Source: https://www.forkeylaw.com/Securities-Commodities-and-Precious-Metals-Terms/SEC-Enforcement-Actions.shtml
Timestamp: 2019-04-24 16:59:31+00:00

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Contact South Florida Securities Lawyer Russell Forkey If You Have Suffered Damages as a Result of Any of the Below Described SEC Enforcement or Criminal Actions by the Perpetrators Thereof. See also Securities Fraud and Misrepresentation Matters Currently Under Investigation.
The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of a Stamford, Conn.-based investment adviser and its principal, Francisco Illarramendi, charging that they misappropriated at least $53 million in investor funds and used the money for self-dealing transactions.
The SEC alleges that Illarramendi defrauded investors in the several hedge funds he managed by improperly transferring their money into bank accounts that he personally controlled. He then invested the money for his own benefit or for the benefit of the entities that he controlled, rather than for the benefit of the hedge fund investors.
The SEC sought an asset freeze and other emergency relief because it alleged that Illarramendi was imminently planning to make additional investments using investor funds without the knowledge or consent of the investors. Since the filing of the complaint, the Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, has held a series of hearings pertaining to the SEC's request for an emergency relief against Illarramendi and Michael Kenwood Capital Management. Judge Arterton then entered an order freezing the assets of the defendants.
The SEC's complaint charges Illarramendi and Michael Kenwood Capital Management, LLC, with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint also names the following Illarramendi-controlled entities as relief defendants, alleging that they received investor funds to which they have no right: Michael Kenwood Asset Management LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar LP. In addition to preliminary emergency relief, the SEC's complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties from the defendants, and disgorgement plus prejudgment interest from the relief defendants.
On January 26, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York alleging that Adam Smith - a former portfolio manager of the Galleon Emerging Technology funds (f/k/a the Galleon Communications funds) engaged in insider trading in the securities of ATI Technologies, Inc. The SEC alleges that Smith caused the Galleon funds he advised to purchase shares of ATI based on material non-public information concerning Advanced Micro Devices Inc.'s $5.4 billion takeover of ATI in July, 2006. The trading generated over $1.3 million in illicit profits.
According to the SEC's complaint, Smith obtained material non-public information concerning the AMD/ATI transaction from an investment banking source that Smith had known for years. This source, according to the SEC, provided Smith with the tip in order to win favors from Galleon such as securing investment banking work from, or obtaining future employment with, Galleon. The complaint filed today relates to a pending enforcement action, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR).
The SEC's complaint charges Smith with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a final judgment permanently enjoining Smith from future violations of the above provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay civil penalties.
The SEC has now charged 28 defendants in its Galleon-related enforcement actions which have alleged widespread and repeated insider trading at numerous hedge funds including Galleon - a multi-billion dollar New York hedge fund complex founded and controlled by Raj Rajaratnam - and by other professional traders and corporate insiders in the securities of 14 companies generating illicit profits totaling over $70 million.
entered into a settlement with Rajiv Goel, a former managing director in the treasury group of Intel Corp., as well as the Director of Strategic Investments at Intel Capital, an Intel subsidiary that makes proprietary equity investments in technology companies. Pursuant to the settlement, Goel is permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act. Goel is also required to pay disgorgement in the amount of $230,570.52, plus prejudgment interest in the amount of $23,447.21, for a total of $254,017.73. The Court will determine at a later date whether any civil penalty is appropriate as to Goel. Finally, Goel is barred from acting as an officer or director of any public company. Goel has agreed to cooperate with the SEC in connection with this action and related investigations.
entered into a settlement with Roomy Khan, an individual investor who had been employed at Intel in the late 1990s and had been subsequently employed at Galleon, pursuant to which Khan is permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, and is required to pay disgorgement in the amount of $1,552,566.94, plus prejudgment interest in the amount of $304,398.77, for a total of $1,856,965.71. The Court will determine at a later date whether any civil penalty is appropriate as to Khan. Khan has agreed to cooperate with the SEC in connection with this action and related investigations.
entered into a settlement with Anil Kumar, a former director at the global consulting firm McKinsey & Co., pursuant to which Kumar is permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, and is required to pay disgorgement in the amount of $2.6 million, plus prejudgment interest in the amount of $190,621, for a total of $2,790,621. The Court will determine at a later date whether any civil penalty is appropriate as to Kumar. Kumar has agreed to cooperate with the SEC in connection with this action and related investigations.
