Thursday, March 31, 2011

David A. Smith Pleads Guilty to $220 Million Ponzi Fraud and Money Laundering Charges



Source- http://tampa.fbi.gov/dojpressrel/pressrel11/ta032911.htm

ORLANDO, FL—United States Attorney Robert E. O'Neill announces that David A. Smith, (41, a Jamaican citizen) who was living in the Turks and Caicos Islands, today pleaded guilty to four counts of wire fraud, one count of conspiracy to commit money laundering, and 18 counts of money laundering. The wire fraud counts carry a maximum penalty of 20 years in federal prison, a fine of $250,000, and a term of supervised release of not more than three years. In addition, for each count of wire fraud the fine may be assessed at twice the amount of gross gain or loss.

Last year, Smith pleaded guilty to fraud and conspiracy charges filed in the Turks and Caicos Islands arising from his investment scam there, and he was sentenced to serve six-and-a-half years in prison.

An information charging Smith with these offenses was filed by the United States Attorney on August 18, 2010. In November 2010, he was brought to the United States. His initial appearance in Federal District Court in Orlando was on November 19, 2010. The case was set for trial in April 2011.

According to the plea agreement, for more than three years, Smith executed a Ponzi scheme to defraud over 6,000 investors located in the Middle District of Florida and elsewhere out of more than $220 million. Smith led investors to believe that he was investing their money in foreign currency trading, earning 10 percent per month on average. In fact, he was not trading their funds. Foreign currency trading is a highly volatile and risky investment vehicle that is regulated in the United States by the Commodity Futures Commission and the National Futures Association.

In addition to defrauding those investors, Smith conspired to launder the proceeds that were received in his scam, and he participated in the laundering of millions of dollars of proceeds that were obtained as a result of wire fraud.

The four counts of wire fraud are based on Smith’s transmitting false and fraudulent account statements to several investors through email and the OLINT Internet website.

Smith also conspired with others to launder approximately $128 million of proceeds that were obtained as a result of the wire fraud scheme, and he in fact laundered those millions of dollars. The purpose of the money laundering engaged in by Smith and his conspirators was to conceal and disguise the nature, the location, the source, the ownership, and the control of the proceeds of the wire fraud.

During the entire time that Smith operated his Ponzi scheme, the only source of income for he and his wife was from investors’ funds. Smith’s operation of the Ponzi scheme effectively ended on July 15, 2008, when the Royal Turks and Caicos Police Force, Financial Crimes Unit, executed search warrants at Smith’s place of business and residence in Providenciales, Turks and Caicos Islands.



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Wednesday, March 30, 2011

FDA Chemist Cheng Yi Liang and Son Andrew Liang Charged with Trading on Inside Information


Source- http://washingtondc.fbi.gov/dojpressrel/pressrel11/wfo032911.htm

WASHINGTON—A Food and Drug Administration (FDA) chemist and his son were arrested in Maryland today in connection with an alleged $2.27 million insider trading scheme, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney for the District of Maryland Rod J. Rosenstein; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Elton Malone, Special Agent in Charge, Department of Health and Human Services, Office of the Inspector General (HHS-OIG), Office of Investigations, Specials Investigations Branch.

A criminal complaint unsealed today in the District of Maryland charges Cheng Yi Liang, 57, and his son, Andrew Liang, 25, both residents of Gaithersburg, Md., with conspiracy to commit securities and wire fraud, securities fraud, and wire fraud relating to their trading in the securities of five companies: Clinical Data Inc., Vanda Pharmaceuticals Inc., Progenics Pharmaceuticals Inc., Middlebrook Pharmaceuticals Inc., and Momenta Pharmaceuticals Inc. They were both arrested at their residence this morning and made their initial appearances in U.S. District Court in Greenbelt, Md. Law enforcement agents executed four search warrants today in connection with the investigation.

“Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens,” said Assistant Attorney General Breuer. “According to the complaint, he and his son repeatedly violated that trust to line their own pockets. Insider trading is an insidious crime. Together with our law enforcement partners, we will continue to root out corruption in our securities markets at every level. Our use of innovative investigative tools like the security software used in this case will provide an additional deterrent the next time someone sits in front of a computer and thinks about committing a crime.”

“It is unacceptable for any government employee to take confidential information and use it for personal gain,” said U.S. Attorney Rosenstein.

“Those in positions of trust, who have access to privileged and valuable information are expected to follow the law,” said Assistant Director in Charge McJunkin of the FBI’s Washington Field Office. “The charges today represent long hours and hard work by the special agents and investigators who are tasked with enforcing laws and regulations designed to ensure the fair operation of our financial markets.”

“Profiting based on sensitive, insider information—as Liang is charged with today—is not only illegal, but taints the image of thousands of hard-working government employees,” said Special Agent in Charge Malone of HHS-OIG Special Investigations Branch. “We will continue to insist that federal government employee conduct be held to the highest of standards.”

According to court documents, Cheng Yi Liang has been employed as a chemist since 1996 at the FDA’s Office of New Drug Quality Assessment (NDQA). Through his work at NDQA, Cheng Yi Liang had access to the FDA’s password-protected internal tracking system for new drug applications, known as DARRTS. FDA utilizes DARRTS to manage, track, receive, and report on new drug applications. The complaint alleges that by accessing DARRTS, and through other unauthorized means, Cheng Yi Liang was able to review confidential non-public documents or inside information, relating to whether and when certain drug applications would be approved.

