Houston-based Penny Stock Chimera Energy Charged with Pump-and-Dump Scheme

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission announced charges against a Houston-based penny stock company and four individuals behind a pump-and-dump scheme that misled investors to believe the company was on the brink of developing revolutionary technology to enable environmentally friendly oil-and-gas production.

The SEC alleges that Andrew I. Farmer orchestrated the scheme by creating a shell company called Chimera Energy, secretly obtaining control of all shares issued in an initial public offering (IPO) in late 2011, and launching an aggressive promotional campaign midway through 2012 to hype the stock to investors. Chimera Energy issued around three dozen press releases in a two-month period about its supposed licensing and development of technology to extract shale oil without the perceived environmental impact of hydraulic fracturing known as fracking. However, Chimera Energy did not actually license or even possess the technology it touted and had not achieved the claimed results in commercially developing it. While the stock was being pumped by the false claims, entities controlled by Farmer dumped more than 6 million shares on the public markets for illicit proceeds of more than $4.5 million.

The SEC suspended trading in Chimera Energy stock in 2012 and prevented Farmer and his associates from dumping additional shares or misleading new investors into their scheme.

In addition to Chimera Energy and Farmer, the SEC’s complaint charges a pair of figurehead CEOs installed by Farmer. The SEC alleges that Charles E. Grob Jr. and Baldemar Rios approved the misleading press releases and operated Chimera Energy at the minimum level necessary to lend the company a veneer of legitimacy while concealing Farmer’s involvement altogether. The SEC’s complaint also charges Carolyn Austin with helping Farmer profit from his scheme by dumping shares of Chimera Energy stock in the midst of the promotional efforts.

“Farmer and his accomplices secretly rigged the market for Chimera Energy stock and illegally profited by exaggerating the company’s capabilities and technology,” said David Woodcock, director of the SEC’s Fort Worth Regional Office. “They seized on fracking as a topic of public discourse and aggressively touted an entirely fictitious business to attract unwitting investors.”

According to the SEC’s complaint filed yesterday in federal court in Houston, Farmer obtained control of all 5 million shares of Chimera Energy stock issued in the IPO by disguising his ownership through the use of nominee shareholders. Farmer’s name and the nature of his control over the company were not disclosed to investors in any of Chimera Energy’s public filings. Following the IPO, Farmer directed the press release barrage along with an Internet advertising campaign designed to increase investor awareness of Chimera Energy’s claims. The initial press release issued by the company on July 30, 2012, sported the headline: CHMR Unveils Breakthrough Shale Oil Extraction Method to Safely and Effectively Replace Hydraulic Fracturing.

The SEC alleges that Chimera Energy disclosed in public filings that an entity named China Inland had granted the company an “exclusive license to develop and commercialize cutting edge technologies related to Non-Hydraulic Extraction.” The technology that China Inland purportedly licensed to Chimera Energy was described as an “environmentally friendly oil & gas extraction procedure for shale to replace hydraulic fracturing.” The SEC’s investigation found that the purported acquisition of a license to develop such technology and the license agreement itself are entirely fictitious. No legitimate entity known as China Inland even exists.

The SEC’s complaint charges Chimera Energy, Farmer, Grob, Rios, and Austin with securities fraud, registration violations, and reporting violations. The SEC seeks permanent injunctions, disgorgement with prejudgment interest and financial penalties, penny stock bars, and officer-and-director bars.

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NY-based brokerage firm Linkbrokers Derivatives Charged in Scheme

As released by the United States Securities and Exchange Commission,

The Securities and Exchange Commission today charged New York-based brokerage firm Linkbrokers Derivatives LLC for unlawfully taking secret profits of more than $18 million from customers by adding hidden markups and markdowns to their trades.

According to the SEC’s order instituting administrative proceedings, certain representatives on Linkbrokers’ cash equity desk defrauded customers by purporting to charge them very low commission fees, but in reality extracting fees that in some cases were more than 1,000 percent greater than represented. These brokers hid the true size of the fees they were collecting by misrepresenting the price at which they had bought or sold securities on behalf of their customers. The scheme was difficult for customers to detect because the brokers charged the markups and markdowns during times of market volatility in order to conceal the false prices they were reporting to customers.

