Manhattan-Based Private Equity Manager Charged with Stealing $9 Million in Investor Funds

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged a Manhattan-based private equity manager and his firm with stealing $9 million from investors in their private equity fund.

 

The SEC has obtained an emergency court order to freeze the assets of Lawrence E. Penn III and his firm Camelot Acquisitions Secondary Opportunities Management as well as another individual and three entities involved in the theft of investor funds.

 

The SEC alleges that Penn and his longtime acquaintance Altura S. Ewers concocted a sham due diligence arrangement where Penn used fund assets to pay fake fees to a front company controlled by Ewers.  Instead of conducting any due diligence in connection with potential investments by Penn’s fund, Ewers’ company Ssecurion promptly kicked the money back to companies and accounts controlled by Penn so he could secretly spend investor funds for other purposes.  For example, Penn paid hefty commissions to third parties to secure investments from pension funds.  Penn also rented luxury office space and used the funds to project the false image that Camelot was a thriving international private equity operation.

 

“Penn held himself out as an ultra-sophisticated and well-connected investor in the private equity world,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “Behind the scenes, Penn disregarded his obligations to the fund’s investors and treated their assets as his own personal and professional slush fund.”

 

According to the SEC’s complaint filed in federal court in Manhattan, Penn tapped into a network of public pension funds, high net worth individuals, and overseas investors to raise assets for his private equity fund Camelot Acquisitions Secondary Opportunities LP, which he started in early 2010.  Penn eventually secured capital commitments of approximately $120 million. The fund is currently invested in growth-stage private companies that are seeking to go public.

 

The SEC alleges that Penn has diverted approximately $9.3 million in investor assets to Ssecurion.  With the assistance of Ewers, who lives in San Francisco, Penn repeatedly misled the fund’s auditors about the nature and purpose of the due diligence fees.  However, the scam began to unravel in 2013 when Camelot’s auditors became increasingly skeptical about the fees.  In their haste to cover their tracks, Penn and Ewers brazenly lied to the auditors and forged documents as recently as July 2013, pretending the files were generated by Ssecurion.

 

The SEC’s complaint charges Penn, two Camelot entities, Ewers, and Ssecurion with violating the antifraud, books and records, and registration application provisions of the federal securities laws.  The complaint seeks final judgments that would require them to disgorge ill-gotten gains with interest, pay financial penalties, and be barred from future violations of the antifraud provisions of the securities laws.  The SEC’s complaint also charges another company owned by Ewers – A Bighouse Photography and Film Studio LLC – as a relief defendant for the purposes of recovering investor funds it allegedly obtained in the scheme.

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Legg Mason Affiliate Charged with Defrauding Clients

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission today announced sanctions against a California-based investment adviser for concealing investor losses that resulted from a coding error and engaging in cross trading that favored some clients over others.

Western Asset Management Company, which is a subsidiary of Legg Mason, agreed to pay more than $21 million to settle the SEC’s charges as well as a related matter announced today by the U.S. Department of Labor.

According to an SEC order instituting settled administrative proceedings, Western Asset serves as an investment manager primarily to institutional clients, many of which are ERISA plans.  Western Asset breached its fiduciary duty by failing to disclose and promptly correct a coding error that caused the improper allocation of a restricted private investment to the accounts of nearly 100 ERISA clients.  The private investment that was off-limits to ERISA plans had plummeted in value by the time the coding error was discovered, and Western Asset had an obligation to reimburse clients for such losses under the terms of its error correction policy.  Instead, Western Asset failed to notify its ERISA clients until nearly two years later, long after the firm had liquidated the prohibited securities out of those client accounts.    

“When the coding error was discovered, Western Asset put its own interests above its clients and avoided telling investors what had caused losses in their accounts,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “By concealing the error, Western Asset avoided reimbursing clients for their losses.”

In a separate order involving a different set of client accounts, the SEC finds that Western Asset engaged in a type of cross trading that was illegal.  Cross trading is the practice of moving a security from one client account to another without exposing the transaction to the market, and when done appropriately it can benefit both clients by avoiding market and execution costs.  However, cross trading also can pose substantial risks to clients due to the adviser’s inherent conflict of interest in obtaining best execution for both the buying and the selling client. 