The complaint alleges that from approximately November 2007 through March 2011, Cheng Yi Liang and Andrew Liang profited from the inside information by repeatedly trading in securities issued by companies with pending drug applications, allegedly reaping illicit profits of more than approximately $2.27 million. According to court documents, the trading was executed in accounts held in the name of Andrew Liang, as well as several accounts in the names of four different nominees. The proceeds from the Liangs’ insider trading were then transferred to various bank and brokerage accounts benefitting the father and son.

According to the complaint, on Jan. 6, 2011, HHS-OIG installed software on Cheng Yi Liang’s work computer, allowing it to collect screen shots from that computer, which revealed Liang was accessing the secure DARRTS database to review information related to a pending drug application submitted by Clinical Data Inc. for an anti-depressant drug called Viibryd. In one instance on Jan. 18, 2011, the software captured information that showed Liang accessed the database and reviewed an internal FDA document recommending approval of Viibryd. The complaint alleges that within minutes, several accounts controlled by Liang and his son purchased 4,875 shares of Clinical Data. Altogether, the defendants, through various accounts which they controlled, acquired 48,875 shares of Clinical Data before Viibryd’s approval was announced on Jan. 21, 2011, and subsequently sold their entire position for a profit of more than $379,000.

The complaint also alleges that Cheng Yi Liang and Andrew Liang traded in advance of a May 6, 2009, announcement by Vanda Pharmaceuticals Inc., that the FDA had approved its drug Fanapt. Utilizing Andrew Liang’s account and several nominee accounts, the Liangs allegedly made a nearly 800 percent profit, netting more than $1 million.

As described in the complaint, the defendants used the proceeds from the scheme to pay various personal expenses, including purchasing cars, paying for travel, and paying credit cards bills.

The maximum penalty for conspiracy to commit securities and wire fraud is five years in prison and a fine of $250,000, or twice the gross gain from the offence. The maximum penalty for wire fraud is 20 years in prison and a fine of $250,000, or twice the gross gain from the offence. The maximum penalty for securities fraud is 20 years in prison and a fine of $5 million for each count.

A criminal complaint is merely an accusation, and a defendant is presumed innocent unless proven guilty in a court of law.


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Tuesday, March 29, 2011

Igor Levin and Yergeny Shvartsshteyn Each Sentenced in Manhattan Federal Court to 87 Months in Prison


Source- http://www.fbi.gov/newyork/press-releases/2011/operators-of-fraudulent-hedge-fund-sentenced-in-manhattan-federal-court-to-87-months-in-prison

The United States Attorney for the Southern District of New York, announced that IGOR LEVIN and YEVGENY SHVARTSSHTEYN were each sentenced in Manhattan federal court to 87 months in prison for their leadership roles in a conspiracy to defraud investors of more than $7 million through a fraudulent hedge fund. LEVIN, 41, and SHVARTSSHTEYN, 40, were sentenced before U.S. District Judge SIDNEY H. STEIN on Friday, March 25.

According to court records in this case:

From 2005 through September 2006, LEVIN and SHVARTSSHTEYN were among the individuals who controlled and operated A.R. Capital, which was the general partner of A.R. Capital Global Fund, L.P. (the “ARC Global Fund”), a purported hedge fund that solicited investors with false promises and representations. These false and fraudulent representations included, among others, claims that: (i) the ARC Global Fund was a hedge fund that invested primarily in the equity of international real estate companies; and (ii) the ARC Global Fund invested in real estate, oil, gas, and other commodities. In reality, there were no such investments. The defendants defrauded their victims of more than $7 million in investor funds, which were wired to various bank accounts in Eastern Europe. From February 2006 until September 2006, when the United States Securities and Exchange Commission (“SEC”) shut down the operation, LEVIN and SHVARTSSHTEYN controlled the ARC Global Fund.

LEVIN, of Brooklyn, New York, and SHVARTSSHTEYN, of Belle Harbor, New York, each previously pled guilty to one count of conspiring to commit mail and wire fraud for their participation in the investment scheme. Judge STEIN also entered forfeiture orders in the amount of $7 million against LEVIN and SHVARTSSHTEYN, which constituted proceeds from their crime.


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Monday, March 28, 2011

Richard H. Nickles Pleads Guilty to Fraud Charges in Ponzi Scheme That Caused Over $6 Million in Losses


Source- http://losangeles.fbi.gov/dojpressrel/pressrel11/la032311.htm

SANTA ANA, CA—The owner and operator of a Santa Ana investment firm pleaded guilty today to mail fraud and securities fraud charges for operating a Ponzi scheme that collected more than $10 million from about two dozen victims, many of whom were elderly residents of Orange County and Los Angeles County. As a result of the scheme, victims suffered losses of approximately $6.22 million.

Richard H. Nickles, 58, of Irvine, the owner of Innovative Advisory Services, Inc., pleaded guilty to the two felony charges before United States District Judge Cormac J. Carney.

Nickles admitted in court today that he placed advertisements in the Orange County Register and the Los Angeles Times advertising safe investments through Innovative Advisory Services. The advertisements variously described the investments as “U.S. Government Guaranteed,” “FDIC Insured,” “Guaranteed,” or “Insured” and stated that there was a “$50,000 Minimum Investment.” After being contacted by potential investors, Nickles met with them and offered investments in various types of low-risk bonds. According to court documents, Nickles took money from investors, but, instead of investing the money in the bonds he recommended, he used the money to pay off prior investors or trade in securities not authorized by the investors. As part of his scheme, Nickles created fraudulent statements from Innovative Advisory Services that were mailed to investors.

