Sunday, December 23, 2012

charged two investment advisory firms and two portfolio managers for Roles in Collapse of Midwest-Based Closed-End Fund


Source- http://www.sec.gov/news/press/2012/2012-272.htm

Washington, D.C., Dec. 19, 2012 — The Securities and Exchange Commission today charged two investment advisory firms and two portfolio managers responsible for managing a Midwest-based closed-end fund for their roles in the failure to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.

An SEC investigation found that the Fiduciary/Claymore Dynamic Equity Fund (HCE) attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed HCE to additional undisclosed risks and caused the fund to lose more than $45 million in September and October 2008, which was approximately 45 percent of its net assets. The fund liquidated in 2009.

Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing HCE’s portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading. FAMCO agreed to pay an additional $2 million in disgorgement and penalties. The SEC’s case continues against former FAMCO employees Mohammed K. Riad of Clayton, Mo., and Kevin Timothy Swanson of St. Louis, the co-portfolio managers who allegedly made misleading statements in HCE’s periodic reports about the two strategies’ contribution to HCE’s performance and about HCE’s exposure to downside risk.

“When discussing fund performance and risks, fund advisers must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark,” said Robert J. Burson, Senior Associate Regional Director of the SEC’s Chicago office.

The SEC’s investigation was conducted by the Chicago office and the Enforcement Division’s Structured and New Products Unit that focuses on derivatives and other complex financial products.

“Derivatives have the potential to vastly increase the amount of leverage and exposure for a fund. HCE was exposed to substantial undisclosed risks as a result of its use of these complex financial instruments, and investors weren’t sufficiently told,” said Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit.

According to the SEC’s orders instituting the settled and unsettled administrative proceedings, FAMCO managed HCE in a manner that was inconsistent with the fund’s registration statement. Through the portfolio managers, FAMCO made misleading statements about HCE’s performance, omitting discussion of contributions from the put-writing and variance swap strategies. FAMCO also made misleading statements about HCE’s exposure to downside risk. Investors in HCE lost $45,396,878 as a result of this riskier trading, and the fund lost $70 million total (72.4 percent of its net asset value) during this period of general market decline.

The SEC’s order found that Claymore failed reasonably to supervise FAMCO as required by the firms’ investment advisory agreements, and found that Claymore caused HCE’s failure to provide adequate disclosure in HCE’s annual report or an amended registration statement about the fund’s use of written put options and variance swaps and their associated risks. Claymore consented to the order without admitting or denying the charges, and has established a distribution plan to fully reimburse shareholders for up to $45,396,878 in losses from these derivative transactions.

FAMCO agreed to pay disgorgement of $644,951, prejudgment interest of $134,978, and a penalty of $1.3 million. Without admitting or denying the charges, FAMCO agreed to be censured and to cease and desist from committing or causing any violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Section 34(b) of the Investment Company Act of 1940.



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Saturday, December 22, 2012

SEC Revokes Registration of Toronto-Based Broker and Bans Two Executives from U.S. Securities Industry for Allowing Layering


Source- http://www.sec.gov/news/press/2012/2012-271.htm

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a Toronto-based brokerage firm and its top two executives for failing to supervise overseas day traders who used the firm’s order management system to engage repeatedly in a manipulative trading practice known as layering.

In layering, a trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders, which the trader later cancels. The SEC’s investigation found that Biremis – whose worldwide day trading business enabled up to 5,000 traders on as many 200 trading floors in 30 countries to gain access to U.S. markets – failed to address repeated instances of layering by many of the overseas day traders using its system. The firm’s co-founders Peter Beck and Charles Kim ignored repeated red flags indicating that overseas traders were engaging in layering manipulations. Biremis served as the broker-dealer for an affiliated Canadian day trading firm, Swift Trade Inc.

Biremis and the two executives agreed to a settlement in which the firm’s registration as a U.S. broker-dealer is revoked and permanent industry bars are imposed on Beck and Kim, who also will pay a combined half-million dollars to settle the SEC’s charges.

“Engaged and forceful supervisors are the first line of defense against individual misconduct in financial services companies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Beck and Kim were neither, as they saw obvious red flags of market manipulation by their firm’s traders but failed to respond or take any steps to prevent the manipulation. They have learned the painful lesson that supervisors who fail to heed repeated red flags of misconduct will no longer have any place in the securities industry.”

According to the SEC’s order instituting settled administrative proceedings, Biremis, Beck, and Kim exercised substantial control over the overseas day traders. They backed the traders’ trading with capital from Biremis, determined the amount of Biremis capital available to each individual trader to purchase stocks, and set and enforced daily loss limits on each trader. They also wielded authority to reprimand, restrict, suspend, or terminate traders.

