts Resident with Criminal Contempt Based On Violations of Court Orders Obtained by the SEC

The Securities and Exchange Commission announced today that, on April 10, 2014, the United States Attorney's Office for the District of Massachusetts charged Steven Palladino with 25 counts of criminal contempt based on his repeated violations of Court orders obtained by the Commission in its civil action against Palladino and his Massachusetts-based company, Viking Financial Group, Inc. (collectively, "Defendants"). The Commission's action charged that Defendants were operating a fraudulent Ponzi scheme. The charging document filed by the United States Attorney's Office alleges that Palladino "knowingly and wilfully disobey[ed]" Court orders in the Commission's action that froze all of Defendants' assets, required that Defendants deposit all funds in their possession into a court-ordered escrow account, and required Palladino to purge himself of a prior order of civil contempt. If convicted, Palladino, who is currently serving a prison sentence based on convictions in state court for the same Ponzi scheme activity, could face additional incarceration.

On April 30, 2013, the Commission filed an emergency action against Defendants in federal district court in Massachusetts. In its complaint, the Commission alleged that, since April 2011, Defendants misrepresented to at least 33 investors that their funds would be used to conduct the business of Viking - which was purportedly to make short-term, high interest loans to those unable to obtain traditional financing. The Commission also alleged that Palladino misrepresented to investors that the loans made by Viking would be secured by first interest liens on non-primary residence properties and that investors would be repaid their principal, plus monthly interest at rates generally ranging from 7-15%, from payments that borrowers made on the loans. The complaint alleged that Defendants actually made very few real loans to borrowers, and instead used investors' funds largely to pay earlier investors and to fund the Palladino family's lavish lifestyle.

When the Commission first filed its action, it moved the Court for a temporary restraining order, asset freeze, and other emergency relief. On April 30, 2013, the Court issued a temporary restraining order, which included the asset freeze, and set the matter for further hearing on May 3, 2013. On May 3, 2013, the Court issued a revised restraining order, which included the same asset freeze. On May 15, 2013, the Court issued the order that Defendants deposit all funds in their possession into an escrow account. The asset freeze and escrow order have remained in effect at all times since April 30, 2013 and May 15, 2013, respectively.

Since September 2013, the Commission has filed four motions for civil contempt against Palladino. The Commission's first motion for contempt, filed on September 4, 2013, alleged that Palladino violated the asset freeze by transferring three vehicles that he owned (solely or jointly with his wife) into his wife's name and using the vehicles as collateral for new loans - effectively cashing out the equity in these vehicles. The motion also alleged that Palladino violated the escrow order by failing to deposit the funds he received from this cashing-out process into the escrow account. On November 15, 2013, the Court held Palladino in contempt and ordered that he restore ownership of the vehicles that he had transferred into his wife's name. Subsequently, Palladino reported to the Court that he had repaid all the new loans and restored ownership of two of the vehicles (but had failed to restore ownership of one vehicle). The Commission alleges that, in truth, the checks used to repay the new loans on the vehicles were all returned for insufficient funds. According to the Commission's allegations, to date, Palladino has not purged the civil contempt order against him. The Commission also filed three other contempt motions against Palladino charging that (i) he obtained a loan for $6,750 from a Viking investor and failed to deposit this amount into the escrow account; (ii) he sold a truck owned by him for $9,500 and failed to deposit this amount into the escrow account; and (iii) he opened new credit cards and ran up charges for cash advances, gold coins, luxury merchandise and fine dining and failed to deposit the cash and other assets obtained into the escrow account - all in violation of the asset freeze and escrow order. These three motions remain outstanding. The United States Attorney's Office's criminal charges arise from these same violations, as well as Palladino's alleged refusal to comply with the civil contempt order.

On July 15, 2013, the Court held that Defendants' conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. On November 18, 2013, the Court entered orders that enjoined Defendants from further violations of the antifraud provisions of the securities laws and ordered them to pay disgorgement of $9,701,738, plus prejudgment interest of $122,370. On January 14, 2014, Palladino pled guilty in Suffolk Superior Court to various state criminal charges based on the same conduct alleged by the Commission in its case. Palladino is currently serving a 10-12 year prison sentence for his state court convictions.

The Commission acknowledges the continued assistance of Suffolk County (Massachusetts) District Attorney Daniel F. Conley's Office, whose office referred Palladino's and Viking's conduct to the Commission.