The charge of mail fraud carries a statutory maximum penalty of 20 years in federal prison. The charge of securities fraud carries a statutory maximum of five years in prison. Therefore, when he is sentenced by Judge Carney on August 8, Nickles faces a maximum possible penalty of 25 years in federal prison.

Nickles has been in custody since he was arrested by special agents with the FBI on July 9, 2010 during a meeting with two victims at his Santa Ana office.


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Saturday, March 26, 2011

SEC Charges Daniel Frishberg and Talk Radio "MoneyMan" for Fraudulent Conduct at Advisory Firm


Source- http://www.sec.gov/news/press/2011/2011-72.htm

Washington, D.C., March 25, 2011 — The Securities and Exchange Commission today charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.

The SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan." Frishberg failed to tell his clients about BizRadio's poor financial condition or his significant conflicts of interest with the note offerings that helped fund his salary at BizRadio.

Frishberg agreed to settle the SEC's charges by paying a $65,000 penalty that will be distributed to harmed investors. He will be barred from future association with any investment adviser.

"Contrary to his obligations as an investment adviser, Frishberg approved risky investment recommendations to his clients without ensuring that the risks and conflicts were properly disclosed," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Frishberg personally benefitted from the questionable investments that were recommended to his clients."

According to the SEC's complaint filed in federal district court in Houston, at least $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg's associate Albert Fase Kaleta. Frishberg and Kaleta jointly controlled BizRadio.

The SEC charged Kaleta and his firm with fraud in 2009, and the court appointed a receiver to marshal the assets of KCM and relief defendants BizRadio and DFFS.

The SEC alleges that Frishberg authorized Kaleta to recommend the notes to DFFS clients, and clients were not provided with critical disclosures. Investors were not told of BizRadio's poor financial condition and the likely inability of KCM and BizRadio to repay the notes. Nor were investors informed about Frishberg's significant conflicts of interest in the note offerings because the proceeds funded his salary as a BizRadio talk show host.

The SEC alleges that Frishberg chose Kaleta to recommend the BizRadio notes even though he was aware of complaints about Kaleta's lack of truthfulness in sales presentations regarding other investments.

The SEC's complaint alleges that Frishberg violated Section 206(2) of the Investment Advisers Act of 1940 and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act.

Without admitting or denying the SEC's allegations, Frishberg consented to the entry of a permanent injunction against these violations and to pay a $65,000 penalty. Frishberg consented to the establishment of a fair fund for the distribution of his penalty to harmed investors, and agreed to be barred from association with any investment adviser or certain other registered entities.


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Friday, March 25, 2011

Barry Minkow Charged with Conspiracy to Manipulate Common Stock of Fortune 500 Company


Source- http://miami.fbi.gov/dojpressrel/pressrel11/mm032411.htm

Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and William J. Maddalena, Acting Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, announce the filing of a criminal Information charging Barry Minkow, 44, of San Diego, CA, with conspiracy to manipulate the stock price of Lennar Corporation (Lennar), a former Fortune 500 company doing business in Miami-Dade, by making false and misleading statements about Lennar's business operations and management. Minkow is expected to make his initial appearance in federal court next week.

According to the charging document, Minkow operated Fraud Discovery Institute, a for profit fraud investigation firm based in California. In this way, Minkow developed ties with federal law enforcement agencies as a purported fraud-finder. Today, Minkow was charged with making false and misleading statements alleging wide-spread improprieties in Lennar Corporation's financial reporting and business structure, and attacking the personal character of Lennar's management.

According to the Information, Minkow was hired to put economic pressure on Lennar to pay money demanded by a business partner in a prior land deal. To this end, beginning in January 2009, Minkow used the Internet, press releases, e-mail communications, Youtube.com videos, and the U.S. mail to broadcast false and misleading statements about Lennar, with the intent of artificially depressing Lennar's stock price.

In addition, the Information alleges that Minkow abused his relationship with federal law enforcement agencies to report false allegations of criminal conduct purportedly committed by Lennar and its management. Once Minkow confirmed that his allegations had successfully induced law enforcement to open a criminal investigation, Minkow allegedly used that knowledge and information to trade Lennar securities for his own benefit.

U.S. Attorney Wifredo Ferrer stated, "In this case, Minkow's manipulation of the market and his relationship with the FBI for his personal gain caused a severe drop in the stock prices of a large local corporation. This type of deceit and abuse of trust will not be tolerated. Together with the FBI and the cooperative efforts of the SEC, we will investigate and prosecute stock manipulation cases to help protect the integrity of our capital markets."

William J. Maddalena, Acting Special Agent in Charge of the FBI's Miami Office, stated, "When false statements are disseminated to deceive the investing public, whether they're designed to prop up a company or tear it down, the FBI will dedicate all available resources to bring disseminators of such falsehoods to justice."

If convicted, Minkow faces a statutory maximum penalty of five years in prison.


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Thursday, March 24, 2011

Christian M. Allmendinger Convicted in $100 Million Fraud Scheme


Source- http://www.justice.gov/opa/pr/2011/March/11-crm-367.html

WASHINGTON – Christian M. Allmendinger, 39, of Houston, was convicted by a federal jury today for his role in a $100 million fraud scheme with more than 800 victims across the United States and Canada.