The SEC’s order found that many of the Biremis-affiliated overseas day traders engaged in repeated instances of layering from January 2007 to mid-2010. Beck and Kim learned from numerous sources – including three U.S. broker-dealers and a Biremis employee – that layering was occurring, yet they failed to take any steps to prevent it. For example, in spring 2008, representatives of one U.S. broker-dealer warned Beck and Kim that certain overseas traders were “gaming” U.S. stocks by altering those stocks’ bid and offer prices in order to buy or sell the stock at the altered price. Beck and Kim failed to act on this information.

According to the SEC’s order, Biremis also failed to retain virtually all of its instant messages related to its broker-dealer business, and failed to file any suspicious activity reports (SARs) related to the manipulative trading.

“Broker-dealers must recognize that their supervisory responsibilities over their associated persons don’t end at the U.S. border,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “Broker-dealers face severe consequences if they fail to supervise their traders who engage in manipulative trading, whether those traders are located in the U.S. or abroad.”

The SEC’s order finds that Biremis, Beck, and Kim failed reasonably to supervise the firm’s associated persons (the overseas day traders) with a view to preventing and detecting their layering manipulations. The order also finds that Biremis willfully violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs and Section 17(a) and Rule 17a-4(b)(4) by failing to retain instant messages.

The SEC’s order revokes Biremis’ registration as a broker-dealer and requires the firm to cease and desist from committing or causing violations of Exchange Act Section 17(a) and Rules 17a-4(b)(4) and 17a-8. The SEC imposed permanent industry bars on Beck and Kim, who each agreed to pay penalties of $250,000. Biremis, Beck, and Kim neither admitted nor denied the findings contained in the SEC’s order.



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Friday, December 21, 2012

Financial Media Company and Executives Involved in Accounting Fraud


Source- http://www.sec.gov/news/press/2012/2012-270.htm

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.

The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year. The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance. They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting. Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services. The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.

The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.

“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “The SEC will continue to root out accounting fraud and punish the executives responsible.”

According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes. After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.

The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet:
Improperly recognized revenue based on sham transactions.
Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts.
Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.

According to the SEC’s complaint, when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008. On Feb. 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts.

Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years. Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years. Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.



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Thursday, December 20, 2012

SEC Charges Eli Lilly and Company with FCPA Violations


Source- http://www.sec.gov/news/press/2012/2012-273.htm

Washington, D.C., Dec. 20, 2012 — The Securities and Exchange Commission today charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China, and Poland.

The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore “marketing agreements” to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with offshore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.

The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third-party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.

“When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated,” said Antonia Chion, Associate Director in the SEC Enforcement Division. “We strongly caution company officials from averting their eyes from what they do not wish to see.”

Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit, added, “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.”

As alleged in the SEC’s complaint filed in federal court in Washington D.C.:
Lilly’s subsidiary in Russia paid millions of dollars to offshore entities for alleged “marketing services” in order to induce pharmaceutical distributors and government entities to purchase Lilly’s drugs, including approximately $2 million to an offshore entity owned by a government official and approximately $5.2 million to offshore entities owned by a person closely associated with an important member of Russia’s parliament. Despite the company’s recognition that the marketing agreements were being used to “create sales potential” with government customers and that it did not appear that any actual services were being rendered under the agreements, Eli Lilly allowed its subsidiary to continue using the agreements for years.

Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians.

Lilly’s subsidiary in Brazil allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate $1.2 million in sales of a Lilly drug product to state government institutions.

Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list.


Lilly agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8.7 million for a total payment of $29,398,734. Without admitting or denying the allegations, Lilly consented to the entry of a final judgment permanently enjoining the company from violating the anti-bribery, books and records, and internal controls provisions of the FCPA. Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures. The settlement is subject to court approval.


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Wednesday, December 19, 2012

Aladdin Capital, Connecticut-Based Investment Adviser was Charged for “Skin in the Game” Misstatements About CDOs


Source- http://www.sec.gov/news/press/2012/2012-267.htm

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged a Connecticut-based investment adviser with falsely stating to clients that it was co-investing alongside them in two collateralized debt obligations (CDO).

The SEC’s investigation found that Aladdin Capital Management’s co-investment representation was a key feature and selling point for its Multiple Asset Securitized Tranche (MAST) advisory program involving CDOs and collateralized loan obligations (CLOs). For example, Aladdin Capital Management asked in one marketing piece, “Why is an investor better off just investing in Aladdin sponsored CLOs and CDOs?” It then emphasized that the “most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors.” Aladdin Capital Management in fact made no such investments in either CDO, and its affiliated broker-dealer Aladdin Capital collected placement fees from the CDO underwriters.