entered into a settlement with Schottenfeld Group, LLC, a New York limited liability company and registered broker-dealer, pursuant to which Schottenfeld is permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, and is required to pay disgorgement in the amount of $460,475.28, plus prejudgment interest in the amount of $72,202.72, and a civil penalty of $230,237.64, representing fifty percent of the disgorgement amount, a discount from a one-time penalty in recognition of its agreement to cooperate. Schottenfeld also agreed to implement enhanced policies and procedures to prevent future securities laws violations, as well as to retain an independent consultant to review its policies and procedures.
entered into settlements with Choo-Beng Lee and Ali T. Far, who were both managing members of Far & Lee LLC, a Delaware limited liability company. In addition, Lee was president and Far a managing member of Spherix Capital LLC, an unregistered hedge fund investment adviser based in San Jose, California. Pursuant to the settlements, Lee and Far are permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, and are required, jointly and severally, to pay disgorgement in the amount of $1,335,618.17, plus prejudgment interest in the amount of $96,385.52, and a civil penalty of $667,809.09, representing fifty percent of the disgorgement amount, a discount from a one-time penalty in recognition of their cooperation.
dismissed its claims against Far & Lee and Spherix, which are now defunct or nearly so, in exchange for their agreement to cooperate and cease doing business.
The Commission today filed an enforcement action against Provident Capital Indemnity, Ltd. ("PCI"), its president Minor Vargas Calvo ("Vargas"), and its purported outside auditor, Jorge L. Castillo ("Castillo") seeking to halt a massive, ongoing fraud by PCI, an offshore company located in Costa Rica that provides financial guarantee bonds on life settlements and claims to protect investors' interests in life insurance policies by promising to pay the death benefit if the insured lives beyond his or her estimated life expectancy. According to the complaint, from at least 2004 through March 2010, PCI issued approximately 197 bonds backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $670 million.
According to the complaint, the PCI bonds were a material component of numerous third-party life settlement offerings in the United States and abroad. Without a bond, a life settlement investment is illiquid and open-ended because the investment's pay-out date and return are dependent upon the date of the insured's death. PCI's bonds offered a fixed maturity date for the investments because PCI's bond obligated PCI to pay investors (directly or indirectly through the life settlement issuer) the face value of the underlying insurance policy by a date certain if the insured lived past his life expectancy date.
Specifically, since at least 2003, PCI, Vargas and Castillo represented to life settlement issuers, and in turn, the investing public, that Castillo had audited PCI's financial statements in accordance with generally accepted accounting standards. Contrary to their representations, however, the complaint alleges that Castillo never conducted an audit of PCI and instead issued clean audit reports at Vargas's bidding, thereby supporting the illusion that PCI had materially larger assets and greater financial wherewithal to support its obligations under the life settlement bonds. According to the complaint, PCI's "audited" financial statements reflect what appears to be a fictitious "Long Term Asset" that has comprised some 70% to 80% of PCI's total reported assets from at least 2003 to the present.
The complaint alleges that PCI's "audited" financial statements were provided to Dun & Bradstreet ("D&B"), which issued PCI a favorable rating of "5 A/S," based exclusively on PCI's reported net worth. PCI then misleadingly represented in its marketing materials that D&B's rating is a reflection of "successful customer satisfaction" and "the ability to maintain one of the insurance industry's lowest loss ratios." According to the complaint, PCI and Vargas also have represented that PCI was backed by a "bouquet" of reputable reinsurers that would backstop PCI's obligations under its life settlement bonds when, in fact, PCI had no reinsurance coverage.
The Commission charged the defendants with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5] and alternatively charged Castillo with aiding and abetting PCI's and Vargas's violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. The Commission also named Desarrollos Comerciales Ronim S.A., PCI's managing general agent, as a relief defendant.
On January 13, 2011, the Securities and Exchange Commission filed a civil action in the United States District Court for the Eastern District of New York against Warren D. Nadel, his broker-dealer, Warren D. Nadel & Co. ("WDNC"), and his investment advisory firm, Registered Investment Advisers, LLC ("RIA"). The Commission alleges that these Defendants fraudulently induced clients to invest tens of millions of dollars in a purported investment program in order to receive over $8 million in commissions and fees from 2007 through 2009. Defendants deliberately overstated the value and liquidity of client holdings in the Strategy, by misrepresenting and concealing critical information about the way they were supposedly executing it. Although Defendants informed clients repeatedly that they were executing open-market transactions on the clients' behalf, the vast majority of transactions, however, were not executed on the open market. Most simply consisted of trades between advisory client accounts controlled by Defendants at inflated prices made up by Nadel himself. Defendants thus created the false impression that there was a liquid market for these securities and that the market prices for the securities were consistent with the inflated values that Defendants reported to their clients.
