Fraud Charges and Asset Freeze Issued Against Promoter

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

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

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

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

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

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

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

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

 

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Executives Charged with Facilitating Fraudulent Bond Offering by Dewey & LeBoeuf

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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SEC Halts Pyramid Scheme Being Promoted Through Facebook and Twitter

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

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

 

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

 

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

 

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

 

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

 

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

 

The SEC’s complaint charges Mutual Wealth with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  For the purposes of recovering investor money in their possession, the complaint names several relief defendants linked to offshore accounts to which investor funds were diverted from the scheme: Risort Partners Inc., Hullstar Capital LLP, Camber Alliance LLP, Kimrod Estate LLP, and Midlcorp Trade LTD.

 

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

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Charges Filed Against Arizona-Based Private Equity Fund Manager in Expense Misallocation Scheme

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

The Securities and Exchange Commission announced charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.

 

The SEC Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants.  CEC and Brittenham did not disclose any such payment arrangement in fund offering documents.  When the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.

 

“Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”

 

According to the SEC’s order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses.  Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself.  The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.

 

According to the SEC’s order, the expense misallocation scheme shrank the funds’ cash reserves.  So CEC and Brittenham made unauthorized “loans” to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets.  The loans jeopardized the funds because Brittenham had pledged fund assets as collateral.  CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money.  Brittenham also lied to a fund investor about his “skin in the game.”  Brittenham claimed that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.

 

The SEC’s order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.

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Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services

The Securities and Exchange Commission announced charges against Zurich-based Credit Suisse Group AG for violating the federal securities laws by providing cross-border brokerage and investment advisory services to U.S. clients without first registering with the SEC.

 

Credit Suisse agreed to pay $196 million and admit wrongdoing to settle the SEC’s charges.

 

According to the SEC’s order instituting settled administrative proceedings, Credit Suisse provided cross-border securities services to thousands of U.S. clients and collected fees totaling approximately $82 million without adhering to the registration provisions of the federal securities laws.  Credit Suisse relationship managers traveled to the U.S. to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered to provide brokerage or advisory services, nor were they affiliated with a registered entity.  The relationship managers also communicated with clients in the U.S. through overseas e-mails and phone calls.

 

“The broker-dealer and investment adviser registration provisions are core protections for investors,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “As Credit Suisse admitted as part of the settlement, its employees for many years failed to comply with these requirements, and the firm took far too long to achieve compliance.”

 

According to the SEC’s order, Credit Suisse began conducting cross-border advisory and brokerage services for U.S. clients as early as 2002, amassing as many as 8,500 U.S. client accounts that contained an average total of $5.6 billion in securities assets.  The relationship managers made approximately 107 trips to the U.S. during a seven-year period and provided broker-dealer and advisory services to hundreds of clients they visited.  Credit Suisse was aware of the registration requirements of the federal securities laws and undertook initiatives designed to prevent such violations.  These initiatives largely failed, however, because they were not effectively implemented or monitored.

 

“As a multinational firm with a significant U.S. presence, Credit Suisse was well aware of the steps that a firm needs to take to legally conduct advisory or brokerage business with U.S. clients,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “Credit Suisse failed to effectively implement internal controls designed to keep its employees from crossing the line and being non-compliant with the federal securities laws.”

 

According to the SEC’s order, it was not until after a much-publicized civil and criminal investigation into similar conduct by Swiss-based UBS that Credit Suisse began to take steps in October 2008 to exit the business of providing cross-border advisory and brokerage services to U.S. clients.  Although the number of U.S. client accounts decreased beginning in 2009 and the majority were closed or transferred by 2010, it took Credit Suisse until mid-2013 to completely exit the cross-border business as the firm continued to collect broker-dealer and investment adviser fees on some accounts.

 

The SEC’s order finds that Credit Suisse willfully violated Section 15(a) of the Securities Exchange Act of 1934 and Section 203(a) of the Investment Advisers Act of 1940.  Credit Suisse admitted the facts in the SEC’s order, acknowledged that its conduct violated the federal securities laws, accepted a censure and a cease-and-desist order, and agreed to retain an independent consultant.  Credit Suisse agreed to pay $82,170,990 in disgorgement, $64,340,024 in prejudgment interest, and a $50 million penalty.

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California Residents Charged with Using Investor Funds for Movie Investment Scam

The Securities and Exchange Commission charged three California residents with defrauding investors in a purported multi-million dollar movie project that would supposedly star well-known actors and generate exorbitant investment returns.

