Monday, October 31, 2011

Christopher Bass Sentenced to Over 12.5 Years in Prison for Orchestrating Ponzi-Style Scheme


Source- http://www.fbi.gov/albany/press-releases/2011/christopher-bass-sentenced-to-over-12.5-years-in-prison-for-orchestrating-ponzi-style-scheme

ALBANY—United States Attorney Richard S. Hartunian; James C. Spero, Special Agent in Charge, Homeland Security Investigations; Charles R. Pine, Special Agent in Charge, Internal Revenue Service, Criminal Investigation Division; William Leege, Resident Agent in Charge, United States Secret Service; and Clifford C. Holly, Special Agent in Charge, Federal Bureau of Investigation, announced that CHRISTOPHER BASS was sentenced today by Senior United States District Judge Lawrence E. Kahn to 151 months’ incarceration, to be followed by a period of three years of upervised release, and ordered to pay restitution in the total amount of $5,308,340.02 to the victims of his Ponzi-style scheme involving entities formerly known under the name “Swiss Capital Harbor.” Bass, who has been in custody since his initial arrest in the case on February 8, 2010, was remanded following sentencing.

Bass, age 54, formerly of Troy and Menands, New York, had admitted at the time of his plea that he relocated from Europe to Albany County in or about May 2006 and, thereafter, from approximately January 1, 2007 through February 1, 2010, he promoted, managed, and directed a fraudulent investment program involving the purchase and sale of securities to investors in the Capital Region and elsewhere. From January through August 2007, the fraudulent investment program operated under the name “Revisco Finanz AG” and, from August through December 2007, it operated under the names Revisco Finance USA and Revisco Finanz AG.” Thereafter, from approximately December 2007 through February 1, 2010, Bass conducted the fraudulent investment program using the name “Swiss Capital Harbor/USA, LLC” and other variations utilizing the name “Swiss Capital Harbor.” At the time of his guilty plea last year, Bass admitted having solicited and accepted a total of over $5.5 million from more than 250 investors and, at sentencing today, the government indicated that additional investigation confirmed the total deposits were over $6.7 million from approximately 400 victims, more than 300 of whom suffered pecuniary loss as a result of their investments in the scheme. While Bass promised these victims that their funds would be sent to Europe for investment, the majority of the investor deposits were (1) disbursed to Bass or used to pay for his personal expenses; (2) used to repay investors who demanded a return of their initial investment or distribution of the income allegedly earned, as is common in such Ponzi-style schemes; and (3) used to pay for expenses incurred in operating the fraudulent investment program. Bass further admitted at the time of his plea that, as part of his scheme, he caused periodic account statements to be issued that reported monthly returns and account balances that were false and grossly overstated, and that he made numerous additional false statements to prospective and actual investors, including that their investments were insured, risk free, or protected by a cash reserve account. At this point, no funds have been recovered to be applied toward the victims’ losses.

In addition to his plea to one count of wire fraud involving the fraudulent investment program, Bass also pled guilty to attempted evasion of taxes in connection with the Form 1040, U.S. Individual Income Tax Return that he filed for himself and his spouse for 2007, in which he falsely reported the amount of income that he received from operation of the fraudulent investment program.

In substance, Bass received gross income of at least $220,000 from the fraudulent investment program in 2007 with taxable income of at least $145,936, whereas he falsely reported only $114,732 in gross income and taxable income of $49,507, resulting in a substantial income tax due and owing for 2007 of at least $34,445. Bass was sentenced today to the statutory maximum of 60 months on the income tax count, to run concurrently with the sentence on his wire fraud conviction, for a total sentence of 151 months in prison.

A number of victim investors attended the sentencing proceeding, and five spoke to the court about the financial and personal devastation suffered by them and their families as a result of Bass’ scheme. The victims who spoke were representative of many who lost their retirement and other life savings, and had their life plans drastically altered by losses suffered as a result of their reliance on Bass and his promises.




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Saturday, October 29, 2011

Scott Kupersmith Arrested, Charged with Defrauding New Jersey Firms and Investors in Securities and Investment Fraud Schemes


Source- http://www.fbi.gov/newark/press-releases/2011/florida-resident-arrested-charged-with-defrauding-new-jersey-firms-and-investors-in-securities-and-investment-fraud-schemes?utm_campaign=email-Immediate&utm_medium=email&utm_source=newark-press-releases&utm_content=40907

NEWARK, NJ—A man who allegedly bought securities without being able to pay for them and claimed to run a phony hedge fund was arrested this morning at his Boca Raton, Fla., office by FBI agents after being charged for allegedly orchestrating the securities and investment fraud schemes, New Jersey U.S. Attorney Paul J. Fishman announced.

Scott Kupersmith, 46, formerly of Alpine, N.J., and currently of Boca Raton, is charged by complaint with one count each of securities and wire fraud. He is scheduled to appear Friday, Oct. 28, 2011, before U.S. Magistrate Judge Ann E. Vitunac in federal court in West Palm Beach, Fla.