The complaint alleges that the Defendants violated the anti-fraud provisions of the federal securities laws, specifically Defendants Nadel, WDNC and RIA violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; Defendant WDNC violated and Defendant Nadel aided and abetted violations of 17(a) of the Exchange Act and Rules 10b-10 and 17a-4 thereunder; Defendants Nadel and RIA violated Sections 206(1), (2) and (3) and 207 of the Investment Advisers Act of 1940 ("Advisers Act"); Defendant RIA violated and Defendant Nadel aided and abetted violations of Sections 204 of the Advisers Act and Rule 204(2)-(a)(3) thereunder.
The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges.
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets fall from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to the complaint filed in federal court in San Francisco and a related order issued by the Commission, CSIM and CS&Co. failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities did not adequately inform investors about the differences between YieldPlus and money market funds. In particular, the maturity and credit quality of the YieldPlus Fund's securities were significantly different than those of a money market fund.
The SEC also found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25% of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50% of the assets of the YieldPlus Fund and more than 25% of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.
Read More, including information relative to companion case.
SEC OBTAINS JUDGMENT AGAINST FLORIDA STOCKBROKER STEPHEN FAYETTE The Securities and Exchange Commission announced today that on December 30, 2010, the United States District Court for the Northern District of Texas entered a Final Judgment against Stephen Fayette (Fayette), of Sarasota, Florida. The Commission's complaint alleged that Fayette was part of a scheme to pump and dump the stock of ConnectAJet.com, Inc. According to the complaint, ConnectAJet.com, Inc., of Austin, Texas, issued 30 million shares of stock in an illegal, unregistered offering to certain penny stock promoters. To pump up demand for the stock, ConnectAJet.com, Inc. and its chief executive, attorney Martin T. Cantu, launched a nationwide advertising campaign including false press releases. The complaint alleged that Fayette, a registered representative at Fagenson & Co., Inc. facilitated the scheme by liquidating ConnectAJet.com, Inc. shares on behalf of multiple customers, including the penny stock promoters. According to the complaint, Fayette ignored numerous red flags and failed to make a reasonable inquiry under the circumstances to ensure that his customers were not acting as underwriters.
The Final Judgment permanently enjoins Fayette from violating Sections 5(a) and (c) of the Securities Act of 1933 and requires him to pay disgorgement, prejudgment interest and civil penalties totaling $313,257. Fayette consented to the entry of the judgment, which also bars him from participating in any penny stock offerings. Fayette, who previously worked for registered broker dealers GLB Trading, Inc. and Franklin Ross, Inc., also consented to an order barring him from association with any broker or dealer.
Previously, the Court entered Final Judgments against Martin T. Cantu, his father Martin M. Cantu, one of the promoters, Verona Funds LLC, and relief defendant Edward Spahiu. Cantu and Martin M. Cantu were held jointly and severally liable for $632,327 in disgorgement. In addition, they were ordered to pay $260,000 and $130,000 respectively in civil penalties. The Commission's case against the remaining defendants is pending. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.
On January 10, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York alleging that Robert Feinblatt - a co-founder and principal of New York-based hedge fund investment adviser Trivium Capital Management LLC - and Trivium analyst Jeffrey Yokuty engaged in insider trading in the securities of Polycom, Hilton, Google and Kronos. The complaint charges Trivium with insider trading as well. The SEC further alleges that Polycom senior executive Sunil Bhalla and Shammara Hussain, an employee at investor relations consulting firm Market Street Partners that did work for Google, tipped the inside information that enabled the insider trading by Feinblatt and Yokuty on behalf of Trivium's hedge funds for illicit profits of more than $15 million. The complaint filed today relates to pending enforcement actions, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR) and SEC v. Hardin, 10-CV-8600 (S.D.N.Y.) (JSR).
The SEC has now charged 27 defendants in its Galleon-related enforcement actions that have alleged widespread and repeated insider trading at numerous hedge funds including Galleon - a multi-billion dollar New York hedge fund complex founded and controlled by Raj Rajaratnam - and by other professional traders and corporate insiders in the securities of 14 companies generating illicit profits totaling approximately $69 million.
