In the week ending with “April Fools Day,” the Commission continued to issue proposed regulations to implement the Dodd-Frank Wall Street and Consumer Protection Act. SEC Enforcement focused on investment fund fraud actions, filing or resolving seven cases. The Commission also brought a significant insider trading case along with DOJ and a market manipulation action. In the UK the long awaited guidance on the Bribery Act was issued. That Act will now come into force in July of this year.
The SEC continued to issue proposed rules to implement Dodd-Frank including:
- Proposed rules requiring listing standards for compensation committees and compensation consultants (here);
- Along with six other agencies, proposals regarding risk retention for sponsors of certain asset backed securities (here); and
- Along with six other agencies, a request for comment regarding a proposal (previously approved by the SEC) that certain financial institutions take in account risk in connection with incentive compensation arrangements (here).
SEC Commissioner Luis Aguilar delivered remarks to the NASAA/SEC 19(d) conference this week. The Commissioner focused on the basics of regulation, improving transparency and the relationship between government regulators and industry participants (here).
The SEC Inspector General issued two reports dated March 30, 2011 titled:
- SEC’s Oversight of the Securities Investor Protection Corporation’s Activities (here).
- OCIE Regional Offices’ Referrals to Enforcement (here).
Investment fund fraud: SEC v. Clements, Civil Action No. 11-cv-60673 (S.D. Fla. Filed March 30, 2011) is an action against James Clements and Zeina Smidi. The defendants operated a Ponzi scheme through a number of entities they controlled, according to the SEC. From 2005 through 2006 investors were solicited with claims of guaranteed monthly returns supposedly from trading foreign currencies. Later investors were told that their funds would be placed with the best Swiss banks and advisors. In reality the investment claims were false. The defendants siphoned off much of the investor money for personal use. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation.
Investment fund fraud: SEC v. LandOak Securities LLC, Civil Action No 3:08CV209 (E.D. TN Filed May 23, 2008) is an action against the firm, a registered investment adviser, Patrick Martin, an owner and associated person, and Michael Atkins, a former owner and associated person. The complaint alleges violations of Advisers Act Sections 204, 206(1), 206(2), 206(4) and 207. It claims that beginning in 1997 and continuing into the next year the individual defendants sold $3.6 million in promissory notes and membership interests to thirty-five investors. Eventually, according to the complaint, Messrs. Martin and Atkins misappropriated most of the investor funds. The company and Mr. Martin settled, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. The company and Mr. Martin were ordered to pay disgorgement of $880,512.16 along with prejudgment interest. If the parties do not agree on a civil penalty the Commission will file an appropriate motion with the court.
Investment fund fraud: SEC v. Navigators International Management Co., Ltd., Case No. 07-cv-04518 (S.D.Tx. Filed Dec. 27, 2007) is an action against the company, James Spurger and Benjamin Young, Jr. The complaint, which alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a), centers on two fraudulent unregistered offerings of securities. The company and Mr. Spurger settled, consenting to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaint. In addition, the company was ordered to pay a penalty of $45,000 while Mr. Spurger will pay $25,000.
Investment fund fraud: SEC v. Aerokinetic Energy Corp., Civil Action No. 8:08-CV-1409 (M.D. Fla. Filed July 28, 2008) is an action against the company and its president Randolph Bridwell. Defendants raised approximately $535,000 from 24 investors between September 2006 and the filing of the complaint. Investors were told that the company had developed a new green technology that created inexpensive electrical energy and that it had patents and orders to purchase the finished product. All of these claims were false, according to the Commission. Defendant Bridwell is alleged to have misappropriated much of the investor funds for his personal use. The complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Each defendant settled, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. In addition, the final judgment imposes, jointly and severally, an obligation to pay disgorgement of $555,000 along with prejudgment interest. The company was ordered to pay a civil penalty of $250,000 while Mr. Bridwell is required to pay $130,000.