SEC FILES ACTION AGAINST IMPRISONED FORMER STOCK PROMOTER

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Files Action Against Former Stock Promoter Now in Prison for Lying to SEC Investigators

On April 23, 2014, the Securities and Exchange Commission filed suit in United States District Court for the Southern District of Florida against defendants Robert J. Vitale ("Vitale") and Realty Acquisitions & Trust, Inc. ("RATI"), and relief defendant Coral Springs Investment Group, Inc. ("CSIG"). The Commission's complaint alleges that between 2004 and 2010, Vitale and RATI fraudulently raised at least $8.7 million from investors through four real estate securities offerings. According to the complaint, Vitale and RATI made numerous materially false and misleading statements and omissions concerning, among other things, the credentials and experience of Vitale and other purported RATI officers, Vitale's supposed reputation for honesty in the investment world, the safety of investing in RATI, and the ownership of the properties purchased with RATI investor proceeds. The complaint further alleges that Vitale also effected transactions in securities for the account of others without being registered as a broker in connection with his RATI activities, and, by so doing, violated both the unregistered-broker statute and a 2006 Commission Order that barred him from association with any broker or dealer. The complaint further alleges that no registration statement was on file with the Commission or in effect with respect to any of the RATI offerings or sales.

The Commission charges Vitale and RATI with violating Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Commission also charges Vitale with violating Sections 15(a) and 15(b)(6)(B) of the Exchange Act. The Commission seeks disgorgement of the ill-gotten gains related to these violations with prejudgment interest from Vitale, RATI, and relief defendant CSIG, and civil money penalties against Vitale and RATI.

Vitale is currently an inmate at the Federal Detention Center in Miami. He was sentenced in September 2013 to two years in prison after being convicted of obstruction of justice and providing false testimony in the investigation that led to the SEC case filed today.

The Commission acknowledges the assistance of the United States Attorney's Office, the Federal Bureau of Investigation, and the Florida Office of the Attorney General in this matter.

SEC CHARGES FORMER BIOPHARMACEUTICAL COMPANY EXECUTIVE, TWO OTHERS WITH INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former 

Former biopharmaceutical company executive and two others with insider trading on confidential information about the company’s key developmental drug.  The company’s stock price fell sharply when it announced clinical trial results for the drug.

Dr. Loretta Itri, president of pharmaceutical development and chief medical officer of Genta, Inc., her longtime friend, Dr. Neil Moskowitz, an emergency room physician, and one of his patients, were named in the insider-trading action.  In a complaint filed in U.S. District Court in New Jersey, the SEC alleged that Itri obtained material nonpublic information about Genta’s clinical trial results for an experimental drug designed to treat advanced melanoma.  In a telephone conversation just one day before the public announcement of the drug trial results, Itri provided Moskowitz with material nonpublic information.  Minutes after that, Moskowitz sold his Genta securities and tipped a friend and patient, Mathew Cashin, concerning the results.  As a result of their trading based on material nonpublic information, Moskowitz and Cashin reaped approximately $139,000 of illegal gains.

“Itri was entrusted with highly confidential information by Genta, but betrayed her duty as an executive allowing a friend to profit,” said Amelia A. Cottrell, associate director of the SEC’s New York Regional Office.  “We will continue to hold company insiders responsible and punish this type of betrayal of trust.”

According to the SEC’s complaint, Itri was directly involved in the drug trials at Genta, and was one of the first to learn of the results prior to the public announcement on October 29, 2009.  Genta’s stock dropped approximately 70 percent on the news, and the SEC alleges that Moskowitz and Cashin obtained illegal gains by selling their Genta stock the day before the announcement.

The SEC’s complaint charges Itri, Moskowitz, and Cashin with violating federal antifraud laws and the SEC’s antifraud rule.  Without admitting or denying the allegations in the complaint, the three defendants agreed to settle the SEC’s charges against them.

The settlement, which is subject to court approval, would enjoin the defendants from further violations of the federal securities laws and require Itri to pay civil penalty of approximately $64,000 and bar her from serving as an officer or director of a public company for five years.  The settlement also requires Moskowitz to return $64,300 of allegedly ill-gotten gains, plus prejudgment interest of $9,556, and pay a civil penalty of $64,300.  The settlement requires Cashin to return $75,140 of allegedly ill-gotten gains, plus prejudgment interest of $10,955, and pay a civil penalty of $37,570, which reflects the cooperation Cashin provided to the SEC’s investigation.

The SEC’s investigation was conducted by Shannon Keyes, Charles D. Riely and Ella Wraga, and was supervised by Amelia A. Cottrell of the SEC’s New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

PYRAMID SCHEME TARGETING DOMINICAN, BRAZILIAN IMMIGRANTS HALTED BY SEC

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Halts Pyramid Scheme Targeting Dominican and Brazilian Immigrants

The Securities and Exchange Commission today announced that on Tuesday, April 15, 2014, it filed charges against the Massachusetts-based operators of a large pyramid scheme that mainly targeted Dominican and Brazilian immigrants in the U.S. The charges were filed under seal, in connection with the Commission's request for an immediate asset freeze. That asset freeze, which the U.S. District Court in Boston ordered on Wednesday, secured millions of dollars of funds and prevented the potential dissipation of investor assets. After the SEC staff implemented the asset freeze, at the SEC's request the Court lifted the seal today, permitting public announcement of the SEC's charges.

