United States District Judge Robert W. Sweet of the Southern District of New York issued an Opinion in favor of the U.S. Securities and Exchange Commission finding that United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and Lewis Chester, PCM’s Chief Executive Officer, engaged in securities fraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, Judge Sweet found that Defendants PCM and Chester orchestrated a scheme to defraud mutual funds in the United States through late trading from February 2001 through September 2003. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. ET. Judge Sweet found that the Defendants “intentionally, and egregiously violated the federal securities laws through a scheme of late trading” through broker-dealer Trautman Wasserman & Company, Inc. (TW&Co.), and found that the scheme was “broad ranging over the course of several years and in no sense isolated.”

As a result of Defendants’ conduct, the Court found that PCM and Chester violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and granted the Commission’s request to enjoin PCM and Chester from future violations of those provisions. Judge Sweet further found PCM and Chester, together with Relief Defendant Pentagon Special Purpose Fund, Ltd., PCM’s advisory client, jointly and severally liable for disgorgement of $38,416,500 of profits from the U.S. mutual fund trades executed through TW&Co. plus prejudgment interest. Finally, Judge Sweet imposed civil penalties against Defendants in the amount of $38,416,500, equal to Defendants’ pecuniary gain for late trades through TW&Co.

The Court found in Defendants’ favor regarding charges of deceptive market timing of U.S. mutual funds.

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and it is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.

Click Here for the Litigation Release.

The U.S. Securities and Exchange Commission announced filed a civil injunctive action in the U.S. District Court for the Central District of California charging Brenda A. Eschbach of Tustin, California with securities fraud, investment advisory fraud, and acting as an unregistered broker-dealer. In its complaint, the Commission alleged that Eschbach misappropriated over $3 million in investment advisory client funds from 2003 through 2009.

The Commission’s complaint alleges that Eschbach violated Section 17(a) of the Securities Act of 1933(Securities Act), Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and seeks a permanent injunction against future violations of those provisions, disgorgement of her ill-gotten gains, with prejudgment interest thereon, and a civil money penalty.

The complaint alleges that Eschbach began to misappropriate client funds while operating a franchise of a large investment adviser and broker-dealer and that the theft of client funds continued after Eschbach founded Aventine Investment Services, Inc., a now-defunct California corporation. The complaint further alleges that Eschbach did not make investments as directed by her clients, instead stealing their funds and using them to pay for, among other things, living expenses, business expenses, credit card payments, Mercedes lease payments, private school tuition for her daughter, and trips to Las Vegas and Atlanta. The complaint alleges that Eschbach concealed her misappropriations by issuing and mailing false and misleading account statements to those clients whom she had defrauded.

Without denying the Commission’s allegations, Eschbach has consented to entry of a proposed final judgment: (1) permanently enjoining her from violating Section 17(a) of the Securities Act, Sections 10(b) and 15(a) of the Exchange Act, Exchange Act Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act; and (2) ordering disgorgement of $2,561,873, payment of which would be deemed satisfied dollar for dollar by criminal restitution ordered in a related criminal proceeding, U.S. v. Brenda A. Eschbach, 8:10-cr-00017-JVS (C.D. Cal.). Entry of the proposed final judgment is subject to approval by the U.S. District Court for the Central District of California.

In the related federal prosecution, Eschbach entered a plea of guilty on September 30, 2011 to one count of mail fraud and one count of money laundering. She is currently awaiting sentencing.

Eschbach has also consented to the issuance of a Commission Order barring her from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and from participating in any offering of a penny stock. Issuance of such an Order is predicated on entry of the proposed injunction against Eschbach and her plea of guilty in the federal prosecution.

Click Here for a Copy of the SEC Complaint.

The Securities and Exchange Commission today charged a hedge fund manager and his Menlo Park, Calif.-based firm for their involvement in the insider trading ring connected to Raj Rajaratnam and hedge fund advisory firm Galleon Management.

The SEC alleges that Douglas F. Whitman and Whitman Capital illegally traded based on material nonpublic information obtained from Rajaratnam associate Roomy Khan, who was Whitman’s friend and neighbor. Khan tipped Whitman with confidential details about Polycom Inc.’s fourth quarter 2005 earnings and Google Inc.’s second quarter 2007 earnings prior to the public announcements of those financial results by the companies. Whitman Capital reaped nearly $1 million in ill-gotten gains by trading on Khan’s illegal tips.