The SEC’s order finds that during the financial crisis, Western Asset was required to sell mortgage-backed securities and similar assets into a sharply declining market as registered investment companies and other clients sought account liquidations or were no longer eligible to hold these securities after rating agency downgrades.  Instead of selling the securities at prices that Western Asset believed did not represent their long-term value, it arranged for certain broker-dealers to purchase the securities from the Western Asset selling clients and sell the same security back to different Western Asset clients with greater risk tolerance in prearranged sale-and-repurchase cross trades.  Because Western Asset arranged to cross these securities at the bid price rather than a price representing an average between the bid and the ask price, the firm improperly allocated the full benefit of the market savings on the trades to buying clients and denied the selling clients approximately $6.2 million in savings.

“Cross trades serve a legitimate purpose and benefit both parties when done appropriately,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “But by moving securities across client accounts in prearranged, dealer-interposed transactions, Western Asset unlawfully deprived its selling clients of their share of the savings.” 

The SEC’s orders find that Western Asset violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7, and aided and abetted and caused violations of Sections 17(a)(1) and 17(a)(2) of the Investment Company Act of 1940.  Without admitting or denying the findings, the firm agreed to be censured and must cease and desist from committing or causing any further such violations.  For the disclosure violations related to the coding error, Western Asset must distribute more than $10 million to harmed clients and pay a $1 million penalty in the SEC settlement and a $1 million penalty in the Labor Department settlement.  For the cross trading violations, Western Asset must distribute more than $7.4 million to harmed clients and pay a $1 million penalty in the SEC settlement and a $607,717 penalty in the Labor Department settlement.  An independent compliance consultant must be retained to internally address both sets of violations.

The SEC’s investigation of the disclosure violations was conducted by Diana K. Tani and DoHoang T. Duong of the Los Angeles office.  An examination that led to the investigation was conducted by Charles Liao, Yanna Stoyanoff, and John Lamonica.  The SEC’s investigation of the cross trading violations was conducted by Asset Management Unit staff Valerie A. Szczepanik and Luke Fitzgerald of the New York office.  An examination identifying the cross trading issues was conducted by Margaret Jackson and Eric A. Whitman.  The SEC appreciates the assistance of the Labor Department and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which assisted with the SEC and Labor Department investigations.

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KPMG Charged with Violating Auditor Independence Rules

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission today charged public accounting firm KPMG with violating rules that require auditors to remain independent from the public companies they’re auditing to ensure they maintain their objectivity and impartiality. 

The SEC issued a separate report about the scope of the independence rules, cautioning audit firms that they’re not permitted to loan their staff to audit clients in a manner that results in the staff acting as employees of those companies.

An SEC investigation found that KPMG broke auditor independence rules by providing prohibited non-audit services such as bookkeeping and expert services to affiliates of companies whose books they were auditing.  Some KPMG personnel also owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules.

 KPMG agreed to pay $8.2 million to settle the SEC’s charges.

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office.  “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”

According to the SEC’s order instituting settled administrative proceedings, KPMG repeatedly represented in audit reports that it was “independent” despite providing services to three audit clients that impaired KPMG’s independence.  The violations occurred at various times from 2007 to 2011.

According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client.  KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client.  In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client.  KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client.  These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934. 

The SEC’s order finds that KPMG’s actions violated Rule 2-02(b) of Regulation S-X and Rule 10A-2 of the Exchange Act, and caused violations of Section 13(a) of the Exchange Act and Rule 13a-1.  The order further finds that KPMG engaged in improper professional conduct as defined by Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice.  Without admitting or denying the findings, KPMG agreed to pay $5,266,347 in disgorgement of fees received from the three clients plus prejudgment interest of $1,185,002.  KPMG additionally agreed to pay a penalty of $1,775,000 and implement internal changes to educate firm personnel and monitor the firm’s compliance with auditor independence requirements for non-audit services.  KPMG will engage an independent consultant to evaluate such changes.