Linkbrokers has agreed to pay $14 million to settle the SEC’s charges. The SEC previously charged four former brokers on the cash equities desk at Linkbrokers, and three of them later agreed to settle those charges by consenting to judgments ordering more than $4 million in disgorgement plus interest.

“Linkbrokers employees engaged in a devious and abusive trading scheme orchestrated to steal from the firm’s unsuspecting customers,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit. “This settlement strips Linkbrokers of its remaining assets and allows those funds to be returned to harmed customers.”

According to the SEC’s order instituting a settled administrative proceeding against Linkbrokers, the scheme occurred from at least 2005 to February 2009 and involved more than 36,000 transactions. The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000. Linkbrokers secured additional illicit profits by stealing a portion of customers’ trades. When customers placed limit orders seeking to purchase or sell shares at a specified maximum or minimum price, the brokers filled the orders at the customers’ limit price but withheld that information from the customers. Instead, they monitored the movement in the price of the securities and purchased or sold portions of these positions back to the market, keeping the profit for the firm. The brokers then falsely reported to the customers that they could not fill the order at the limit price.

The SEC’s order, to which Linkbrokers consented without admitting or denying the findings, finds that the firm violated Section 15(c)(1) of the Securities Exchange Act of 1934 and requires Linkbrokers to pay $14 million in disgorgement. Linkbrokers ceased acting as a broker-dealer in April 2013 and will withdraw its registration.

The former brokers who previously agreed to settle the SEC’s charges are Benjamin Chouchane, Marek Leszczynski, and Henry Condron, who each also have pleaded guilty to criminal charges.

The SEC’s litigation continues against the fourth former broker, Gregory Reyftmann.

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NY-based Crucible Capital Group Charged by the SEC

As released by the United States Securities and Exchange Commission,

The Securities and Exchange Commission today announced charges against a New York-based brokerage firm and its founder for allegedly violating net capital requirements and falsifying books and records to conceal the capital deficiencies.

The SEC’s Division of Enforcement alleges that Charles “Chuck” Moore and Crucible Capital Group attempted to disguise the firm’s extensive and repeated net capital insufficiencies by improperly off-loading its liabilities onto the books of an affiliated firm and improperly treating non-marketable stock as an allowable asset. Moore went so far as to try to hide Crucible’s true financial condition from SEC examiners by providing them doctored invoices that sought to mask the extent of those liabilities. But SEC examiners and investigators successfully detected that the documents had been fabricated, and referred the matter to criminal authorities for prosecution.

The U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Moore for obstructing the SEC’s examination.

“Moore attempted to mislead SEC examiners by giving them documents he intentionally falsified in an effort to hide Crucible’s severe capital insufficiencies,” said Andrew Ceresney, director of the SEC’s Division of Enforcement. “We will continue to work with our law enforcement partners to pursue parties that try to obstruct or delay the SEC’s critical work in overseeing broker-dealers and other regulated entities.”

According to the SEC’s order instituting administrative proceedings against Crucible and Moore, Crucible entered into an expense-sharing agreement with another firm called Angelic Holdings that also was wholly owned by Moore. Under the agreement, Angelic was obligated to pay Crucible’s expenses, so Moore had Crucible’s vendors bill Angelic for the services they performed for Crucible. When SEC examiners asked for documents concerning Angelic’s liabilities, Moore arranged to provide the examiners with copies of invoices that had been doctored to eliminate significant past due amounts.

The SEC’s Division of Enforcement alleges that Moore knew that the expense-sharing agreement was illegitimate because Angelic did not have the resources to pay the debts to the vendors. And Moore knew that if those liabilities were properly attributed to Crucible, then SEC examiners would learn that Crucible had failed to meet its required minimum net capital over a 10-month period from December 2012 to September 2013

“The net capital rule is a principal tool by which the SEC monitors the financial health of brokerage firms,” said Amelia A. Cottrell, an associate director in the SEC’s New York Regional Office. “It is therefore crucial that SEC examiners have prompt access to accurate and complete information about a firm’s financial condition.”