“Whitman engaged in what even he termed ‘slimeball’ activity and together with Khan brought new illicit meaning to the maxim ‘help thy neighbor,’” said George S. Canellos, Director of the SEC’s New York Regional Office.

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, added, “This action should send a strong signal that the SEC will continue to pursue every angle of the Galleon investigation to hold accountable those who have undermined the integrity of our markets by engaging in illegal insider trading.”

According to the SEC’s complaint, filed in federal court in Manhattan, the inside information about Polycom and Google used by Whitman is the same information that the SEC has previously alleged Khan provided to many of her hedge fund contacts, including Rajaratnam as well as Robert Feinblatt and Jeffrey Yokuty at Trivium Capital.

The SEC alleges that Khan illegally tipped Whitman in January 2006 with information about Polycom’s quarterly financial results, and she noted that these details were nonpublic and acquired from a source at Polycom. Whitman Capital accumulated 132,263 shares of Polycom stock in the next two weeks. When the company announced its results on January 25, Whitman Capital liquidated its entire Polycom position for a profit of more than $360,000. On at least one later occasion, in September 2008, Whitman asked Khan to contact her Polycom source to obtain inside information about the company’s upcoming earnings so the two could “short it.” When Khan rebuffed Whitman citing a fear of getting caught, Whitman suggested that she use “Skype” to avoid detection. Whitman later stated that he would stop speaking to Khan if she wasn’t going to be a “slimeball” anymore.

The SEC further alleges that Khan illegally tipped Whitman with inside information about Google’s quarterly financial results shortly before the company’s post market-close earnings announcement on July 19, 2007. At Whitman’s insistence, Khan identified her Google source as an employee of an investor relations firm used by Google. Whitman Capital funds then purchased 2,761 Google put option contracts based on the tip from Khan. On July 20, Whitman Capital closed the put option positions and generated ill-gotten profits of more than $620,000. Afterwards, Whitman sent Khan a large floral arrangement to thank her for the tip.

The SEC’s complaint charges Whitman and Whitman Capital with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. 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 SEC has charged 30 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders located throughout the country. The insider trading occurred in the securities of more than 15 companies for illicit profits totaling more than $91 million.

Click Here for SEC Complaint.

The Securities and Exchange Commission today charged that a former employee of Takeda Pharmaceuticals International, Inc. traded on inside information about the Japanese firm’s business alliances and corporate acquisitions.

Brent Bankosky, a former Senior Director in Takeda’s U.S.-based business development group, has agreed to pay more than $136,000 to settle the SEC’s charges. The proposed settlement is subject to the approval of Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York. Under the proposed settlement, the Court, upon motion by the Commission, will determine whether to impose an officer-and-director bar against Bankosky.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Bankosky reaped more than $63,000 of profits, achieving a 169% rate of return, by trading on non-public information about two business transactions in 2008. Takeda’s business development group worked on the transactions, a strategic alliance with Cell Genesys, Inc., and the acquisition of Millennium Pharmaceuticals, Inc., which were referred to internally by their code names, Project Ceres and Project Mercury. Bankosky’s trading violated U.S. securities laws and Takeda’s policies, which forbade employees from disclosing or trading based on inside information.

“Brent Bankosky was entrusted with highly confidential information of Takeda and betrayed that trust to line his own pocket,” said George S. Canellos, Director of the SEC’s New York Regional Office. “His is another cautionary tale of an employee who succumbed to greed and the delusion that he wouldn’t get caught.”

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, added, “We are determined to rid the U.S. marketplace of illegal insider trading, and we will pursue it wherever we find it, irrespective of whether it’s a hedge fund reaping millions of dollars in illicit gains or an individual investor hoping to fly under the radar by making relatively small insider trading profits.”