The conviction was announced today by U.S. Attorney for the Eastern District of Virginia Neil H. MacBride and Assistant Attorney General Lanny A. Breuer of the Criminal Division.

“Christian Allmendinger stole millions from elderly retirees to buy flashy cars and a multi-million-dollar home,” said U.S. Attorney MacBride. “This was a national fraud case brought by the Virginia Financial and Securities Fraud Task Force that has real implications to dozens of investors in Richmond, who gave most of their life savings and have seen it all disappear. Mr. Allmendinger has now been held accountable for his crimes, and we will continue to pursue other financial fraudsters who prey on those in Virginia and throughout the country.”

“Christian Allmendinger operated a business that relied on deceit, and he used the profits of his fraudulent scheme to spend lavishly on himself,” said Assistant Attorney General Breuer. “Today a federal jury held him to account. Other would-be criminals should take note.”

On Sept. 7, 2010, a federal grand jury returned an 18-count indictment against Allmendinger and two other principals of A&O Resource Management Ltd. and various related entities that acquired and marketed life settlements to investors. Today, Allmendinger was convicted on one count of conspiracy to commit mail fraud, two counts of mail fraud, one count of conspiracy to commit money laundering, two counts of money laundering, and one count of securities fraud. At sentencing on Aug. 12, 2011, Allmendinger faces up to 20 years in prison on each count except the securities fraud count, on which he faces up to 5 years in prison.

Allmendinger’s co-defendant, Adley H. Abdulwahab, 35, is scheduled for a jury trial beginning July 5, 2011. Evidence at Allmendinger’s trial established that during his involvement with the company, A&O obtained approximately $80 million from approximately 500 investors. The indictment alleges that the A&O fraud scheme as a whole exceeds $100 million and affected more than 800 investors, many of whom were elderly.

According to court records and evidence at trial, Allmendinger was a co-founder and vice president of A&O and was active in the day-to-day management of the companies, as well as in the marketing of A&O life settlement investment products to investors. He and others engaged in a scheme to defraud investors by making misrepresentations about such things as A&O’s prior success, its size and office locations, its number of employees, the risks of its investment offerings, and its safekeeping and use of investor funds. Evidence at trial showed that Allmendinger routinely used investor funds for personal enrichment, including a $2 million home, a Lamborghini Spyder, and a 15-carat diamond ring, among other property.

When state regulators began to scrutinize A&O’s investment products, Allmendinger and his co-conspirators decided to sell A&O in August 2007, which ended Allmendinger’s association with the fraud scheme. The indictment alleges that, through a series of sham sales, co-conspirators, including Abdulwahab and David White, continued the fraud scheme through September 2009.

Five individuals have pleaded guilty in connection with the A&O fraud scheme: White, the former President of A&O; Brent Oncale, former vice president of A&O; Russell E. Mackert, an attorney for A&O; Eric M. Kurz, a wholesaler of A&O investment products; and Tomme Bromseth, an A&O sales agent in the Richmond area.

This continuing investigation is being conducted by the U.S. Postal Inspection Service, Internal Revenue Service, and FBI, with significant assistance from the Texas State Securities Board. These cases are being prosecuted by Assistant U.S. Attorneys Michael S. Dry and Jessica Aber Brumberg from the Eastern District of Virginia and Trial Attorney Albert B. Stieglitz Jr., of the Criminal Division’s Fraud Section.

The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia. The task force is an investigative arm of the President’s Financial Fraud Enforcement Task Force, an interagency national task force.


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Wednesday, March 23, 2011

Christopher Rad a Organizer of International Securities Fraud Ring Charged in Stock Manipulation Conspiracy Using Hackers and Botnet Operators


Source- http://newark.fbi.gov/dojpressrel/pressrel11/nk032111.htm

NEWARK, NJ—Federal agents arrested the alleged organizer of an international securities fraud ring employing hackers, botnet operators, and e-mail spam distributors today for conspiring to artificially inflate the value of stocks through the scheme, U.S. Attorney Paul J. Fishman announced.

Christopher Rad, 42, of Cedar Park, Texas, was arrested this afternoon by FBI special agents on a federal Indictment charging him with one count of conspiracy to commit securities fraud and transmit multiple commercial e-mail messages with fraudulent information. The defendant is scheduled for an initial appearance and bail hearing this afternoon before U.S. Magistrate Judge Robert L. Pitman in Austin, Texas federal court.

James Bragg, 42, of Chandler, Ariz., pleaded guilty on October 20, 2010, before U.S. District Judge Joel A. Pisano in Trenton, N.J., federal court for his role in hiring botnet operators and engaging in mass e-mail campaigns to pump up the value of stock prior to dumping shares.

According to the indictment unsealed today, other documents filed in this case, and statements made in Newark and Trenton federal court:

Rad conspired with stock promoters in a scheme to manipulate the price and volume of particular stocks, including stocks with ticker symbols RSUV and VSHE (the “Manipulated Stocks”), in order to later sell them at an artificially inflated price—a practice known as a “pump and dump” scheme. The scheme began as early as November 2007 and continued through February 2009. After conspiring with the stock promoters, Rad organized others to manipulate the stock price.