According to the criminal complaint unsealed today in Newark federal court:

Kupersmith engaged in a securities fraud scheme commonly referred to as “free-riding,” in which a customer buys or sells securities in a brokerage account without the cash or securities to cover the trades. To perpetuate the scheme, Kupersmith and his associates opened more than half a dozen brokerage accounts at multiple brokerage firms located in New Jersey and elsewhere. In order to induce the brokerage firms to open these accounts, Kupersmith falsely represented that he had a personal net worth of approximately $5 million and that he controlled a hedge fund in Manhattan with assets of as much as $20 million.

Kupersmith also misappropriated the personal identification information of a family member and a friend and used that information to open additional brokerage accounts. Once these accounts were opened, Kupersmith used them to make large-dollar-value securities trades.

The defendant then failed to pay for or “settle” the trades he made that were not profitable. As a result, the brokerage firms were forced to settle the trades on Kupersmith’s behalf, leading to approximately $1 million in losses.

To induce investors to invest in a hedge fund he claimed to control, Kupersmith falsely represented to investors that they would receive extraordinary returns—representing to at least one prospective investor that he would receive a return on his investment of approximately 43 percent every three months—and told prospective investors that their principal investment was “guaranteed.”

Based on these, and other, misrepresentations, Kupersmith raised approximately $500,000 from investors in New Jersey and elsewhere. Kupersmith did not use investors’ funds to make legitimate securities trades. He used a small portion of the investments to fund his freeriding scheme, and spent the bulk of the funds either on personal expenditures—such as private limousine services, luxury hotel rooms, and adult entertainment clubs—or to make principal and interest payments to existing investors in Ponzi-scheme fashion.

If convicted, Kupersmith faces a maximum potential penalty per count of 20 years in prison, as well as a $5 million fine on the securities fraud count and a $250,000 fine on the wire fraud count.

The Manhattan District Attorney’s Office worked with the New Jersey U.S. Attorney’s Office in conducting the investigation, and is charging related violations of New York state law.

The SEC is also filing a parallel civil action.

“According to the complaint, Scott Kupersmith managed to defraud both investors and brokerage firms of least a million dollars by making trades he couldn’t pay for and promises he couldn’t keep,” said U.S. Attorney Fishman. “‘Free riders’ and Ponzi schemers who live large on others’ money do so on borrowed time.”

“The alleged conduct undermines the confidence investors place in the markets,” said FBI Acting Assistant Special Agent in charge Douglas Veivia. “Kupersmith’s alleged defrauding of investors is even more troublesome in this time of economic stress.”

“Financial markets are governed by rules that keep investors safe. This defendant, skilled in the technicalities of market function and bank operations, allegedly came up with a clever scheme to create risk-free investments,” said District Attorney Cyrus R. Vance Jr. “The illegal scheme he is accused of was little more than a confidence game using offshore banks, shell companies, and fraud, and ultimately cost legitimate broker-dealers hundreds of thousands of dollars.”




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Friday, October 28, 2011

Guadalupe Valencia Was Sentenced to Nine Years in Federal Prison for Running Investment Scheme That Raised Nearly $7 Million


Source- http://www.fbi.gov/losangeles/press-releases/2011/west-covina-woman-sentenced-to-nine-years-in-federal-prison-for-running-investment-scheme-that-raised-nearly-7-million?utm_campaign=email-Immediate&utm_medium=email&utm_source=los-angeles-press-releases&utm_content=40561

LOS ANGELES—A West Covina woman who admitted running a Ponzi scheme that took in approximately $6.9 million from more than 150 victims has been sentenced to 108 months in federal prison.

Guadalupe Valencia, 47, was sentenced late yesterday by United States District Judge S. James Otero after a nearly five-hour hearing. In addition to the nine-year prison term, Judge Otero ordered Valencia to pay restitution of $5.2 million, which is the total loss figure.

Valencia has been in custody since she pleaded guilty last December to two counts of mail fraud, two counts of wire fraud, and two counts of tax fraud.

Valencia ran her scheme out of the Downey offices of companies she called Real Estate & Loan Consultants and R.E. Equity Group, Inc. Beginning in 2001 and continuing through 2009, Valencia promoted two types of investment pools, with one purportedly funding loans to purchase real estate, and a second purporting to fund short-term loans to businesses. According to court documents, Valencia promised high rates of interest in both investment vehicles—from 8 percent to 20 percent in as little as 45 days. Valencia admitted that she falsely told investors that their investments were fully secured, backed by deeds of trust on valuable real estate, as well as promissory notes that equaled “money-back guarantees.”

When she pleaded guilty, Valencia admitted that the investments she promoted did not generate any profits and that she used newer investor funds to pay original investors. Further, Valencia admitted that she had provided victims with worthless promissory notes that she had created.

Valencia “callously victimized over 150 people,” prosecutors wrote in sentencing papers. “She was a major force in a Ponzi scheme that negatively impacted the lives of the victims and the families of the victims.”

