Former CFO of Dallas-Based Jewelry and Collectibles Company Charged with Accounting Fraud

As released by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles. Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold. Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“Benson’s job as CFO was to protect the integrity of DGSE’s financial statements,” said David Woodcock, chair of the SEC Enforcement Division’s Financial Reporting and Audit Task Force and director of the Fort Worth Regional Office. “Instead he took advantage of DGSE’s weak internal control environment to intentionally manipulate its public filings.”

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data. The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores. As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance. The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars. Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE. Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE. Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings. Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws. DGSE is charged with reporting, recordkeeping, and internal controls failures. DGSE and Benson each consented to injunctions against future violations of these provisions. DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

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Sarasota-Based Private Fund Manager Charged With Stealing Investor Money and Conducting Ponzi Scheme

As announced by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission charged a Sarasota, Fla.-based private fund manager with defrauding investors in a Ponzi scheme that ensued after he squandered their money on bad investments and personal expenses.

The SEC alleges that Gaeton “Guy” S. Della Penna raised $3.8 million from investors in three private investment funds that he operated. Investors were told their funds would be used to trade securities or invest in small companies. Despite depicting himself as a distinguished trader and profit-maker, Della Penna lost nearly all of their money by making unsuccessful investments and diverting more than a million dollars to himself for mortgage payments and money for his girlfriend. In an effort to cover up his fraud as it unraveled, Della Penna began operating a Ponzi scheme by using money from newer investors to pay fake returns to prior investors. He provided some investors with false account statements to mislead them into believing they were profiting by investing their money with him.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida today announced criminal charges against Della Penna.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

According to the SEC’s complaint filed in the U.S. District Court for the Middle District of Florida, many of the investors in Della Penna’s scheme were acquaintances who he met through his church. He solicited investors to purchase notes in his private investment funds from 2008 to 2013, often promising 5 percent annual returns along with 80 percent of the trading profits generated with their investments. He later promised some investors 10 percent returns on their money to be used for investing in small companies. All the while, Della Penna was siphoning away investor funds to the tune of about $1.1 million to make mortgage payments on his 10,000-square-foot home and make payments to his girlfriend who lived with him there. Della Penna also transferred some investor funds into accounts at Gaeton Capital Advisors LLC, an entity that is named as a relief defendant in the SEC’s complaint for the purpose of recovering any investor funds in its possession.

The SEC’s complaint alleges that Della Penna violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Della Penna.

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California-based Securities Salesman Charged with Selling Millions of Dollars in Securities without Registration

As published by the Securities and Exchange Commission:

The Securities and Exchange Commission charged a Tiburon, Calif.-based securities salesman for selling millions of dollars in oil-and-gas investments without being registered with the SEC as a broker-dealer or associated with a registered broker-dealer.

Behrooz Sarafraz has agreed to settle the SEC’s charges by paying disgorgement of his commissions, prejudgment interest, and a penalty for a total of more than $22 million.

“By failing to become associated with a registered broker-dealer, Sarafraz denied investors the protections of regulatory oversight and firm supervision,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “The SEC is committed to holding such unregistered salespeople accountable for their conduct.”

According to the SEC’s complaint filed in federal court in San Francisco, Sarafraz acted as the primary salesman on behalf of TVC Opus I Drilling Program LP and Tri-Valley Corporation, which were based in Bakersfield, Calif. From February 2002 to April 2010, these companies raised more than $140 million for their oil-and-gas drilling venture. While Sarafraz was raising money for these entities, he was not associated with any broker-dealer registered with the SEC.

The SEC’s complaint charges Sarafraz with violating Section 15(a) of the Securities Exchange Act of 1934, which requires securities salesmen to be associated with broker-dealers that are registered with the SEC.

According to the SEC’s complaint, Sarafraz worked full-time locating investors for the Opus and Tri-Valley oil-and-gas ventures. He described the investment program to investors and recommended they purchase Opus partnership interests or securities of Tri-Valley and its affiliated entities. In return, Sarafraz received commissions that ranged from seven to 17 percent of the sales proceeds that he and members of a sales network generated. The SEC alleges that Opus and Tri-Valley paid Sarafraz approximately $18.3 million in sales commissions. He paid approximately $1.9 million to others as referral fees and kept the remaining $16.4 million for himself.

Sarafraz has agreed to settle the SEC’s charges by consenting to entry of a final judgment ordering him to pay a total of $22,482,318.87 without admitting or denying the allegations. The sum consists of $16,406,459 in disgorgement, $6,075,859.87 in prejudgment interest, and a $50,000 penalty. The final judgment will also permanently enjoin him from violating Section 15(a) of the Exchange Act. The settlement is subject to court approval.

