California-Based Investment Firm Charged With Fraud

As related by the Securities and Exchange Commission:

The Securities and Exchange Commission today charged the former president of a purported private equity real estate firm based in San Bernardino, Calif., with defrauding nearly 500 investors who purchased promissory notes under the false premise that they were secured by specific properties or other collateral.

 

The SEC alleges that Larry Polhill used his company American Pacific Financial Corporation (APFC) to buy and sell real estate and distressed assets, and he offered investors the opportunity to invest in the company through unregistered notes that would yield them interest payments of 5 to 17 percent per year.  However, the collateral that Polhill and APFC claimed made the investments secure was often non-existent or otherwise impaired.  The properties underlying the investments were sometimes even sold without notice to investors.  When APFC eventually filed for bankruptcy, it named the investors as unsecured creditors who were owed nearly $160 million.  None of Polhill’s investment offerings were registered with the SEC.

 

“Polhill falsely presented investment opportunities that were safe and reliable based on collateral that didn’t always exist, and his fraudulent misrepresentations left investors with nothing to show for their investments when APFC declared bankruptcy,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

 

Polhill agreed to settle the SEC’s charges and be barred from acting as the officer or director of any public company.  The settlement is subject to the approval of the U.S. District Court for the Central District of California, which would decide monetary sanctions at a later date.

 

According to the SEC’s complaint, in addition to promissory notes, investors also could invest in APFC-sponsored funds that pooled investor money to make loans to APFC.  The company made regularly scheduled interest payments to investors in the notes and the funds from the mid-1980s to 2007.  As a result, its investor base continually grew and the company began making larger and larger investments in distressed assets by buying numerous companies out of bankruptcy.  While a few of APFC’s investments were successful, the vast majority failed unbeknownst to investors.  Consequently, the assets held by APFC that were securing the notes and loans held by investors decreased in value.  In early 2008, APFC ceased making its scheduled payments to most investors, but continued to issue newsletters, pay preferred investors, and engage in other activities designed to create a false sense of security about the investments in the company.

 

The SEC alleges that Polhill made several material misrepresentations to investors.  Specifically, he told investors that the notes were secured by collateral when no such security interest existed.  He failed to disclose that the collateral securing some investors’ notes already had been pledged to other lenders.  Polhill represented that he would notify investors if their collateral went into default when that was often not the case.  For instance, one investor’s note specifically stated it was secured by property located in Hesperia, Calif., that was owned by APFC and pledged as collateral.  However, APFC sold the collateral in 2004, and neither Polhill nor APFC informed the investor that his collateral had been sold and there was no longer any asset securing the note.

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New York-Based Firm at the Center of a $125 Million Investment Scheme

As reported by the Securities and Exchange Commission:

The Securities and Exchange Commission announced charges against 10 former brokers at an Albany, N.Y.-based firm at the center of a $125 million investment scheme for which the co-owners have received jail sentences.

 

The SEC filed an emergency action in 2010 to halt the scheme at McGinn Smith & Co. and freeze the assets of the firm and its owners Timothy M. McGinn and David L. Smith, who were later charged criminally by the U.S. Attorney’s Office for the Northern District of New York and found guilty.

 

The SEC’s Enforcement Division alleges that 10 brokers who recommended the unregistered investment products involved in the scheme made material misrepresentations and omissions to their customers.  The registered representatives ignored red flags that should have led them to conduct more due diligence into the securities they were recommending to their customers.

 

“As securities professionals, these brokers had an important duty to determine whether the securities they recommended to customers were suitable, especially when red flags were apparent.  These registered representatives performed inadequate due diligence and failed to fulfill their duties,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

 

The SEC’s order names 10 former McGinn Smith brokers in the administrative proceeding:

  • Donald J. Anthony, Jr. of Loudonville, N.Y.
  • Frank H. Chiappone of Clifton Park, NY.
  • Richard D. Feldmann of Delmar, N.Y.
  • William P. Gamello of Rexford, N.Y.
  • Andrew G. Guzzetti of Saratoga Springs, N.Y.
  • William F. Lex of Phoenixville, Pa.
  • Thomas E. Livingston of Slingerlands, N.Y.
  • Brian T. Mayer of Princeton, N.J.
  • Philip S. Rabinovich of Roslyn, N.Y.
  • Ryan C. Rogers of East Northport, N.Y.

