OZ MANAGEMENT LP TO PAY $4.25 MILLION PENALTY TO SETTLE CHARGES FOR MISIDENTIFYING TRADES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

07/14/2015 10:00 AM EDT

The Securities and Exchange Commission today charged OZ Management LP with providing inaccurate trade data to four prime brokers, causing inaccuracies in the brokers’ books and records and in data provided to the SEC in investigations.  OZ Management, an investment adviser for numerous Och-Ziff funds, admitted wrongdoing and agreed to pay a $4.25 million penalty to settle the charges.

According to the SEC’s order instituting a settled cease-and-desist proceeding, for nearly six years, ending in December 2013, OZ Management misidentified some trades in data provided to four of its prime brokers.  Although trade settlement was unaffected, the erroneous data had a significant impact, causing the four prime brokers to inaccurately list approximately 552 million shares in their own books and records.  The erroneous information also was incorporated into data that brokers provide electronically to regulators, resulting in approximately 14.4 million shares being inaccurately reported in response to the SEC’s “blue sheet” requests.  FINRA made several referrals to the Commission based on the incorrect trade data.

Detailed trade data on “blue sheets,” named for the original paper form, help the SEC investigate conduct such as insider trading and market manipulation, and reconstruct trading after extreme market volatility.  The SEC discovered OZ Management’s violations during an investigation in 2013, when it determined that the firm’s own files identified certain trades differently than the blue sheets.  The discrepancy arose for trades where OZ Management did not characterize sales as long or short based on how they were marked when they were sent to the market but filtered them based on other factors, such as the relevant fund’s position in the stock at the prime broker.  As a result, the way trades were identified sometimes changed, causing some long sales to be erroneously shown as short sales when OZ Management provided the data to its prime brokers.  OZ Management has since provided corrected historical information to the affected prime brokers who are working to make their own corrections.

“The SEC relies on the accuracy of the books and records of financial institutions and blue sheet data,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “OZ Management’s inaccurate data had a substantial ripple effect that the SEC staff discovered through diligent investigative work.”

This is the second recent SEC enforcement action involving blue sheets.  In 2014, the Commission sanctioned Scottrade for failing to provide accurate and complete blue sheet submissions to the SEC.

The SEC’s order finds that OZ Management’s conduct caused violations by four prime brokers of the federal securities laws and SEC rules requiring accurate books and records.  The SEC also found that OZ Management wrongfully purchased stock during a restricted period for a secondary offering in 2011, in violation of SEC Rule 105.  OZ Management admitted the facts in the SEC’s order and consented to a cease-and-desist order.  In addition to the $4.25 million penalty, OZ Management agreed to return $243,427 of ill-gotten trading gains and prejudgment interest from its trading in violation of Rule 105.

The SEC’s investigation was conducted by Ann Rosenfield, John Marino, Ainsley Kerr and Carolyn M. Welshhans of the Enforcement Division’s Market Abuse Unit.  The case was supervised by Daniel M. Hawke, Chief of the Market Abuse Unit, and co-deputy unit chief Robert A. Cohen.

ALLEGED PONZI/PYRAMID GOLD MINE INVESTMENT SCHEMERS CHARGED BY SEC WITH FRAUD

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/02/2015 01:10 PM EDT

The Securities and Exchange Commission announced fraud charges and an asset freeze against the operators of a pyramid and Ponzi scheme falsely promising a gold mine of investment opportunity to investors in Spanish and Portuguese-speaking communities in Massachusetts, Florida, and elsewhere in the U.S.

The SEC alleges that DFRF Enterprises, named for its founder Daniel Fernandes Rojo Filho, claimed to operate more than 50 gold mines in Brazil and Africa, but the company’s revenues came solely from selling membership interests to investors and not from mining gold.  With the help of several promoters, they lured investors with such false promises as their money would be fully insured, DFRF has a line of credit with a Swiss private bank, and one-quarter of DFRF’s profits are used for charitable work in Africa.  The scheme raised more than $15 million from at least 1,400 investors by recruiting new members in pyramid scheme fashion to keep the fraud afloat, and commissions were paid to earlier investors in Ponzi-like fashion for their recruitment efforts.  The SEC further alleges that Filho has withdrawn more than $6 million of investor funds to buy a fleet of luxury cars among other personal expenses.