The SEC’s Division of Enforcement alleges that Crucible violated the net capital rule: Section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-1. Crucible also allegedly violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(11), 17a-4(b)(3), 17a-4(j),17a-5(a), and 17a-11(b)(1) by failing to maintain and keep accurate records of its aggregate indebtedness and net capital, notify the SEC of its net capital deficiency, file accurate Financial and Operational Combined Uniform Single (FOCUS) reports, and provide the examiners with accurate copies of records evidencing its expenses. Moore is alleged to have aided and abetted and caused each of these violations. The administrative proceedings will determine what, if any, remedial action or financial penalties are appropriate in the public interest against Crucible and Moore.

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Four Promoters Charged with Manipulating Marijuana-Related Stocks and Other Microcap Companies

As reported by the United States Securities and Exchange Commission,

The Securities and Exchange Commission charged four promoters with ties to the Pacific Northwest for manipulating the securities of several microcap companies, including marijuana-related stocks that the agency has warned investors about in recent weeks.

The SEC alleges that the four promoters bought inexpensive shares of thinly traded penny stock companies on the open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks. They then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially. However, these companies had little to no business operations at the time. The promoters reaped more than $2.5 million in illegal profits through their schemes.

Two of the companies manipulated in this case – GrowLife Inc. and Hemp Inc. – claim to be related to the medical marijuana industry. The SEC has issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industries to lure investors into stock manipulation schemes. Other schemes by these four promoters involved an oil-and-gas company – Riverdale Oil and Gas Corporation – and three other microcap stocks, ISM International, Allied Products Corp, and Aden Solutions.

The SEC was able to unearth the schemes through the work of its recently created Microcap Fraud Task Force.

“Our Microcap Fraud Task Force is taking direct aim at abusive practices and serial violators within the microcap markets like these four promoters seeking to exploit retail investors for personal gain,” said Michael Paley, co-chair of the SEC’s Microcap Fraud Task Force. “In this case, we meticulously reviewed trading records and developed the evidence necessary to connect these four promoters and their coordinated trading efforts.”

The SEC’s complaint filed in federal court in Tacoma, Wash., charges the following individuals:
• Mikhail Galas, a stock promoter who lives in Vancouver, Wash.
• Alexander Hawatmeh, a member of Worthmore Investments LLC, which owns a stock promotion website called stockhaven.com. He formerly lived in Vancouver and currently resides in Lincoln City, Oregon.
• Christopher Mrowca, a stock promoter who operates Money Runners Group LLC, which has an affiliated stock promotion website called MoneyRunnersGroup.com. He lives in Bradenton, Fla.
• Tovy Pustovit, who owns a stock promotion website called Explosive Alerts. He also lives in Vancouver.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington announced criminal charges against Galas, Hawatmeh, and Mrowca.

According to the SEC’s complaint, GrowLife Inc. was part of a broader online promotion of several marijuana-related stocks in early 2014. Mrowca specifically promoted GrowLife through his Money Runners Group website and predicted that the stock price would nearly double. Mrowca, Galas, and Hawatmeh meanwhile engaged in manipulative trading designed to increase the price and volume of GrowLife stock, and they later sold their shares for illicit profits.

Similarly, the SEC alleges that Hawatmeh, Galas, and Mrowca bought and sold approximately 41.7 million shares of Hemp Inc. in January and February 2014 while the stock was actively promoted on the Internet. For example, one Internet tout on February 6 claimed that Hemp could reach “a REAL Possible Gain of OVER 2900%.” During the promotion, Hawatmeh, Mrowca, and Galas engaged in manipulative wash trades and matched orders to manipulate Hemp’s common stock before selling their shares for illegal gains.

“This was a carefully planned operation by Galas, Hawatmeh, Mrowca, and Pustovit to distort the performance of specific penny stocks as they were simultaneously promoted through social media and the Internet. As the companies’ stock prices increased, these four promoters opportunistically dumped their shares for illicit gains,” said Amelia A. Cottrell, associate director in the SEC’s New York Regional Office.

The SEC’s complaint charges Galas, Hawatmeh, Mrowca and Pustovit with violating antifraud provisions of the federal securities laws. The SEC seeks temporary, preliminary, and permanent injunctions along with an emergency asset freeze, disgorgement, prejudgment interest, financial penalties, and orders barring the promoters from participating in a penny stock offering.

The SEC’s complaint names Nadia Hawatmeh as a relief defendant for the purposes of recovering ill-gotten gains in her brokerage account, which was used by the promoters to conduct some of their manipulative trades.