Aladdin Capital Management and Aladdin Capital agreed to pay more than $1.6 million combined to settle the SEC’s charges. One of the firms’ former executives Joseph Schlim agreed to pay a $50,000 penalty to settle charges against him for his role in the misrepresentations.

“If you sell an investment with the pitch that you are co-investing and have ‘skin in the game,’ then you better actually have ‘skin in the game,’” said Robert Khuzami, Director of the SEC’s Enforcement Division. “Such a representation by an investment adviser or broker-dealer is an important consideration to investors in complex products.”

Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit, added, “Aladdin marketed these CDOs via the co-investment representation, but then did not take steps to ensure that the representation was accurate. This action demonstrates our continuing commitment to holding market participants, including individuals, responsible for their misconduct leading up to the financial crisis.”

According to the SEC’s orders instituting settled administrative proceedings, Aladdin Capital Management’s clients committed to investing in upcoming CDO deals that would be managed by the firm. Aladdin Capital Management inaccurately informed a municipal retirement plan, a pension plan, and an individual entrepreneur that it would co-invest alongside them. After those three clients invested in the two CDOs, Aladdin Management erroneously continued to inform clients from 2007 to 2010 that the firm had skin in the game.

According to the SEC’s order against Schlim, he was significantly involved in the MAST program on a day-to-day basis. He made sales calls to potential clients and negotiated with CDO and CLO underwriters about the amount of equity in those securities that Aladdin Capital could place with customers or purchase for itself. Schlim also negotiated the placement fees to be received by Aladdin Capital for securing MAST investments in equity tranches of each CDO or CLO.

The SEC found that Schlim knew that Aladdin used the co-investment representation as a significant marketing feature in its pitches to clients, but he failed to take any action to ensure that such representations were accurate when they were made. As the CFO of Aladdin, Schlim was responsible for reserving funds for Aladdin to co-invest alongside its MAST clients, yet he failed to ensure that funds were reserved or allocated for any co-investments alongside clients in either CDO.

Aladdin Capital Management and Schlim agreed to cease-and-desist orders without admitting or denying the SEC’s allegations. The Aladdin entities agreed to jointly pay $900,000 in disgorgement, $268,831 in prejudgment interest, and a $450,000 penalty. Schlim agreed to pay a $50,000 penalty.



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Tuesday, December 18, 2012

SEC Charges Germany-Based Allianz SE with FCPA Violations


Source- http://www.sec.gov/news/press/2012/2012-266.htm

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

“Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

According to the SEC’s order, the second complaint was made to Allianz’s external auditor in 2009. Allianz failed to properly account for certain payments in their books and records. The improper payments were disguised in invoices as an “overriding commission” for an agent that was not associated with the government insurance contract. In other instances, the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. Excess funds were then paid to foreign officials who were responsible for procuring the government insurance contracts. Allianz lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting.

The SEC’s order found that Allianz violated the books and records and internal controls provisions of the FCPA, specifically Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.



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Monday, December 17, 2012

W. Mark Miller Provident CFO Indicted in $485 Million Investment Fraud Scheme


Source- http://www.fbi.gov/dallas/press-releases/2012/provident-cfo-indicted-in-485-million-investment-fraud-scheme

PLANO, TX—A 59-year-old Plano Texas, man has been indicted in connection with a $485 million investment fraud scheme in the Eastern District of Texas, announced U.S. Attorney John M. Bales today.

W. Mark Miller was indicted by a federal grand jury late yesterday and charged with conspiracy to commit mail fraud.

According to the indictment, Miller, who served as chief financial officer of Provident Royalties, is alleged to have conspired with others to defraud investors in an oil and gas scheme that involved over $485 million and 7,700 investors throughout the United States. Specifically, beginning in September 2006, Miller and other individuals are alleged to have made materially false representations and failed to disclose material facts to their investors in order to induce the investors into providing payments to Provident. Among these false representations were statements that funds invested would be used only for the oil and gas project for which those funds were raised; among the omissions of material fact were the facts that another of Provident founders, Joseph Blimline, had received millions of dollars of unsecured loans; that Blimline had been previously charged with securities fraud violations by the state of Michigan; and that funds from investors in later oil and gas projects were being used to pay individuals who invested in earlier oil and projects.

Blimline, 35, pleaded guilty in connection with the scheme and was sentenced in May 2012 to 20 years in federal prison. Provident CEO/founder Paul R. Melbye, 47, pleaded guilty in connection with the scheme in November 2012 and awaits sentencing. Two other Provident principals, Brendan Coughlin, 46, and Henry Harrison, 47, were indicted by a federal grand jury in July 2012 and are awaiting trial.

