SEC Announces First Deferred Prosecution Agreement with Former Hedge Fund Administrator

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission announced a deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.

 

Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation.  In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.

 

According to the SEC’s DPA with Scott Herckis – the agency’s first with an individual – he served as administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld.  With voluntary and significant cooperation from Herckis, the SEC filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.  The SEC’s action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors.  Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.

 

“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”

 

According to the DPA, Herckis served as the fund’s administrator from December 2010 to September 2012, when he resigned and contacted government authorities with his concerns about Hochfeld’s conduct and certain discrepancies in Heppelwhite’s accounting records.  Herckis voluntarily produced voluminous documents and described to the SEC how Hochfeld was able to perpetrate his fraud.  As a result, the SEC was able to file the emergency action within weeks.

 

Under the terms of the DPA, which states that Herckis aided and abetted Hochfeld’s securities law violations, Herckis must comply with certain prohibitions and undertakings.  Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.  The DPA requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors.  A second round of distributions from the Fair Fund is expected after additional money is collected for harmed investors through the sale of Hochfeld’s personal assets, including a collection of antiques he paid for with stolen funds.

Leave a comment

Deferred Prosecution Agreement Announced for a Former Hedge Fund Manager

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission announced a deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.

 

Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation.  In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.

 

According to the SEC’s DPA with Scott Herckis – the agency’s first with an individual – he served as administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld.  With voluntary and significant cooperation from Herckis, the SEC filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.  The SEC’s action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors.  Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.

 

“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”

 

According to the DPA, Herckis served as the fund’s administrator from December 2010 to September 2012, when he resigned and contacted government authorities with his concerns about Hochfeld’s conduct and certain discrepancies in Heppelwhite’s accounting records.  Herckis voluntarily produced voluminous documents and described to the SEC how Hochfeld was able to perpetrate his fraud.  As a result, the SEC was able to file the emergency action within weeks.

 

Under the terms of the DPA, which states that Herckis aided and abetted Hochfeld’s securities law violations, Herckis must comply with certain prohibitions and undertakings.  Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.  The DPA requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors.  A second round of distributions from the Fair Fund is expected after additional money is collected for harmed investors through the sale of Hochfeld’s personal assets, including a collection of antiques he paid for with stolen funds.

Leave a comment

SEC Charges Royal Bank of Scotland Subsidiary with Misleading Investors in Subprime RMBS Offering

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission today charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering.  RBS agreed to settle the matter and pay more than $150 million, which the SEC will use to compensate investors for harm suffered as a result of RBS’s conduct.

The SEC alleges that RBS said the loans backing the offering “generally” met the lender’s underwriting guidelines even though nearly 30 percent fell so short of the guidelines that RBS should have excluded them from the offering entirely.  Stamford, Connecticut-based RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction, the SEC said in a complaint filed in federal court in Connecticut.

“In its rush to meet a deadline set by the seller of these loans, RBS cut corners and failed to complete adequate due diligence, with predictable results,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Today’s action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.”

RBS told investors the loans backing the offering were “generally in accordance with” the lender’s underwriting guidelines, which consider the value of the home relative to the mortgage and the borrower’s ability to repay the loan.  RBS knew or should have known that was false because due diligence before the offering showed that almost 30% of the loans underlying the offering did not meet the underwriting guidelines.  In its complaint, the SEC said RBS gave investors a misleading impression of the quality of the loans backing the offering and the likelihood of their repayment.

The SEC’s complaint charges Stamford-based RBS with violations of Sections 17(a)(2) and (3) of the Securities Act of 1933.  RBS, without admitting or denying the SEC’s allegations, has agreed to a final judgment that orders it to disgorge $80.3 million, plus prejudgment interest of $25.2 million, and pay a civil penalty of $48.2 million.

Leave a comment

New York-Based Audit Firm and Four Accountants Charged for Failures in Audits

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission announced sanctions against a New York-based audit firm, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies publicly traded in the U.S.

 

An SEC investigation found that Sherb & Co. LLP and its auditors falsely represented in audit reports that they had conducted the audits in accordance with U.S. auditing standards when it fact they were riddled with failures and improper professional conduct.  One of the companies they audited – China Sky One Medical Inc. – has since been charged by the SEC with financial fraud.

 

To settle the SEC’s charges, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.  The firm agreed to pay a $75,000 penalty.

 

“Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.

 

According to the SEC’s order instituting settled administrative proceedings, the flawed audits involved China Sky One Medical, China Education Alliance Inc., and Wowjoint Holdings Ltd.  The individuals responsible for the audits were the firm’s founder Steven J. Sherb, fellow partners Christopher A. Valleau and Mark Mycio, and audit manager Steven N. Epstein.  They failed to properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances.  They ignored clear red flags and failed to exercise professional skepticism and due care.  They also failed to maintain complete audit work papers.

 

According to the SEC’s order, Sherb engaged in improper professional conduct as the concurring partner for the China Sky audit and as concurring partner and engagement quality review (EQR) partner for the Wowjoint audits.  Valleau engaged in improper professional conduct as the engagement partner for the China Sky audit and four of five Wowjoint audits, and as the EQR for the China Education audit.  Mycio engaged in improper professional conduct as the engagement partner for the China Education audit and one of the Wowjoint audits.  Epstein engaged in improper professional conduct as the senior audit manager on the China Sky audit, China Education audit, and four of five Wowjoint audits.

 

The SEC order finds that Sherb & Co., Sherb, Valleau, Mycio, and Epstein violated Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and Section 4(C) of the Securities Exchange Act of 1934.  The SEC’s order also finds that Sherb & Co. and Mycio violated Exchange Act Section 10A(b)(1).  Sherb & Co. and Mycio are ordered to cease and desist from committing or causing any violations of Section 10A(b)(1) of the Exchange Act.  Sherb, Valleau, and Mycio are prohibited from practicing before the SEC as an accountant for at least five years, and Epstein is barred for at least three years.

Leave a comment

SEC Halts Ponzi Scheme Involving New Zealand Companies

As released by the Securities and Exchange Commission:

The Securities and Exchange Commission today announced an emergency asset freeze to halt a Ponzi scheme involving U.S. and New Zealand-based companies peddling sham investment opportunities ranging from a bank trading program to kidney dialysis clinics.

The SEC alleges that Christopher A.T. Pedras, who has residences in Turlock, Calif., and New Zealand, misled his initial investors into believing they were investing in a profitable trading platform in which his company served as an intermediary between global banks.  When Pedras and his companies encountered difficulty paying the promised 4 to 8 percent monthly returns, they began steering investors to a different investment program to purportedly increase the value of their investment by 80 percent by funding kidney dialysis clinics in New Zealand.  Pedras’s business partner Sylvester M. Gray II and lead sales representative Alicia Bryan helped him solicit investors for both programs, and the money was never invested as promised.  Earlier investors were paid supposed returns with funds received from newer investors, and Pedras stole more than $2 million and spent another $1.2 million on sales agents.

“Rather than conducting any legitimate business activity, Pedras and his partners were simply operating a Ponzi scheme that was ultimately doomed to collapse,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “This emergency action stops them from fraudulently raising any more money from U.S. investors.”

According to the SEC’s complaint unsealed late Friday in U.S. District Court for the Central District of California, Pedras raised more than $5.6 million from at least 50 investors in the U.S. since July 2010 by selling securities in two phases.  Pedras, Gray, and Bryan first solicited investors for their Maxum Gold Small Cap Trade Program in which Pedras’s company Maxum Gold purportedly serves as the intermediary between banks that can’t legally trade with each other directly, so they use Maxum Gold’s trade platform to do so indirectly.  Maxum Gold purports to share portions of the trading profits with investors.

The SEC alleges that the Ponzi scheme shifted gears earlier this year when Pedras and others began promoting the FMP Renal Program to Maxum Gold investors.  They characterized it as an investment in a New Zealand company called FMP Medical Services Limited that would be publicly traded and operate kidney dialysis clinics in New Zealand.  Investors were told if they converted their Maxum Gold investments into the FMP Renal Program, they would instantly realize an 80 percent increase in the value of their investment.