Offering fraud: SEC v. Frishbert, Civil Action No 4:11-cv-0197 (S.D. Tx. Filed March 25, 2011). The action names as a defendant, registered investment adviser Daniel Sholom Frishberg, a principal of Daniel Frishberg Financial Services (“DFFS”). The case centers on the sale of notes from two issuers to advisory clients. The first involved the sale of notes of Business Radio Network L.P., from April 2008 through September 2009. About $5.5 million was raised in sales solicited by Albert Kaleta with the approval of Mr. Frishbert. Note purchasers were not told that Mr. Frishberg is the CEO and Mr. Kaleta is affiliated with the company. They also were not told that both men drew a salary from the company or that it was in poor financial condition and lacked the resources to repay the notes. The second involved the sale of notes issued by Kaleta Capital Management, Inc., a company controlled by Mr. Kaleta. Investors were not told that the company had no real ability to repay the notes. Again Mr. Frishbert permitted a solicitation of DFFS clients. In a related action the SEC claimed these notes were sold based on fraudulent representations (SEC v. Kaleta, Civil Action No. 4:09-cv-3674 (S.D. Tx. Nov. 13, 2009). The complaint alleges violations of Advisers Act Sections 206(1) and (2). Mr. Frishberg settled by consenting to the entry of a permanent injunction prohibiting future violations of Section 206(2) and from aiding and abetting violations of Sections 206(1) and (2). He also agreed to pay a civil penalty of $65,000. He also consented to the filing of a related administrative proceeding that will bar him from associating with an investment adviser.
Insider trading: SEC v. Liang, Case 8:11-cv-00819 (D. Md. Filed March 29, 2011) and U.S. v. Liang (D. Md. Filed March 29, 2011) are actions against FDA chemist Cheng Yi Liang. The criminal case also names his son as a defendant. Mr. Lang is alleged to have used confidential information from the FDA to trade in the stock of pharmaceutical companies. Overall he made profits of $3.6 million from trades placed through several accounts he controlled. The criminal complaint charges the father and son with conspiracy to commit securities and wire fraud, securities fraud and wire fraud relating to their trading in the securities of five companies. The SEC complaint against the father alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It is based on trading in advance of 27 announcements involving 19 stocks. A civil forfeiture action was also filed. All three cases are pending.
Investment fund fraud: SEC v. Quan, Case no. 0:11-cv-00723 (D. MN Filed March 24, 2011) is an action against Marlon Quan a hedge fund manager who operated Acorn Capital Group, LLC and Stewardship Investment Advisors, LLC. The companies were used to manage several hedge funds. From 2001 through 2008 Mr. Quan raised over $459,077,561from at least 165 investors. From the beginning Mr. Quan’s funds fed millions of dollars of investor money to fraudster Tom Petters who operated a huge Ponzi scheme. When soliciting funds from investors Mr. Quan furnished them written materials which assured investors that he had taken certain steps to protect their funds. The claims were false. When the Petters entities began to default on the notes held by the Quan funds, the defendant covered it up. Eventually a receiver for the Petters entities authorized the payment of $14 million in settlement to the Quan funds. A Quan controlled entity negotiated a deal to obtain the funds and planned to divert them at the time the SEC filed its action and secured a freeze order. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). The emergency order entered by the Court at the request of the SEC froze the settlement funds, preserving the money for the defrauded investors.
Investment fund fraud: SEC v. Clark, Case No. 1:11-cv-00046 (D. Utah Filed March 25, 2011) is a Ponzi scheme case which named as defendants John Clark, Impact Cash, LLC and Impact Payment Systems, LLC. From March 2006 through September 2010 the defendants raised over $47 million from at least 120 investors who were told their funds would be used to fund payday loans. Instead the funds were diverted to the personal use of Mr. Clark. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act sections 10(b) and 15(a). The Commission obtained an emergency freeze order and the appointment of a receiver to preserve the assets. The case is in litigation.