Valencia’s scheme raised approximately $6.9 million. With Ponzi payments that were made to some victims during the course of the scheme, the actual loss amount is $5.2 million.




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Thursday, October 27, 2011

The Securities and Exchange Commission Files Insider Trading Charges against Rajat K. Gupta



Source- http://www.sec.gov/news/press/2011/2011-223.htm

Washington, D.C., Oct. 26, 2011 – The Securities and Exchange Commission today charged former McKinsey & Co. global head Rajat K. Gupta with insider trading for illegally tipping convicted hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam after first charging him with insider trading in October 2009.

According to the SEC’s complaint filed in federal court in Manhattan, Gupta illegally tipped Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and P&G as well as an impending $5 billion investment in Goldman by Berkshire Hathaway at the height of the financial crisis. Rajaratnam, the founder of Galleon Management who was recently convicted of multiple counts of insider trading in other securities stemming from unrelated insider trading schemes, allegedly caused various Galleon funds to trade based on Gupta’s inside information, generating illicit profits or loss avoidance of more than $23 million.

“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets to the disadvantage of investors, shareholders, and fellow directors,” said Robert S. Khuzami, Director of the SEC’s Division of Enforcement. “Directors who exploit board room confidences for private gain can be certain they will ultimately be held responsible for their illegal actions.”

The SEC’s complaint alleges that Gupta provided his friend and business associate Rajaratnam with confidential information learned during board calls and in other communications and meetings relating to his official duties as a director of Goldman and P&G. Rajaratnam used the inside information to trade on behalf of certain Galleon funds, or shared the information with others at his firm who caused other Galleon funds to trade on it ahead of public announcements by the firms. During this period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with him.

According to the SEC’s complaint, Gupta while serving as a Goldman board member tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Based on this inside information, Rajaratnam arranged for Galleon funds to purchase more than 215,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $800,000.

The SEC also alleges that Gupta tipped Rajaratnam to inside information about Goldman’s positive financial results for the second quarter of 2008. There was a flurry of calls between Gupta and Rajaratnam on the evening of June 10, 2008, after Gupta learned from Goldman CEO Lloyd Blankfein of the firm’s quarterly earnings results, which were significantly better than analyst consensus estimates. The following morning, minutes after the markets opened, Rajaratnam caused Galleon funds to start purchasing Goldman securities including 7,350 out-of-the-money Goldman call options and 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17 – the date when Goldman announced its quarterly earnings – generating illicit profits of more than $18.5 million for the Galleon funds.

The SEC’s complaint further alleges that Gupta tipped Rajaratnam with confidential information that Gupta learned during an Oct. 23, 2008, board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. Mere seconds after the board call ended, Gupta tipped Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 150,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman to earn $2.50 per share, he heard the prior day from a Goldman board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on inside information provided by Gupta, the Galleon funds avoided losses of more than $3.6 million.

The SEC’s complaint additionally alleges that Gupta illegally disclosed to Rajaratnam inside information about P&G’s financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterwards informed another participant in the insider trading scheme that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000.

The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge on a joint and several basis their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser.

The SEC previously instituted an administrative proceeding against Gupta for the conduct alleged in today’s enforcement action, but later dismissed those proceedings while reserving the right to file an action against Gupta in federal court.

The SEC previously charged Rajaratnam and others in the widespread insider trading investigation centering on Galleon, the multi-billion dollar New York hedge fund complex founded and controlled by Rajaratnam.




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Wednesday, October 26, 2011

SEC Charges Banco Espirito Santo S.A. for Violating Registration Provisions of U.S. Securities Laws


Source- http://www.sec.gov/news/press/2011/2011-221.htm

Washington, D.C., Oct. 24, 2011 – The Securities and Exchange Commission today charged multinational banking conglomerate Banco Espirito Santo S.A. (BES) with violations of the broker-dealer and investment adviser registration provisions and the securities transaction registration provisions of the federal securities laws.

The SEC's enforcement action finds that Lisbon, Portugal-based BES offered brokerage services and investment advice between 2004 and 2009 to approximately 3,800 U.S.-resident customers and clients who were primarily Portuguese immigrants. However, during this time, BES was not registered with the SEC as a broker-dealer or investment adviser, and it offered and sold securities to its U.S. customers and clients without the intermediation of a registered broker-dealer. None of these securities transactions was registered and many of the securities offerings did not qualify for an exemption from registration.

BES agreed to settle the SEC's charges and pay nearly $7 million in disgorgement, prejudgment interest and penalties. In determining to accept BES's offer to settle, the SEC considered remedial acts promptly undertaken by BES and its cooperation with SEC staff.

"The registration provisions are core safeguards of the integrity of our securities markets and the financial institutions that act as gatekeepers of those markets," said George S. Canellos, Director of the SEC's New York Regional Office. "BES brazenly ignored those provisions over the course of many years by acting as an investment adviser and broker-dealer without registration and by offering and selling securities to members of the U.S. public without any of the disclosures required by the law."