If convicted, Miller faces up to 20 years in federal prison for his role in the conspiracy.



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Sunday, December 16, 2012

Former Robertson County Commissioner Edward Shannon Polen Pleads Guilty to Operating Ponzi Schemes Totaling $16 Million


Source- http://www.fbi.gov/memphis/press-releases/2012/former-robertson-county-commissioner-edward-shannon-polen-pleads-guilty-to-operating-ponzi-schemes-totaling-16-million

NASHVILLE—Edward Shannon Polen, 37, of Greenbrier, Tennessee, and former Robertson County commissioner, pleaded guilty yesterday before U.S. District Judge Todd J. Campbell, to charges of bank fraud, mail and wire fraud, and money laundering, announced Jerry E. Martin, U.S. Attorney for the Middle District of Tennessee.

At the plea hearing, Polen admitted that, between January 2007 and March 2011, he operated three investment Ponzi schemes in which he solicited and received approximately $16 million from more than 50 investors. Polen admitted, however, that the investment schemes, identified individually as the “John Deere Investment,” the “Greenway Investment,” and the “Tennesseein Valley Authority Coal Ash Cleanup Investment,” were totally fraudulent, and he never intended to invest any of the funds he received from investors.

“Cases like these are devastating to investors, especially people who invest their life savings with individuals they trust, only to find that their trust has been misplaced,” said United States Attorney Jerry E. Martin. “In this case, a lot of people invested money they couldn’t afford to lose, particularly in hard economic times. The United States Attorney’s Office will diligently and aggressively prosecute those who perpetrate such schemes and prey on unsuspecting and trusting investors.”

Polen admitted that beginning in January 2007, he began soliciting funds for investment in the purchase and resale of tractors and other farm equipment that had been repossessed by John Deere & Company. As part of the scheme, Polen falsely represented to investors that he needed funds to finance the initial purchase of repossessed John Deere farm equipment, which he would immediately resell to a “guaranteed buyer” for a significant profit. According to Polen, investors would thereafter receive a return of their principal investment, plus a substantial profit. However, the John Deere Investment did not exist, and Polen never invested any of the funds he collected from investors but instead converted the funds to his own personal use and to repay other investor-victims.

Polen admitted that in January 2008, as part of another scheme, he began soliciting funds to finance the initial purchase of construction materials, which he told investors would be re-sold to the subcontractors of the state of Tennessee Greenway projects for a significant profit. As in the John Deere scheme, Polen promised investors that they would receive a return of their principal investment, plus a substantial profit. However, the Greenway Investment did not exist, and Polen never invested any of the lain funds but instead converted the investor funds to his own personal use and to repay other investors.

Polen also admitted that in February 2009, he devised a third scheme and began soliciting investment funds to purchase construction materials and equipment and told investors that the materials would then be sold to contractors and sub-contractors hired by the Tennessee Emergency Management Agency for use in the Kingston Fossil Plant clean-up project. As in the former investment schemes, Polen promised investors that they would receive a return of their principal investment, plus a substantial profit. However, the TVA Coal Ash Investment did not exist, and Polen never invested any of the funds and again converted the funds to his own personal use and to repay other investors.

It was a significant part of each of the three investment schemes that Polen would, at the time of investment, provide investors with a minimum of two post-dated checks, one for the principal amount of their investment, and the other for the profit that their investment was expected to produce. The post-dated checks were drawn on multiple accounts controlled by Polen at various banks. Polen used the post-dated checks as a ruse to create the illusion for in investors that their investments were safe and secure. Polen also assured investors that the post-dated checks could be cashed at any time, knowing that the accounts upon which the checks were drawn had either been closed or did not and would never contain funds sufficient to cover the amounts of the checks.



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Saturday, December 15, 2012

Former Wells Fargo Investment Banker and Co-Conspirators Charged with $11 Million Insider Trading Conspiracy


Source- http://www.fbi.gov/charlotte/press-releases/2012/former-wells-fargo-investment-banker-and-co-conspirators-charged-with-11-million-insider-trading-conspiracy

CHARLOTTE, NC—A federal indictment unsealed today in U.S. District Court charged nine defendants in Charlotte and elsewhere with insider trading and money laundering, announced Anne M. Tompkins, U.S. Attorney for the Western District of North Carolina. The charges in the indictment arise from the Charlotte-based FBI investigation, Operation Insider Out, which began in early 2012 and identified targets involved in insider trading activities in the Charlotte area.

Roger A. Coe, