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  In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II.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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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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