 

According to the SEC’s order, the scheme victimized approximately 750 investors and led to $80 million in investor losses.  Guzzetti was the managing director of McGinn Smith’s private client group from 2004 to 2009, and he supervised brokers who recommended the firm’s offerings.  The SEC’s Enforcement Division alleges that despite his knowledge of serious red flags, Guzzetti failed to take any action to investigate the offerings and instead encouraged the brokers to sell the notes to McGinn Smith customers.

 

The SEC’s Enforcement Division alleges that the other nine brokers charged in the administrative proceeding should have conducted a searching inquiry prior to recommending the products to their customers.  The brokers continued to sell McGinn Smith notes even after being told that customers placed in some of the firm’s offerings could only be redeemed if a replacement customer was found.  This was contrary to the offering documents.  In January 2008, the brokers learned that four earlier offerings that raised almost $90 million had defaulted, yet they failed to conduct any inquiry into subsequent offerings and continued to recommend McGinn Smith notes.

 

The SEC’s order alleges that the misconduct of Anthony, Chiappone, Feldmann, Gamello, Lex, Livingston, Mayer, Rabinovich, and Rogers resulted in violations of 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 order alleges that Guzzetti failed to reasonably supervise the nine brokers, giving rise to liability under Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4).

 

The SEC’s civil case continues against the firm as well as McGinn and Smith, who were sentenced to 15 and 10 years imprisonment respectively in the criminal case.

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Indiana-Based Company and Executives Charged for Defrauding Investors in Renewable Fuel Production Scheme

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission today charged a company in Evansville, Ind., and several executives and suppliers for posing to investors as a legitimate biodiesel production business while concealing the extensive illegal activity that accounted for 99 percent of its revenues.

The SEC alleges that when Imperial Petroleum purchased Middletown, Ind.-based E-Biofuels LLC as a subsidiary in 2010, E-Biofuels’ owners falsely represented that they were producing renewable fuel from raw agricultural products such as soybean oil and chicken fat.  E-Biofuels received significant government incentives based on its biodiesel production representations.  But E-Biofuels actually used middlemen to buy finished biodiesel and portrayed those purchases in fake invoices as the raw “feedstock” needed to produce biodiesel.  E-Biofuels later sold the purchased biodiesel for as high as double the price it paid for it.  When Imperial’s CEO Jeffrey Wilson learned that E-Biofuels was not producing biodiesel from raw materials, he allowed the scheme to continue instead of taking corrective action.  Imperial’s annual revenue increased from $1 million to more than $100 million and its stock price soared as the company falsely told investors that E-Biofuels was in the business of environmentally friendly biodiesel production.  Imperial’s stock price plummeted to less than 10 cents per share after the scheme fell apart, resulting in a market loss of approximately $60 million.

“Imperial Petroleum and its executives outright lied to investors about how their company turned a profit,” said Robert Burson, Associate Director of the SEC’s Chicago Regional Office.  “When their illegal scheme collapsed, investors paid the price.”

The SEC’s complaint filed in federal court in Indianapolis charges Imperial Petroleum and Wilson as well as three former owners of E-Biofuels – brothers Craig and Chad Ducey of Fisher, Ind., and Brian Carmichael, who now lives in Bend, Oregon.  The complaint also charges three New Jersey-based companies – Caravan Trading LLC, Cima Green LLC, and CIMA Energy Group – and their operators Joseph Furando and Evelyn Pattison (also known as Katirina Tracy) for acting as the middlemen in the scheme.  They allegedly provided false and misleading documents to deceive government regulators and attract investors to Imperial.

In a separate action, the U.S. Attorney’s Office for the Southern District of Indiana today announced criminal charges.

According to the SEC’s complaint, Imperial falsely stated in its annual reports for fiscal years 2010 and 2011 that E-Biofuels produced and sold more than 28 million gallons of biodiesel from May 24, 2010 (the closing date of Imperial’s acquisition of E-Biofuels) to July 31, 2011 (end of the fiscal year).  More than 99 percent of Imperial’s revenues came from E-Biofuels during this time period.  Wilson, the Duceys, Carmichael, and others under their direction misrepresented to customers that the product they were selling was valid renewable fuel produced by E-Biofuels.  In reality, the vast majority was biodiesel bought from the New Jersey companies and fraudulently recertified with new incentives and tax credits.  The biodiesel was purchased and then resold unchanged to customers for more than $100 million.

