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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London-Based Hedge Fund Adviser and U.S.-Based Holding Company Charged for Internal Control Failures

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

The Securities and Exchange Commission charged a London-based hedge fund adviser and its former U.S.-based holding company with internal controls failures that led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.

 

GLG Partners L.P. and its former holding company GLG Partners Inc. agreed to pay nearly $9 million to settle the SEC’s charges.

 

“Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement.  “GLG’s pricing committee did not have the information and time it needed to properly value assets.”

 

According to the SEC’s order instituting settled administrative proceedings, the GLG firms managed the GLG Emerging Markets Special Assets 1 Fund.  From November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25 percent private equity stake in an emerging market coal mining company.  The overvaluation resulted in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.

 

According to the SEC’s order, GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee.  On a number of occasions, GLG employees received information calling into question the $425 million valuation for the coal company position.  But there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all.  There was confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.

 

The SEC’s order finds that GLG Partners L.P. violated and GLG Partners Inc. caused violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13.  The order requires the firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.  The order directs the firms to cease and desist from violating or causing violations of various provisions of the federal securities laws.  The firms consented to the order without admitting or denying the charges.  The SEC is establishing a Fair Fund to distribute money to harmed fund investors.  The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679, and penalties totaling $750,000.

 

The SEC’s investigation was conducted by Jonathan Cowen, Ann Rosenfield, Robert Dodge, and Lisa Deitch.  The case arose from the SEC’s Aberrational Performance Inquiry, an initiative by the Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns. Performance that is flagged as inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny.

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Emergency Asset Freeze Placed Against Perpetrators of a Texas-based Ponzi Scheme

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

The Securities and Exchange Commission announced charges and an emergency asset freeze against the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects.

 

The SEC alleges that Robert A. Helms and Janniece S. Kaelin, who work out of an office in Austin, misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests.  Despite representations that nearly all of the money they raised would be used to make oil and gas investments, Helms and Kaelin actually used only a fraction of the offering proceeds for that purpose.  Instead, the vast majority of investor funds were used to make Ponzi payments and cover various personal and business expenses.

 

“Helms and Kaelin pretended to be in the oil and gas business when they were really in the business of fattening their own wallets,” said David R. Woodcock, director of the SEC’s Fort Worth Regional Office.  “They lied to investors about the use of offering proceeds, spent investor funds on personal expenses, and made Ponzi payments to give investors the false impression that they were earning returns in a profitable venture.”

 

The SEC’s complaint unsealed late yesterday in U.S. District Court for the Western District of Texas also charges Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., with illegally selling investments for Helms and Kaelin without being registered with the SEC.  They also allegedly misled investors about the sales commissions and referral fees they were receiving.

 

According to the SEC’s complaint, Helms and Kaelin began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control.  They have since attracted at least 80 investors in more than a dozen states while promising in offering documents that they would use more than 99 percent of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests.  The offering documents were fraudulent as Helms and Kaelin invested only 10 percent of the proceeds, and the oil and gas projects in which they actually did invest generated only minuscule returns.

 

The SEC alleges that Helms and Kaelin directed Vendetta Royalty Partners to make approximately $5.9 million in so-called partnership income distributions to investors.  They used money from newer investors to make the distributions to earlier investors.  Helms and Kaelin created the illusion that Vendetta Royalty Partners was a profitable enterprise when, in fact, it was a fraudulent Ponzi scheme.  Some offering documents touted Helms to have extensive oil-and-gas experience, misrepresenting that he had “worked with various mineral companies over the last 10 years advising management on issues involving the acquisition and management of royalty interests, mineral properties and related legal and financial issues.”  In fact, Helms’s oil-and-gas experience came almost entirely from operating Vendetta Royalty Partners and its affiliated or predecessor companies.

 

The SEC alleges that Helms and Kaelin misled investors about other important matters besides their business background and industry reputation.  They failed to disclose the existence of litigation against them and companies they control.  They misrepresented the performance of the limited oil-and-gas royalty investments actually under their management.  And they failed to inform investors that Vendetta Royalty Partners was behind on its line of credit.  The company ultimately defaulted.