During his plea hearing, Bragg admitted that as part of his conspiracy with Rad he hired hackers and spammers, including an individual in Russia referred to in the information as “B.T.” The hackers distributed computer viruses to infect computers around the world and create a virtual army of computers, or “botnet.” The hackers then caused the botnets to distribute spam to promote the Manipulated Stocks. Some of the targeted victim-investors were residents of New Jersey.

In addition to relying on unsuspecting investors to buy into the spam promotions, the hackers also hacked into the brokerage accounts of third parties, liquidated the stocks in those accounts, and then used those accounts to purchase shares of the Manipulated Stocks. This created trading activity in the Manipulated Stocks and increased the volume of shares being traded, further creating an impression that the Manipulated Stocks were worth purchasing.

Rad also agreed with others to trade the Manipulated Stocks between themselves, creating the impression that the stocks were active. In some instances this was done prior to the spam campaigns so that recipients of the spam would perceive active trading in the promoted stocks.

A stock promoter who was also part of the conspiracy falsified documents submitted to attorneys in order to obtain opinion letters to secure millions of freely trading shares in those stocks. Those letters certified that trading restrictions on shares of the Manipulated Stocks could be lifted because certain conditions set forth in securities regulations were met.

The conspiracy count with which Rad was charged carries a maximum potential penalty of five years in prison and a $250,000 fine.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward in Newark, with the investigation leading to the charges. He also thanked the U.S. Securities and Exchange Commission’s Division of Enforcement.

The government is represented by Assistant U.S. Attorneys Christopher Kelly of the U.S. Attorney’s Office Economic Crimes Unit and Erez Liebermann, Deputy Chief of the Economic Crimes Unit and Chief of the Computer Hacking and Intellectual Property Section.

The charge and allegations contained in the indictment are merely accusations, and the defendant is considered innocent unless and until proven guilty.


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Tuesday, March 22, 2011

Igor Poteroba, Sentenced in Manhattan Federal Court to 22 Months in Prison for Insider Trading Scheme


Source- http://www.fbi.gov/newyork/press-releases/2011/former-ubs-investment-banker-sentenced-in-manhattan-federal-court-to-22-months-in-prison-for-insider-trading-scheme

PREET BHARARA, the United States Attorney for the Southern District of New York, announced that IGOR POTEROBA, a former investment banker in the Healthcare Group of UBS Securities LLC (“UBS”), was sentenced today to 22 months in prison for his participation in an insider trading scheme in which he passed material, non-public information regarding six mergers and acquisitions that certain UBS clients were contemplating to a co-conspirator, ALEXEI P. KOVAL, who then traded on this information, generating hundreds of thousands of dollars in illicit profits. POTEROBA, 37, was sentenced in Manhattan federal court by U.S. District Judge PAUL A. CROTTY.

Manhattan U.S. Attorney PREET BHARARA said: “The message of today’s sentence of Igor Poteroba should be crystal clear—this office, along with our law enforcement partners, will not abide corrupt insiders who use their privileged positions to steal their companies’ valuable secrets and cash in on them. Professionals who engage in insider trading will be punished to the full extent of the law.”

According to documents previously filed in Manhattan federal court:

Since 2006, POTEROBA served as an executive director at UBS where he obtained material, non-public information (the “UBS Inside Information”) regarding certain mergers and acquisitions involving the following six publicly traded health care companies: Guilford Pharmaceuticals, Inc., Molecular Devices Corporation, PharmaNet Development Group, Inc., Via Cell, Inc., Millennium Pharmaceuticals, Inc., and Indevus Pharmaceuticals, Inc. (collectively, the “Health Care Companies”). In violation of his duties of trust and confidence, he then disclosed the UBS Inside Information to KOVAL, who in turn disclosed the UBS Inside Information to another co-conspirator (“CC-1”).

As part of the scheme, POTEROBA typically tipped KOVAL by telephone in advance of a public announcement that one of the Health Care Companies was to be acquired. Shortly after receiving such a call, KOVAL and CC-1 purchased securities in the company. Following the public announcement of the acquisition, KOVAL and CC-1 quickly sold the securities they had purchased. KOVAL and CC-1 executed dozens of securities transactions based on UBS Inside Information provided by POTEROBA. POTEROBA then received a portion of the profits from KOVAL.

In addition to his prison term, Judge CROTTY sentenced POTEROBA, of Darien, Connecticut, to three years of supervised release and ordered him to forfeit $465,095.21, representing the amount of foreseeable proceeds obtained as a result of the securities fraud offenses. Judge CROTTY also ordered POTEROBA to pay a $25,000 fine and will determine the amount of restitution at a later date.

POTEROBA’s co-defendant, ALEXEI KOVAL, 37, of Chicago, Illinois and Pasadena, California, pled guilty to related charges on January 7, 2011, and is scheduled to be sentenced on May 24, 2011, at 4:00 p.m., before Judge CROTTY.


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Monday, March 21, 2011

Former Goldman Sachs Computer Programmer Sergey Aleynilov Sentenced in Manhattan Federal Court to 97 Months in Prison for Stealing Firm’s Trade Secrets


Source- http://www.fbi.gov/newyork/press-releases/2011/former-goldman-sachs-computer-programmer-sentenced-in-manhattan-federal-court-to-97-months-in-prison-for-stealing-firm2019s-trade-secrets

PREET BHARARA, the United States Attorney for the Southern District of New York, announced that SERGEY ALEYNIKOV, a former computer programmer at Goldman Sachs & Co. (“Goldman Sachs”) was sentenced today in Manhattan federal court to 97 months in prison for stealing valuable, proprietary computer code of Goldman Sachs. A jury in Manhattan federal court previously found ALEYNIKOV guilty on December 10, 2010, of theft of trade secrets and interstate transportation of stolen property charges. U.S. District Judge DENISE L. COTE imposed the sentence on ALEYNIKOV.