The SEC alleges that the scheme generated gross illicit profits of more than $50 million by buying the biodiesel at or near market price, fabricating invoices describing the transactions as the purchase of soybean oil or some other legitimate type of feedstock, and falsely certifying to the Environmental Protection Agency that E-Biofuels had produced biodiesel.  On some occasions, E-Biofuels pretended to blend the biodiesel in order to receive improper tax credits, or sold the fuel with the tax credits to end users.  From November 2009 to January 2012, E-Biofuels created more than 52 million fraudulent renewable energy credits and $35 million in false tax credits.  This illegal business model was never disclosed to Imperial’s investors or auditors.

According to the SEC’s complaint, Wilson knew by at least mid-June 2010 that E-Biofuels was not operating in the manner described in its annual report for 2010.  Nonetheless, he signed and certified the accuracy of the 10-K filing.  For the next three quarters and in the 10-K a year later, Imperial filed similar disclosures falsely describing the business as “biodiesel production” and misrepresenting that it used raw feedstock – primarily “premium white grease (chicken fat)” – to produce biodiesel.  Wilson signed and certified the accuracy of these reports.  Wilson also gave a false portrayal of the company when he had direct contact with prospective investors, including a power-point presentation with a video about E-Biofuels purportedly producing biodiesel from waste oils and greases.  In reality, E-Biofuels’ business was almost entirely illegal and unsustainable.

The SEC complaint charges Imperial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 and various rules thereunder.  Wilson, the Duceys, and Carmichael are charged with violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b) of the Exchange Act, and various rules thereunder.  They also are charged with aiding and abetting violations of the Exchange Act.  The complaint charges Furando, Pattison, and the three New Jersey companies with aiding and abetting violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.

The SEC’s complaint seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctions against further violations of the securities laws.  The SEC seeks to bar Wilson, the Duceys, and Carmichael from acting as officers or directors of a public company.

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New York-Based Hedge Fund Adviser Charged with Breaching Fiduciary Duty

As released by the Securities and Exchange Commission:

The SEC has charged the adviser to a New York-based hedge fund with breaching his fiduciary duty by engineering an undisclosed principal transaction in which he had a financial conflict of interest.

In a principal transaction, an adviser acting for its own account buys a security from a client account or sells a security to a client account.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They also must obtain the client’s consent.

The SEC alleges that Shadron L. Stastney, a partner at investment advisory firm Vicis Capital LLC, traded as a principal when he authorized the client hedge fund to pay approximately $7.5 million to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director.  Stastney required his friend to divest these personal securities holdings as he came on board at the firm because they overlapped with securities in which the hedge fund also was invested.  Stastney failed to tell the client hedge fund or any other partners and management at the firm that he had a financial stake in some of the same securities sold into the fund.  Stastney personally benefited and received a portion of the proceeds from the sale, and therefore was trading as a principal in the transaction.

Stastney agreed to pay more than $2.9 million to settle the SEC’s charges.

“Fund advisers cannot sit on both sides of a transaction as buyer and seller without the consent of the clients who rely on them for unbiased investment advice,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Stastney failed to live up to his fiduciary duty when he unilaterally set the terms of the transaction and authorized it without disclosing that he would personally profit from it.”

According to the SEC’s order instituting a settled administrative proceeding, in late December 2007 and early January 2008, Stastney arranged for his friend to sell the conflicted securities to the client hedge fund – Vicis Capital Master Fund – for $7.475 million.  Stastney’s friend informed him at the time that Stastney had a financial interest in some of the conflict securities, and Stastney would receive a portion of the sales proceeds.

The SEC’s order alleges that Stastney informed his two partners at the firm about the contemplated transaction, but never disclosed his personal financial interest in the transaction to them.  Stastney also did not disclose the conflict to the individual serving as the firm’s chief financial officer and chief compliance officer.  Moreover, Stastney failed to disclose to the trustee of the hedge fund that he had a personal financial interest in the transaction, and failed to obtain the client’s consent as required in a principal transaction.

According to the SEC’s order, after the hedge fund purchased the conflicted securities, Stastney’s friend wired Stastney’s share of more than $2 million of the sales proceeds to his personal savings bank account.

The SEC’s order requires Stastney, who lives in Marlboro, N.J., to pay disgorgement of $2,033,710.46, prejudgment interest of $501,385.06, and a penalty of $375,000.  Stastney also is barred from association with any investment company, investment adviser, broker, dealer, municipal securities dealer, or transfer agent for at least 18 months.  Stastney will be permitted to finish winding down the fund under the oversight of an independent monitor payable at his own expense.  Stastney has consented to the issuance of the order without admitting or denying any of the findings and has agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(2) and 206(3) of the Investment Advisers Act of 1940.