“DFRF and its operators falsely claimed that they were running a lucrative gold mining business when in reality they were operating a Ponzi and pyramid scheme that preyed on investors in particular ethnic communities who stand to lose millions of dollars,” said John T. Dugan, Associate Regional Director of the SEC’s Boston Regional Office.  “Investors were not given the full story about the true value and security of their investments.”

According to the SEC’s complaint filed June 30 and unsealed today in federal court in Boston, Filho is a Brazilian native who lives in Winter Garden, Fla., and he orchestrated the scheme with assistance from six promoters also charged in the case: Wanderley M. Dalman of Revere, Mass.; Gaspar C. Jesus of Malden, Mass.; Eduardo N. Da Silva of Orlando, Fla.; Heriberto C. Perez Valdes of Miami; Jeffrey A. Feldman of Boca Raton; and Romildo Da Cunha of Brazil.

The SEC alleges that Filho and others began selling “memberships” in DFRF last year through meetings with prospective investors primarily in Massachusetts hotel conference rooms, private homes, and businesses.  DFRF promoted the investment opportunity through online videos in which Filho falsely claimed that the company had registered with the SEC and its stock would be publicly traded.  As DFRF’s marketing reach widened, membership sales dramatically increased from under $100,000 in June 2014 to more than $4 million in March 2015 alone.

The SEC’s complaint alleges that all 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 thereunder, and registration provisions Section 5(a) and 5(c) of the Securities Act.

The SEC’s investigation was conducted by Caitlyn M. Campbell, Mark Albers, John McCann, Frank C. Huntington, and Michele T. Perillo of the SEC’s Boston Regional Office, and assisted by Carlos Costa-Rodrigues in the agency’s Office of International Affairs.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, the Boston field office of the Federal Bureau of Investigation, the Massachusetts Securities Division of the Massachusetts Secretary of Commonwealth’s office, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico, the British Columbia Securities Commission, the Swiss Financial Market Supervisory Authority, the Financial Services Commission  of Barbados, and the United Kingdom Financial Conduct Authority.

Statement on NYSE

Statement on NYSE

SEC ANNOUNCES CRIMINAL CONVICTION OF INDIVIDUAL INVOLVED WITH AMATEUR GOLFER INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23289 / June 17, 2015

Securities and Exchange Commission v. Eric McPhail, et al., Civil Action No. 1:14-cv-12958 (District of Massachusetts, Complaint filed July 11, 2014)

United States v. Eric McPhail and Douglas Parigian, 1:14-cr-10201-DJC (District of Massachusetts filed July 9, 2014)

Jury in Criminal Case Convicts Individual in Insider Trading Case Involving Group of Amateur Golfers

The Securities and Exchange Commission announced that, on June 16, 2015, a federal jury in Massachusetts convicted Eric McPhail of criminal charges of conspiracy and securities fraud for his role in an insider trading ring that traded on inside information about Massachusetts-based American Superconductor Corporation. The criminal charges against McPhail arose out of the same fraudulent conduct for which the Commission instituted a securities fraud action against him and others during July 2014.

The U.S. Attorney's Office for the District of Massachusetts indicted McPhail and another defendant, Douglas Parigian, in July 2014. The indictment alleged that McPhail had a history, pattern and practice of sharing confidences with an individual who had material, nonpublic information concerning American Superconductor's quarterly earnings and other business activities (the "Inside Information"). This individual provided McPhail with the Inside Information with the understanding that it would be kept confidential. Instead, McPhail used email and other means to provide the Inside information to his friends, including Parigian, with the intent that they profit by buying and selling American Superconductor stock and options. Parigian, who used this information to profit on the purchase and sale of American Superconductor stock and options, pled guilty to criminal securities fraud and conspiracy charges on May 13, 2015.

In July 2014, the Commission filed a civil injunctive against Eric McPhail and six of his golfing buddies, including Parigian, alleging that McPhail repeatedly provided non-public information about American Superconductor. McPhail's source was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. According to the complaint, from July 2009 through April 2011, the executive told McPhail about American Superconducter's expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential. Instead, McPhail misappropriated the inside information and tipped his friends, who improperly traded on the information. Four defendants settled the SEC's charges, without admitting or denying the allegations, by consenting to the entry of judgments permanently enjoining them from violating the antifraud provisions of the Exchange Act, paying disgorgement and civil penalties. The SEC's case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing.