Manhattan U.S. Attorney PREET BHARARA said: “Protecting the proprietary information of America’s companies is critically important. Today’s sentence sends a clear message that professionals like Sergey Aleynikov who abuse their positions of trust to steal confidential business information from their employers will be prosecuted and punished.”

According to the evidence presented at trial and at the sentencing hearing:

From May 2007 to June 2009, ALEYNIKOV was employed at Goldman Sachs as a computer programmer responsible for developing computer programs supporting the firm’s high-frequency trading on various commodities and equities markets. Since acquiring the system in 1999 for approximately $500 million, Goldman Sachs modified and maintained it and took significant measures to protect the confidentiality of its computer programs. Goldman Sachs’ trading system generated millions of dollars per year in profits for the firm. They took several measures to protect the system’s source code, including requiring all Goldman employees to agree to a confidentiality agreement.

In April 2009, ALEYNIKOV resigned from Goldman Sachs and accepted a job at Teza Technologies (“Teza”), a newly-formed company in Chicago, Illinois. He was hired to develop Teza’s own version of a computer platform that would allow Teza to engage in high-frequency trading. His last day of employment at Goldman Sachs was June 5, 2009.

Beginning at approximately 5:20 p.m. on June 5, 2009—his last day working at Goldman Sachs—ALEYNIKOV, from his desk at Goldman Sachs, transferred substantial portions of the firm’s proprietary computer code for its trading platform to an outside computer server in Germany. He encrypted the files and transferred them over the Internet without informing Goldman Sachs. After transferring the files, he deleted the program he used to encrypt them and deleted his computer's “bash history,” which records the most recent commands executed on his computer.

In addition, throughout his employment at Goldman Sachs, ALEYNIKOV transferred thousands of computer code files related to the firm’s proprietary trading program from the firm’s computers to his home computers, without the knowledge or authorization of Goldman Sachs.

On July 2, 2009, ALEYNIKOV flew to Chicago, Illinois, to attend meetings at Teza’s offices, bringing with him his laptop computer and another storage device, each of which contained Goldman Sachs’ proprietary source code. He was arrested on July 3, 2009, as he arrived at Newark Airport following that visit.

In addition to the prison sentence, Judge COTE ordered ALEYNIKOV to serve three years of supervised release following his prison sentence. Judge COTE also ordered him to pay a $12,500 fine.


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Sunday, March 20, 2011

SEC Charges Kentucky Steel Company Executives Patrick Carroll, William “Tad” Carroll, David Mark Calcutt and David Stitt, With Insider Trading


Source- http://www.sec.gov/news/press/2011/2011-69.htm

Washington, D.C., March 17, 2011 – The Securities and Exchange Commission today charged four executives at a Louisville-based steel processing company and four of their family and friends with illegal insider trading in advance of the company’s acquisition.

The SEC alleges that Patrick Carroll, William “Tad” Carroll, David Mark Calcutt and David Stitt – who are vice presidents of sales at Steel Technologies – traded based on confidential information about their company’s acquisition by Mitsui & Co. (USA) Inc. Three of the four executives illegally tipped family members or friends. The ring of eight traders together purchased $578,000 of Steel Technologies stock in the month prior to the public announcement of the acquisition and made $320,000 in illegal profits.

Merri Jo Gillette, Director of the SEC’s Chicago Regional Office, said, “Our complaint alleges that these high-level salespeople exploited their insider status for monetary gain, and their friends and family knowingly used confidential information to gain an illegal advantage over other traders in the market.”

Specifically, the SEC alleges that Patrick Carroll tipped his son James Carroll, and Calcutt tipped his brother Christopher Calcutt. David Stitt tipped his friend John Monroe, who then tipped another friend Stephen Somers.

According to the SEC’s complaint filed in U.S. District Court for the Western District of Kentucky, Patrick and Tad Carroll are brothers of Michael Carroll, who is the president and chief operating officer of Steel Technologies. Patrick traded after Michael introduced him to Mitsui representatives who were touring the Steel Technologies facility where Patrick worked. Patrick tipped his son James, who then purchased his own Steel Technologies stock shortly before the acquisition was publicly announced. Tad bought more than $84,000 of Steel Technologies stock approximately one week before the public announcement following his own communications with Michael.

The SEC alleges that before getting inside information about the forthcoming acquisition, Calcutt liquidated nearly all of his company stock. However after he went on a hunting trip with Michael Carroll, Calcutt soon started aggressively buying Steel Technologies stock at higher prices. He also tipped his brother Christopher Calcutt, who then sold all of his shares in another company for a loss and used that money to buy Steel Technologies stock on margin to increase his illicit gains.

According to the SEC’s complaint, Stitt, Monroe and Somers have known each other since childhood. Stitt learned about the forthcoming acquisition on the Friday before the public announcement and immediately purchased Steel Technologies stock that same day. Over the weekend, Stitt told Monroe about the forthcoming acquisition. On Monday, Monroe passed the inside information to Somers. That same day, Monroe told his broker to immediately open a new account so he could buy Steel Technologies stock. Somers also immediately traded based on the inside information. During the SEC’s investigation, Stitt and Monroe contradicted each other’s testimony about their communications and advance knowledge of the acquisition.