The SEC’s investigation separately considered whether KPMG’s independence was impaired by the firm’s practice of loaning non-manager tax professionals to assist audit clients on-site with tax compliance work performed under the direction and supervision of the clients’ management.  While the SEC did not bring an enforcement action against KPMG on this basis, it has issued a report of investigation noting that by their very nature, so-called “loaned staff arrangements” between auditors and audit clients appear inconsistent with Rule 2-01 of Regulation S-X, which prohibits auditors from acting as employees of their audit clients.

The report also emphasized: 

  • An auditor may not provide otherwise permissible non-audit services (such as permissible tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules.
  • An arrangement that results in an auditor acting as an employee of the audit client implicates Rule 2-01 regardless of whether the accountant also acts as an officer or director, or performs any decision-making, supervisory, or ongoing monitoring functions, for the audit client. 
  • Audit firms and audit committees must carefully consider whether any proposed service may cause the auditors to resemble employees of the audit client in function or appearance even on a temporary basis.

The SEC’s Office of the Chief Accountant has a Professional Practice Group that is devoted to addressing questions about auditor independence among other matters.  Auditors and audit committees are encouraged to consult the SEC staff with questions about the application of the auditor independence rules, including the permissibility of a contemplated service.

 “The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients,” said Paul A. Beswick, the SEC’s chief accountant.  “Resolving questions about permissibility of non-audit services is always best done before commencing the services.”

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Former Hedge-Fund Manager Aleksander Efrosman Sentenced to 15 years in Prison

As released by Bloomberg Wire:

Aleksander Efrosman, the former hedge-fund manager who fled the U.S. after swindling his clients out of $5 million and gambling away most of it at a casino, was sentenced to more than 15 years in prison.

Efrosman, 51, who was extradited from Poland and pleaded guilty to wire fraud in 2012, was sentenced today by U.S. District Judge Nicholas Garaufis in Brooklyn, New York, to 188 months behind bars and ordered to pay restitution of $4 million, federal prosecutors said in a statement.

“Efrosman has finally been held to account for his betrayal of his clients’ trust,” U.S. Attorney Loretta Lynch in Brooklyn said in the statement. The former hedge-fund manager had been “globe-trotting to escape justice.”

A U.S. citizen, Efrosman was indicted in 2006 after fleeing in 2005. He traveled to Mexico, Panama and Poland, where he assumed the identity of Mikhail Grosman, using a fraudulent Russian passport, Lynch said.

Law enforcement authorities in Austria, the Czech Republic and Poland tracked and arrested Efrosman in Krakow, Poland, on May 28, 2010, according to the statement.

Efrosman controlled foreign-currency hedge funds Century Maxim Fund Inc. and AJR Capital Inc. As part of his plea, he admitted to running a scheme to cheat more than 100 clients out of $5 million in 2004 and 2005.

Foxwoods Gambling

Efrosman used customer money for his personal benefit and gambled more than $3 million at the Foxwoods Resort Casino in Connecticut, according to prosecutors.

The former hedge-fund manager’s federal public defender, Michael Schneider, had sought a sentence of about 10 years, citing Efrosman’s “undiagnosed mental illness in his criminal conduct, his failing health and the harsh nature of his confinement” in Poland and New York, according to a Jan. 10 letter filed with the court.

Efrosman’s gambling was evidence that his scheme wasn’t part of a “calculated plan to defraud investors, build his assets, and flee the country for his next fraud,” Schneider said in the letter.

“The hard truth for Mr. Efrosman is that as fast as AJR and Century Maxim took in money, he spent it, mostly on vices,” Schneider said in the report. “He recognizes that there is little redeeming in that story, but he looks forward to trying to redeem himself day by day.”

Profitable Trading

He told the investors he would put their money in the stock market and foreign-currency exchange market, according to prosecutors. He falsely said that he had a history of profitable trading and that he would use a “stop-loss” mechanism to ensure that no trade would lose more than 3 percent, the government said.

Formerly of Staten Island, New York, Efrosman fled the U.S. while on supervised release after leaving prison in April 2003 for a conviction in a foreign-exchange scheme, according to prosecutors. He pleaded guilty in that case after being extradited from France.

Efrosman ran a third investment scheme while in Panama, where he was joined by his wife and children, prosecutors said.