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Houston-Based Company and CEO Charged with Oil-and-Gas Fraud Charges

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced charges against a Houston-based oil-and-gas exploration and production company and its CEO for making fraudulent claims about the company’s oil reserves.

An SEC enforcement investigation found that Houston American Energy Corp. and John F. Terwilliger fraudulently claimed that a Colombian exploration concession in which Houston American only owned a fractional interest held between 1 billion and 4 billion barrels of oil reserves, and that the reserves were worth more than $100 per share to Houston American’s investors. The estimates lacked any reasonable basis and were falsely attributed to the concession’s operator, whose actual estimates were much lower.

“Terwilliger and Houston American misled investors by wildly exaggerating the extent and nature of their oil and gas holdings,” said Gerald H. Hodgkins, associate director of the SEC’s Enforcement Division. “They used a cadre of third parties to publicize and bolster their misleading claims.”

The SEC’s order instituting administrative proceedings also charges stock promoter Kevin T. McKnight and his firm Undiscovered Equities Inc., who were paid by Houston American to disseminate its fraudulent claims about the oil-and-gas concession project in Colombia.

The SEC’s Enforcement Division alleges that the fraudulent conduct by Terwilliger and Houston American occurred during several months in late 2009 and early 2010. During this time, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 per share to more than $20 per share. Contrary to the lofty estimates made by Terwilliger and Houston American, the company participated in drilling multiple unsuccessful wells on the concession from 2010 to 2012, and withdrew from the operation in early 2013 without recovering any oil. The company’s stock price eventually cratered under the weight of the fraud. Houston American now trades for approximately 40 cents per share, which represents a market capitalization loss of $600 million since it peaked in April 2010.

The SEC’s order charges Terwilliger and Houston American with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 20(b) of the Exchange Act and Section 17(a) of the Securities Act of 1933. The Section 20(b) charges against Houston American and Terwilliger relate to statements made by touts and other third parties, who disseminated the Terwilliger’s and Houston American’s fraudulent estimates. McKnight and Undiscovered Equities are charged with violations of Section 17(b) of the Securities Act.

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SEC Obtains Nearly $70 Million Judgment Against Richmond, Va.-Based Financial Services and Brokerage Firms

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission announced that it has obtained a final judgment in federal court in Tennessee requiring a Richmond, Va.-based financial services holding company, a subsidiary brokerage firm, and their CEO to pay nearly $70 million as the outcome of a trial that found them liable for fraud.

The SEC’s complaint filed against AIC Inc., Community Bankers Securities LLC, and Nicholas D. Skaltsounis alleged that they conducted an offering fraud while selling AIC promissory notes and stock to numerous investors across multiple states, many of whom were elderly or unsophisticated brokerage customers. They misrepresented and omitted material information about the investments when pitching them to investors, including the safety and risk associated with the investments, the rates of return, and how the proceeds would be used by AIC. In reality, AIC and its subsidiaries were never profitable, and Skaltsounis and the companies used money raised from new investors to pay back principal and returns to existing investors.

“The very significant penalties in this case reinforce the message that we’re prepared to aggressively pursue companies and individuals, and when necessary take them to trial, in order to hold them accountable when they aren’t truthful with investors,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

A jury returned a verdict in the SEC’s favor in October 2013 after a nearly three-week trial in the Knoxville division of U.S. District Court for the Eastern District of Tennessee. Chief Judge Thomas A. Varlan issued the final judgments today that include the following monetary sanctions:
• AIC: disgorgement of $6,647,540, prejudgment interest of $969,262.10, and a penalty of $27.95 million for a total of $35,566,802.10.
• Community Bankers Securities: disgorgement of $2,830,946 plus prejudgment interest of $412,773.53 and a penalty of $27.95 million for a total of $31,193,719.53.
• Skaltsounis: disgorgement of $948,389.13 plus prejudgment interest of $138,282.35 and a penalty of $1.505 million for a total of $2,591,671.48.

The court also imposed permanent injunctions against AIC, Community Bankers Securities, and Skaltsounis for future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

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Va.-Based Broker Charged With Stealing Funds From Elderly Customers

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission charged a broker based in Roanoke, Va., with defrauding elderly customers, including some who are legally blind, by stealing their funds for her personal use and falsifying their account statements to cover up her fraud.