In the SEC's complaint filed earlier today in federal court in Manhattan, the SEC alleges that Feinblatt and Yokuty traded on behalf of Trivium in connection with two corporate takeovers and two quarterly earnings announcements based on material nonpublic information that Feinblatt and Yokuty allegedly received from Roomy Khan, an individual investor who had, herself, received such information from various sources.
The SEC's complaint alleges that Bhalla tipped Khan to inside information about Polycom's 2005 fourth quarter earnings, and that Khan traded on that information and tipped others. The tippees included Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. Bhalla also tipped Khan with inside information about Polycom's 2006 first quarter earnings. Khan traded on the information and tipped Rajaratnam, who traded on behalf of Galleon based on the information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that Khan received from a Moody's rating agency analyst about an impending takeover of Hilton by The Blackstone Group. Feinblatt and Yokuty then traded on behalf of Trivium based on the information.
The SEC further alleges that Hussain tipped Khan among others with inside information about Google's 2007 second quarter earnings. Khan traded on the information and also tipped Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that she received about the impending acquisition of Kronos by Hellman & Friedman. Feinblatt and Yokuty then traded on behalf of Trivium based on the information.
The SEC's complaint charges the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Bhalla, with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Bhalla from acting as an officer or director of any registered public company.
entered into a settlement with Khan, an individual investor who had been employed at Intel in the late 1990s and had been subsequently employed at Galleon, pursuant to which Khan is permanently enjoined from violating the anti-fraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, and is required to pay disgorgement in the amount of $1,552,566.94, plus prejudgment interest in the amount of $304,398.77, for a total of $1,856,965.71. The Court will determine at a later date whether any civil penalty is appropriate as to Khan. Khan has agreed to cooperate with the SEC in connection with this action and related investigations.
On January 6, 2011, the Securities and Exchange Commission filed a civil injunctive action in U.S. District Court for the Northern District of Georgia, charging Stanley J. Kowalewski ("Kowalewski") and SJK Investment Management, LLC ("SJK"), a registered investment adviser, with violations of the federal securities laws for defrauding investors in two hedge funds managed by SJK.
The Commission's Complaint alleges that, beginning in the summer of 2009, SJK and Kowalewski, the firm's CEO, raised a total of $65 million for two hedge funds, the SJK Absolute Return Fund, LLC, and the SJK Absolute Return Fund, Ltd. (collectively, the "Absolute Return Funds") and represented to investors that: (1) "substantially all" of the monies invested in the Absolute Return Funds would be invested in "unaffiliated" underlying hedge funds pursuing complex investment strategies, (2) no single underlying fund would be allocated more than 15% of the Absolute Return Funds' monies, and (3) as compensation for its services, SJK would receive no more than a 1% annual asset management fee and a 10% profits incentive fee. Contrary to these representations, Kowalewski and SJK formed a new, undisclosed fund, the Special Opportunities Fund, LP (the "Special Opportunities Fund"), which they used to divert to themselves millions of dollars through various self-dealing transactions, including having the Special Opportunities Fund: (1) buy Kowalewski's personal home for $2.8 million, almost $1 million more than its 2006 purchase price, (2) purchase a vacation home for Kowalewski for $3.9 million, (3) pay approximately $1 million of Kowalewski and SJK's personal and business expenses, and (4) pay SJK an unfounded $4 million "administration" fee, which Kowalewski then paid himself as a "salary draw."
In its Complaint, the Commission alleges that Kowalewski and SJK violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act ("Advisers Act") and Rule 206(4)-8 thereunder.
On January 6, 2011, the Honorable Timothy C. Batten, Sr., United States District Judge for the Northern District of Georgia, entered an order temporarily restraining the defendants from violations of the federal securities laws identified above, instituting an asset freeze, and ordering other relief.
The Securities and Exchange Commission announced the filing of a complaint in federal district court against Raymond P. Morris (Morris), James L. Haley (Haley), Jay J. Lindford (Lindford), attorney Luc D. Nguyen (Nguyen), E&R Holdings, LLC (E&R Holdings), Wise Financial Holdings, LLC (Wise Financial), Momentum Leasing, LLC (Momentum), Cornerstone Capital Fund, LLC (Cornerstone), Vantage Point Capital, LLC (Vantage Point) and Freedom Group, LLC (Freedom Group), alleging unregistered fraudulent offers, sales and purchases of securities that bilked at least 90 investors out of no less than $60 million.