The case is U.S. v. Efrosman, 06-cr-00095, U.S. District Court, Eastern District of New York (Brooklyn).

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A 2013 Review of Ponzi Schemes in the U.S.

As published by the United States Securities and Exchange Commission, the following are top Ponzi Schemes exposed in 2013 by the SEC:

  • John K. Marcum – SEC charged an Indiana resident who falsely touted himself as a successful trader and asset manager to raise more than $6 million from investors. He squandered the money on personal luxuries and other ventures such as a reality TV show, and continued soliciting money from new investors to pay earlier investors’ redemption requests.

 

  • Trendon T. Shavers – SEC charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin.

 

  • Duncan MacDonald and Gloria Solomon – SEC charged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors by falsely promoting their start-up venture as a thriving business.

 

  • Mark Morrow and Detroit Memorial Partners – SEC charged a Cincinnati resident and his purported cemetery operations business with issuing approximately $19 million in fraudulent promissory notes and selling $4.5 million in equity interests through an investment advisory company that operated as a massive Ponzi scheme.

 

  • Alvin R. Brown and First Choice Investment – SEC shut down a $3 million Ponzi scheme that targeted seniors, including an elderly investor suffering from a stroke and dementia, by falsely promising high profits from commercial and residential rental properties in California and other Western states.

 

  • Walter Ng, Kelly Ng, and Bruce Horwitz – SEC charged three Bay Area real estate fund managers with operating a Ponzi-like scheme in which they solicited and secretly used $39 million in assets of a new real estate fund to make payouts to investors in an older, rapidly collapsing fund.

 

  • Five real estate executives – SEC charged five former executives at Cay Clubs Resorts and Marinas with defrauding investors into believing they were funding the development of five-star destination resorts in Florida and Las Vegas when they were actually buying into a $300 million Ponzi scheme.
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Diamond Foods and Former Executives Charged in Accounting Scheme

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged San Francisco-based snack foods company Diamond Foods and two former executives for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. 

The SEC alleges that Diamond’s then-chief financial officer Steven Neil directed the effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods.  In internal e-mails, Neil referred to these commodity costs as a “lever” to manage earnings in Diamond’s financial statements.  By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts’ estimates for fiscal quarters in 2010 and 2011.  After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company’s stock price slid to just $17 per share from a high of $90 per share in 2011.

Diamond Foods agreed to pay $5 million to settle the SEC’s charges.  Former CEO Michael Mendes, who should have known that Diamond’s reported walnut cost was incorrect at the time he certified the company’s financial statements, also agreed to settle charges against him.  The SEC’s litigation continues against Neil.

“Diamond Foods misled investors on Main Street to believe that the company was consistently beating earnings estimates on Wall Street,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “Corporate officers cannot manipulate fiscal numbers to create a false impression of consistent earnings growth.” 

According to the SEC’s complaints filed in federal court in San Francisco, one of the company’s significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers.  With sharp increases in walnut prices in 2010, Diamond encountered a situation where it needed to pay more to its growers in order to maintain longstanding relationships with them.  Yet Diamond could not increase the amounts paid to growers for walnuts, which was its largest commodity cost, without also decreasing the net income that Diamond reports to the investing public.  And Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts.

The SEC alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways.  He devised two special payments to please Diamond’s walnut growers and bring the total yearly amounts paid to growers closer to market prices, but improperly excluded portions of those payments from year-end financial statements.  Instead of correctly recording the costs on Diamond’s books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered.  By disguising the reality that the payments were related to prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed estimates by analysts.  For instance, after adjusting the walnut cost in order to meet an EPS target for the second quarter of 2010, Diamond went on to tout its record of “Twelve Consecutive Quarters of Outperformance” in its reported EPS results during investor presentations.

The SEC further alleges that Neil misled Diamond’s independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments.  Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond’s reported EPS in fiscal years 2010 and 2011. 

The SEC’s order against Mendes finds that he should have known that Diamond’s reported walnut cost was incorrect because of information he received at the time, and he omitted facts in certain representations to Diamond’s outside auditors about the special walnut payments.  Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations.  Mendes already has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the company’s fraudulent financial reporting.