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Operator of Miami-Dade County’s Largest Hospital Charged with Misleading Investors

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

The Securities and Exchange Commission today charged the operator of the largest hospital in Miami-Dade County with misleading investors about the extent of its deteriorating financial condition prior to an $83 million bond offering.

An SEC investigation found that the Public Health Trust, which is the governing authority for Jackson Health System, misstated present and future revenues due to breakdowns in a new billing system that inaccurately recorded revenue and patient accounts receivable.  The Public Health Trust projected a non-operating loss in the official statement accompanying the bond offering in August 2009, but reported a figure that was more than four times lower than what was ultimately reported at the end of the 2009 fiscal year.  The Public Health Trust also failed to properly account for an adverse arbitration award, and misrepresented that its financial statements were prepared according to U.S. Generally Accepted Accounting Principles (GAAP).

The Public Health Trust has agreed to settle the SEC’s charges.

“The Public Health Trust fell short in its obligation to maintain adequate accounting systems and controls that ensure truthful disclosures to investors about its financial condition,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “The Public Health Trust used stale numbers to calculate its revenue figures and lacked any reasonable basis for projecting losses that were far less than reality.”

Mark Zehner, Deputy Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “Investors must be able to rely on the financial information accompanying municipal bond offerings.  We will continue to scrutinize financial statements provided to investors and pursue municipal issuers who aren’t providing accurate information to the public.”

According to the SEC’s order instituting settled administrative proceedings, the official statement accompanying the bond offering represented that the Public Health Trust (PHT) projected a $56 million non-operating loss for its fiscal year ending Sept. 30, 2009.  Several months after the bonds were sold, external auditors discovered problems with the PHT’s patient accounts receivable valuation.  This discovery required a large accounting adjustment to the reported net income, and the PHT ultimately reported a non-operating loss of $244 million for fiscal year 2009 – more than four times the projection made to bond investors.

The SEC’s order found that the PHT was aware of the rising level of patient accounts receivable and declining cash-on-hand prior to the bond offering, which caused concern among trustees and executive management.  They raised questions about the accounts receivable amounts and collection rates that were used to calculate the PHT’s revenue figures.  The $56 million non-operating loss amount included in the bond offering’s official statement was generated by the budget department using stale cash collection numbers amid the known problems with the new billing system.  The budget department was not updating its collection rates in a timely fashion due to a lack of adequate communication among departments.  Therefore, the PHT lacked a reasonable basis for its loss projection, and the official statement was materially misleading.

The SEC’s order also found that the PHT failed to properly account for a December 2008 arbitration award that negatively impacted patient accounts receivable in its 2008 audited financial statements that were attached to the bond offering’s official statement.  The arbitration award required the PHT to pay a third-party receivables company $3.9 million in cash, and transfer to the company $360 million face amount of existing accounts receivable and $250 million face amount of future accounts receivable.  The PHT failed to perform an analysis to determine the value of the replacement accounts receivable awarded to the third-party company.  The analysis is required under the relevant accounting standards in order to evaluate whether to accrue an expense related to the arbitration award or disclose the arbitration award in the notes to its financial statements.  Without the proper analysis, the PHT failed to accurately account for the arbitration award in the audited financial statements.

The SEC’s order directs the PHT to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933.  The PHT neither admitted nor denied the SEC’s findings.  The Commission determined not to impose a monetary penalty due to the PHT’s current financial condition.  The Commission also considered the PHT’s cooperation with the investigation and the remedial measures undertaken.

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Money Manager Charged in New York with Scheming Investors and Lying to SEC Examiners

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management.

The SEC alleges that Fredrick D. Scott registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors.  SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities.

“Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

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SEC Halts Florida-Based Prime Bank Investment Scheme

As released by the Securities and Exchange Commission:

Washington D.C., Sept. 9, 2013 — 

The Securities and Exchange Commission today announced charges and an emergency asset freeze against a Miami-based attorney and other perpetrators of a prime bank investment scheme that promised exorbitant returns from a purported international trading program.