The complaint alleges that from at least March 2007 through January 2009, Morris, through his entities E&R Holdings, Wise Financial and Momentum, offered and sold unregistered promissory notes to investors and in doing so made misrepresentations and omissions designed to convince investors that they were purchasing high yield notes that were risk free. Morris told investors that their funds would be deposited into a secure account and would be used only to verify deposits. Instead of using the funds as represented Morris used investor funds to support his extravagant lifestyle and to make Ponzi payments to certain investors.
The complaint further alleges that Haley, Linford and Nguyen assisted Morris in the fraud, soliciting funds from investors through misrepresentations, recklessly repeating Morris' misrepresentations.
The Commission's complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings, Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group with violations of 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 (Exchange Act) and Rule 10b-5 thereunder. The complaint also charges Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The complaint seeks an injunction, disgorgement and civil penalties.
The Commission acknowledges the assistance of the United States Attorney's Office for the District of Utah, the Federal Bureau of Investigation and the Utah County Attorney's Office in this matter.
The Securities and Exchange Commission announced today that, on December 17, 2010, the Honorable Gregory A. Presnell of the United States District Court for the Middle District of Florida entered Final Judgments against Enzyme Environmental Solutions, Inc. (EESO) and its sole director and officer, Jared E. Hochstedler. The Commission's complaint alleged that the defendants engaged in a scheme to evade the registration requirements of Section 5 of the Securities Act of 1933. The complaint further alleged that, under the guise of converting debt obligations into shares, EESO and Hochstedler distributed over two billion shares of EESO stock to the public through stock distributors in unregistered transactions. The defendants consented to entry of the Final Judgments without admitting or denying the allegations in the complaint.
The Final Judgments permanently enjoin EESO and Hochstedler from violating Sections 5(a) and (c) of the Securities Act and require them to pay disgorgement, prejudgment interest and, in the case of EESO, civil penalties. EESO consented to an entry of a judgment ordering it to disgorge $346,135 plus prejudgment interest and to pay a civil penalty of $25,000. Hochstedler consented to the entry of a judgment ordering him to disgorge $1,445,000 plus prejudgment interest and, based upon his financial condition, waiving all but $385,000, $65,000 of which will be paid within 30 days of the entry of judgment and the balance within 24 months of the entry of judgment. With this settlement, the action is fully resolved as to all defendants.
The Securities and Exchange Commission announced that, on January 6, 2011, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania against Joseph M. Braas, of Lititz, Pennsylvania, and Michael J. Schlager, of Lancaster, Pennsylvania. The Commission's complaint alleges that Braas and Schlager, two senior officers at Equipment Finance, LLC ("EFI"), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. ("Sterling"), conducted a financial fraud that lasted over five years. Sterling was a publicly traded bank holding company based in Lancaster, Pennsylvania. Without admitting or denying the Commission's allegations, Braas and Schlager have agreed to settle the matter. The settlements are pending final approval by the court.
The Commission's complaint alleges that, from at least February 2002 until April 2007, Braas, EFI's Vice President and Chief Operating Officer, and Schlager, EFI's Executive Vice President, orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI's commercial loan portfolio from Sterling's senior management and auditors.
The Commission further alleges that Braas and Schlager were able to subvert virtually every aspect of EFI's loan process and internal controls. They created fictitious loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI's maximum lending limitations. They also deceived Sterling's internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings, and by recruiting vendors to assist in the circumvention of loan confirmation procedures.
As alleged in the complaint, Braas and Schlager caused EFI to report false financial information to Sterling which, in turn, from 2002 through 2006, filed quarterly and annual reports with the Commission containing materially false and misleading financial statements. As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI's loan portfolio, and approximately 13 percent of Sterling's total loan portfolio during the period of the fraud.
Braas and Schlager have consented to the entry of orders permanently enjoining them from violating Section 17(a) of the Securities Act of 1933; Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder; and 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 orders will bar Braas and Schlager from serving as officers or directors of a public reporting company. Braas will also be ordered to pay disgorgement and prejudgment interest of $1,489,024, and Schlager ordered to pay disgorgement and prejudgment interest of $1,121,302. In view of each defendant's agreement to pay restitution in conjunction with his guilty plea in a related criminal case filed by the U.S. Attorney's Office for the Eastern District of Pennsylvania [USA v. Braas, et al., Crim. No. 10-cr-00753-PD (E.D. Pa. Nov. 18, 2010)], the ordered amounts shall be deemed satisfied upon the entry of a restitution order in the criminal case that is equal to or greater than the amounts ordered in the Commission's case.