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New York-based Rafferty Capital Markets Charged with Illegal Facilitating Trades for a Non-Broker Dealer

As published by the Securities and Exchange Commission:

The Securities and Exchange Commission charged New York-based Rafferty Capital Markets with illegally facilitating trades for another firm that wasn’t registered as a broker-dealer as required under the federal securities laws.

Rafferty agreed to settle the SEC’s charges by disgorging all of the profits it received in the arrangement with the unregistered firm plus interest and a penalty for a total of nearly $850,000. The SEC’s investigation is continuing.

According to the SEC’s order instituting settled administrative proceedings, Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm. While Rafferty held the necessary licenses and processed the trades, it was the unregistered firm that managed the business. Five of the firm’s employees became registered representatives with Rafferty but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation. Rafferty had no involvement in the trading or compensation decisions while the registered representatives executed the trades through Rafferty’s systems on behalf of the unregistered firm. Based on the agreement, Rafferty kept 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

According to the SEC’s order, during the course of this arrangement from May 2009 to February 2010, Rafferty did not preserve communications with its registered representatives working on behalf of the unregistered firm. Rafferty did not ensure that the unregistered firm performed such recordkeeping duties either. Due in part to Rafferty’s lack of recordkeeping, one of the registered representatives was able to conceal two trades from Rafferty, which caused its books and records to be inaccurate.

The SEC’s order finds that Rafferty willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(1) and 17a-4(b)(4). Rafferty also willfully aided and abetted and caused the unregistered broker-dealer’s violation of Section 15(a) of the Exchange Act. Without admitting or denying the findings, Rafferty consented to a cease-and-desist order that censures the firm and requires the disgorgement of $637,615 as well as payment of $82,011 in prejudgment interest and a $130,000 penalty.

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SEC Charges Three Sales Managers With Insider Trading Ahead of Major Acquisition

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged three former sales managers at San Diego-based Qualcomm Inc. with insider trading ahead of a major acquisition announcement.

The SEC alleges that Derek Cohen, Robert Herman, and Michael Fleischli learned through work e-mails that Qualcomm was planning a big announcement. A sales meeting later revealed that Qualcomm was negotiating an acquisition of Atheros Communications. Armed with the nonpublic information, all three sales managers purchased Atheros securities while exchanging a series of suspiciously-timed phone calls. As news leaked about the impending acquisition and the two companies subsequently announced it in a joint news release, Atheros’ stock price jumped 20 percent. Cohen, Herman, and Fleischli sold their securities to realize quick profits.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today announced criminal charges against Cohen and Herman.

“As alleged in our complaint, Qualcomm placed trust in these sales managers who proceeded to exploit the confidential information shared with them and conduct insider trading for their personal gain,” said Michele Wein Layne, director of SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of California, Cohen and Herman live in San Diego and Fleischli lives in Newport Beach, Calif. Qualcomm had an insider trading policy that clearly explained that it was illegal for employees to trade securities while possessing material nonpublic information. Cohen, Herman, and Fleischli each acknowledged receipt of the Qualcomm insider trading policy included in the company’s code of business conduct.

However, the SEC alleges that after learning confidentially that Atheros was the target of a Qualcomm acquisition, all three sales managers proceeded to purchase Atheros securities on Jan. 4, 2011. None of them had ever previously traded in Atheros securities. News of the acquisition began leaking out through media reports that same afternoon, and the two companies formally announced the merger agreement on January 5. After selling all of the securities they had purchased, Cohen’s illegal trading profits mounted to more than $200,000, and Herman and Fleischli made profits of $30,000 and $3,000 respectively.

The SEC’s complaint charges Cohen, Herman, and Fleischli with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks disgorgement of ill

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Toronto-Based Consultant and Associates Charged in Reverse Merger Schemes

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged a Toronto-based consultant and four associates with conducting illegal reverse merger schemes to bring a pair of China-based companies into the U.S. markets so they could manipulate trading and reap millions of dollars in illicit profits.

The SEC alleges that S. Paul Kelley and three of the associates acquired controlling interests in two U.S. public shell companies in order to orchestrate reverse mergers with China Auto Logistics Inc. and Guanwei Recycling Corp. They then hired stock promoter Shawn A. Becker of Overland Park, Kan., and others to tout the two companies’ unregistered stock to investors. Kelley and his associates engaged in various forms of manipulative trading in order to further drive up the price and volume of China Auto and Guanwei Recycling stock, and they profited when they dumped their shares into the inflated market they created.