According to the SEC’s complaint, Pedras and Bryan routinely communicate with investors via email and also conduct investor conference calls.  Pedras has falsely claimed that Maxum Gold has been doing business for 15 to 20 years with more than 6,000 clients and has been making regular payments to investors.  Pedras conducted at least one in-person seminar at Paramount Studios in Los Angeles.  Investments were falsely touted as risk-free and investor funds were not maintained safely in escrow accounts as described to investors.

The SEC alleges that the Ponzi scheme paid investors more than $2.4 million in “returns” using new investor money.  Pedras stole more than $2 million from investors in the form of cash withdrawals, car and retail purchases, and transfers of investor funds to his various companies.  Approximately $1.2 million in sales commissions were paid to a small network of sales agents who sold the investments to U.S. investors.

According to the SEC’s complaint, during at least one conference call, Pedras advised investors not to respond if contacted by the SEC.  He characterized SEC investor questionnaires as “fake” and stated that the SEC’s investigation was motivated by a “personal vendetta” against him.

The SEC’s complaint charges Pedras, Gray, Bryan and the Maxum Gold and FMP entities with violations 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.  Pedras and Bryan also are charged with violations of Section 15(a) of the Exchange Act, and they and Pedras’s companies are charged with violations of Sections 5(a) and 5(c) of the Securities Act.  The Honorable Gary Feess granted the SEC’s request for a temporary asset freeze against Maxum Gold, FMP, and Pedras.  Judge Feess’s order prohibits the destruction of documents and requires the defendants to provide accountings.  A court hearing has been scheduled for November 8.

Leave a comment

Fraud Charges and Emergency Asset Freeze Filed Against a Group of California-Based Companies

As announced by the United States Securities and Exchange Commission:

The SEC announced fraud charges and an emergency asset freeze against a group of Pasadena, Calif.-based companies at the center of an ongoing real estate investment scheme.

 

The SEC alleges that Yin Nan (Michael) Wang and Wendy Ko have raised more than $150 million from approximately 2,000 investors by selling promissory notes issued through Velocity Investment Group, which manages a series of investment funds entitled the Bio Profit Series.  Each of the Bio Profit Series funds purports to be primarily in the business of making real estate-related loans in California, but in reality Wang and Ko have used money received from newer investors to make the promised quarterly interest payments to earlier investors in Ponzi-like fashion.

 

“The SEC sought emergency action to prevent the further dissipation of investor assets through an expected set of upcoming Ponzi-like payments,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “Wang falsified financial records and used another company to create the illusion of legitimate economic activity.”

 

According to the SEC’s complaint unsealed today in U.S. District Court for the Central District of California, Wang and Velocity Investment Group have been raising money since at least 2005.  Wang is the sole owner of Velocity Investment Group, and the Bio Profits Series fund accounts are controlled by Wang and Ko, who transferred some investor funds to make quarterly interest payments to other investors. The SEC’s complaint says Wang has admitted that Velocity was using new investor money to pay earlier investors.

 

The SEC alleges that Wang directed one of the Bio Profit Series funds to provide its outside accountant with inaccurate financial information that materially overstated its mortgage loans receivable and mortgage income figures.  The more than $9.8 million of mortgage loan income shown in those financial statements included accrued interest that Wang knew that the fund would never actually receive. Wang told Velocity’s accounting manager that investors would flee if they were told the true numbers, and it would be difficult for him to raise money.

 

The SEC further alleges that Wang and Ko used transactions between the Bio Profit Series funds and another company charged in the complaint – Rockwell Realty Management – with the apparent purpose of concealing the fraud.  These transactions appear to have had no purpose other than to obfuscate the amount of transfers among the various funds.

 

The SEC’s complaint charges Wang and his companies as well as Ko with violations 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 Honorable John A. Kronstadt of the U.S. District Court for the Central District of California granted the SEC’s request for a temporary asset freeze against Velocity, Bio Profit Series I, Bio Profit Series II, Bio Profit Series III, Bio Profit Series V, and Rockwell Realty Management.  Judge Kronstadt’s order prohibits the destruction of documents, requires the defendants to provide accountings, and allows expedited discovery.  A court hearing has been scheduled for December 9 on the SEC’s motion for a preliminary injunction.

Leave a comment

Three SEC-Registered Investment Advisory Firms Charged for Violating the Custody Rule

As released by the Securities and Exchange Commission:

Three SEC-registered investment advisory firms were charged for violating the “custody rule” that requires them to meet certain standards when maintaining custody of their clients’ funds or securities.