The Securities and Exchange Commission today charged Gendarme Capital Corporation ("Gendarme") and its two executives with engaging in an illegal stock distribution scheme.
The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. Through its two principals - CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. - Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.
According to the SEC's complaint, filed today in federal district court in Sacramento, Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for "investment purposes only." Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets, profiting by more than $1.6 million from its unregistered stock distributions.
The SEC also alleges that Gendarme's outside attorney - Cassandra Armento of Greenwich, N.Y. - violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities. Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.
In its federal court action, the SEC alleges Gendarme, Rahimi, Lamphere, and Armento violated Sections 5(a) and (c) of the Securities Act of 1933. Against Gendarme, Rahimi, and Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock. The SEC seeks injunctive relief and monetary penalties against Armento.
The Securities and Exchange Commission announced today that on December 21, 2010, Judge Elaine Bucklo of the United States District Court for the Northern District of Illinois entered a final judgment against Bulverde, Texas resident George L. Phelps (Phelps), also known as "Lin" Phelps and also doing business under the name "Safe Estate Plans." The final judgment: (1) enjoined Phelps from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-10 promulgated thereunder; (2) ordered Phelps to pay disgorgement in the amount of $2,002,766.66, plus prejudgment interest of $919,732.93, for a total of $2,922,499.59; and (3) ordered Phelps to pay a civil penalty in the amount of $120,000.
The SEC's complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Phelps, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Leases. Universal Lease investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others, including Phelps, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Phelps, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme, its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants, including Phelps, failed to disclose key facts about the Universal Lease investment, including the risks of the investment and that Kelly was paying commissions as high as 27% to the selling brokers. The SEC's action against the remaining defendants is pending.
The Securities and Exchange Commission today charged Jupiter, Florida-based Pharma Holdings, Inc., its CEO Edward Klapp IV, and its CFO Edward Klapp Jr., with violations of the anti-fraud provisions of the federal securities laws. The SEC's complaint alleges that from 2005 through September 2009, Pharma Holdings, purportedly in the pharmaceutical supply business, and the Klapps raised approximately $5 million from at least 80 European investors, primarily residing in the United Kingdom, through the fraudulent offer and sale of Pharma Holdings stock.
The SEC's complaint alleges that Pharma Holdings and the Klapps engaged various sales offices and agents to conduct Pharma Holdings' offerings, and also directly offered shares in later offerings to existing shareholders. According to the SEC's complaint, in connection with its stock offerings, Pharma Holdings issued false press releases and made false postings on its website overstating Pharma Holdings' sales revenues and net profits, and touting non-existent business agreements with multinational corporations.
The complaint further alleges that Pharma Holdings and its sales agents repeatedly told investors and prospective investors, both in written materials from Klapp IV and on the company's website, that Pharma Holdings would soon conduct an IPO or be bought out by a large corporation or mutual fund. The complaint also alleges that Klapp Jr. falsely promised investors an imminent IPO. Further, the complaint alleges that Pharma Holdings and the Klapps failed to disclose that Edward Klapp IV had been criminally convicted of a felony involving fraud.
The SEC's enforcement action charges Pharma Holdings and the Klapps with violating 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. The SEC is seeking permanent injunctions, disgorgement and financial penalties against Pharma Holdings, Klapp IV and Klapp Jr., and the imposition of officer and director bars against Klapp IV and Klapp Jr.
Two former Wachovia Securities brokers tricked dozens of mostly elderly clients into investing in what were supposed to be can't-miss opportunities, only to lose roughly $8 million, according to a lawsuit filed by the Securities and Exchange Commission.
The SEC complaint charges William Harrison and Eddie Sawyers of misrepresenting the investment strategies they were selling to at least 42 clients in 2007 and 2008, guaranteeing 35 percent returns while using the money to trade securities in risky online deals.
"Instead of safeguarding their customers' investments through suitable investments and prudent recommendations, these two brokers crossed the line with a scheme that victimized unsuspecting investors," said William Hicks, the SEC's associate regional director for enforcement in its Atlanta office, in a statement.
Harrison, 33, lives in Pilot Mountain, and Sawyers, 45, lives in Mount Airy. A phone message left at Sawyers' home was not immediately returned Thursday. A message left with Harrison's lawyer also was not immediately returned. Both men resigned from Wachovia in October, 2008.