According to the SEC’s complaint, almost immediately after Bankosky joined Takeda in January 2008 as a Director in its business development group, he began to misuse confidential corporate information for his personal benefit. In February 2008, Bankosky began placing trades in his personal brokerage account based on non-public information about Takeda’s proposed strategic alliance with Cell Genesys, which was announced in March. Starting in March 2008, Bankosky made additional trades for his own account based on non-public information about Takeda’s plan to acquire Millennium, which was announced in April. Bankosky also traded on other confidential information in 2009 and 2010, purchasing call options in the securities of Arena Pharmaceutical, Inc., and AMAG Pharmaceutical, Inc., respectively, when the firms were engaged in confidential discussions on business transactions with Takeda. Bankosky, who was promoted to Senior Director of Takeda’s business development group in September 2010, resigned from Takeda in May 2011.

The SEC’s complaint charges Bankosky with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as Section 14(e) of the Exchange Act and Rule 14e-3. The complaint seeks a final judgment ordering Bankosky to pay a financial penalty and disgorge his ill-gotten gains plus prejudgment interest, preventing him from serving as an officer or director of a public company, and permanently enjoining him from future violations of those provisions of the federal securities laws.

Click Here for a Copy of the SEC Complaint.

The Securities and Exchange Commission charged Glencoe, Illinois resident Kenneth A. Dachman with misappropriating over $1.8 million in investor funds and making false and misleading statements to investors in offerings for three companies for which he was the Chairman – Central Sleep Diagnostics, LLC (Central Sleep), Central Sleep Diagnostics of Florida, LLC (Central Sleep Florida), and Advanced Sleep Devices, LLC (Advanced Sleep). The SEC also charged Scott A. Wolf and his company, Stone Lion Management, Inc., the brokers for the three offerings, for their roles in selling unregistered securities to investors.

Filed in the U.S. District Court for the Northern District of Illinois, the SEC’s complaint alleges that between July 2008 and June 2010, Dachman raised at least $3,594,709 from investors located in 13 states and 12 foreign countries on behalf of Central Sleep, a purported provider of outpatient diagnostic sleep studies. Between December 2008 and April 2010, Dachman raised an additional $567,399 on behalf of Central Sleep Florida, a purported expansion of Central Sleep into Florida, and Advanced Sleep, a purported provider of medical devices. According to the complaint, Dachman made numerous misrepresentations to investors in each of the companies, including misrepresentations about how their funds would be used and his academic and business backgrounds. Dachman also failed to tell investors that he misappropriated at least $1,875,739 of their funds, over 45% of the total funds raised. According to the SEC’s complaint, among other things, Dachman used investor funds to rent-to-own a 10,000 square foot home, to pay for family vacations to Alaska, Europe and elsewhere, to purchase a new Range Rover, books, collectibles and antiques, and for personal expenses and credit card bills. Dachman also diverted investor funds to a tattoo parlor that he co-owned with his son-in-law.

The SEC’s complaint further alleges that Wolf and Stone Lion acted as unregistered brokers in selling unregistered securities to investors without qualifying for an exemption from the SEC’s registration provisions. The SEC alleges that Dachman violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that Wolf and Stone Lion violated Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Exchange Act. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and penny stock bars.

Wolf and Stone Lion each have agreed to settle the SEC’s charges without admitting or denying the allegations against them. Wolf and Stone Lion have consented to the entry of final judgments permanently enjoining them from violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Exchange Act. Wolf also has agreed to pay disgorgement of $335,216, prejudgment interest of $16,268, and a penalty of $20,000, and to be barred from participating in an offering of penny stock for one year. The proposed settlements are subject to the approval of the District Court.

The Securities and Exchange Commission today charged London-based medical device company Smith & Nephew PLC with violating the Foreign Corrupt Practices Act (FCPA) when its U.S. and German subsidiaries bribed public doctors in Greece for more than a decade to win business.

Smith & Nephew PLC and its U.S. subsidiary Smith & Nephew Inc. agreed to pay more than $22 million in agreements with the SEC and U.S. Department of Justice. The charges stem from the SEC’s and DOJ’s ongoing proactive global investigation of bribery of publicly-employed physicians by medical device companies.

The SEC’s complaint against Smith & Nephew PLC alleges that its subsidiaries used a distributor to create a slush fund to make illicit payments to public doctors employed by government hospitals or agencies in Greece. On paper, it appeared as though Smith & Nephew’s subsidiaries were paying for marketing services, but no services were actually performed. The scheme basically created off-shore funds that were not subject to Greek taxes to pay bribes to public doctors to purchase Smith & Nephew products.

“Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition,” said Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit. “The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”

According to the SEC’s complaint against Smith & Nephew PLC filed in federal court in Washington D.C., U.S. subsidiary Smith & Nephew Inc. and German subsidiary Smith & Nephew Orthopaedics GmbH has sold orthopedic products in Greece since the 1970s through the Greek distributor. Greece has a national health care system in which most Greek hospitals are publicly-owned and operated, and doctors who work at those publicly-owned hospitals are government employees and “foreign officials” as defined in the FCPA.

The SEC alleges that the misconduct began in 1997, when Smith & Nephew’s subsidiaries developed a scheme to make payments to three shell entities in the United Kingdom controlled by the distributor. Those funds were used by the distributor to pay bribes to the Greek doctors on behalf of the Smith & Nephew subsidiaries. Smith & Nephew failed to act on numerous red flags of bribery as employees at the company and its subsidiaries became aware of the payments. In one e-mail exchange between employees at the U.S. subsidiary and the distributor concerning whether to reduce the distributor’s commissions, the distributor stated, “… In case it is not clear to you, please understand that I am paying cash incentives right after each surgery…” Smith & Nephew Inc. determined not to reduce the commissions.

Smith & Nephew PLC agreed to settle the SEC’s charges by paying more than $5.4 million in disgorgement and prejudgment interest. Its subsidiary Smith & Nephew Inc. agreed to pay a $16.8 million fine as part of a deferred prosecution agreement with the Department of Justice. Smith & Nephew PLC consented without admitting or denying the SEC’s allegations, to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering it to retain an independent compliance monitor for a period of 18 months to review its FCPA compliance program.

Click Here for a Copy of the SEC Complaint.

The Securities and Exchange Commission today charged a Fort Lauderdale-based firm and its founder with conducting a fraudulent boiler room scheme in which they hyped stock in two thinly-traded penny stock companies while behind the scenes they sold the same stock themselves for illegal profits.

The SEC alleges that First Resource Group LLC and its principal David H. Stern employed telemarketers who fraudulently solicited brokers to purchase stock in TrinityCare Senior Living Inc. and Cytta Corporation. While recommending the securities in these two microcap companies, Stern sold First Resource’s shares of TrinityCare and Cytta stock unbeknownst to investors who were purchasing them – a practice known as scalping. As Stern was selling the stocks, he also purchased small amounts in order to create the false appearance of legitimate trading activity and induce investors to purchase shares in both companies.

“First Resource and Stern used a telephone sales boiler room to make inflated claims and defraud investors while simultaneously manipulating the price of the stocks and making profits for themselves,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC will continue to aggressively pursue perpetrators of microcap stock fraud schemes that hound potential investors to buy stock.”

Since the beginning of fiscal year 2011, the SEC has filed more than 50 enforcement actions for misconduct related to microcap stocks, and issued 63 orders suspending the trading of suspicious microcap issuers. Microcap stocks are issued by the smallest of companies and tend to be low priced and trade in low volumes. Many microcap companies do not file financial reports with the SEC, so investing in microcap stocks entails many risks. The SEC has published a Microcap Stock Guide for Investors and an Investor Alert about avoiding microcap fraud perpetrated through social media.

According to the SEC’s complaint filed against Stern and First Resource in U.S. District Court for the Southern District of Florida, they violated federal securities laws by acting as unregistered broker-dealers. Stern hired and trained First Resource’s salespeople and gave them information about TrinityCare to prepare sales scripts and pitch the stock to potential investors. Stern reviewed the draft scripts, made edits, and approved the scripts before the salespeople were allowed to use them.

The SEC alleges that Stern gave the salespeople a list of potential investors to cold call and pitch the stocks. First Resource’s salespeople falsely claimed TrinityCare stock “is going to be $5-7 in 6-12 months” and the company “is going to be a half-a-billion dollar company in five years or roughly a $40 stock.” Stern also disseminated a research report on Cytta to investors and falsely touted: “Sales projections for 2010-2014 should exceed $500 million with a pre-tax net of over $400 million.”