The SEC’s complaints against Diamond and Neil allege that they violated or caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Sections 17(a)(1), (2), and (3) of the Securities Act of 1933.  Diamond agreed to settle the charges without admitting or denying the allegations.  The Commission took into account Diamond’s cooperation with the SEC’s investigation and its remedial efforts once the fraud came to light.  The penalties collected from Diamond and Mendes may be distributed to harmed investors if SEC staff determines that a distribution is feasible.

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New York-based Brokerage Firm Sanctioned for Ignoring Red Flags

As reported by the U.S. Securites & Exchange Commission:

The Securities and Exchange Commission announced sanctions against a New York-based brokerage firm for ignoring red flags and paying more than $400,000 in soft dollars for expenses that an investment adviser had not properly disclosed to clients.

 

Soft dollars are credits or rebates from a brokerage firm on commissions that clients pay for trades executed in an investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may use the soft dollar credits to pay for such expenses as brokerage and research services that benefit clients.

 

An SEC investigation found that Instinet LLC approved soft dollar payments to San Diego-based investment advisory firm J.S. Oliver Capital Management despite clear signs that the payments were improper.  The SEC’s Enforcement Division has separately charged J.S. Oliver and its president Ian Mausner for their alleged wrongdoing.

 

Instinet agreed to pay more than $800,000 to settle the SEC’s charges.

 

“Instinet repeatedly approved soft dollar payments despite clear warning signs that J.S. Oliver and Mausner were improperly using client funds for their benefit,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Brokers perform a crucial gatekeeper function in approving soft dollar payments, and they cannot turn a blind eye to red flags that investment advisers may be breaching their fiduciary duty to clients.”

 

According to the SEC’s order instituting settled administrative proceedings, among the red flags that Instinet ignored while approving soft dollar payments to J.S. Oliver from January 2009 to July 2010:

 

  • J.S. Oliver provided Instinet with inconsistent reasons for a payment of more than $329,000 to Mausner’s ex-wife under the guise of employee compensation.  The payment was actually related to the Mausners’ divorce.  Instinet approved the payment despite a purported employment agreement provided by J.S. Oliver that, while significantly altered, still failed to indicate that Mausner’s ex-wife had performed any work for J.S. Oliver after 2006.
  • After J.S. Oliver had submitted invoices to Instinet indicating a monthly rent of $10,000 for all of 2009, the firm requested soft dollars in July 2009 for a 50 percent increase in rent to $15,000 per month.  However, J.S. Oliver rented offices in Mausner’s home, and Instinet knew that Mausner owned the company to which the rent was paid.  The increased rent payments were inflated for Mausner’s personal benefit and not properly disclosed to J.S. Oliver clients.  Nevertheless, Instinet approved $65,000 in soft dollar payments for the rent increase over a period of 13 months.
  • J.S. Oliver again provided Instinet with inconsistent reasons for two requested soft dollar payments purportedly for Mausner’s travel expenses related to evaluating “potential investment opportunities.”  However, the expenses actually were for maintenance, taxes, and fees on Mausner’s personal timeshare in New York City.  Despite copies of timeshare bills that were clearly in Mausner’s name indicating the payments would be for his own financial benefit, Instinet approved the soft dollar payments totaling more than $40,000.

 

The SEC’s order finds that Instinet willfully aided, abetted, and caused J.S. Oliver’s violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Instinet agreed to pay a penalty of $375,000, disgorgement of $378,673.76, and prejudgment interest of $59,607.66.  The firm also must engage an independent compliance consultant to review its policies, procedures, and practices related to soft dollar payments.  Without admitting or denying the SEC’s findings, Instinet also consented to a censure and a cease-and-desist order.

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SEC Charges Archer-Daniels-Midland Company With FCPA Violations

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged global food processor Archer-Daniels-Midland Company (ADM) for failing to prevent illicit payments made by foreign subsidiaries to Ukrainian government officials in violation of the Foreign Corrupt Practices Act (FCPA).

 

An SEC investigation found that ADM’s subsidiaries in Germany and Ukraine paid $21 million in bribes through intermediaries to secure the release of value-added tax (VAT) refunds.  The payments were then concealed by improperly recording the transactions in accounting records as insurance premiums and other purported business expenses.  ADM had insufficient anti-bribery compliance controls and made approximately $33 million in illegal profits as a result of the bribery by its subsidiaries.

 

ADM, which is based in Decatur, Ill., has agreed to pay more than $36 million to settle the SEC’s charges.  In a parallel action, the U.S. Department of Justice today announced a non-prosecution agreement with ADM and criminal charges against an ADM subsidiary that has agreed to pay $17.8 million in criminal fines.

 

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials,” said Gerald Hodgkins, an associate director in the SEC’s Division of Enforcement.  “Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

 

According to the SEC’s complaint filed in U.S. District Court for the Central District of Illinois, the bribery occurred from 2002 to 2008.  Ukraine imposed a 20 percent VAT on goods purchased in its country.  If the goods were exported, the exporter could apply for a refund of the VAT already paid to the government on those goods.  However, at times the Ukrainian government delayed paying VAT refunds it owed or did not make any refund payments at all.  On these occasions, the outstanding amount of VAT refunds owed to ADM’s Ukraine affiliate reached as high as $46 million.

 

The SEC alleges that in order to obtain the VAT refunds that the Ukraine government was withholding, ADM’s subsidiaries in Germany and Ukraine devised several schemes to bribe Ukraine government officials to release the money.  The bribes paid were generally 18 to 20 percent of the corresponding VAT refunds.  For example, the subsidiaries artificially inflated commodities contracts with a Ukrainian shipping company to provide bribe payments to government officials.  In another scheme, the subsidiaries created phony insurance contracts with an insurance company that included false premiums passed on to Ukraine government officials.  The misconduct went unchecked by ADM for several years because of its deficient and decentralized system of FCPA oversight over subsidiaries in Germany and Ukraine.

 

The SEC’s complaint charges ADM with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.  ADM consented to the entry of a final judgment ordering the company to pay disgorgement of $33,342,012 plus prejudgment interest of $3,125,354.  The final judgment also permanently enjoins ADM from violating those sections of the Exchange Act, and requires the company to report on its FCPA compliance efforts for a three-year period.  The settlement is subject to court approval.  The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.

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Woman and Stepson Charged with ZeekRewards Ponzi and Pyramid Scheme

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced charges against a woman and her stepson for their involvement in a North Carolina-based Ponzi and pyramid scheme that the agency shut down last year.

 

The SEC alleges that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions.  While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits.  Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.

 

Wright-Olivares and Olivares have agreed to settle the SEC’s charges.  In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina today announced criminal charges against the pair.

 

“Wright-Olivares was a marketing and operational mastermind behind the scheme and Olivares was the chief architect of the computer databases they used,” said Stephen Cohen, an associate director in the SEC’s Division of Enforcement.  “After they learned ZeekRewards was under investigation by law enforcement, they accepted substantial sums of money from the scheme while keeping investors in the dark about its imminent collapse.”

 

Pyramid schemes are a type of investment scam often pitched as a legitimate business opportunity in the form of multi-level marketing programs. According to the SEC’s complaint filed in federal court in Charlotte, N.C., the ZeekRewards scheme raised more than $850 million from approximately one million investors worldwide.

 

The SEC alleges that Wright-Olivares served as the chief operating officer for much of the existence of ZeekRewards.  She helped develop the program and its key features, marketed it to investors, and managed some of its operations.  She also helped design and implement features that concealed the fraud.  Olivares managed the electronic operations that tracked all investments and managed payouts to investors.  Together, Wright-Olivares and Olivares helped perpetuate the illusion of a successful retail business.

 

The SEC’s complaint charges Wright-Olivares with violating the registration and antifraud provisions of Sections 5 and 17 of the Securities Act, and Section 10 of the Exchange Act and Rule 10b-5.  The complaint charges Olivares with violating Section 17 of the Securities Act and Section 10 of the Exchange Act and Rule 10b-5.  To settle the SEC’s charges, Wright-Olivares agreed to pay at least $8,184,064.94 and Olivares agreed to pay at least $3,272,934.58 – amounts that represent the entirety of their ill-gotten gains plus prejudgment interest.  Payments will be made as part of the parallel criminal proceeding in which additional financial penalties could be imposed in a restitution order.