The SEC alleges that TelexFree, Inc. and TelexFree, LLC claim to run a multilevel marketing company that sells telephone service based on "voice over Internet" (VoIP) technology but actually are operating an elaborate pyramid scheme. In addition to charging the company, the SEC charged several TelexFree officers and promoters, and named several entities related to TelexFree as relief defendants based on their receipt of investor funds.

According to the SEC's complaint filed in federal court in Massachusetts, the defendants sold securities in the form of TelexFree "memberships" that promised annual returns of 200 percent or more for those who promoted TelexFree by recruiting new members and placing TelexFree advertisements on free Internet ad sites. The SEC complaint alleges that TelexFree's VoIP sales revenues of approximately $1.3 million from August 2012 through March 2014 are barely one percent of the more than $1.1 billion needed to cover its promised payments to its promoters. As a result, in classic pyramid scheme fashion, TelexFree is paying earlier investors, not with revenue from selling its VoIP product but with money received from newer investors.

According to the SEC's complaint, the defendants have continued enrolling new investors but recently changed TelexFree's method of compensating promoters, requiring them to actually sell the VoIP product to qualify for payments that TelexFree had previously promised to pay them. The complaint also alleges that since December 2013, TelexFree has transferred $30 million or more of investor funds from TelexFree operating accounts to accounts controlled by TelexFree affiliates or the individual defendants.

In addition to the TelexFree firms, the complaint charges TelexFree co-owner James Merrill, of Ashland, Mass., TelexFree co-owner and treasurer Carlos Wanzeler, of Northborough, Mass., TelexFree CFO Joseph H. Craft, of Boonville, Ind., and TelexFree's international sales director, Steve Labriola, of Northbridge, Mass. The SEC also charged four individuals who were promoters of TelexFree's program: Sanderley Rodrigues de Vasconcelos, formerly of Revere, Mass., now of Davenport, Fla., Santiago De La Rosa, of Lynn, Mass., Randy N. Crosby, of Alpharetta, Ga., and Faith R. Sloan, of Chicago.

The SEC's complaint alleges that TelexFree, Inc., TelexFree, LLC, Merrill, Wanzeler, Craft, Labriola, Rodrigues de Vasconcelos, De La Rosa, Crosby, and Sloan violated the registration and antifraud provisions of U.S. securities laws: 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. Among other things, the SEC's complaint seeks, against these primary defendants, permanent injunctions prohibiting further violations of the laws charged, disgorgement of ill-gotten gains plus prejudgment interest, and civil monetary penalties. The SEC also charged three entities related to TelexFree (TelexFree Financial, Inc., TelexElectric, LLLP, and Telex Mobile Holdings, Inc.) as relief defendants based on their receipt of investor funds, and seeks disgorgement of those funds plus prejudgment interest.

Looking at Corporate Governance from the Investor’s Perspective

Looking at Corporate Governance from the Investor’s Perspective

COMPANY TO PAY PENALTY FOR VIOLATING MINIMUM FINANCIAL REQUIREMENT RULES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Capital Market Services, LLC Ordered to Pay $275,000 Penalty to Settle CFTC Charges of Violating Minimum Financial Requirement Rules

Washington, DC–The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges that, between March 2009 and October 2012, Capital Market Services, LLC (CMS), a CFTC-registered Futures Commission Merchant (FCM) and former Retail Foreign Exchange Dealer (RFED) headquartered in New York, New York, failed to comply with minimum financial requirements for FCMs and RFEDs. The CFTC Order requires CMS to pay a $275,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC Regulations, as charged.

The Order recognizes CMS’s cooperation and corrective action it undertook after its deficiencies were discovered.

According to the Order, under CFTC regulations, an FCM must maintain adjusted net capital (ANC) equal to or in excess of the greatest of $1,000,000 or various other measures, including the “amount of [ANC] required by a registered futures association of which it is a member.” Between January 2009 and mid-December 2010, while a Forex Dealer Member (FDM) with the National Futures Association (NFA), CMS was subject to the NFA’s FDM Financial Requirements, which imposed ANC requirements that ranged between $15,000,000 and approximately $21,000,000. CFTC Regulations also require that an RFED maintains ANC of $20,000,000 plus five percent of its total retail forex obligation in excess of $10,000,000 at all times. CMS’s ANC requirement as an RFED was approximately $21,000,000.

CMS did not maintain its required ANC during at least 17 separate months between March 2009 and October 2012, with month-end ANC computations showing that CMS was undercapitalized by more than $19 million at one point, the Order finds.

CMS has been registered with the CFTC as an FCM since January 2002 and was registered as an RFED from September 2009 to mid-December 2010. CMS also operated as an FDM from approximately January 2009 until mid-December 2010.

The CFTC thanks the NFA for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Kevin S. Webb, Brandon Tasco, Michael Solinsky, Charles D. Marvine, Paul G. Hayeck, and Richard Wagner. Annette Vitale of the CFTC’s Division of Swap Dealer and Intermediary Oversight also assisted in this matter.