New York City-based Executives Charged in Kickback Scheme

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced another round of charges in its ongoing case against several individuals involved in a massive kickback scheme to secure the bond trading business of a state-owned Venezuelan bank.

The SEC alleges that two executives at New York City-based brokerage firm Direct Access Partners (DAP) were integral participants in the wide-ranging fraud.  Benito Chinea, who was a co-founder and CEO of the firm, and Joseph DeMeneses, who was DAP’s managing partner of global strategy, devised and facilitated sham arrangements to conceal multi-million dollar kickback payments to a high-ranking Venezuelan finance official of the bank.  In one instance, DeMeneses made kickback payments from funds he controlled to a shell entity controlled by the Venezuelan official, and Chinea arranged for the firm to reimburse DeMeneses.  The allegations were made in a second amended complaint that the SEC submitted in federal court in Manhattan as part of its pending action against four individuals with ties to DAP as well as the head of DAP’s Miami office, who were charged last year for their roles in the scheme.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York and the U.S. Department of Justice’s Criminal Division today announced criminal charges against Chinea and DeMeneses.

“The corruption at Direct Access Partners reached the very top,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “The schemers depended on Chinea as CEO to authorize outsized payments from the firm to be funneled as kickbacks to Venezuela.”

The filing of the SEC’s second amended complaint is subject to court approval.  The SEC seeks disgorgement of ill-gotten gains plus interest and financial penalties against Chinea, who lives in Manalapan, N.J., and DeMeneses, who lives in Fairfield, Conn., as well as the five previously named defendants with ties to DAP, which has filed for bankruptcy.

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Honolulu Woman Charged with Defrauding Investors Through Social Media

The Securities and Exchange Commission today announced fraud charges against a Honolulu woman posing as an investment banker and soliciting investors through Twitter, Facebook, and other social media.

 

An SEC investigation found that Keiko Kawamura engaged in two separate fraudulent schemes to raise money from investors while casting herself as an investment and hedge fund expert when in fact she had virtually no prior trading experience.  In one scheme, she sought investors for her self-described hedge fund and posted on Twitter some screenshots of brokerage account statements suggesting she was personally obtaining incredible investment returns.  However, the account statements were not hers.  And instead of investing the money she raised from investors, she spent it on her own living expenses and luxury trips to Miami and London.  In a later scheme, Kawamura continued to boast phony experience to attract investors to her subscription service for investment advice.  She falsely told subscribers that she had been in the investment banking industry for nearly a decade and had achieved 800 percent returns in her personal brokerage account.

 

“As alleged in our case, Kawamura used social media to ensnare investors and raise money to support her lifestyle,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “Investors should beware of fraudsters who use social media to hide behind anonymity and reach many investors with little to no cost or effort.”

 

The SEC’s order instituting administrative proceedings alleges that Kawamura willfully 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 20(4)-8.  The administrative proceedings will determine any remedial action or financial penalties that are appropriate in the public interest against Kawamura.

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N.J.-Based Brokerage Firm Owner Charged With Manipulative Trading

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading of publicly traded stocks through an illegal practice known as “layering” or “spoofing.”

 

The SEC also charged the owner and others for registration violations.  Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case.

 

In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels.  An SEC investigation found that Joseph Dondero, a co-owner of Visionary Trading LLC, repeatedly used this strategy to induce other market participants to trade in a particular stock.  By placing and then canceling layers of orders, Dondero created fluctuations in the national best bid or offer of a stock, increased order book depth, and used the non-bona fide orders to send false signals to other market participants who misinterpreted the layering as true demand for the stock.

 

“The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC.”

 

Joseph G. Sansone, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit, added, “Week after week, Dondero lined his pockets by placing phony orders and tricking others into trading with him at distorted prices.  The fact that Dondero perpetrated this deceit through the entry of trade orders did not allow him to evade detection.”

 

The SEC additionally charged Dondero, Visionary Trading, and three other owners with operating a brokerage firm that wasn’t registered as required under the federal securities laws.  New York-based brokerage firm Lightspeed Trading LLC is charged with aiding and abetting the registration violations, and its former chief operating officer is charged with failing to supervise one of the Visionary owners who shared with his co-owners commission payments that he received from Lightspeed while he was simultaneously working as a registered representative there.