Market manipulation: SEC v. Catapano, Civil Action No. 11 Civ. 1476 (E.D.N.Y. March 25, 2011) is an action against Joseph Catapano and Michael Piervinanzi alleging that they engaged in a scheme to manipulate the shares of Euro Solar Parks, Inc. The complaint, which alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1) and 10(b), claims that from mid-February 2011 the two defendants engaged in a scheme in which they agreed to pay a 30% kickback to an unidentified individual who purported to represent a group of registered representatives with discretion over the accounts of wealthy investors. The kickback was to purchase the shares of Euro solar. At one point defendant Catapano instructed the individual to arrange the purchase of 130,000 shares of Euro Solar stock for about $31,000 through matched trades. An $8,800 bribe was paid to follow precise instructions on the size, price and timing of the purchase orders. The case is in litigation.
Investment fund fraud: SEC v. Cantens, Case No. 10-cv-20635 (S.D. Fla. Filed March 3, 2010) is an action against Gaston Cantens and Terestia Cantens. The complaint claims that the two defendants are the founders and co-owners of Royal West Properties, Inc., a real estate developer. Defendants raised approximately $135 million from over 400 investors who were promised annual returns of 9 to 16% from notes backed by mortgage assignments. Investors were assured that the notes were safe and that the two defendants had a very substantial net worth. In fact the company did not generate sufficient revenue to pay the notes and, since at least 2002, the company was operated as a Ponzi scheme. About $20 million in investor funds was diverted to the personal use of the two defendants. This week the Commission settled with the two defendants who consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). In addition, the two defendants will be jointly and severally liable for the payment of disgorgement of $5,276,750 along with prejudgment interest. A penalty was waived based on the financial condition of the defendants.
Customer fraud: SEC v. Vianna, Case No. 10 Civ. 1842 (S.D.N.Y. Filed March 9, 2010) is an action against Jose Vianna, a former registered representative of Maxim Group LLC, a registered broker-dealer. According to the complaint, between July 2007 and March 2008 Mr. Vianna diverted profitable trades from the account of a large Spanish bank to the account of relief defendant Creswell Equities, Inc. He did this by placing simultaneous orders in each account and then diverting profitable trades to Creswell. The defendant settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement of $306,412 along with prejudgment interest and a civil penalty. Creswell previously settled with the SEC by consenting to the entry of a judgment requiring the payment of $1,661,650.18 as disgorgement. The SEC Litigation Release did not specify that Mr. Vianna had agreed to resolve any administrative proceeding.
The CFTC, along with the National Futures Association and AARP, is co-sponsoring a program titled “Don’t Lose Your Life Savings to Investment Fraud” during Money Smart Week (April 2 – 9). The program will be conducted on Friday, April 8, 2011 from 12:00 p.m. to 1:00 p.m. at the AARP Illinois office at 222 N. LaSalle, Suite 710, Chicago, Ill. Approximately 450 free classes, seminars and activities promoting financial education will be held during Money Smart Week Chicago. The program is being coordinated by the Federal Reserve Bank of Chicago.
U.S. v. Levin, Case No. 1 cr 00032 (S.D.N.Y.) is an investment fund fraud action against Igor Levin and Yevgeny Sevartsshteyn. Previously each man pleaded guilty to conspiracy to commit wire fraud. As part of their pleas they agreed to forfeit $7 million. This week each defendant was sentenced to 87 months in prison. According to the charges in the underlying case, from 2005 through 2006 the two defendants controlled and operated A.R. Capital which was the general partner of A.R. Capital Global Fund, LP The fund claimed to be involved in real estate, oil, gas and other commodities. In reality it was a fraud. The $7 million in investor funds was wired to various accounts in Easter Europe. The fund continued in operation until halted by an suit filed by the SEC.
The Director of Public Prosecutions and the Director of the Serious Fraud office issued joint guidance for prosecutions under the Bribery Act 2010. The guidance reviews the Act and its legal framework and discusses the applications of various sections. It is available here.