According to the SEC’s complaint filed in U.S. District Court for the Western District of Virginia, Donna Jessee Tucker siphoned $730,289 from elderly customers and used the money to pay for such personal expenses as vacations, vehicles, clothes, and a country club membership. Tucker ensured that the customers received their monthly account statements electronically, knowing that they were unable or unwilling to access their statements in that format. The SEC further alleges that Tucker engaged in unauthorized trading and other financial transactions while making misrepresentations to customers about their investment accounts and forging brokerage, banking, and other documents.

The SEC’s investigation resulted from a broker-dealer examination of the firm where Tucker worked that was conducted by the SEC’s Philadelphia Regional Office.

“Tucker befriended her customers and gained their trust, only to be stealing their money behind their backs and giving them phony documents to hide it,” said Sharon Binger, director of the SEC’s Philadelphia office.

In a parallel action, the U.S. Attorney’s Office for the Western District of Virginia announced criminal charges against Tucker.

Tucker has agreed to settle the SEC’s charges and disgorge the $730,289 in ill-gotten gains either in the criminal case or the civil case. She consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The settlement is subject to court approval.

The SEC’s investigation was conducted by Brendan P. McGlynn, Lisa M. Candera, and Daniel L. Koster of the Philadelphia Regional Office, with assistance from Christopher R. Kelly. The examination that led to the investigation was conducted by James A. O’Leary, Calvin N. Inge, and William McIntyre under the supervision of Diane J. Hagy.

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Florida based CEO and CFO Charged witih Hiding Internal Controls Deficiencies and Violating Sarbances-Oxley

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission announced charges against the CEO and former CFO of a Florida-based computer equipment company for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting.

The Sarbanes-Oxley Act of 2002 requires a management’s report on internal controls over financial reporting to be included in a company’s annual report. The CEO and CFO must sign certifications confirming they’ve disclosed all significant deficiencies to the outside auditors, reviewed the annual report, and attest to its accuracy.

The SEC’s Enforcement Division alleges that CEO Marc Sherman and former CFO Edward L. Cummings represented in a management’s report accompanying the fiscal year 2008 annual report for QSGI Inc. that Sherman participated in management’s assessment of the internal controls. However, Sherman did not actually participate. The Enforcement Division further alleges that Sherman and Cummings each certified that they had disclosed all significant deficiencies in internal controls to the outside auditors. On the contrary, Sherman and Cummings misled the auditors – chiefly by withholding that inadequate inventory controls existed within the company’s Minnesota operations. They also withheld from auditors and investors that Sherman was directing and Cummings participating in a series of maneuvers to accelerate the recognition of certain inventory and accounts receivables in QSGI’s books and records by up to a week at a time. The improper accounting maneuvers, which rendered QSGI’s books and records inaccurate, were performed in order to maximize the amount of money that QSGI could borrow from its chief creditor.

Cummings agreed to settle the charges, and the SEC’s Enforcement Division will litigate its case against Sherman in a separate administrative proceeding.

“Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously. Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process,” said Scott W. Friestad, associate director in the SEC’s Enforcement Division.

According to the SEC’s orders for the administrative proceedings, QSGI’s efforts in 2008 to introduce new internal controls to the operations at its Minnesota facility largely failed. The deficiencies existed throughout that fiscal year and continued until the company filed for bankruptcy in July 2009. QSGI failed to design inventory control procedures that took into account the existing control environment, such as employees’ qualifications and experience levels. For example, sales and warehouse personnel often failed to document their removal of items from inventory. When they did prepare the paperwork, accounting personnel often failed to process it and adjust inventory in the company’s financial reporting system.

The SEC’s Enforcement Division alleges that in management representation letters and other communications with QSGI’s external auditors, Sherman and Cummings claimed they had disclosed all significant deficiencies in internal controls over financial reporting. Yet they did not disclose or direct anyone else to disclose the ongoing inventory and accounts receivable issues, nor did they disclose the improper acceleration of recognition and the resulting falsification of QSGI’s books and records. In fact, Sherman and Cummings withheld information from the external auditors. Had they disclosed the deficiencies and the circumvention of inventory controls as well as the improper acceleration of accounts receivable and inventory recognition, the auditors would have changed the nature, timing, and extent of their procedures in conducting the audit of QSGI’s financial statements.