The SEC’s complaint alleges that First Resource Group and Stern violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and financial penalties as well as a penny stock bar against Stern.

The Securities and Exchange Commission announced that it has obtained final judgments in its civil enforcement action against investment adviser, Carlo G. Chiaese, age 39 and resident of Springfield, New Jersey, his company, C.G.C. Advisors, LLC, and his wife, Micol Chiaese, a relief defendant.

The Commission’s Complaint, filed in October 2010 in the District of New Jersey, alleged that, since 2008, Chiaese and CGC had misappropriated at least approximately $2.4 million from six of their advisory clients. Micol Chiaese, an officer of CGC, benefited from this fraud by directly receiving at least $289,000 of clients’ funds. The Complaint charged Chiaese and CGC with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

In a related criminal action, on March 31, 2011, Chiaese pled guilty to one count of fraud in violation of 15 U.S.C. §§ 78j(b), 78ff, 17 CFR § 240.10b-5, and 18 U.S.C. § 2 before the United States District Court for the District of New Jersey, in United States v. Carlo G. Chiaese, Crim. Information No. 11-CR-00193. On August 18, 2011, the District Court entered a criminal judgment against Chiaese ordering 58 months imprisonment and payment of $2,464,518 in restitution to be distributed to the victims.

On October 27, 2011, Chiaese agreed to consent to a final judgment in the civil action for full injunctive relief, enjoining Chiaese from violating Section 10(b) of the Exchange Act, Section 17(a) of the Securities Act, and Sections 206(1) and 206(2) of the Advisers Act, and acknowledging that while he is liable for $2,464,518 in disgorgement, such disgorgement shall be deemed satisfied by the order of restitution in the criminal action. On January 23, 2012, the Court entered this consent and final judgment against Chiaese. Also on October 27, 2011, CGC agreed to consent to a judgment in the civil action for full injunctive relief, enjoining CGC from violating Section 10(b) of the Exchange Act, Section 17(a) of the Securities Act, and Sections 206(1) and 206(2) of the Advisers Act. On November 3, 2011, the Court entered this consent and judgment against CGC.

Finally, on December 12, 2011, the Court entered a final judgment against relief defendant Micol Chiaese in the civil action, ordering that she pay disgorgement of her ill-gotten gains of $304,860.34, inclusive of prejudgment interest.

The Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep “Sandy” Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

According to the SEC’s complaint, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.

The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.

The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcements, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

Click Here for a Copy of the Complaint.

The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of St. Louis-based private investment funds and management firms after suing them and their principal for a scheme to defraud investors.

The SEC alleges that Burton Douglas Morriss diverted more than $9 million of investors’ money to himself without their knowledge or consent, and he mischaracterized the transfers as ‘loans” in his companies’ books. Morriss misused the money for alimony payments, interest on personal loans, and costly vacations including an African safari.

“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “It is fraud, pure and simple.”

The SEC’s complaint filed Tuesday in federal court in St. Louis charges Morriss, his two private investment funds MIC VII LLC and Acartha Technology Partners LP, and his management firms, Gryphon Investments III LLC and Acartha Group LLC. Morriss Holdings LLC, an entity to which Morriss transferred some of the investor funds, is named as a relief defendant.

The SEC alleges that Morriss raised $88 million from investors who were told their funds would be invested in emerging financial services and technology companies. Instead, the SEC said Morriss transferred millions to himself and Morriss Holdings and used them for personal expenses.  In an attempt to conceal his scheme, the fraudulent transfers that Morriss made to himself were recorded as “loans” on the books of Morriss’s companies. However, the transfers were never truly loans because Morriss did not intend to repay them. Morriss also recruited new investors for one of his funds without the unanimous consent of existing investors as required, thereby diluting their holdings.

On Tuesday, the Honorable Carol E. Jackson granted the SEC’s request for asset freezes, the appointment of a receiver, and other emergency relief to prevent further dissipation of investor assets. The SEC seeks to bar Morriss from serving as a public company officer or director; it also seeks permanent injunctive relief and financial penalties against Morriss and the entity defendants, and disgorgement of all ill-gotten gains from them and relief defendant Morriss Holdings.

Click Here for a Copy of the SEC Complaint.