 

According to the SEC’s order instituting settled administrative proceedings, the misconduct occurred from May 2008 to November 2011.  Visionary Trading and its four owners – Dondero, Eugene Giaquinto, Lee Heiss, and Jason Medvin – illegally received from Lightspeed a share of the commissions generated from trading by Visionary customers.  Lightspeed aided and abetted the violation by ignoring red flags that Visionary and its owners were receiving transaction-based compensation while Visionary and its owners were not registered as a broker or dealer or associated with a registered broker-dealer firm.

 

According to the SEC’s order, Lightspeed also failed to establish reasonable policies and procedures designed to prevent and detect the improper sharing of commissions between its registered representatives such as Giaquinto, who was associated with Lightspeed for part of the relevant period, and others who were not registered with the SEC in any capacity.  Lightspeed’s former COO Andrew Actman failed reasonably to supervise Giaquinto by not taking appropriate steps to address red flags indicating that Giaquinto was sharing commission payments that he received from Lightspeed with the other Visionary owners.

 

The SEC’s order finds that Dondero violated Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Visionary and its owners willfully violated Section 15(a)(1) of the  Exchange Act.  Giaquinto willfully aided and abetted and caused Visionary’s and his co-owners’ violations of Exchange Act Section 15(a)(1).  Lightspeed willfully aided and abetted and caused Visionary’s and its owners’ violations of Exchange Act Section 15(a)(1).  Lightspeed and Actman failed reasonably to supervise Giaquinto.

 

In settling the SEC’s charges, Dondero agreed to pay disgorgement of $1,102,999.96 plus prejudgment interest of $46,792 and penalties of $785,000 for a total exceeding $1.9 million. He agreed to a bar from the securities industry.  Giaquinto, Heiss, and Medvin must each pay disgorgement of $118,601.96 plus prejudgment interest of $14,391.32 and a penalty of $35,000 for a combined total of more than $500,000 from the three of them.  They are barred from the securities industry for at least two years.  Lightspeed must pay disgorgement of $330,000 plus prejudgment interest of $43,316.54, post-order interest of $4,900.38, and a penalty of $100,000 for a total of approximately $478,000.  Actman agreed to a penalty of $10,000 and a supervisory bar for at least one year.

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SEC Halts Los Angeles Pyramid Scheme Targeting Asian and Latino Communities

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced charges and asset freezes against the operators of a worldwide pyramid scheme targeting Asian and Latino communities in the U.S. and abroad.

 

The SEC alleges that three entities collectively operating under the business names WCM and WCM777 are posing as multi-level marketing companies in the business of selling third-party cloud computing services, which can include website hosting, data storage, and software support.  The entities are based in California and Hong Kong and controlled by “Phil” Ming Xu, who is a resident of Temple City, California.

 

According to the SEC’s complaint filed in federal court in Los Angeles, WCM and WCM777 have raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that the return on investment in the cloud services venture would be 100 percent or more in 100 days.  Investors were told they would receive “points” for making investments or enrolling other investors.  The points would be convertible into equity in initial public offerings of high-tech companies their money would help launch.  However, rather than building out cloud services or incubating high-tech companies, Xu and the WCM entities used investor funds to make Ponzi payments of purported investment returns to some investors.  They also spent investor money to purchase golf courses and other U.S.-based properties among other unauthorized expenditures.

 

The court has granted the SEC’s request for an asset freeze and the appointment of a temporary receiver over the assets of WCM, WCM777, and several other entities named as relief defendants for the purpose of recovering money from the scheme in their possession.

 

“Xu and his entities claimed they were using investor funds to build a strong cloud services company that would then ignite other high-tech companies and ultimately make their investors very wealthy,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “In reality, they were operating a pyramid scheme that preyed on investors in particular ethnic communities, leaving them with nothing left to show for their investment.”

 

According to the SEC’s complaint, WCM and WCM777 sell their products exclusively to investors and have no other apparent sources of revenue.  Their offerings and operations depend almost entirely on the recruitment of new investors and purchases by existing investors to provide the money for returns.  On its website, WCM777 specifically addressed the question “Is WCM777 a Ponzi Game?” by writing, “In summary, we are not a Ponzi game company. We are creating a new business model.”

 

The SEC alleges that Xu and his entities made various false claims to investors about purported partnerships with more than 700 major companies such as Siemens, Denny’s, and Goldman Sachs – in some instances falsely representing that they had permission to use their logos.  Meantime, besides buying two golf courses with investor money, Xu and his entities also purchased a warehouse, vacant land, and several single family homes  They also used investor funds to play the stock market and make other related investments through intermediary companies, such as an oil and gas offering.  They also sent investor money to a rough diamond jewel merchant in Hong Kong and another unrelated company affiliated with Xu.