Kelley and two associates – Roger D. Lockhart of Holiday Island, Ark., and Robert S. Agriogianis of Florham Park, N.J. – have agreed to settle the SEC’s charges. Kelley agreed to pay more than $6 million and will be barred from the securities industry as well as participation in any penny stock offering. Lockhart agreed to pay more than $3 million and Agriogianis entered into a cooperation agreement. The SEC’s litigation continues against Becker and another Kelley associate, George Tazbaz of Oakville, Ontario.

“Kelley and his associates concealed their acquisition and control of public shell companies, and they manipulated trading in two China-based companies following reverse mergers with those shells,” said Julie Lutz, director of the SEC’s Denver Regional Office. “The SEC has exposed their scheme with persistence and the help of fellow regulators.”

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the schemes involving China Auto and Guanwei Recycling occurred in 2008 and 2009. Becker, Lockhart, and Tazbaz orchestrated manipulative trading in a third China-based issuer Kandi Technologies in 2009 and 2010.

The SEC alleges that Kelley, Tazbaz, Lockhart, and Agriogianis reached secret oral agreements with management at China Auto and Guanwei Recycling in which they covered all of the costs to take the companies public in the U.S. in exchange for approximately 30 to 40 percent of the resulting stock. Kelley and his associates then acquired controlling interests in the two U.S. public shell companies used to conduct the reverse mergers with China Auto and Guanwei. They concealed their controlling interest in the public shell companies and the reverse merger transactions by having others create at least nine Hong Kong-based companies to hold their shares. Despite their concealment efforts, the SEC was able to obtain documents and testimony to corroborate the suspected conduct with assistance from the Ontario Securities Commission.

The SEC’s complaint charges Kelley, Tazbaz, Lockhart, Agriogianis, and Becker with violating the antifraud, securities registration, and securities ownership reporting provisions of the federal securities laws. Becker is charged with violating the antifraud and securities registration provisions. Kelley and Becker also are charged with violating the broker-dealer registration provisions. The SEC’s complaint seeks disgorgement of ill-gotten gains plus prejudgment interest and financial penalties as well as penny stock bars.

In the settlements, Kelley agreed to pay disgorgement of $2,828,353.53, prejudgment interest of $560,812.47, and penalty of $2,828,353.53. Lockhart agreed to pay disgorgement of $1,819,211.77, prejudgment interest of $332,268.15, and a penalty of $1 million. Lockhart also consented to a bar from participation in any penny stock offering. Agriogianis entered into a cooperation agreement with the SEC under terms that reflect his assistance in the investigation and anticipated cooperation in the pending litigation. Agriogianis agreed to a penny stock bar, and financial sanctions will be determined by the court at a later date upon the SEC’s motion. Kelley, Lockhart, and Agriogianis consented to the entry of final judgments including permanent injunctions without admitting or denying the allegations. The settlements are subject to court approval.

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Utah-based Retirement Plan Administrator Charged with Defrauding Investors

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Utah-based retirement plan administrator who defrauded investors in self-directed individual retirement accounts (IRAs), causing them to lose millions of dollars of savings.

The SEC alleges that American Pension Services Inc. (APS) and its founder, president and CEO Curtis L. DeYoung squandered more than $22 million of investor funds on high-risk investments. DeYoung hid the losses by issuing inflated account statements, allowing him to continue collecting fees and further victimizing his customers.

“This misconduct jeopardized retirement security for thousands of APS customers,” said Karen L. Martinez, director of the SEC’s Salt Lake Regional Office.

According to the SEC’s complaint unsealed yesterday in federal court in Salt Lake City, DeYoung’s scheme dates back to at least 2005 and targeted customers with retirement accounts holding non-traditional assets typically not available through traditional 401(k) retirement plans or other IRA custodians. Although APS has no authority to direct customer trades, DeYoung allegedly used forged letters and signatures to invest on behalf of customers, including in promissory notes issued by a friend whose businesses never turned a profit. DeYoung continued to recommend that APS customers invest in the notes, and he sent customer funds to the friend until at least April 2013 without disclosing to investors that the friend had defaulted on the notes in 2010 and DeYoung had forgiven the debt.

The SEC further alleges that investments in other bankrupt ventures, including an office building in Wichita, Kan., caused APS customers to lose more money. APS concealed those losses and issued account statements that inflated the value of customer holdings, allowing APS to levy fees based on the full value of the holdings even when they were worthless.

According to the SEC’s complaint, when DeYoung was questioned by the SEC about a $22 million gap between actual holdings and those showing on account statements, he invoked his Fifth Amendment privilege against self-incrimination and refused to answer.

The Honorable Robert J. Shelby granted the SEC’s request for a temporary restraining order to freeze the assets of APS and DeYoung.