Prime bank schemes lure investors to participate in a sham international investing opportunity with phony promises of exclusivity and enormous profits.  The SEC alleges that attorney Bernard H. Butts, Jr. has acted as an escrow agent to enable Fotios Geivelis, Jr. and his purported financial services firm Worldwide Funding III Limited to defraud approximately 45 investors out of more than $3.5 million they invested in a trading program that doesn’t actually exist.  Geivelis, who lives in Tampa and uses the alias “Frank Anastasio” with investors, touted returns of 6.6 million Euros (approximately $8.7 million converted to U.S. dollars) for investors within 15 to 45 business days on an initial investment of $60,000 to $90,000 in U.S. dollars.  Geivelis and Butts assured investors that their funds would remain with Butts in an escrow account until Worldwide Funding acquired the bank instruments necessary to generate the promised returns.  Butts instead has been doling out investor funds almost as soon as they’re received to enrich himself, sales agents, and Geivelis, who has been spending the money on such personal expenses as travel and gambling.

The SEC’s complaint, filed under seal on August 29 in federal court in Miami, also charged three sales agents who Geivelis and Butts paid to sell interests in the scheme: Douglas J. Anisky of Delray Beach, Fla., James Baggs of Lake Forest, Calif., and Sidney Banner of Delray Beach, Fla., and his company Express Commercial Capital.  The court granted the SEC’s request for an asset freeze on August 30, and the case was unsealed late Friday, September 6.

“Geivelis attempted to add a twist of legitimacy to a classic prime bank scheme by using a long-time attorney as an escrow agent to give investors the false impression that their money was secure,” said Julie K. Lutz, Acting Co-Director of the SEC’s Denver Regional Office.  “Meanwhile, Geivelis and Butts have misused investor funds and made lulling statements to investors that portray the sham trading program as successful and payments to investors as imminent.”

According to the SEC’s complaint, investors were lured through the Internet, telephone, and personal contact with promises of extraordinary profits.  Investors were told their $60,000 to $90,000 investment would pay for bank charges to lease a standby letter of credit (SBLC) in the amount of 10 million Euros from a banking group in Europe.  The SBLCs were to be used to acquire loans, and the funds from the loan were to be placed in a securities trading program.  Investors were promised that after their initial profit of at least 6.6 million Euro within 15 to 45 business days, the securities trading program would generate a weekly return of approximately 14 percent for 40 to 42 weeks.

The SEC alleges that investors were falsely promised that their money was being deposited into Butts’ attorney trust account, and Butts would not release the funds until he received proof from the receiving bank that a $10 million Euro SBLC had been deposited into the securities trading program to generate profits for investors.  Contrary to these representations by Butts, Geivelis, and the sales agents, no SBLC acquisitions ever occurred, no loans were obtained, and no promised returns were earned in a trading program or paid to investors. Investors were not told that instead of using the funds to obtain SBLCs, Butts and Geivelis each took approximately 45 percent and paid approximately 10 percent to the sales agents.

The SEC’s complaint charges all defendants with violations of the antifraud and securities registration provisions of the federal securities laws.  The complaint also charges Butts, Geivelis, Anisky, Banner, Express Commercial Capital, and Baggs with violations of the broker-dealer registration provisions of the federal securities laws.  The SEC seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctions.  The SEC’s complaint names several relief defendants: Butts’ law firm, his wife Margaret A. Hering, and Butts Holding Corporation as well as two other companies with ties to Geivelis (Global Worldwide Funding Ventures) and Anisky (PW Consulting Group).  The complaint names relief defendants for the purposes of recovering any ill-gotten assets from the fraud that may be in their possession.

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Thailand-Based Trader Agrees to Pay $5.2 Million to Settle Insider Trading Case

As released by the Securities and Exchange Commission:

Washington D.C., Sept. 5, 2013 — 

The Securities and Exchange Commission today announced that a Bangkok-based trader whose U.S. brokerage account was frozen in an SEC emergency action in June has agreed to pay $5.2 million to settle charges that he traded on inside information in advance of a public announcement about a proposed acquisition of Smithfield Foods by a firm in China.

The SEC obtained the asset freeze on June 5 after filing a complaint alleging that Badin Rungruangnavarat made more than $3 million in illicit profits just days earlier by insider trading in Smithfield securities.  Badin loaded up on out-of-the-money Smithfield call options and single-stock futures contracts in the week leading up to a May 29 public announcement about the proposed sale of Smithfield Foods to Shuanghui International Holdings.  Among his possible sources of material, non-public information about the impending deal was a Facebook friend who was an associate director at the investment bank for a different company that was considering a Smithfield acquisition.  

The settlement was approved today by Judge Matthew Kennelly of the U.S. District Court for the Northern District of Illinois.

“Our quick action in June to stop Badin’s insider trading profits from leaving the U.S. made this multi-million dollar settlement possible,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Once he was denied access to his trading account, Badin elected to forfeit all of his ill-gotten proceeds plus pay a $2 million penalty to settle the case against him.”

Badin agreed to the entry of a final judgment ordering him to pay $3.2 million in disgorgement and the $2 million penalty.  Without admitting or denying the SEC’s allegations, he agreed to be permanently enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 

The SEC’s investigation was conducted jointly by staff in the Market Abuse Unit and the Chicago Regional Office, including Kathryn A. Pyszka, Frank D. Goldman, R. Kevin Barrett, Benjamin J. Hanauer, and Steven C. Seeger.  The Market Abuse Unit is led by Chief Daniel M. Hawke and the Chicago office is led by Acting Regional Director Timothy Warren.

 

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SEC Charges Purported Money Manager With Defrauding Investors and Brokerage Firms

As released by the Securities and Exchange Commission:

Washington D.C., Sept. 3, 2013 — 

The Securities and Exchange Commission today charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.

The SEC alleges that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created.  He had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.

The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.

“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Then Feldstein used blatantly false promises to lure longtime acquaintances to pour their life savings into his investment schemes that were footing the bill for his luxurious lifestyle.”

According to the SEC’s complaint filed in U.S. District Court in the Southern District of New York, Feldstein and the two purported investment funds – Mara Capital Management LLC and Vita Health of America LLC – traded through a type of account that brokerage firms offer to customers with the understanding that the customer has sufficient assets held with a third-party custodial bank to cover the cost of the trades.  Feldstein and the funds never disclosed to three broker-dealers that they were simply gambling with the brokerage firms’ money.  Their plan was to refuse to issue instructions to settle the trades, and stick the broker-dealers with the unprofitable positions.  The free-riding scheme began in September 2008 and continued until February 2009. 

According to the SEC’s complaint, Feldstein shifted his fraudulent conduct to individual investors later in 2009.  He induced investors to give him money they typically had saved for their retirement or their children’s education.  Feldstein raised approximately $450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company.  The investor funds were typically deposited into Feldstein’s personal bank account or the bank account of an entity that he owned so he could spend their money on his personal expenses.

The SEC’s complaint charges Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management LLC is charged as a relief defendant.

The SEC’s investigation was conducted in the New York Regional Office by Celeste Chase and Katherine Bromberg with assistance from Desiree Marmita.  The SEC’s litigation will be led by senior trial counsel Richard Primoff.

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SEC Rewards Three Whistleblowers Who Helped Stop Sham Hedge Fund

As released by the Securities and Exchange Commission:

Washington D.C., Aug. 30, 2013 — 

The Securities and Exchange Commission today announced that three whistleblowers have been awarded more than $25,000 combined for tips and information they provided to help the SEC and Justice Department stop a sham hedge fund.

This is the first installment of anticipated payments to the whistleblowers as additional assets are collected from the purported hedge fund manager.  The whistleblowers are expected to ultimately receive approximately $125,000 in total. 

The SEC issued an order earlier this summer rewarding each of the three whistleblowers with 5 percent of the money that the SEC ultimately collects from its enforcement action against Locust Offshore Management and its CEO Andrey C. Hicks.  In cases where there are related criminal proceedings in which money is collected by another regulator, a provision in the whistleblower rules allows whistleblowers to then additionally apply for an award based off the other regulator’s collections in what qualifies as a “related action.”  The Commission subsequently approved 5 percent payouts to each whistleblower for money collected in the related criminal action.

Hicks pled guilty on Dec. 12, 2012, to five counts of wire fraud and consented to the forfeiture of his interest in property previously seized by the Justice Department.  He was sentenced to 40 months in prison.  Approximately $170,000 has been administratively forfeited in the criminal proceeding – money that is deemed collected for purposes of issuing whistleblower awards.  Therefore, the three whistleblowers will now receive $8,505 each.  Additional payments can be made to these whistleblowers upon forfeiture of the additional assets that have been seized.

The aggregate value of assets seized from Hicks is estimated to be approximately $845,000, and the whistleblowers are expected to ultimately receive 15 percent of this amount for a combined total of approximately $125,000.

The SEC’s order does not identify the whistleblowers, whose confidentiality is protected under the SEC’s whistleblower program.  The order states that two of the whistleblowers provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed.  The third whistleblower identified key witnesses and confirmed information the other two whistleblowers provided.

The SEC’s whistleblower program is authorized under the law to reward individuals who offer high-quality, original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.

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