 

The SEC’s complaint alleges that WCM, WCM777, and Xu 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.  The complaint further alleges that Xu violated Section 20(a) of the Exchange Act.  In addition to the asset freezes and appointment of a temporary receiver, the Honorable Christina A. Snyder also granted the SEC’s request for an order prohibiting the destruction of documents and requiring the defendants to provide accountings. A court hearing has been scheduled for April 10, 2014.

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Fraud Charges Against Seattle Coal Company and CEO for False Disclosures About Management

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced fraud charges against a Seattle-headquartered coal company and its founder for making false disclosures about who was running the company.

 

The SEC’s Enforcement Division alleges that L&L Energy Inc., which has all of its operations in China and Taiwan, created the false appearance that the company had a professional management team in place when in reality Dickson Lee was single-handedly controlling the company’s operations.  An L&L Energy annual report falsely listed Lee’s brother as the CEO and a woman as the acting CFO in spite of the fact that she had rejected Lee’s offer to serve in the position the month before.  L&L Energy and Lee continued to misrepresent that they had an acting CFO in the next three quarterly reports.  Certifications required under the Sarbanes Oxley Act ostensibly bore the purported acting CFO’s electronic signature.  Lee and L&L Energy also allegedly misled NASDAQ to become listed on the exchange by falsely maintaining they had accurately made all of their required Sarbanes-Oxley certifications.

 

In a parallel action, a criminal indictment against Lee was unsealed today in federal court in Seattle.  The U.S. Attorney’s Office in the Western District of Washington is prosecuting the case.

 

“Lee and L&L Energy deceived the public by falsely representing that the company had a CFO, which is a critical gatekeeper in the management of public companies,” said Antonia Chion, associate director in the SEC’s Enforcement Division.  “The integrity of Sarbanes-Oxley certifications is critical, and executives who manipulate the process will be held accountable for their misdeeds.”

 

This enforcement action stems from the work of the SEC’s Cross-Border Working Group, which focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Cross-Border Working Group has contributed to the filing of fraud cases against more than 90 companies, executives, and auditors.  The securities of more than 60 companies have been deregistered.

 

The SEC separately issued a settled cease-and-desist order against L&L Energy’s former audit committee chair Shirley Kiang finding that she played a role in the company’s reporting violations by signing an annual report that she knew or should have known contained a false Sarbanes-Oxley certification by Lee.  Kiang, who neither admitted nor denied the charges, must permanently refrain from signing any public filing with the SEC that contains any certification required pursuant to Sarbanes-Oxley.

 

According to the SEC’s order against Lee and L&L Energy, the false representations began in the annual report for 2008 and continued with quarterly filings in 2009.  The purported acting CFO did not actually sign any public filings during this period or provide authorization for her signature to be placed on any filings.  After Lee was confronted by the purported acting CFO in mid-2009, he nonetheless continued to falsely represent to L&L Energy’s board of directors that the company had an acting CFO.  When L&L Energy filed its annual report for 2009, it contained a false Sarbanes-Oxley certification by Lee that all fraud involving management had been disclosed to the company’s auditors and audit committee.  Then, in connection with an application to gain listing on NASDAQ, Lee informed the exchange that L&L Energy had made all of its required Sarbanes-Oxley certifications – including during the period of the purported service of an acting CFO.  As a result, L&L Energy became listed on NASDAQ.

 

The SEC’s order against Dickson Lee and L&L alleges that they violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  The order also alleges other violations of rules under the Exchange Act concerning Sarbanes-Oxley certifications, disclosure controls and procedures, and obtaining and retaining electronic signatures on filings.  The order seeks disgorgement and financial penalties against L&L Energy and Lee as well as an officer-and-director bar against Lee.  The order also seeks to prohibit Lee, who is a certified public accountant, from practicing before the SEC pursuant to Rule 102(e) of the Commission’s rules of practice.

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Offshore Bankers and Attorney Charged with Helping Americans Hide Assets

As released by the United States Department of Justice,

Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted for conspiracy to launder monetary instruments, the Department of Justice and Internal Revenue Service (IRS) announced today.  The indictment alleges that Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud.  The Caribbean-based defendants allegedly assisted undercover law enforcement agents, posing as U.S. clients, in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners.  Vandyk and St-Cyr invested the laundered funds on the clients’ behalf and represented the funds would not be reported to the U.S. government.

 

The indictment was returned in the Eastern District of Virginia on March 6, 2014, and unsealed on March 12, 2014, when all three defendants were arrested in Miami, Fla.  In addition to the conspiracy charge, Vandyk, St-Cyr and Poulin were each charged with two counts of money laundering.

 

“These charges result from an extensive investigation and are the latest demonstration of the Department’s resolve to find and prosecute those who aid money laundering and tax fraud globally,” said Deputy Attorney General James M. Cole.

 

According to the indictment, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based in the Cayman Islands.  St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens.  Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada and in the Turks and Caicos.  His clientele also included numerous U.S. citizens.

 

According to the indictment, Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government.  Vandyk and St-Cyr directed the undercover agents posing as U.S. clients to create offshore foundations with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients.  Vandyk and St-Cyr used the offshore entities to move money into the Cayman Islands and used foreign attorneys as intermediaries for such transactions.

 

According to the indictment, Poulin established an offshore foundation for the undercover agents posing as U.S. clients and served as a nominal board member in lieu of the clients.  Poulin transferred wire payments from the offshore foundations to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside the United States in the name of the offshore foundation.  The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients.  Clients were able to monitor their investments online through the use of anonymous, numeric passcodes.  Upon request from the U.S. client, Vandyk and St-Cyr would liquidate investments and transfer money, through Poulin, back to the United States.  According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion.

 

“I commend IRS Criminal Investigation and the Division’s prosecutors for the extraordinary work that they have done over many months in this investigation,” said Assistant Attorney General Kathryn Keneally for the Tax Division.  “In particular, it is important to note that the IRS’s voluntary disclosure policy excludes disclosures after the government has received information about taxpayers’ identities.  If the investigation team now has the names of account holders who have not yet come forward, time has run out for them.”

 

“As alleged in the indictment, these defendants were in the business of creating layers of transactions so their US clients could launder criminal proceeds,” said Chief of IRS-Criminal Investigation Richard Weber.  “IRS Criminal Investigation is committed to unraveling complex financial and money laundering schemes and holding those accountable for creating mechanisms to hide assets offshore and dodge the tax system.”

 

An indictment merely alleges that crimes have been committed, and the defendants are presumed innocent until proven guilty beyond a reasonable doubt. If convicted, each defendant faces a maximum potential sentence of 20 years in prison for each count.

 

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Stockbroker and New York Law Firm Managing Clerk Charged in Scheme

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

The Securities and Exchange Commission charged a stockbroker and a managing clerk at a law firm with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.

 

The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals.

 

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.

 

“Law firms are sanctuaries for the confidential treatment of client information, and this scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  “We are continuing to combat serial insider trading schemes, particularly by law firm employees and other professionals who are entrusted with extremely sensitive market-moving information.”

 

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the insider trading scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks.  When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt.  Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked.  As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius.  Eydelman expressed similar concern about Sirius’ struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm.  Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, “Nice trade.”  The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a “thank you” for the information.  Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro’s behalf based on confidential information that he planned to pass him in the future.

 

According to the SEC’s complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities.  Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction.  Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired.  Metro also conveyed the approximate price of the transaction and the approximate announcement date.  The middleman then communicated to Eydelman that they should meet.  Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction.  Eydelman watched the middleman chew or eat the tip to destroy the evidence.  Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.

 

The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company.  He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense.  The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.

 

“People often try to cover their insider trading tracks by using middlemen, destroying evidence, and creating phony documents.  They should learn that sham cover stories simply don’t work and won’t deter us from finding their schemes,” said Robert A. Cohen, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit.

 

According to the SEC’s complaint, Eydelman also traded on inside information in the accounts of more than 50 of his brokerage customers.  Eydelman earned substantial commissions as a result of this trading, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme.  The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading in advance of at least two transactions.

 

The SEC’s complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933.  The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.

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Fraud Charges and Asset Freeze Issued Against Promoter

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

The Securities and Exchange Commission announced fraud charges and an emergency asset freeze against a promoter behind a platform of affiliated microcap stock promotion websites.

The SEC alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively “APS,” to commit a brand of securities fraud known as “scalping.”  The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ).  What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank.  The APS emails immediately triggered massive increases in America West’s share price and trading volume, which Babikian exploited by unloading shares of America West’s stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.

According to documents filed simultaneously with the SEC’s complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies.  He was seeking to wire the proceeds offshore.  The Honorable Paul A. Crotty granted the SEC’s emergency request to preserve these assets by issuing an asset freeze order.

“The Enforcement Division, including its Microcap Fraud Task Force, is intensely focused on the scourge of microcap fraud and is aggressively working to root out microcap fraudsters who make their living by preying on unwitting investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

“By obtaining today’s emergency asset freeze, we have thwarted Babikian’s attempts to liquidate and expatriate assets that should be used to return his ill-gotten gains and pay appropriate penalties,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement in Washington, D.C.

According to the SEC’s complaint, America West’s stock was both low-priced and thinly traded prior to Babikian’s mass dissemination of the APS e-mails promoting it.  America West’s trading volume in 2011 averaged approximately 15,400 shares per day.  There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent.  However, in the immediate aftermath of Babikian’s e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West’s share price hit an all-time high.  Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.

The court’s order, among other things, freezes Babikian’s assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery.  Pursuant to the order, the SEC has taken immediate action to freeze Babikian’s U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

 

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Executives Charged with Facilitating Fraudulent Bond Offering by Dewey & LeBoeuf

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

The Securities and Exchange Commission today charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked.

 

The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger.  Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals combed through its financial statements line by line and devised ways to artificially inflate income and distort financial performance.  Dewey & LeBoeuf then resorted to the bond markets to raise significant amounts of cash through a private offering that seized on the phony financial numbers.

 

“Investors were led to believe they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Dewey & LeBoeuf’s senior-most finance personnel used a grab bag of accounting gimmicks to create that illusion, and top executives green-lighted the decision to sell $150 million in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.”

 

The SEC’s complaint filed in federal court in Manhattan charges the following executives at Dewey & LeBoeuf, which is no longer in business: chairman Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, finance director Frank Canellas, and controller Tom Mullikin.

 

In a parallel action, the Manhattan District Attorney’s Office today announced criminal charges against Davis, DiCarmine, and Sanders.

 

According to the SEC’s complaint, the roots of the fraud date back to late 2008 when senior financial officers began to conjure up fake revenue by manipulating various entries in Dewey & LeBoeuf’s internal accounting system.  The firm’s profitability was inflated by approximately $36 million (15 percent) in its 2008 financial results through this use of accounting tricks.  For example, compensation for certain personnel was falsely reclassified as an equity distribution in the amount of $13.8 million when they in fact those personnel had no equity in the firm.  The improper accounting also reversed millions of dollars of uncollectible disbursements, mischaracterized millions of dollars of credit card debt owed by the firm as bogus disbursements owed by clients, and inaccurately accounted for significant lease obligations held by the firm.

 

The SEC alleges that   Dewey & LeBoeuf finance executives continued using these and other fraudulent techniques to prepare its 2009 financial statements, which were misstated by $23 million.  The culture of accounting fraud was so prevalent at the firm that Canellas sent Sanders an e-mail with a schedule containing a list of suggested cost savings to the budget.  Among them was a $7.5 million line item reduction entitled “Accounting Tricks.”

 

According to the SEC’s complaint, Sanders acknowledged in separate e-mail communications, “I don’t want to cook the books anymore. We need to stop doing that.”  But he and other finance personnel continued to banter about ways to create fake income.  For example, in the midst of a mad scramble at year-end 2008 to meet obligations to bank lenders, Sanders boasted to DiCarmine in an e-mail, “We came up with a big one: Reclass the disbursements.”  DiCarmine responded, “You always do in the last hours. That’s why we get the extra 10 or 20% bonus. Tell [Sanders’ wife], stick with me! We’ll buy a ski house next.”  DiCarmine later e-mailed Sanders, “You certainly cheered the Chairman up. I could use a dose.”  Sanders answered, “I think we made the covenants and I’m shooting for 60%.”  He cryptically added, “Don’t even ask – you don’t want to know.”

 

The SEC alleges that Dewey & LeBoeuf didn’t want investors in the bond offering to know either.  The firm continued using and concealing improper accounting practices well after the offering closed in April 2010.  The note purchase agreement governing the bond offering required Dewey & LeBoeuf to provide investors and lenders with quarterly certifications.  The quarterly certifications made by the firm were all fraudulent.