The SEC accuses the two of recruiting Wachovia investors to a new business venture they called Harrison/Sawyers Financial Services, which they billed as offering an essentially foolproof investment plan guaranteed to make money regardless of market conditions.
The lawsuit, filed Wednesday in federal court in Charlotte, contends the brokers misrepresented the riskiness of their plans as well as what they were actually doing with clients' money.
In one case, according to the SEC, Harrison and Sawyers told a husband and wife who had invested $100,000 that their money had "maxed out" by achieving a 35 percent return, when in fact it ultimately lost about $84,000.
"All of the brokerage customers Harrison and Sawyers solicited were unsophisticated investors," the lawsuit says. Most customers were over 50, and an unspecified number were retired and living on fixed incomes.
The lawsuit contends that the two brokers set up online brokerage accounts in some clients' names, while pooling the investment money from other clients into accounts set up in the name of Harrison's wife and in a joint account held by the Harrisons.
The brokers then obtained permission to trade securities using their clients' personal accounts, designating Harrison's wife as each client's agent, the lawsuit says. The SEC argues they did this to conceal their conduct, and that they didn't notify Wachovia of what they were doing.
The brokers' investment plans initially made money, according to the SEC, but when the economy began to collapse in 2008, things quickly went sour. In Harrison's letter of resignation from Wachovia, he "confessed his wrongdoing, stating that he had 'misdirected' $6.6 million of his clients' money," the lawsuit says.
The Securities and Exchange Commission today charged penny stock promoters Joshua Konigsberg and Louis Fischler with securities fraud for their roles in various illicit schemes to manipulate the volume and price of four microcap stocks and illegally generate stock sales. The SEC also charged microcap company MediSys Corp., of which defendant Konigsberg is the president and chief executive officer, in connection with one of those schemes.
The SEC worked closely with the U.S. Attorney's Office for the Southern District of Florida and the Federal Bureau of Investigation as the schemes were uncovered through FBI undercover operations conducted so that no investors suffered harm. The U.S. Attorney today announced criminal charges against the same two individuals facing SEC civil charges.
The SEC's complaint, filed in the United States District Court for the Southern District of Florida, alleges that Konigsberg and Fischler sought to manipulate the volume and price of four different microcap stocks and to generate stock sales through the payment of illegal kickbacks and bribes. Konigsberg and Fischler thought they were paying-off a corrupt pension fund employee, stockbroker, and middlemen. In reality, the pension fund employee and the stockbroker were fictitious persons, and the middlemen were an undercover FBI agent and a cooperating witness.
According to the SEC's complaint, two of the schemes involved Konigsberg and Fischler paying kickbacks to a purported corrupt pension fund employee to buy restricted shares of stock in two microcap companies, MediSys Corp. and Casino Management of America, Inc., n/k/a Crosslands Energy Corp. The SEC's complaint alleges Konigsberg and Fischler understood they needed to disguise the kickbacks as payments to a phony consulting company that they knew would perform no actual work. According to the complaint, in two other schemes, Konigsberg and Fischler paid bribes to a purported corrupt stockbroker, who in return would use his clients' accounts to purchase the publicly traded stock of microcap issuers Pavillion Energy Resources, Inc. and Xtreme Motorsports International, Inc. The fraudulent buying would create the false impression in the market that these companies were developing active trading supporting a rising stock price.
The SEC's complaint charges the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC is seeking permanent injunctions, financial penalties, and disgorgement plus prejudgment interest against all three defendants, and penny stock bars against Konigsberg and Fischler.
Previously, on October 7, 2010, the SEC filed eight separate civil actions stemming from the FBI undercover operation, charging a dozen penny stock promoters and their companies for their roles in schemes to manipulate the volume and price of various microcap stocks and illegally generate stock sales. The same day, the U.S. Attorney's Office for the Southern District of Florida announced the filing of criminal charges against the same individual defendants stemming from the same conduct underlying the SEC's actions.
The U.S. Securities and Exchange Commission sued an attorney for Kenneth Starr, claiming he helped the former New York money manager steal more than $25 million from investors.
Jonathan Bristol, a former partner at Winston & Strawn LLP, funneled stolen investor funds to Starr through attorney trust accounts from November 2008 through May of this year, the SEC said today in a lawsuit filed at federal court in New York. Starr pleaded guilty in September to defrauding his clients of as much as $50 million.
Bristol, 55, never disclosed the existence of the attorney trust accounts to his law firm, and monthly account statements listing the names of Starr's clients as the source of funds were sent to Bristol's home instead of the law firm, according to the lawsuit.