The SEC’s complaint charges the eight defendants with securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of monetary penalties against all defendants.


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Friday, March 18, 2011

SEC Charges Former Supervisor at Colonial Bank Teresa A. Kelly for Role in Securities Fraud Scheme


Source- http://www.sec.gov/news/press/2011/2011-68.htm

Washington, D.C., March 16, 2011 – The Securities and Exchange Commission today charged the former operations supervisor of Colonial Bank’s mortgage warehouse lending division (MWLD) with participating in a $1.5 billion securities fraud scheme.

The SEC alleges that Teresa A. Kelly enabled the sale of fictitious and impaired mortgage loans and securities from the MWLD’s largest customer – Taylor, Bean & Whitaker Mortgage Corp. (TBW) – to Colonial Bank. She caused these securities to be falsely reported to the investing public as high-quality, liquid assets.

The SEC previously charged former TBW chairman and majority owner Lee B. Farkas in June 2010, charged TBW’s former treasurer Desiree E. Brown in February 2011, and charged the head of Colonial Bank’s MWLD Catherine L. Kissick earlier this month.

“For nearly seven years, Kelly abused her access to Colonial Bank’s accounting systems, allowing Farkas and TBW to defraud the bank and its investors out of more than $1.5 billion,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Kelly along with Farkas, Kissick and Brown perpetrated the fraudulent scheme from March 2002 to August 2009, when Colonial Bank was seized by regulators and Colonial BancGroup and TBW each filed for bankruptcy. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank’s mortgage warehouse lending division to fund such mortgage loans.

The SEC alleges that TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. Kelly, Farkas, Kissick and Brown concealed the overdraws through a pattern of “kiting” in which certain debits were not entered until after credits due for the following day were entered. In order to conceal this initial fraudulent conduct, Kelly, Farkas, Kissick and Brown created and submitted fictitious loan information to Colonial Bank and created fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. These fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup’s financial statements.

The SEC’s complaint charges Kelly with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, including Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.


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Thursday, March 17, 2011

Teresa Kelly, a Former Operations Supervisor in Colonial Bank’s Mortgage Warehouse Lending Division (MWLD), Pleads Guilty to Fraud Scheme


Source- http://washingtondc.fbi.gov/dojpressrel/pressrel11/wfo031611a.htm

WASHINGTON – Teresa Kelly, a former operations supervisor in Colonial Bank’s Mortgage Warehouse Lending Division (MWLD), pleaded guilty today to conspiring to commit bank, wire and securities fraud for her role in a fraud scheme that contributed to the failures of Colonial Bank and Taylor, Bean & Whitaker (TBW).

The guilty plea was announced today by Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride for the Eastern District of Virginia; Special Inspector General Neil Barofsky for the Troubled Asset Relief Program (SIGTARP); Assistant Director in Charge James W. McJunkin of the FBI’s Washington Field Office; Michael P. Stephens, Inspector General of the Department of Housing and Urban Development (HUD OIG); Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC OIG); Steve A. Linick, Inspector General of the Federal Housing Finance Agency (FHFA OIG); and Victor F. O. Song, Chief of the Internal Revenue Service (IRS) Criminal Investigation.

Kelly, 35, of Ocoee, Fla., pleaded guilty before U.S. District Judge Leonie M. Brinkema in the Eastern District of Virginia. Kelly faces a maximum penalty of five years in prison when she is sentenced on June 17, 2011. In a related action, the U.S. Securities and Exchange Commission (SEC) today filed civil charges against Kelly in the Eastern District of Virginia.

According to court documents, Kelly admitted that from 2002 through August 2009, she and her co-conspirators at Colonial Bank and TBW engaged in a scheme to defraud various entities and individuals, including Colonial Bank, a federally-insured bank; Colonial BancGroup Inc.; and the investing public. Kelly admitted that she knowingly and intentionally placed Colonial Bank and Colonial BancGroup at significant risk by causing them to purchase more than $400 million in assets that had no value.

Court documents state that in early 2002, TBW began running overdrafts in its master bank account at Colonial Bank because of TBW’s inability to meet its operating expenses, which included payroll, servicing payments owed to third-party purchasers of loans and/or mortgage-backed securities and other obligations. Kelly and her co-conspirators engaged in a series of fraudulent actions to cover up the overdrafts, first by sweeping overnight money from one TBW account with excess funds into another, and later through the fictitious “sales” of mortgage loans to Colonial Bank, a fraud scheme the conspirators dubbed “Plan B.” The conspirators accomplished this by sending mortgage data to Colonial Bank for loans that did not exist or that TBW had already committed or sold to other third-party investors. Kelly admitted that she knew and understood she and her co-conspirators had caused Colonial Bank to pay TBW for assets that were worthless to the bank.

According to court documents, Kelly and her conspirators also caused TBW to engage in sales to Colonial Bank of fictitious trades that had no collateral backing them and had no value. To obtain fraudulent funding through these trades, TBW co-conspirators would contact Kelly or another co-conspirator at Colonial Bank when the mortgage company needed an advance from the bank. Conspirators at TBW would wire a request that included false documentation purporting to represent the sale of the trades to Colonial Bank to support the release of the funds. Kelly and others caused the false information to be entered into Colonial Bank’s books and records, giving the appearance that Colonial Bank owned a 99 percent interest in legitimate securities, when in fact the securities had no value and could not be sold.

Kelly admitted today that she and her co-conspirators took steps to hide the fraud scheme from Colonial Bank’s and Colonial BancGroup’s senior management, auditors and regulators, and Colonial BancGroup’s shareholders, including by providing materially false information that significantly overstated assets held in the MWLD portfolio. Kelly knew that these actions caused materially false financial data to be reported to Colonial BancGroup and incorporated in its publicly filed statements.

In August 2009, the Alabama State Banking Department, Colonial Bank’s regulator, seized the bank and appointed the FDIC as receiver. Colonial BancGroup also filed for bankruptcy in August 2009.

Raymond Bowman, the former president of TBW; Desiree Brown, the former treasurer of TBW; and Catherine Kissick, a former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division, previously pleaded guilty for their roles in the fraud scheme.


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Wednesday, March 16, 2011

Timothy S. Durham, James F. Cochran and Rick D. Snow, Charged in $200 Million Fraud Scheme Involving Fair Financial Company Investors


Source- http://indianapolis.fbi.gov/dojpressrel/pressrel11/ip031611.htm

WASHINGTON—Three former executives of Fair Financial Company (Fair), an Ohio financial services business, were arrested today and charged in an indictment filed in the Southern District of Indiana for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; Timothy M. Morrison, First Assistant U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Michael E. Welch of the FBI in Indiana.

The indictment, returned by a federal grand jury on March 15, 2011, and unsealed today, charges Timothy S. Durham, 48; James F. Cochran, 55; and Rick D. Snow, 47, with one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud, and one count of securities fraud. Durham was arrested in Los Angeles, and Cochran and Snow were arrested in Indianapolis.

According to the indictment, Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002. Durham was the chief executive officer of Fair and a member of the board of directors; Cochran was the chairman of the board of Fair; and Snow, a certified public accountant, served as the chief financial officer of Fair.

The indictment alleges that between approximately February 2005 through the end of November 2009, Durham, Cochran, and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money. The indictment further alleges that Durham, Cochran, and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.

According to the indictment, when Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million. The indictment alleges that in November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.

“These former executives are charged with engaging in fraudulent and deceptive business practices to hide from investors and regulators Fair’s true financial condition and their misuse of the company’s funds,” said Assistant Attorney General Breuer. “As alleged in the indictment, by using investors’ money to fund their failing business ventures and personal lifestyles, they perpetrated a $200 million fraud. Today’s charges and arrests reflect that investigating and prosecuting financial fraud is a Justice Department priority.”

“This has been an arduous journey, as are most large white-collar cases,” said First Assistant U.S. Attorney Morrison. “But we now welcome the opportunity to prove the indictment’s allegations against these three men beyond a reasonable doubt.”

“These arrests follow the largest corporate fraud investigation in the history of the FBI in Indiana which resulted in over 5,000 victims and an estimated loss of $200 million dollars,” said Special Agent in Charge Welch.

According to the indictment, when Durham and Cochran bought Fair in 2002, its primary business was purchasing and collecting finance receivables. Fair financed its purchase of finance receivables by selling investment certificates to investors. Investors who purchased investment certificates were promised regular interest payments for a set period of time, at the end of which they were entitled to the return of their principal investment.

In order to sell its investment certificates, Fair was required to register the investment certificates with the State of Ohio Division of Securities. Fair did so by submitting registration documents and a proposed “offering circular” to the Division of Securities that was required to contain truthful and accurate disclosures about Fair’s business.

The indictment alleges that after Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds. Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates, and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.

According to the indictment, companies owned or controlled by Durham and Cochran, including DC Investments LLC (DCI) and Obsidian Enterprises Inc., as well as other businesses controlled through Obsidian and DCI, were among the primary beneficiaries of the loans Durham and Cochran made with Fair investor money. Durham and Cochran allegedly loaned money through Obsidian and DCI to a variety of struggling businesses and start-up ventures, including a car magazine, restaurants, a surgery center, trailer manufacturers, Internet companies, a race car team, a replica vintage car manufacturer, a rubber reclaiming plant, and a luxury bus-leasing business. The indictment further alleges that after receiving loans from Fair, many of these businesses failed and were never able to repay the money they borrowed, while others, with the benefit of continued loans from Fair, struggled as unprofitable entities for years. In addition, Durham and Cochran allegedly took loans of Fair investor money for themselves, and used a significant portion of the proceeds of the loans to maintain their lifestyles and to pay for personal expenses.

According to the indictment, Durham, Cochran, and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral. The indictment alleges that after firing the accountants, the defendants never released audited financial statements for 2005 and never obtained or released audited financial statements for 2006 through September 2009. The indictment further alleges that with independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.

The indictment also alleges that Durham, Cochran, and Snow falsely represented, in registration documents and offering circulars submitted to the Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates. According to the indictment, the defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses, and lines of credit for Durham and Cochran’s personal expenses.

The indictment alleges that the defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates. According to the indictment, even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses; to their family, friends, and acquaintances; and to the struggling businesses that they owned or controlled.

An indictment is only a charge and is not evidence of guilt. A defendant is presumed innocent and is entitled to a fair trial at which the government must prove guilt beyond a reasonable doubt.


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