 

The majority of investment advisers do not maintain custody of client assets, which are instead held by qualified third-party custodians like a bank or broker-dealer.  Investment advisers must comply with the custody rule if they have legal ownership or access to client assets or an arrangement permitting them to withdraw client assets.  The Commission amended the custody rule in 2010 to strengthen investor protections by requiring all advisers with custody to undergo an annual “surprise exam” to verify the existence of client assets.  Advisers also must have a reasonable basis to believe that a qualified custodian is sending account statements to fund investors at least quarterly.  Advisers with custody of hedge fund or other private fund assets may alternatively comply with the custody rule through fund audits by a PCAOB-registered auditor, after which financial statements must be delivered to investors.

 

SEC investigations following referrals by agency examiners found that New York-based Further Lane Asset Management, Massachusetts-based GW & Wade, and Minneapolis-based Knelman Asset Management Group failed to maintain client assets with a qualified custodian or engage an independent public accountant to conduct surprise exams.  The firms also committed other violations of the federal securities laws.  Each firm has agreed to settle the SEC’s charges.

 

“The heart of the relationship between advisers and their customers is the safety of client assets.  Surprise exams or procedures associated with audited financial statements provide additional safeguards against assets being stolen or misused,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.  “These firms failed to comply with their custody rule obligations, and other firms who hold client assets should take notice that we will vigorously enforce such requirements.”

 

The SEC issued orders instituting settled administrative proceedings against the three firms for deficiencies related to the custody rule – Rule 206(4)-2 under Section 206(4) of the Investment Advisers Act of 1940.

 

According to the SEC’s order against Further Lane Asset Management (FLAM) and its CEO Jose Miguel Araiz, despite maintaining custody of assets of hedge funds managed by FLAM and affiliated adviser Osprey Group Inc. (OGI), Araiz and FLAM failed to arrange an annual surprise examination to verify the funds’ assets.  The funds’ investors also did not receive quarterly account statements from a qualified custodian of the funds as required by the custody rule.  FLAM and Araiz additionally engaged in fraud related to a fund-of-funds under their control.  They caused the fund to acquire a promissory note from another entity that Araiz owned without informing investors in writing that the fund might acquire related party promissory notes or otherwise materially deviate from its fund-of-funds investment strategy.  The order details other securities law violations, including FLAM and OGI engaging in securities transactions with advisory clients on a principal basis without providing prior written disclosure to clients or obtaining their consent.  In consenting to a censure and cease-and-desist order, Araiz, FLAM and OGI agreed to pay disgorgement and prejudgment interest totaling $347,122.  Araiz additionally agreed to pay a $150,000 penalty and be suspended from the industry for one year.  FLAM consented to comply with certain compliance-based undertakings.

 

According to the SEC’s order against GW & Wade, the firm was subject to the custody rule in part due to its practice of using pre-signed letters of authorization and then transferring client funds without always obtaining contemporaneous client signatures.  The firm did not have proper safeguards as a custodian of client funds, and failed to identify itself as a custodian to its independent auditors or in public disclosures.  This practice exposed clients to potential harm and ultimately contributed to a third-party fraud in one client account in June 2012, when someone hacked into the client’s e-mail account and posed as the client.  The imposter requested that GW & Wade wire the client’s funds to a foreign bank, and the scheme was not discovered until three separate wires totaling $290,000 had been sent to the foreign bank.  The firm reimbursed the client.  GW & Wade additionally made inaccurate Form ADV disclosures about the amount of client assets in custody and its custody arrangements.  In consenting to a censure and cease-and-desist order, GW & Wade agreed to pay a $250,000 penalty.

 

According to the SEC’s order against Knelman Asset Management Group (KAMG) and its CEO and chief compliance officer Irving P. Knelman, KAMG had custody of the assets of a fund of private equity funds named Rancho Partners I.  However, Rancho’s funds were not subject to annual surprise examinations and Rancho members did not receive quarterly account statements from a qualified custodian.  Alternatively, Rancho’s financial statements were not audited or distributed to Rancho members.  The order details other violations of the securities laws, including improper discretionary cash distributions to Rancho members, failure to adopt and implement controls designed to safeguard client assets, and failure to conduct annual compliance reviews.  In consenting to a censure and cease-and-desist order, KAMG agreed to pay a $60,000 penalty.  Knelman agreed to pay a $75,000 penalty and be barred from acting as a chief compliance officer for at least three years.  KAMG and Knelman also consented to compliance training and other compliance-based undertakings.

 

The SEC’s investigation of Further Lane Asset Management was conducted by Asset Management Unit members Mark D. Salzberg, Robert Guzman, Igor Rozenblit, and Valerie A. Szczepanik as well as Daphna A. Waxman and Roseann Daniello in the New York Regional Office.  The preceding examination was conducted by Raymond Slezak, Michael O’Donnell, Charles Hooper, and Dave Miller of the New York office.

 

The SEC’s investigation of GW & Wade was conducted by Asset Management Unit members Mayeti Gametchu and Kevin Kelcourse in the Boston Regional Office.  The preceding SEC examination was conducted by Raymond Tan, Matthew Keating, John Clark, and Melissa Clough of the Boston office.

Leave a comment

Michigan-Based Medical Technology Company Stryker Corp. Charged with FCPA Violations

As released by the Securities and Exchange Commission:

Michigan-based medical technology company was charged with violating the Foreign Corrupt Practices Act (FCPA) when subsidiaries in five different countries bribed doctors, health care professionals, and other government-employed officials in order to obtain or retain business.

An SEC investigation found that Stryker Corporation’s subsidiaries in Argentina, Greece, Mexico, Poland, and Romania made illicit payments totaling approximately $2.2 million that were incorrectly described as legitimate expenses in the company’s books and records.  Descriptions varied from a charitable donation to consulting and service contracts, travel expenses, and commissions.  Stryker made approximately $7.5 million in illicit profits as a result of the improper payments.

 

Stryker has agreed to pay more than $13.2 million to settle the SEC’s charges.

 

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

 

The SEC’s order instituting settled administrative proceedings details improper payments by employees of Stryker’s subsidiaries as far back as 2003.  They used third parties to make the payments in order to win or keep lucrative contracts for the sale of Stryker’s medical technology products.  For example, in January 2006, Stryker’s subsidiary in Mexico directed a law firm to pay approximately $46,000 to a Mexican government employee in order to secure the winning bid on a contract.  The result was $1.1 million in profits for Stryker.  The subsidiary reimbursed the Mexico-based law firm for the bribe and booked the payment as a legitimate legal expense.  However, no legal services were actually provided and the law firm simply acted as a funnel to pay the bribe.

 

According to the SEC’s order, Stryker’s subsidiary in Greece made a purported “donation” of nearly $200,000 in 2007 to a public university in Greece to fund a laboratory that was a pet project of a public hospital doctor.  In exchange for the payment, the doctor agreed to provide business to Stryker.

 

The SEC’s investigation also found that Stryker’s subsidiaries bribed foreign officials by paying their expenses for trips that lacked any legitimate business purpose.  For example, in exchange for the promise of future business from the director of a public hospital in Poland, Stryker paid travel costs for the director and her husband in May 2004.  This included a six-night stay at a New York City hotel, attendance at two Broadway shows, and a five-day trip to Aruba.

 

The SEC’s order requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million.  Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

Leave a comment

Pyramid Scheme Halted Targeting Asian-American Community

As related by the Securities and Exchange Commission

The SEC announced charges and asset freezes against the operators and promoters of a worldwide pyramid scheme that falsely promises exponential, risk-free returns to investors in a venture that purportedly sells Internet-based children’s educational courses.

The SEC alleges that five entities based in Hong Kong, Canada, and the British Virgin Islands that collectively operate under business names “CKB” and “CKB168” are at the center of the scheme.  Through the efforts of three CKB executives who live overseas and several promoters living in the U.S., the scheme has ensnared at least 400 investors in New York, California, and other areas with large Asian-American communities.  These promoters have raised more than $20 million from U.S. investors, and millions of dollars more from investors in Canada, Taiwan, Hong Kong, and other countries in Asia.