 

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Perpetrators Charged with Prime Bank Schemes in Las Vegas and Switzerland

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

The Securities and Exchange Commission announced fraud charges against a company named with an acronym for “Make A Lot Of Money” that is behind a pair of advance fee schemes guaranteeing astronomical returns to investors in purported prime bank transactions and overseas debt instruments.

 

The SEC alleges that Swiss-based Malom Group AG and several individuals conducted the schemes from Las Vegas and Zurich.  They raised $11 million from U.S. investors by using a series of lies and forged documents to steer them into seemingly successful foreign trading programs that were nothing more than vehicles to steal money.  Advance fee frauds solicit investors to make upfront payments before purported deals can go through, and perpetrators fool investors with official-sounding terminology to add an air of legitimacy to the investment programs.  Many transactions offered by Malom Group bore hallmarks of prime bank frauds, which tout the supposed use of well-known overseas banks to attract investors.

 

The SEC alleges that Malom Group charged fees to investors for bogus services, and the individuals pulling the strings distributed investor funds among themselves for personal use.  They further lied to investors who later inquired about the progress of the transactions, lulling them with excuses about why they have yet to receive investment returns or refunds.

 

“Under the guise of a name insinuating they would make a lot of money for investors, the individuals behind this scheme sought nothing more than to make a lot of money for themselves,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.  “They peddled agreements and transactions filled with technical-sounding jargon that was as meaningless as their promises to investors.”

 

In a parallel action, the U.S. Department of Justice today announced criminal charges against the same six individuals charged in the SEC’s complaint:

 

  • Anthony B. Brandel of Las Vegas, who served as Malom Group’s main point of contact with U.S. investors – explaining the investments, collecting investor funds, and lulling investors about the status of the transactions.  His Las Vegas company M.Y. Consultants also is charged in the SEC’s complaint.
  • Sean P. Finn of Whitefish, Mont., who recruited U.S. investors through his Wyoming-based company M. Dwyer LLC, which also is charged in the SEC’s complaint.
  • Hans-Jürg Lips of Switzerland, who has been described as the Malom Group’s president or chairman of the board of directors.
  • Joseph N. Micelli of Las Vegas, who has been described as Malom Group’s compliance officer.
  • Martin U. Schläpfer of Switzerland, who has been described as Malom Group’s chief executive officer, managing director, and legal counsel.
  • James C. Warras of Waterford, Wisc., who has been described as Malom Group’s executive vice president.

 

According to the SEC’ s complaint filed in U.S. District Court for the District of Nevada, the schemes occurred from 2009 to 2011 and the lulling of investors continued into 2013.  None of the transactions in securities offered or sold were registered with the SEC or eligible for an exemption.  In the first scheme, they offered “joint venture” agreements that purportedly allowed investors to “use” Malom Group’s financial resources in exchange for an upfront fee.  The agreements required the investors to propose investment transactions for Malom Group to enter into with third parties in order to generate returns for the company and the investor.  Malom Group supplied investors with forged bank statements and “proof of funds” letters to give the false impression that the company had the millions of dollars needed for the transactions.  Before investors paid their upfront fees, the Malom Group executives and promoters typically knew at least the basic details of the proposed trading programs, in some cases actually providing the trading program for investors to propose.  But after receiving the upfront fees from investors, Malom Group proceeded to reject every proposed transaction and misappropriate investor funds to further the scheme and line the perpetrators’ pockets.

 

According to the SEC’s complaint, the second scheme falsely promised investors that Malom Group would generate funding by creating structured notes that would be listed on “Western European” exchanges.  After inducing investors to pay an “underwriting fee” and making personal and corporate guarantees of repayment, Malom Group reneged on the guarantees of repayment and failed to issue any structured notes.  Again the perpetrators behind the scheme quickly distributed investor funds among themselves.

 

The SEC’s complaint alleges that Malom Group, Schläpfer, Lips, Warras, and Micelli violated the antifraud and securities registration provisions of the federal securities laws, and Brandel, Finn, M.Y. Consultants, and M. Dwyer LLC violated the antifraud and securities and broker-dealer registration provisions.  The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

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