 

“As Dewey & LeBoeuf’s revenue was falling and the firm was struggling to meet commitments, its top executives and finance professionals brazenly looked for ways to create fake income and retain their lucrative salaries and bonuses,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

 

The SEC’s complaint alleges that Davis violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint alleges that DiCarmine, Sanders, Canellas, and Mullikin violated Section 17(a) of the Securities Act and aided and abetted Dewey LeBoeuf’s and Davis’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) pursuant to Section 20(e) of the Exchange Act.  The SEC is seeking disgorgement and financial penalties as well as permanent injunctions against all five defendants, and officer and director bars against Davis, DiCarmine, and Sanders.  The SEC also will separately seek to prohibit Davis and DiCarmine from practicing as lawyers on behalf of any publicly traded company or other entity regulated by the SEC.

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SEC Halts Pyramid Scheme Being Promoted Through Facebook and Twitter

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

The Securities and Exchange Commission announced an emergency enforcement action to stop a fraudulent pyramid scheme by phony companies masquerading as a legitimate international investment firm.

 

The SEC has obtained a federal court order to freeze accounts holding money stolen from U.S. investors by Fleet Mutual Wealth Limited and MWF Financial – collectively known as Mutual Wealth.  The SEC alleges that Mutual Wealth has been exploiting investors through a website and social media accounts on Facebook and Twitter, falsely promising extraordinary returns of 2 to 3 percent per week for investors who open accounts with the firm.  Mutual Wealth purports to invest customer funds using an “innovative” high-frequency trading strategy that allows “capital to be invested into securities for no more than a few minutes.”  In classic pyramid scheme fashion, Mutual Wealth encourages existing investors to become “accredited advisors” and recruit new investors in exchange for a referral fee or commission.

 

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, almost nothing that Mutual Wealth represents to investors is true.  The company does not purchase or sell securities on behalf of investors, and instead merely diverts investor money to offshore bank accounts held by shell companies.  Mutual Wealth’s purported headquarters in Hong Kong does not exist, nor does its purported “data-centre” in New York.  Mutual Wealth also lists make-believe “executives” on its website, and falsely claims in e-mails to investors that it is “registered” or “duly registered” with the SEC.  Approximately 150 U.S. investors have opened accounts with Mutual Wealth and collectively invested a total of at least $300,000.

 

“Mutual Wealth used Facebook and Twitter as well as a team of recruiters to spread a steady stream of lies that tricked investors out of their money,” said Gerald W. Hodgkins, an associate director in the SEC’s Division of Enforcement.  “Fortunately we were able to quickly trace the fraud overseas and obtain a court order requiring Mutual Wealth to shut down its website before the scheme gains more momentum.”

 

According to the SEC’s complaint, Mutual Wealth operates through entities in Panama and the United Kingdom and uses offshore bank accounts in Cyprus and Latvia and offshore “payment processors” to divert money from investors.  Mutual Wealth’s sole director and shareholder presented forged and stolen passports and a bogus address to foreign government authorities and payment processors.

 

The SEC alleges that Mutual Wealth leverages the scope and reach of social media to solicit investors with its fraudulent pitch.  Mutual Wealth maintains Facebook and Twitter accounts that link to its website and serve as platforms through which it lures new investors.  Some of Mutual Wealth’s “accredited advisors” then use social media channels ranging from Facebook and Twitter to YouTube and Skype to recruit additional investors and earn referral fees and commissions.  Mutual Wealth’s Facebook page spreads such misrepresentations as “HFT portfolios with ROI of up to 250% per annum.  Income yield up to 8% per week.”  A Facebook post on Aug. 12, 2013, boasted “$1000 investment into the Growth and Income Portfolio made on April 8th, 2013 is now worth $2,112.77.”  Mutual Wealth regularly posts status updates for investors on its Facebook page, and the comment sections beneath the posts are often filled with solicitations by the accredited advisors.  Mutual Wealth also tweets announcements posted on its Facebook page.

 

The SEC’s complaint charges Mutual Wealth 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 and Rule 10b-5.  For the purposes of recovering investor money in their possession, the complaint names several relief defendants linked to offshore accounts to which investor funds were diverted from the scheme: Risort Partners Inc., Hullstar Capital LLP, Camber Alliance LLP, Kimrod Estate LLP, and Midlcorp Trade LTD.

 

The Honorable Dolly M. Gee has granted the SEC’s request for a court order deactivating Mutual Wealth’s website and freezing assets in all accounts at any bank, financial institution, brokerage firm, or third-payment payment processor (including those commercially known as SolidTrust Pay, EgoPay, and Perfect Money) maintained for the benefit of Mutual Wealth.

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