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CEO Charged with Violation of Duty of Trust in Insider Trading Scheme

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged a former executive with insider trading in advance of eBay’s acquisition of the e-commerce company where he worked by tipping friends and relatives with confidential information about the pending deal so they could attain more than $300,000 in illegal profits.

The SEC alleges that Christopher Saridakis violated a duty of trust as CEO of the marketing solutions division of GSI Commerce by providing two family members and two friends with nonpublic information about the pending acquisition and encouraging them to trade on it. To settle the SEC’s charges, Saridakis agreed to an officer-and-director bar and must pay $664,822, which includes a penalty equal to twice the amount of his tippees’ profits. In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Saridakis, who lives in Delaware.

The five traders and the individual who entered into a non-prosecution agreement will pay a combined total of more than $490,000 in their settlements, which range from disgorgement-only or reduced penalties for cooperators to penalties of two or three times the trading profits for other traders.

“Although Saridakis’ tips spun a web of illegal trading, some of the downstream tippees substantially assisted in our investigation while others hindered it,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “The reduction in penalties for those tippees who assisted us, together with the non-prosecution agreement for one of the traders, demonstrate the benefits of cooperating with our investigations. The increased penalties for others highlight the risks of impeding our work.”

Scott Friestad, associate director of the SEC’s Division of Enforcement, added, “Saridakis chose to dole out confidential, market-moving information to enrich relatives and friends, and the nonpublic details then spread further through multiple levels of tippers and tippees. The SEC thoroughly investigates suspicious trading to trace it to the source and pursue all those involved.”

According to the SEC’s complaint filed in federal court in Philadelphia, GSI Commerce was renamed eBay Enterprise after the merger and is still based in King of Prussia, Pa. When the deal was publicly announced on March 28, 2011, GSI’s stock price increased more than 50 percent. Saridakis became aware of negotiations between GSI and eBay in early 2011, and his involvement increased when he participated in a meeting between eBay and GSI executives on March 11. GSI took steps to ensure the pending deal remained secret, and Saridakis understood that any information concerning the potential acquisition was confidential.

The SEC alleges that Saridakis, who became president of eBay Enterprise after the merger and has since resigned, tipped two family members in the weeks leading up to eBay’s acquisition of GSI. The relatives made a combined $41,060 by trading on the nonpublic information provided by Saridakis, who in his settlement has agreed to pay disgorgement of that amount plus interest on behalf of those family members.

According to the SEC’s complaint, Saridakis tipped his longtime friend and former colleague Jules Gardner, who lives in Villanova, Pa. The two regularly exchanged text messages during the weeks leading up to the merger, including an exchange one week before the public announcement in which Saradakis encouraged Gardner to buy shares in GSI. Gardner discussed the text messages from Saridakis with two friends who also traded. Gardner has agreed to fully disgorge his ill-gotten gains of $259,054 as part of a cooperation agreement in which the SEC is not seeking a penalty. Gardner agreed to continue cooperating in the ongoing investigation.

The SEC alleges that Saridakis separately tipped his friend Suken Shah, a doctor who resides in Wilmington, Del., with nonpublic information about the deal following the March 11 meeting with eBay executives. Shah earned insider trading profits of $9,838 and provided the nonpublic information to his brother and another individual. Shah agreed to settle the SEC’s charges in an administrative proceeding by paying disgorgement of $10,446, which includes $609 in trading profits made by the other individual he tipped. Shah agreed to pay prejudgment interest of $1,007 and a penalty of $64,965 for a total of $76,418. Shah’s penalty is three times the amount of his and his tippees’ trading profits.

In a separate settled administrative proceeding, the SEC charged Shimul Shah, a doctor who now resides in Cincinnati, with insider trading on the nonpublic information he received from his brother. Besides trading himself, Shah tipped others with the nonpublic information during a group dinner he attended with several friends from his medical residency. To settle the SEC’s charges, Shah agreed to disgorge his trading profit of $11,209 and pay prejudgment interest of $1,022 and a penalty of $22,418 for a total of $34,650. Shah’s penalty is twice the amount of his trading profit.

The individual who entered into the non-prosecution agreement was tipped by Shah at the group dinner. This individual has agreed to disgorge a trading profit of $31,777 and pay $2,725 in prejudgment interest for a total of $34,502. The SEC entered into a non-prosecution agreement because this individual provided early, extraordinary, and unconditional cooperation.