Sanjay Wadhwa, Associate Director of the SEC's New York Regional Office, added, "Foreign entities seeking to provide financial or securities-related services in the U.S. must familiarize themselves with the statutory and regulatory framework in this arena. A failure to do so, as was the case here, can be a costly misstep."

The SEC's order instituting administrative proceedings against BES describes the various ways that the bank offered and sold securities and provided brokerage and advisory services to its U.S. customers and clients. BES used its Portugal-based Departmento de Marketing de Comunicacao & Estudo do Consumidor (Department of Marketing, Communications, and Consumer Research) to mail U.S. residents marketing materials. A customer service call center operated by a third party and located in Portugal (known as the ES Contact Center) employed individuals who were dedicated to servicing BES's U.S. customers and offered such U.S. customers various financial products. BES also used a state-licensed money transmission service named Espirito Santo e commercial Lisbona Inc. with offices in Connecticut, New Jersey, and Rhode Island. BES also had U.S.-dedicated International Private Banking relationship managers who visited the U.S. approximately twice a year to meet with clients and serviced U.S. clients from Portugal.

The SEC's order finds that by acting as an unregistered broker-dealer and investment adviser to U.S. customers and clients, BES willfully violated Section 15(a) of the Securities Exchange Act of 1934, and Section 203(a) of the Investment Advisers Act of 1940. According to the SEC's order, BES also willfully violated Sections 5(a) and 5(c) of the Securities Act of 1933 by offering and selling securities in the U.S. without registration and without an applicable exemption from registration.

Without admitting or denying the SEC's findings, BES has agreed to cease and desist from committing or causing any violations of Sections 5(a) and 5(c) of the Securities Act, Section 15(a) of the Exchange Act, and Section 203(a) of the Advisers Act, and to pay nearly $7 million in disgorgement, prejudgment interest and penalties. BES also has agreed to an undertaking that requires it to pay a certain minimum rate of interest to its U.S. customers and clients on securities purchased through BES, and to make whole each of its U.S. customers and clients for any realized or unrealized losses with respect to any securities purchased through BES.




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Monday, October 24, 2011

Alan Labiner Pleads Guilty to Conspiracy to Commit $6 Million Securities Fraud


Source- http://www.fbi.gov/newyork/press-releases/2011/brooklyn-boiler-room-operator-pleads-guilty-to-conspiracy-to-commit-6-million-securities-fraud

Defendant Alan Labiner pleaded guilty today before United States District Judge Brian M. Cogan in federal court in Brooklyn to conspiracy to commit securities, mail, and wire fraud for operating a boiler room in Brooklyn. This is the second guilty plea in this four-defendant case. The plea was announced by Loretta E. Lynch, United States Attorney for the Eastern District of New York.

The indictment and other filed documents in the case charge that from 2004 to 2009, the defendant and his co-conspirators took in more than $6 million from at least 50 investors, including from Individual Retirement Account funds of senior citizens, by selling fraudulent securities in four different investment schemes:

Manhattan North Real Estate Investment Trust, Inc., a purported real estate investment trust that claimed to invest in real property in upper Manhattan;

Next Point USA, Inc., which purported to invest in credit cards with high interest rates;

Grant Boxing, Inc., which purported to sell boxing equipment and clothes; and

Exposure Management Group, which purported to manage and promote popular musicians, models and actors.

In each scheme the defendant and his co-conspirators allegedly induced investors to send money by lying about the companies and subsequently commingling and misappropriating the investors’ money. The defendants then spent the investors’ money on personal expenses, including strip clubs, tanning salons and car washes.

The defendant faces a maximum sentence of five years’ imprisonment.




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Sunday, October 23, 2011

Drew K. Brownstein Pleads Guilty in Manhattan Federal Court to Insider Trading Scheme That Netted Nearly $2.5 Million in Profits


Source- http://www.fbi.gov/newyork/press-releases/2011/hedge-fund-ceo-pleads-guilty-in-manhattan-federal-court-to-insider-trading-scheme-that-netted-nearly-2.5-million-in-profits

PREET BHARARA, the United States Attorney for the Southern District of New York, and JANICE K. FEDARCYK, the Assistant Director in Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced today that DREW K. BROWNSTEIN, a/k/a “Bo Brownstein,” CEO of a Denver-based hedge fund (the “Hedge Fund”), pled guilty in Manhattan federal court to securities fraud arising from an insider trading scheme in which he received material, non-public information (“Inside Information”) about a pending acquisition of Mariner Energy, Inc. (“Mariner”) by Apache Corporation (“Apache”). BROWNSTEIN traded on the Inside Information he received from his friend DREW CLAYTON PETERSON (“DREW PETERSON”), who got it from his father, Mariner board member H. CLAYTON PETERSON (“CLAYTON PETERSON”). When the acquisition was publicly announced, BROWNSTEIN realized nearly $2.5 million in profits for himself, the Hedge Fund, and others. BROWNSTEIN pled guilty today before U.S. District Judge ROBERT P. PATTERSON, JR.