 

The SEC alleges that Los Angeles-based attorney Samuel Braslau was the architect of the fraudulent scheme that raised money through a boiler room operation spearheaded by Rand Chortkoff of Encino, Calif.  High-pressure salespeople including Stuart Rawitt persuaded more than 60 investors nationwide to invest a total of $1.8 million in the movie first titled Marcel and later changed to The Smuggler.  Investors were falsely told that actors ranging from Donald Sutherland to Jean-Claude Van Damme would appear in the movie when in fact they were never even approached.  Instead of using investor funds for movie production expenses as promised, Braslau, Chortkoff, and Rawitt have spent most of the money among themselves.  The investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors.

 

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Braslau, Chortkoff, and Rawitt.

 

“Braslau, Chortkoff, and Rawitt sold investors on the Hollywood dream,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “But the dream never became a reality because they took investors’ money for themselves rather than using it to make a movie.”

 

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Braslau set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds from investors for the movie project.  In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II.  Shortly thereafter, Mutual Entertainment began raising money from investors through a boiler room operation that Chortkoff operated out of Van Nuys, Calif.

 

The SEC alleges that Braslau, Chortkoff, and Rawitt claimed that 63.5 percent of the funds raised from investors would be used for “production expenses.”  However, very little if any money was actually spent on movie expenses as they instead used the vast majority of investor funds to pay sales commissions and phony “consulting” fees to themselves and other salespeople.  Rawitt made numerous false claims to investors about the movie project.  For instance, he flaunted a baseless projected return on investment of about 300 percent.  He falsely depicted that they were just shy of reaching a $7.5 million fundraising goal and the movie was set to begin shooting in summer 2013.  He instilled the belief that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz.  And he falsely stated that investors would realize revenues from action figures and other products tied to the movie when in fact no such licensing rights had been sold.

 

According to the SEC’s complaint, Rawitt was the subject of a prior SEC enforcement action in 2009, when he was charged for his involvement in an oil-and-gas scheme.

 

“Investors can help protect themselves when approached for an investment opportunity by using the Internet to their advantage and researching the individual making the offer,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.  “In this case, a quick search of the SEC website reveals a copy of the complaint filed against Rawitt in federal court for participating in an offering fraud as well as an order barring him from the brokerage industry.”

 

The SEC’s complaint alleges that Braslau, Chortkoff, and Rawitt violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint further alleges that Chortkoff and Rawitt violated Section 15(a) of the Exchange Act, and Rawitt violated Section 15(b)(6)(B) of the Exchange Act.  The SEC seeks financial penalties and permanent injunctions against Braslau, Chortkoff, and Rawitt.

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La Jolla, California Resident Charged with Defrauding Advisory Clients

The Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC’s complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee’s clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws – Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee’s girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.

In a related matter, on February 12, 2014, the SEC settled administrative and cease-and-desist proceedings against Ronald E. Huxtable II, of Palm Coast Florida. (Rel. 33-9547) In those proceedings the SEC found that Huxtable, one of Lee’s clients, aided, abetted and caused Lee’s violations by helping Lee charge certain clients fees for the month of February 2011 based on false performance and conceal the fact that they had actually incurred net realized losses for that month.

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Two Hong Kong-Based Firms to Pay $11 Million for Insider Trading

 

The Securities and Exchange Commission today announced that two Hong Kong-based asset management firms whose accounts were frozen in a major insider trading case have agreed to pay nearly $11 million to settle the charges against them.

 

The SEC obtained an emergency asset freeze in July 2012 against unknown traders just days after the announcement that China-based CNOOC Ltd. had agreed to acquire Canadian energy company Nexen Inc., causing more than a 50 percent spike in the price of Nexen shares.  The SEC filed the emergency action after discovering that traders using brokerage accounts in Hong Kong and Singapore stood to make more than $13 million in potentially illicit profits.

 

Combined with earlier settlements in the case, the SEC has now obtained nearly $30 million in ill-gotten gains plus financial penalties from foreign traders who purchased Nexen stock while in possession of nonpublic information about the pending acquisition.

 

“The SEC’s swift action in this case ensured that traders located on the other side of the globe were not only deprived of their illegal insider trading profits but eventually paid steep penalties,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “Our efforts have recouped nearly $30 million and sent a strong deterrent message that insider trading in the U.S. even if carried out from overseas simply doesn’t pay.”

 

CITIC Securities International Investment Management (HK) Limited and China Shenghai Investment Management Limited agreed to pay $6.6 million and $4.3 million respectively.  These two firms managed the last remaining frozen accounts in the case.  Once SEC investigators located the suspicious accounts and froze their assets, they worked with foreign regulators and carefully scrutinized the trading records to identify the traders, setting the stage for a string of settlements by firms and individuals:

  • Hong Kong-based firm Well Advantage agreed to a $14.2 million settlement in October 2012.
  • A Chinese businessman, his private investment company, and his wife and her brokerage customers agreed to a $3.3 million settlement in March 2013.
  • A Singapore-based businesswoman agreed to a $566,000 settlement in May 2013.

 

The settlement with China Shenghai, approved earlier today by Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York, requires disgorgement of all ill-gotten gains totaling $4,268,057.16 by the firm and eight clients on whose behalf Nexen stock trades were made in the week leading up to the public announcement: Biggain Holdings Limited, Classictime Investments Limited, Feng Hai Yan, Gao Mei, Sparky International Trade Co., Stephen Wang Sang Wong, Zhang Jing Wei, and Zheng Rong.  They neither admitted nor denied the allegations.

 

The settlement with CITIC Securities, approved by the court in late January, requires the firm to pay $3,299,596.84 in disgorgement and a $3,299,596.84 penalty for purchasing shares of Nexen stock in the U.S. for the accounts of two of its affiliates.  The firm neither admitted nor denied the allegations.  The disgorgement amount represents the total profits that the firm and its affiliates obtained.  The SEC acknowledges the cooperation of CITIC Securities and its parent company CITIC Securities International Company Limited in the investigation.

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Fraud Charges Filed Against Two Wall Street Traders Involved in Parking Scheme

The Securities and Exchange Commission announced charges against two Wall Street traders involved in a fraudulent “parking” scheme in which one temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus.

 

The SEC’s Enforcement Division alleges that Thomas Gonnella solicited the assistance of Ryan King to evade a policy at his firm that penalizes traders financially if they hold securities for too long.  Gonnella arranged for King, who worked at a different firm, to purchase several securities with the understanding that Gonnella would repurchase them at a profit for King’s firm.  By parking the securities in King’s trading book in order to reset the holding period when he repurchased them, Gonnella’s intention was to avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory.

 

The alleged round-trip trades caused Gonnella’s firm to lose approximately $174,000.  The SEC’s Enforcement Division alleges that after Gonnella’s supervisor began inquiring about the trades, Gonnella and King took steps to evade detection by interposing an interdealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms.  Gonnella and King were eventually fired by their firms for the misconduct.

 

King, who has cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry.  Any additional financial penalties will be determined at a later date.  The Enforcement Division’s litigation against Gonnella continues in a proceeding before an administrative law judge.

 

“Gonnella conducted trades for the purpose of avoiding his firm’s aged-inventory policy and protecting his own bonus,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “Even though Gonnella misled his employer and resorted to text messages on his cell phone to avoid detection, his tricks failed and we are holding him accountable for these deceptive trades.”

 

According to the SEC’s administrative orders, Gonnella parked a total of 10 securities with King.  The scheme began on May 31, 2011, when Gonnella offered to sell King several asset-backed bonds issued by Bayview Commercial Asset Trust (BAYC).  Gonnella wrote in an instant message to King, “i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging purposes … i like these bonds … and would more than likely have a higher bid for these later this wk when the calendar turns …”  Gonnella’s reference to “aging purposes” was his firm’s aged-inventory policy.  After King agreed, Gonnella sold him the securities and repurchased them before they had even settled in the account at King’s firm.

 

The SEC’s Enforcement Division alleges that Gonnella contacted King again a few months later on August 29, writing, “let’s talk tmrw. Have some aged bonds that I might offer you, if you’re game … maybe do what we did a few months ago w/ some of those bayc’s …”  After Gonnella sold three BAYC bonds to King, he repurchased two but did not immediately repurchase the other security. He later did so at a loss to King’s firm, but made them whole by selling two other bonds at prices favorable to King’s firm and unfavorable to his own firm. King then used the resulting profit on the two bonds to offset the original loss incurred.

 

As their scheme began to unravel, the SEC’s Enforcement Division alleges that Gonnella and King discussed their trading plans via cell phone and text messaging in an effort to avoid detection.  Cell phone records show that they rarely contacted one another that way in the prior four years.  For example, after discussing some trades in instant messages, Gonnella told King, “Check your text [messages] in like 3 minutes.” King responded, “haha, ok … sneaky sneaky.”

 

The order against Gonnella alleges that he willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The order alleges that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3.

 

The order against King finds that he willfully aided and abetted and caused Gonnella’s violations.  The Commission took into account King’s cooperation when agreeing to the settlement.  King agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66.  The cease-and-desist order bars King from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization as well as participating in any penny stock offering, with the right to apply for re-entry after three years.

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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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