The SEC also instituted settled administrative proceedings against two other traders in GSI stock who received material nonpublic information from a different source than Saridakis. The SEC’s investigation found that the wife of another insider at GSI became aware of the proposed acquisition and shared the news with a friend the weekend before the public announcement. The friend shared the information with Oded Gabay, who then tipped his friend Aharon Yehuda. Gabay and Yehuda, who live in New York, each proceeded to trade GSI stock the following Monday morning.

Gabay agreed to settle the SEC’s charges by disgorging his trading profit of $23,615 and paying prejudgment interest of $1,207 and a penalty of $22,177 for a total of $46,999. Gabay’s penalty was reduced to half the amount of his and Yehuda’s trading profits to reflect his early cooperation in the investigation. Yehuda agreed to settle the SEC’s charges by disgorging his trading profit of $20,740 and paying prejudgment interest of $1,666 and a penalty of $20,740 for a total of $43,146.

In a case that the SEC unraveled in part due to extensive cooperation by some of the tippees, the SEC also charged five traders and entered into a non-prosecution agreement with a trader who provided extraordinary cooperation in the investigation. It’s the agency’s first non-prosecution agreement with an individual. The SEC’s investigation is continuing into trading by other individuals.

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Former Stock Promoter Charged with Defrauding Investors in Florida Real Estate Venture

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission filed fraud charges against a former Florida-based stock promoter currently serving a two-year prison sentence for lying to SEC investigators.

The SEC’s complaint filed in U.S. District Court in the Southern District of Florida alleges that Robert J. Vitale defrauded investors in a Florida real estate venture, sold unregistered securities, and acted as an unregistered broker-dealer. Vitale and his firm Realty Acquisitions & Trust Inc. raised at least $8.7 million from investors, including many senior citizens. Vitale allegedly told investors their funds were “100% protected” when they were not, and he claimed to be a financial expert with a business degree from Notre Dame when he never attended college after graduating from Notre Dame High School in West Haven, Conn.

The SEC alleges that although Vitale told investors his success rested on his “great honesty and integrity,” he failed to tell them that he was charged by the SEC in 2004 for participating in a pump-and-dump market manipulation scheme or that he later settled the charges and was barred from the brokerage industry as part of the settlement.

Vitale is now an inmate at the Federal Detention Center in Miami. He was sentenced in September 2013 after being convicted of obstruction of justice and providing false testimony in the SEC’s investigation that led to the charges filed today.

“We are gratified that the criminal authorities held Mr. Vitale responsible for his attempts to derail our investigation,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “His prison sentence and our determination to uncover and charge his underlying misconduct notwithstanding his obstruction show how seriously we and our law enforcement partners take our missions.”

The SEC is seeking the return of allegedly ill-gotten gains with interest, a monetary penalty, and a permanent injunction against Vitale. The SEC’s complaint also charges Coral Springs Investment Group Inc. as a relief defendant, alleging the company holds assets that came from defrauded investors that should be returned.

“Vitale hid the truth from investors just as he tried to hide his assets during our investigation,” said Stephen L. Cohen, associate director of the SEC’s Division of Enforcement. “When individuals barred from the industry continue their wrongdoing, we pursue them aggressively and seek to return their ill-gotten gains to investors.”

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Pyramid Scheme Halted Targeting Dominican and Brazilian Immigrants

As released by the United States Securities and Exchange Commission:

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

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

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

“This is one of several pyramid-scheme cases that the SEC has filed recently where parties claim that investors can earn profits by recruiting other members or investors instead of doing any real work,” said Paul G. Levenson, director of the SEC’s Boston Regional Office. “Even after the SEC and other regulators have alleged that such programs are a fraud, the promoters of TelexFree continued selling the false promise of easy money.”

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

In addition to the TelexFree firms, the complaint charges TelexFree co-owner James Merrill, of Ashland, Mass., TelexFree co-owner and treasurer Carlos Wanzeler, of Northborough, Mass., TelexFree CFO Joseph H. Craft, of Boonville, Ind., and TelexFree’s international sales director, Steve Labriola, of Northbridge, Mass. The SEC also charged four individuals who were promoters of TelexFree’s program: Sanderley Rodrigues de Vasconcelos, formerly of Revere, Mass., now of Davenport, Fla., Santiago De La Rosa, of Lynn, Mass., Randy N. Crosby, of Alpharetta, Ga., and Faith R. Sloan of Chicago. The SEC’s complaint alleges that TelexFree, Inc., TelexFree, LLC, Merrill, Wanzeler, Craft, Labriola, Rodrigues de Vasconcelos, De La Rosa, Crosby, and Sloan violated the registration and antifraud provisions of U.S. securities laws and the SEC’s antifraud rule. The SEC also charged three entities related to TelexFree as relief defendants based on their receipt of investor funds.

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