TWO FIRMS CHARGED WITH EB-5 FOREIGN INVESTOR VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/23/2015 03:10 PM EDT

The Securities and Exchange Commission charged two firms that illegally brokered more than $79 million of investments by foreigners seeking U.S. residency.  The charges are the first against brokers handling investments in the government’s EB-5 Immigrant Investor Program and follow earlier SEC actions against fraudulent EB-5 offerings.

Ireeco LLC, originally of Boca Raton, Fla., and its successor Ireeco Limited, a Hong Kong-based company operating in the U.S., were charged with acting as unregistered brokers for more than 150 EB-5 investors.  The EB-5 program administered by the U.S. Citizenship and Immigration Services (USCIS) provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries.

According to the SEC’s order, Ireeco LLC and Ireeco Limited used their website to solicit EB-5 investors, some of whom were already in the U.S. on a temporary visa.  While Ireeco LLC and Ireeco Limited promised to help investors choose the right regional center to invest with, they allegedly directed most EB-5 investors to the same handful of regional centers, ones that paid them commissions of about $35,000 per investor once USCIS approved an investor’s petition for conditional residence (“green card”).

“While raising money for EB-5 projects in the U.S., these two firms were not registered to legally operate as securities brokers,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “The broker-dealer registration requirements are critical safeguards for maintaining the integrity of our securities markets, and the SEC will vigorously enforce compliance with these provisions.”

Without admitting or denying the SEC’s findings, Ireeco LLC and Ireeco Limited agreed to be censured and to cease and desist from committing or causing similar violations in the future.  They also agreed to administrative proceedings to determine whether they should be ordered to return their allegedly ill-gotten gains, pay penalties, or both based on their violations.

The SEC’s investigation was conducted by Brian Theophilus James in the Miami office, and the case was supervised by Assistant Regional Director Chedly C. Dumornay and Associate Regional Director Glenn S. Gordon.  The SEC appreciates the assistance of the USCIS.

SEC TAKES ENFORCEMENT ACTION AGAINST COMPANY OFFERING COMPLEX DERIVATIVE PRODUCTS TO RETAIL INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/17/2015 12:05 PM EDT

The Securities and Exchange Commission announced an enforcement action against a company that illegally offered complex derivatives products to retail investors.

The Dodd-Frank Act implemented two key requirements for any security-based swaps offering to a retail investor who doesn’t meet the high standard of an “eligible contract participant” defined in the law.  A registration statement must be effective for the offering, and the contracts must be sold on a national securities exchange.  These requirements are intended to make financial information and other significant details about the offering fully transparent to retail investors, and limit the transactions to platforms subject to the highest level of regulation.

An SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.  The violations were detected shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.

Sand Hill agreed to settle the SEC’s charges.

“The Dodd-Frank Act prohibits security-based swaps from being offered in the darkness to retail investors, and we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework,” said Reid A. Muoio, Deputy Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to scrutinize this space for companies circumventing the law to offer security-based swaps without the safeguards provided to retail investors.”

According to the SEC’s order instituting a settled administrative proceeding against Sand Hill and two individuals:

Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league.  But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.

Sand Hill sought people to fund accounts using dollars or bitcoins.  Hall and Ou did not ask users about their financial holdings or limit the offering to users with any specific amount of assets.  In fact, they wrote on the Sand Hill website: “We accept everybody regardless of accreditation status.”  Hall and Ou intended to pay users who profited from their contracts.

Hall and Ou understood that they were buying and selling derivatives linked to the value of private companies, and Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts.

For about seven weeks, Sand Hill offered, bought, and sold contracts through the website in violation of the Dodd-Frank provisions that limit security-based swaps transactions with people who don’t meet the definition of an eligible contract participant.  Hall and Ou exaggerated Sand Hill’s trading, operations, controls, and financial backing.

Sand Hill, Hall, and Ou ceased offering and selling security-based swaps following inquiries from the SEC in early April.

The SEC’s order finds that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Sand Hill, Hall, and Ou agreed to cease and desist from committing or causing any future violations of the securities laws.  Sand Hill agreed to pay a $20,000 penalty.

The Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.  The SEC’s investigation of Sand Hill was conducted by Brent Mitchell and Creola Kelly, and the case was supervised by Michael Osnato and Mr. Muoio.  The investigation was assisted by Carol McGee and Andrew Bernstein of the Division of Trading and Markets as well as Amy Starr and Andrew Schoeffler of the Division of Corporation Finance.