According to the SEC’s orders, Sherman and Cummings signed a Form 10-K and Sherman signed a Form 10-K/A each containing the false management’s report on internal controls over financial reporting. And each signed certifications required under Section 302 of the Sarbanes-Oxley Act in which they falsely represented that they had evaluated the report and disclosed all significant deficiencies to the auditors.

The SEC’s Enforcement Division alleges that Sherman violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. Sherman also is charged with causing QSGI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

Without admitting or denying the SEC’s findings, Cummings consented to a cease-and-desist order finding that he willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. The order also finds that he caused QSGI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Cummings agreed to pay a $23,000 penalty, and to be barred from serving as an officer and director of a publicly traded company for five years. Cummings also agreed to be suspended for at least five years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

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SEC Charges Smith & Wesson With FCPA Violations

As released by the US Securities and Exchange Commission,

The Securities and Exchange Commission charged Smith & Wesson Holding Corporation with violating the Foreign Corrupt Practices Act (FCPA) when employees and representatives of the U.S.-based parent company authorized and made improper payments to foreign officials while trying to win contracts to supply firearm products to military and law enforcement overseas.

Smith & Wesson, which profited by more than $100,000 from the one contract that was completed before the unlawful activity was identified, has agreed to pay $2 million to settle the SEC’s charges. The company must report to the SEC on its FCPA compliance efforts for a period of two years.

According to the SEC’s order instituting a settled administrative proceeding, the Springfield, Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010. During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries.

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

According to the SEC’s order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852.

The SEC’s order finds that Smith & Wesson employees made or authorized improper payments related to multiple other pending or contemplated international sales contracts. For example, in 2009, Smith & Wesson attempted to win a contract to sell firearms to an Indonesian police department by making improper payments to its third-party agent in Indonesia. The agent indicated he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs. He said Indonesian police officials expected to be paid additional amounts above the actual cost of testing the guns. Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated.

The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided to foreign officials in Turkey, Nepal, and Bangladesh. The attempts to secure sales contracts in those countries were ultimately unsuccessful.

The SEC’s order finds that Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934. The company agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty. Smith & Wesson consented to the order without admitting or denying the findings. The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light. Smith & Wesson halted the impending international sales transactions before they went through, and implemented a series of significant measures to improve its internal controls and compliance process. The company also terminated its entire international sales staff.

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Harbinger’s Former Chief Operating Officer Agrees to Settle Charges for Assisting Hedge Fund Scheme

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

The Securities and Exchange Commission announced that the former chief operating officer at Harbinger Capital Partners LLC has agreed to settle charges that he assisted a scheme by the firm and its owner Philip A. Falcone to misappropriate millions of dollars from a hedge fund they managed to pay Falcone’s personal taxes.

Peter A. Jenson, who was charged along with Falcone and Harbinger in a 2012 enforcement action by the SEC, has agreed to admit wrongdoing and pay a $200,000 penalty. He also agreed to be prohibited from working in the securities industry for at least two years, and agreed to be suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

The settlement papers were filed in U.S. District Court for the Southern District of New York and must be approved by the court.

Falcone and Harbinger consented to a settlement last year in which they agreed to pay more than $18 million and admit wrongdoing.

“Jenson assisted a fraudulent scheme that allowed Falcone to put his own interests ahead of investors by engaging in a related party loan on favorable terms,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit. “This settlement shows that we hold accountable not only those who perpetrate a scheme, but also those who enable them.”

In his settlement, Jenson admits that with knowledge of Falcone’s and Harbinger’s violations, he provided substantial assistance in connection with the loan by failing to:
• Ensure that the lender (Harbinger Capital Partners Special Situations Fund) had separate counsel.
• Ensure that the loan was consistent with Falcone’s fiduciary obligations to the Special Situations Fund.
• Ensure that Falcone paid an “above market” interest rate on the loan.
• Timely disclose the loan to investors.
• Take actions to cause the lender to accelerate Falcone’s payment on the loan once investors in the Special Situations Fund were permitted to begin redeeming their investments.

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