"Bristol had a legal and professional responsibility not to assist Ken Starr in conduct he knew was unlawful," George Canellos, director of the SEC's New York regional office, said in a statement. "Bristol crossed the line from lawyer to conspirator when he failed to safeguard funds entrusted to him, helped Starr steal client money, and lied to the victims to perpetuate the scheme."
Bristol lied to one of Starr's victims after being confronted about an unauthorized $1 million transfer, the SEC said in its complaint. He told the investor the funds were being bundled with other clients' money for an investment when in reality it had been used to pay a multimillion-dollar legal settlement with another former client, the agency said.
Gerard Hanlon, an attorney for Bristol at Hanlon, Dunn & Robertson, didn't immediately return a call seeking comment.
Starr, who handled a roster of celebrity clients including actors Sylvester Stallone and Wesley Snipes, could face more than 12 years in prison when he is sentenced Feb. 2.
A Houston man already facing federal charges in Virginia for his role in an alleged life insurance scam has been indicted by a federal grand jury in Texas.
The U.S. Attorney's Office in Dallas said Wednesday that Adley Husni Abdulwahab was indicted on five counts of securities fraud and one count of conspiracy in connection with an alleged $17 million investment scam.
Two co-defendants in the case have pleaded guilty to a single count of securities fraud and face up to five years in prison.
Abdulwahab remains in custody in the Eastern District of Virginia for his alleged role in an alleged $100 million life insurance scam and couldn't be reached for comment. Federal court records do not list an attorney for Abdulwahab in the Texas matter.
The Securities and Exchange Commission announced that, on October 28, 2010, it filed a civil action in the United States District Court for the Northern District of Illinois, Eastern Division, against Brewer Financial Services, LLC ("BFS"), a registered broker-dealer, Brewer Investment Advisors, LLC ("BIA"), a registered investment adviser, Brewer Investment Group, LLC ("BIG"), their parent holding company, and their managing principals/officers, Steven Brewer and Adam Erickson, for allegedly participating in a fraudulent offering of promissory notes. BFS, BIA, and BIG are based in, and Brewer and Erickson reside in, Chicago, Illinois.
The Complaint alleges that, from June 2009 through at least September 2010, the defendants raised approximately $5.6 million from 74 investors who invested in promissory notes issued by an Isle of Man company. Although investors were told that their money would be used to repay certain debts of the issuer's parent company, and thereby release assets that would be used to secure their promissory note obligations, the Complaint alleges that nearly all of the offering proceeds were transferred to BIG and its subsidiaries. According to the Complaint, in addition to misrepresenting the manner in which the offering proceeds would be used, the defendants failed to tell investors that BIG and its subsidiaries were in a precarious financial state. In addition to sustaining substantial operating losses from the inception of the offering through the present, BIG had failed to make required interest payments to investors by July 1, 2010, and had failed to meet its own payroll obligations by August 2010. The Complaint alleges that, notwithstanding, and without disclosing, this material information, the defendants continued selling promissory notes to new investors for at least three additional months. According to the Complaint, the note offerings were not registered with the Commission.
The Complaint claims that, based on this conduct, all of the defendants violated 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 ("Exchange Act") and Rule 10b-5 thereunder. The Complaint also claims that BFS violated, and Brewer and Erickson aided and abetted the violation of, Exchange Act Section 15(c), and that BIA violated, and Brewer and Erickson aided and abetted the violation, Sections 206(1) and 206(2) of the Investment Advisers Act. On the Commission's motion, and upon the consent of all defendants, the Court issued Preliminary Injunctions and an Order Imposing Asset Freeze and Other Ancillary Relief ("Order") on October 29, 2010. Among other things, the Court's Order froze certain bank accounts of defendants BIG and BFS.
A former Maryland resident has been sentenced to 15 years in prison for bilking online investors out of more than $17 million.
Thirty-four-year-old Byron Brown of Vienna, Va., was sentenced Tuesday in U.S. District Court in Baltimore. In addition to the prison term, he was ordered to pay $9.8 million in restitution.
U.S. Attorney Rod Rosenstein says Brown used the Internet to make it look like he was running an investment management business for wealthy clients. In reality, Rosenstein says Brown was stealing millions of dollars and using it to buy a fleet of luxury cars.
According to testimony, Brown ran a series of websites with names like In God We Trust Financial Services. He presented himself as an experienced investment manager, but prosecutors say he was running a Ponzi scheme.

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