 

According to the SEC’s complaint, Helms and Kaelin along with Sellers and Barrera told potential investors that any commissions or finder’s fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.

 

At the SEC’s request, the court entered an order temporarily restraining the defendants from further violations of the federal securities laws, freezing their assets, prohibiting the destruction of documents, requiring them to provide an accounting, and authorizing expedited discovery.
The SEC’s complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint further alleges that Sellers and Barrera acted as unregistered brokers in violation of Section 15(a) of the Exchange Act.  The complaint requests permanent injunctions and the disgorgement of ill-gotten gains plus prejudgment interest and penalties.

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Fifth Third Bank and its Former CFO Charged for Improper Accounting

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

The Securities and Exchange Commission charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.

 

Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

 

According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.

 

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

 

According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.

 

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.

 

Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.

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Detroit-Based Money Market Fund Manager Charged with Fraud

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

The Securities and Exchange Commission announced fraud charges against a Detroit-based investment advisory firm and a portfolio manager for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund’s portfolio.

 

Money market funds seek to maintain a stable share price by investing in highly safe securities.  Under the federal securities laws, a money market fund may only invest in securities determined by the fund’s board of trustees to present minimal credit risk.

 

The SEC’s Enforcement Division alleges that Ambassador Capital Management and Derek Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio.  Trustees also were misled about the fund’s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund’s portfolio.

 

“Money market fund managers must not hide the ball from a fund’s board,” said George S. Canellos, co-director of the SEC’s Enforcement Division.  “Ambassador Capital Management and Oglesby weren’t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price.”

 

The enforcement action stems from an ongoing analysis of money market fund data by the SEC’s Division of Investment Management, in this case a review of the gross yield of funds as a marker of risk.  The performance of the Ambassador Money Market Fund was identified as consistently different from the rest of the market.  Upon further examination by the SEC’s Office of Compliance Inspections and Examinations, the matter was referred to the Enforcement Division’s Asset Management Unit for investigation.

 

The Enforcement Division’s investigation found that Ambassador Capital Management and Oglesby misrepresented or withheld critical facts from the fund’s trustees:

 

  • The firm’s self-imposed holding period restrictions were frequently exceeded for securities in the fund’s portfolio.
  • The fund regularly purchased securities that had greater than minimal credit risk under the firm’s own guidelines.
  • Throughout the Eurozone credit crisis in 2011, the fund continually purchased securities issued by Italian-affiliated entities despite Oglesby’s claim that Ambassador Capital Management was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market.
  • The fund’s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees.

According to the SEC’s order instituting administrative proceedings, Ambassador Capital Management also caused the fund to deviate from the risk-limiting provisions of Rule 2a-7 under the Investment Company Act of 1940.  The firm also failed to conduct an appropriate stress test of the fund’s portfolio.  Since the Ambassador Money Market Fund failed to follow the risk-limiting provisions of Rule 2a-7, it was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $1 per share.  It also shouldn’t have been represented to investors as a money market fund.

 

“Compliance with the risk-limiting provisions is critically important for a money market fund.  Deviations can have serious consequences for pricing of fund shares and how the fund markets itself to investors,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

 

The SEC’s order alleges that Ambassador Capital Management violated the antifraud provisions of the Investment Advisers Act of 1940 and Oglesby aided and abetted the firm’s violations.  They allegedly caused violations of the pricing, naming, and recordkeeping provisions of the Investment Company Act, and the firm caused violations of the compliance provision.

 

The SEC’s investigation was conducted by Amy Stahl Cotter and John J. Sikora Jr. of the Asset Management Unit in the Chicago Regional Office with assistance from Marita Bartolini of the Office of Compliance Inspections and Examinations.  The SEC’s litigation will be led by Jonathan S. Polish, Robert Moye, and Timothy S. Leiman.

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Houston-Based Firms Charged for Engaging in Thousands of Undisclosed Principal Transactions

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

The Securities and Exchange Commission announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

 

One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.

 

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

 

The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.

 

“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

 

According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions.

 

According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions.

 

The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

 

According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors.

 

According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.

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Penny Stock Financier Agrees to Pay $1.4 Million to Settle SEC Charges

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

The Securities and Exchange Commission today charged a New York-based penny stock financier and his firms with violating the federal securities laws when they purchased billions of shares in a pair of microcap companies and failed to register them before they were re-sold to investors for sizeable profits.

Curt Kramer and his firms Mazuma Corporation, Mazuma Funding Corporation, and Mazuma Holding Corporation agreed to disgorge those profits in paying a total of $1.4 million to settle the SEC’s charges.

An SEC investigation found that Kramer and his firms obtained unregistered shares in penny stock issuers Laidlaw Energy Group and Bederra Corporation.  For the Laidlaw transactions, they claimed to rely on an exemption in Rule 504 of Regulation D that permits certain companies to offer and sell up to $1 million in unregistered shares.  However, the Mazuma firms’ purchases of Laidlaw shares exceeded Rule 504’s $1 million limit, so the shares were restricted and not exempt from the registration requirements of the securities laws when they were re-sold.  Mazuma Holding Corporation’s acquisition and sale of more than one billion unregistered shares of Bederra that had been misappropriated from the issuer by its transfer agent also were not exempt from registration.

“Unless there is a valid exemption, shares can’t be sold publicly without a registration statement that provides investors with the level of detail they deserve about the investment opportunity being offered,” said Michael Paley, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force that was created earlier this year to target abusive trading and fraudulent conduct in securities issued by microcap companies that often don’t regularly report their financial results publicly.

“Billions of shares were not vetted through the registration process yet became publicly traded as a result of the violations by Kramer and his Mazuma firms, and the SEC will continue to punish non-compliance with the registration provisions of the securities laws to ensure the investing public is protected in these types of transactions,” Mr. Paley added.

According to the SEC’s order instituting settled administrative proceedings, Kramer and his firms purchased two billion Laidlaw shares, which amounted to 80 percent of Laidlaw’s outstanding shares at the time.  They purchased these shares at a significant discount from prevailing market prices, making it highly likely they could immediately re-sell them publicly for a short-term profit.  Kramer and his firms purchased the shares in 35 tranches with no six-month gaps, thus quantifying the transactions as a single, integrated offering through which Laidlaw exceeded the $1 million limit under Rule 504 by raising a total of $1,259,550.  No registration statement was filed for any shares that Laidlaw offered and sold to Kramer and his firms, nor was any registration statement filed for any shares that Kramer and his firms subsequently re-sold into the public market.  Despite exceeding the $1 million limit, Kramer and his firms continued to acquire and sell additional Laidlaw shares and profited by $126,963 from these transactions.

According to the SEC’s order, Kramer and Mazuma Holding Corporation acquired more than one billion shares of Bederra in 2009 and 2010 through 21 separate transactions from the principal of Bederra’s transfer agent, who had misappropriated the Bederra share certificates.  Again they purchased the shares at a significant discount from prevailing market prices.  Kramer and Mazuma Holding Corporation re-sold the misappropriated Bederra shares to the public without any registration statement for a profit of $934,404.

In the settlement, Kramer and his Great Neck, N.Y.-based Mazuma firms agreed to pay disgorgement totaling $1,061,367 plus prejudgment interest of $128,611 and penalties totaling $273,000.  Without admitting or denying the SEC’s findings, Kramer and Mazuma consented to the entry of an order finding that they violated Sections 5(a) and 5(c) of the Securities Act of 1933.  The order requires them to cease and desist from committing violations of Sections 5(a) and 5(c) and not participate in any Rule 504 offerings.  Entry of the order will constitute a disqualifying event for Kramer and the Mazuma firms under the recently enacted bad actor disqualification provisions of Rule 506.

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