According to the SEC’s complaint unsealed late yesterday in U.S. District Court for the Eastern District of New York, the scheme’s promotional efforts seek to exploit close connections among members of the Asian-American community.  The scheme’s operators and promoters use Internet videos, promotional materials, and seminars to create the appearance of a legitimate enterprise.  But in reality, CKB has little or no real-world retail consumer sales to generate the extraordinary returns promised to investors.  In fact, CKB has no apparent source of revenue other than money received from new investors.  Bank records show that the bulk of the money raised has been paid out to accounts controlled by CKB executives and as commissions to promoters of the pyramid scheme.

The court has granted the SEC’s request for an asset freeze against the CKB entities and the operators and promoters charged in the SEC’s complaint.

“CKB’s operators and promoters profited by abusing relationships of trust within the Asian-American community and promising investors they can earn more money by recruiting other investors instead of selling actual products,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement.  “What CKB really sells is the false promise of easy wealth.”

The SEC issued an investor alert today warning investors about the dangers of potential investment scams involving pyramid schemes posing as multi-level marketing programs.

The SEC’s complaint charges three CKB executives:

  • Rayla Melchor Santos is a Philippines national who is featured on the CKB website as its founder.  Nicknamed “Teacher Sam,” Santos has traveled to New York and other areas of the U.S. to participate in meetings and seminars to promote CKB.
  • Hung Wai (“Howard”) Shern is a Canadian citizen and resident of Hong Kong who is featured on the CKB website as the director of CKB168 International Marketing.  Shern is one of the signatories to bank accounts used to receive and transfer funds from CKB investors, and has traveled to New York and other areas of the U.S. to participate in meetings and seminars to promote CKB.
  • Rui Ling (“Florence”) Leung is a Hong Kong national who is described on the CKB website as its chief financial officer.  Leung is one of the signatories to bank accounts used to receive and transfer funds from CKB investors, and approximately $4.6 million has been transferred from CKB bank accounts to bank accounts in her name and the names of entities she controls. Leung portrays herself as a professional investment adviser who will assist CKB in its supposed future public offering.

The SEC’s complaint charges eight CKB promoters in the U.S.:

  • Daliang (David) Guo is a China native and a resident of Coram, N.Y., who was among CKB’s first U.S. promoters.  He currently sits atop an investment pyramid, and claims in a testimonial on the CKB website to have earned more than $1 million within eight months.
  • Yao Lin is a resident of Fresh Meadows, N.Y., who was among CKB’s first U.S. promoters.  He currently sits atop an investment pyramid, and claims in a CKB website testimonial to have earned more than $300,000.  The SEC’s complaint alleges that bank and credit card accounts he controls have received approximately $450,000 from CKB investors.
  • Chih Hsuan (“Kiki”) Lin is a Taiwanese native and resident of Las Vegas who claims in a CKB website testimonial to have earned “one million USD” in her first two months of investing.  She operates a website through which “CKB members” can log in to a password-protected area.  She is within David Guo’s pyramid.  The SEC’s complaint alleges that bank accounts she controls have received approximately $1.8 million from CKB investors.
  • Wen Chen Hwang (“Wendy Lee”) is a Taiwanese native and resident of Rowland Heights, Calif., who claims in a CKB website testimonial to have made $53,000 within four months.  She is within Yao Lin’s pyramid.  The SEC’s complaint alleges that bank accounts she controls have received approximately $2.2 million from CKB investors.
  • Toni Tong Chen is a resident of Hacienda Heights, Calif., and a certified public accountant who was formerly associated with a registered broker-dealer and held securities licenses.  She and her husband claim to have earned six-digit commissions and in excess of a 100 percent return on their investment.  They are connected to Wendy Lee and have made presentations at her weekly seminars in Los Angeles.
  • Cheongwha (“Heywood”) Chang is a Chinese native and the husband of Toni Tong Chen.  He was formerly associated with a registered broker-dealer and held securities licenses.  The SEC’s complaint alleges that bank accounts that he and his wife control have received approximately $2.1 million from CKB investors.
  • Joan Congyi Ma is a resident of Arcadia, Calif., who was formerly associated with a broker-dealer and held securities licenses.  She is connected to Wendy Lee and has helped her organize seminars and other events in Los Angeles.  In her CKB website testimonial, she references the day she met Yao Lin as her “lucky day.”  The SEC’s complaint alleges that bank accounts she controls have received approximately $200,000 from CKB investors.
  • Heidi Mao Liu is a resident of Diamond Bar, Calif., who was formerly associated with a broker-dealer and held securities licenses.  She is connected to Wendy Lee and has provided testimonials at her seminars in Los Angeles.  She also operates her own website that promotes the CKB scheme. The SEC’s complaint alleges that bank accounts she controls have received approximately $1.2 million from CKB investors.