Manhattan U.S. ATTORNEY PREET BHARARA said: “Bo Brownstein is the latest example of a privileged professional who thought he could make a quick and easy profit by trading on his access to confidential information—here, from the Boardroom of a public company. He is also the latest example of a privileged professional to find out he was woefully mistaken.”

FBI Assistant Director in Charge JANICE K. FEDARCYK said: “Acting on material, non-public information, Brownstein purchased stock and options in a company about to be acquired, and then, immediately after the announcement of the acquisition—and the sharp increase in the value of those securities—sold the securities at a hefty profit. This is a textbook example of the kind of conduct for which the law imposes a heavy price.”

According to the Information and statements made during today’s guilty plea proceeding:

On March 25, 2010, representatives of Apache began confidential discussions with representatives of Mariner to acquire the company. On April 7, 2010, Mariner’s board of directors convened a conference call to consider Apache’s proposal to buy Mariner for cash and stock totaling $25 per share. At the time, Mariner stock was trading at approximately $17 per share.

The next day, Mariner board member CLAYTON PETERSON told his son, DREW PETERSON, who worked as an investment adviser in Denver, Colorado, that he had recently participated in several Mariner board meetings and that DREW PETERSON should purchase Mariner stock on behalf of his sister.

Over the next several days DREW PETERSON had two discussions with BROWNSTEIN, during which he advised him that his father had been participating in several Mariner board meetings and that it appeared Mariner was about to be acquired.

On Monday, April 12, 2010, after participating in another conference call with the board of directors, CLAYTON PETERSON telephoned his son and told him that Mariner would be acquired by another company within a week. At the time he made this disclosure, he knew that Mariner had not yet publicly announced the acquisition. DREW PETERSON immediately telephoned BROWNSTEIN and left a short, coded voice-mail message confirming the Mariner acquisition. Early in the morning on Tuesday, April 13, 2010, BROWNSTEIN had a telephone conversation with DREW PETERSON during which he conveyed to BROWNSTEIN that Mariner would soon be acquired and that the source of the information was his father.

That same day, BROWNSTEIN, using the Inside Information, purchased Mariner options for the Hedge Fund as well as Mariner stock and options for other individuals who had previously given BROWNSTEIN trading authority. The following day, after having had further discussions with DREW PETERSON, BROWNSTEIN purchased additional Mariner options for the Hedge Fund and also purchased Mariner options for his personal account.

On April 15, 2010, before the market opened, Apache and Mariner announced that Apache would acquire Mariner. Mariner’s stock, which opened at approximately $18 per share, rose dramatically, and closed at approximately $26 per share. During the trading day, BROWNSTEIN caused the Hedge Fund, his personal account, and the accounts of the other individuals to sell all of their Mariner stock and options, reaping illegal profits of nearly $2.5 million.




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Friday, October 21, 2011

Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market


Source- http://www.sec.gov/news/press/2011/2011-214.htm

Washington, D.C., Oct. 19, 2011 – The Securities and Exchange Commission today charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits.

The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.

Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors.

The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir H. Bhatt.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

Kenneth R. Lench, Chief of the Structured and New Products Unit in the SEC Division of Enforcement, added, “As the collateral manager, Credit Suisse also was responsible for the disclosure failures and breached its fiduciary duty to investors when it allowed Citigroup to significantly influence the portfolio selection process.”

According to the SEC’s complaints filed in U.S. District Court for the Southern District of New York, personnel from Citigroup’s CDO trading and structuring desks had discussions around October 2006 about the possibility of establishing a short position in a specific group of assets by using credit default swaps (CDS) to buy protection on those assets from a CDO that Citigroup would structure and market. After discussions began with Credit Suisse Alternative Capital (CSAC) about acting as the collateral manager for a proposed CDO transaction, Stoker sent an e-mail to his supervisor. He wrote that he hoped the transaction would go forward and described it as the Citigroup trading desk head’s “prop trade (don’t tell CSAC). CSAC agreed to terms even though they don’t get to pick the assets.”

The SEC alleges that during the time when the transaction was being structured, CSAC allowed Citigroup to exercise significant influence over the selection of assets included in the Class V III portfolio. The transaction was marketed primarily through a pitch book and an offering circular for which Stoker was chiefly responsible. The pitch book and the offering circular were materially misleading because they failed to disclose that Citigroup had played a substantial role in selecting the assets and had taken a $500 million short position that was comprised of names it had been allowed to select. Citigroup did not short names that it had no role in selecting. Nothing in the disclosures put investors on notice that Citigroup had interests that were adverse to the interests of CDO investors.

According to the SEC’s complaints, the Class V III transaction closed on Feb. 28, 2007. One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.” On Nov. 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on Nov. 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost virtually their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position.

The SEC alleges that Citigroup and Stoker each violated Sections 17(a)(2) and (3) of the Securities Act of 1933. While the SEC’s litigation continues against Stoker, Citigroup has consented to settle the SEC’s charges without admitting or denying the SEC’s allegations. The settlement is subject to court approval. Citigroup consented to the entry of a final judgment that enjoins it from violating these provisions. The settlement requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty for a total of $285 million that will be returned to investors through a Fair Fund distribution. The settlement also requires remedial action by Citigroup in its review and approval of offerings of certain mortgage-related securities.

The SEC instituted related administrative proceedings against CSAC, its successor in interest Credit Suisse Asset Management (CSAM), and Bhatt. The SEC found that as a result of the roles that they played in the asset selection process and the preparation of the pitch book and the offering circular for the Class V III transaction, CSAM and CSAC violated Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 17(a)(2) of the Securities Act and that Bhatt violated Section 17(a)(2) of the Securities Act and caused the violations of Section 206(2) of the Advisers Act by CSAC.

Without admitting or denying the SEC’s findings, CSAM and CSAC consented to the issuance of an order directing each of them to cease and desist from committing or causing any violations, or future violations, of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and requiring them to pay disgorgement of $1 million in fees that it received from the Class V III transaction plus $250,000 in prejudgment interest, and requiring them to pay a penalty of $1.25 million. Without admitting or denying the SEC’s findings, Bhatt consented to the issuance of an order directing him to cease and desist from committing or causing any violations or future violations of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and suspending him from association with any investment adviser for a period of six months.

The SEC’s investigation was conducted by Andrew H. Feller and Thomas D. Silverstein of the Enforcement Division’s Structured and New Products Unit with assistance from Steven Rawlings, Brenda Chang and Elisabeth Goot of the New York Regional Office. The SEC trial attorney who will lead the litigation against Stoker is Jeffrey Infelise.




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Thursday, October 20, 2011

SEC Charges Thomas L. Kivisto With Misleading Investors About Liquidity Risks


Source- http://www.sec.gov/news/press/2011/2011-212.htm

Washington, D.C., Oct. 18, 2011 – The Securities and Exchange Commission today charged the co-founder of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading.

According to the SEC’s complaint filed in federal court in Tulsa, Thomas L. Kivisto was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. Kivisto managed these trading activities. Meanwhile, Kivisto also was a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and Kivisto signed certain corporate filings that SGLP made with the SEC, including registration statements and its annual report.

The SEC alleges that SGLP’s filings assured investors that its revenue stream from SemGroup, which was its largest customer, was “stable and predictable” and protected from volatility in oil prices. However, unbeknownst to investors, Kivisto’s energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders cancelled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent.

“Investors have a right to know the risks that could imperil their investment,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Kivisto should have known that the SGLP filings he signed did not warn investors about the risks created by his energy trading, and investors were blindsided when those risks came to fruition.”

The SEC alleges that Kivisto should have known that certain SGLP public filings that he signed were misleading investors about the reliability of SGLP’s revenue stream and the risks that SGLP faced from Kivisto’s energy trading. SemGroup provided up to 89 percent of SGLP’s revenues and thus was critical to SGLP’s profitability. SGLP is now known as Blueknight Energy Partners L.P.

Kivisto agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million that were awarded to him under SGLP’s long-term incentive plan. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.




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Wednesday, October 19, 2011

Cheng Yi Liang Pleads Guilty to Using Insider Information to Trade on Pharmaceutical Stocks Resulting in Almost $4 Million in Profits


Source- http://www.fbi.gov/washingtondc/press-releases/2011/fda-chemist-pleads-guilty-to-using-insider-information-to-trade-on-pharmaceutical-stocks-resulting-in-almost-4-million-in-profits?utm_campaign=email-Immediate&utm_medium=email&utm_source=washington-press-releases&utm_content=38610

WASHINGTON—A Food and Drug Administration (FDA) chemist pleaded guilty today before U.S. District Court Judge Deborah K. Chasanow in the District of Maryland to one count of securities fraud and one count of making false statements, related to a $3.7 million insider trading scheme that spanned nearly five years.

The guilty plea was announced by Assistant Attorney General Lanny A. Breuer of the Justice Department’s 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 of the Department of Health and Human Services, Office of the Inspector General (HHS-OIG), Office of Investigations, Special Investigations Branch.

According to court documents and statements made during court proceedings, Cheng Yi Liang, 57, of Gaithersburg, Md., has been employed as a chemist since 1996 at the FDA’s Office of New Drug Quality Assessment (NDQA). Through his work at NDQA, Liang had access to the FDA’s password-protected internal tracking system for new drug applications, known as the Document Archiving, Reporting and Regulatory Tracking System (DARRTS), which is used to manage, track, receive and report on new drug applications. Liang reviewed DARRTS for information relating to the progression of experimental drugs through the FDA approval process. Much of the information accessible on the DARRTS system constituted material, non-public information regarding pharmaceutical companies that had submitted their experimental drugs to the FDA for review.

“Mr. Liang used inside information about pharmaceutical companies—information he had access to solely because of his position at the FDA—to pocket millions in illicit profits,” said Assistant Attorney General Breuer. “In a shocking abuse of trust, Mr. Liang exploited his position as a chemist in the FDA’s Office of New Drug Quality Assessment to cash in, using the accounts of relatives and acquaintances to hide his illegal trading. Now, like many others on Wall Street and elsewhere, he is facing the significant consequences of trading stocks on inside information.”

“Those who use privileged and valuable information for personal gain, break the trust placed in them as a government employee and the integrity of the research they conduct on behalf of the U.S. government,” said Assistant Director in Charge McJunkin of the FBI’s Washington Field Office. “This case is the result of long hours and hard work by the FBI and HHS-OIG special agents who are tasked with enforcing laws and regulations designed to ensure the fair operation of our financial markets.”

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

Liang admitted that from approximately July 2006 through March 2011, he used the inside information he learned from DARRTS and other sources to trade in the securities of pharmaceutical companies. Liang used accounts of relatives, including his son, and acquaintances to execute the trades (referred to as the controlled accounts). When the inside information was positive about a company’s product, Liang used the controlled accounts to purchase securities. When the inside information was negative, Liang would make trades in anticipation of the stocks’ downward movement. Liang admitted that he used these controlled accounts to execute trades to profit from the change in the company’s share price after the FDA’s action was made public, resulting in total profits and losses avoided of more than $3.7 million.

For example, on May 21, 2010, the FDA accepted Clinical Data Inc.’s application for Viibryd, an anti-depressant. According to court documents, on Jan. 6, 2011, HHS-OIG installed software on Liang’s work computer, allowing it to collect screen shots from that computer, which revealed Liang regularly accessed the DARRTS system and reviewed information regarding Clinical Data’s drug Viibryd. Between Jan. 6, 2011, and Jan. 20, 2011, Liang purchased a total of 46,875 shares of Clinical Data stock using the controlled accounts. After the markets closed on Friday, Jan. 21, 2011, news of the FDA’s approval of Viibryd was reported. Clinical Data’s stock, which had closed that day at approximately $15.03 per share opened the following Monday, Jan. 24, 2011, at approximately $24.76 per share. Liang then sold all 46,875 shares of Clinical Data stock in the controlled accounts, netting a total profit of approximately $384,300.

During the time he was employed by the FDA, Mr. Liang was required to file a Confidential Financial Disclosure form disclosing, among other things, investment assets with a value greater than $1,000 and sources of income greater than $200. During the time period of his insider trading scheme, Liang annually filed these forms and failed to disclose using the controlled accounts or his income from the illicit securities trading.

Sentencing is scheduled for Jan. 9, 2012, at 12:30 p.m. The maximum penalty for the securities fraud count is 20 years in prison and a fine of $5 million, or twice the gross gain from the offense. The maximum penalty for the false statement count is five years in prison and a fine of $250,000.

As part of his plea agreement, Liang has agreed to forfeit $3,776,152, including a home and condominium in Montgomery County, Md., along with funds held in 10 bank or investment accounts.



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Tuesday, October 18, 2011

Keith Epstein a Michigan Investment was Sentenced to 97 Months in Ponzi Scheme


Source- http://www.fbi.gov/detroit/press-releases/2011/investment-adviser-sentenced-to-97-months-in-ponzi-scheme?utm_campaign=email-Immediate&utm_medium=email&utm_source=detroit-press-releases&utm_content=38570

A 56 year-old Farmington Hills, Michigan investment adviser was sentenced today in federal court to 97 months in prison for running a $4 million Ponzi scheme, United States Attorney Barbara L. McQuade announced. Joining in the announcement was Andrew G. Arena, Special Agent in Charge of the Federal Bureau of Investigation.

Keith Epstein was sentenced today by the Honorable Nancy G. Edmunds, following his April 2011 guilty plea to bank fraud charges. In addition to his incarceration, Judge Edmunds ordered that Epstein pay restitution to his victims in the amount of $4.1 million.

According to court documents, Epstein devised a scheme where he directed clients—many of whom were elderly—to liquidate legitimate investments in order to purportedly place them in new, less risky instruments, with him. Epstein then diverted these funds for his own use, where he spent it gambling and at adult entertainment clubs, financially supporting multiple exotic dancers, and making “interest” payments to other investors to continue the scheme. Epstein was able to convince his clients to provide him with their funds in this manner by ingratiating himself to them in numerous ways. He regularly visited his clients at home, shared his personal life with them, attended family functions (such as birthdays and weddings) in which he provided gifts, put money towards charitable causes important to clients, and assisted some clients with life decisions (such as the purchase of a home). Victim losses exceed $4 million. Many of his victims’ retirement funds have been completely eviscerated, leaving them with nothing after lifetimes of saving and hard work.



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Monday, October 17, 2011

Former Pegasus Wireless Stephen Durland CFO Sentenced to 33 Months for His Role in Securities Fraud Scheme


Source- http://www.fbi.gov/sanfrancisco/press-releases/2011/former-pegasus-wireless-cfo-sentenced-to-33-months-for-his-role-in-securities-fraud-scheme?utm_campaign=email-Immediate&utm_medium=email&utm_source=san-francisco-press-releases&utm_content=37761

SAN FRANCISCO—Stephen Durland, the former CFO of Pegasus Wireless Corporation, a wireless technology company based in Fremont, Calif., was sentenced yesterday to 33 months in prison for his role in a complex scheme to defraud in which approximately a half a billion shares of company stock were issued under false pretenses, United States Attorney Melinda Haag announced.

Durland, 57, of Greensboro, N.C., pleaded guilty on March 18, 2011, to one count each of conspiracy to commit securities fraud in violation of Title 18 U.S.C. § 1349; Title 18 U.S.C. § 1348, and Title 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff, respectively. According to court documents, Durland executed a scheme to defraud in which he created 31 fake promissory notes and other documents representing that Pegasus had outstanding debt. Durland caused Pegasus to issue shares to satisfy the debt and then arranged for those shares, or assets from their sale, to be funneled to himself, family friends, and associates. All told, between May 2005 and January 2008, Pegasus had more than 490 million shares issued to satisfy this fabricated debt. By February 2008, Pegasus had issued more than 75 percent of its outstanding shares through this fraudulent scheme. When the fraudulently issued shares were sold, Durland, his family, and friends made more than $25 million. During this time, Pegasus filed reports with the SEC that falsely reported that the company had issued shares to satisfy a legitimate debt and that hid the fact that Durland and his associates had received the majority of those shares. At the height of the scheme, in May 2006, Pegasus stock traded on the NASDAQ for more than $18 a share and Pegasus had a market capitalization of more than $4 billion. By September 2006, the stock traded for less than $1 a share.



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Sunday, October 16, 2011

Richard J. Buswell and Herbert S. Fouke, a/k/a Steve Fouke, Former Owners of Lafayette Investment Firm Bowman Investment Group Charged with Conspiracy, Securities Fraud, Investment Adviser Fraud, Wire Fraud, and Mail Fraud


Source- http://www.fbi.gov/neworleans/press-releases/2011/former-owners-of-lafayette-investment-firm-bowman-investment-group-charged-with-conspiracy-securities-fraud-investment-adviser-fraud-wire-fraud-and-mail-fraud?utm_campaign=email-Immediate&utm_medium=email&utm_source=new-orleans-press-releases&utm_content=37895

LAFAYETTE, LA—U.S. Attorney Stephanie A. Finley announced today the unsealing of a 28-count indictment charging the former owners of a Lafayette investment firm, Bowman Investment Group, with conspiracy, securities fraud, investment advisor fraud, wire fraud, and mail fraud.

Richard J. Buswell, 43, and Herbert S. Fouke, a/k/a Steve Fouke, 52, both of Lafayette, La., made an initial appearance in United States District Court in Lafayette today. On August 10, 2011, a federal grand jury returned a sealed indictment charging Buswell with one count of conspiracy, one count of securities fraud, one count of investment adviser fraud, eight counts of wire fraud, and 15 counts of mail fraud. Fouke is charged with one count of conspiracy, one count of securities fraud, and one count of investment adviser fraud.

According to the indictment, beginning in 2007 and continuing through 2009, the defendants obtained investors’ funds through false pretenses, representations, and promises in order to gain an economic benefit for themselves through the payment of commissions and wages. Fouke, formerly a general contractor, recruited his business associates and friends to become clients of the Bowman Investment Group. Buswell then engaged in trading on clients’ accounts without their knowledge or consent. His goal was to generate large commissions.

The government is seeking forfeiture of the more than $1.7 million in commissions that Buswell made from the improper trades. According to the indictment, the defendants caused over 100 clients in Lafayette and surrounding parishes to lose more than $8 million.

U.S. Attorney Stephanie A. Finley stated, “This conspiracy involved a complex scheme to defraud innocent investors. Our prosecutor and investigator were able to cut through the mountains of paperwork to get to the heart of this case—greed. The U.S. Attorney’s Office and our law enforcement partners will continue to work tirelessly to hold accountable those who participate in fraud.”

Special Agent in Charge of the FBI’s New Orleans Division, David Welker, stated, “Frauds as alleged in this indictment are serious offenses which have brought financial ruin to many citizens. The public is reminded to protect themselves from such schemes and report the fraud to law enforcement when it occurs so it can be swiftly and aggressively investigated.”

The conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. The securities fraud charge carries a maximum penalty of 20 years in prison and a $5,000,000 fine. The investment advisor fraud charge carries a maximum penalty of five years and a fine of $10,000. Each count of wire fraud and mail fraud carries a maximum penalty of 20 years and a fine of $250,000.



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