According to the SEC’s complaint, after David Guo and Yao Lin began recruiting investors in the New York area in mid-2011, the CKB scheme quickly expanded to California and other areas with large Asian-American communities.  David Guo, Yao Lin, Rayla Santos, and Howard Shern appear in presentations recorded in San Francisco and Los Angeles, where they recruited energetic and highly visible promoters who have organized seminars and meetings nationwide.  They maintained a robust Internet presence, recorded and posted numerous promotional videos, and organized and executed the transfer of CKB investor funds.

The SEC alleges that CKB represents that potential purchasers of its educational products must invest in CKB to get one of its courses.  In addition to the course, they receive “Profit Reward Points” upon their initial investment and are told they can earn money once those points increase in value or pay dividends.  They are promised even larger returns by converting their points into shares of CKB stock when the company conducts a promised IPO on the Hong Kong Stock Exchange in 2014.

According to the SEC’s complaint, however, Profit Rewards Points are not the only incentive for investors, who are told that they will be able to make even more money through commissions and bonuses by recruiting new investors.  The scheme’s ultimate goal is to turn investors into recruiters.  In fact, active recruitment is the only real way for investors to make actual money in the scheme.  For instance, Kiki Lin exemplified the pitch in a videotaped recording posted to the Internet, telling potential investors that in the “pyramid triangle system, we spread it from one to ten, and ten to hundred, and hundred to thousand, thousand to ten thousand.”  Kiki Lin later added, “And for those who really want to make money, who are really hard working, in a short time you would all be like John,” who she claimed “made money to buy five houses in Las Vegas.”

The complaint alleges that the investments in CKB constitute securities, and the securities offerings were not registered with the SEC as required under the federal securities laws.  The SEC’s complaint charges the CKB entities, three executives, and eight promoters with violations of the antifraud and securities registrations provisions of the federal securities laws.  Nine of the individuals are charged with violating the broker-dealer registration provisions.  The SEC seeks disgorgement of ill-gotten gains, financial penalties, permanent injunctions, and other relief.

The Honorable Roslynn Mauskopf granted the SEC’s request for a temporary restraining order, asset freeze, and other emergency relief against the 16 defendants as well as seven entities controlled by the U.S. promoters that are named as relief defendants in the SEC’s complaint for the purpose of recovering ill-gotten proceeds from the alleged fraud.

Leave a comment

Minnesota Hedge Fund Manager Gets 17 Years in Connection with Petters Ponzi Scheme

As released by HedgeCo.Net

Hedge fund manager James Nathan Fry of Orono, Minnesota was sentenced to 17½ years in prison on five counts of securities fraud, four counts of wire fraud, and three counts of making a false statement to the SEC.

The StarTribune reports: “Fry’s investors lost $120 million when the $3.65 billion Ponzi scheme engineered by Petters and associates collapsed in September 2008. Before that, however, he collected $40 million in fees and commissions from the transactions he conducted with the Petters operation.”

Fry’s company, Arrowhead Capital Management was one of the hedge funds that Thomas Petters used to perpetuate the third-largest hedge fund fraud case in U.S. history. Petters used these funds to finance his big box and other acquisitions. He then fabricated retail orders from those acquisitions and used them as collateral to borrow more money through the funds.

“He could have told investors the truth, but he didn’t because he was worried people would pull their money out,”  Assistant U.S. Attorney Tim Rank said before the sentencing yesterday. “So he chose to lie.”

Thomas Petters was convicted of fraud and imprisoned at the United States Penitentiary, Leavenworth. He was the former CEO and chairman of Petters Group Worldwide. He resigned his position as CEO on September 29, 2008, amid mounting criminal investigations. He later was convicted for turning Petters Group Worldwide into a $3.65 billion Ponzi scheme and received a 50 year federal sentence.

Leave a comment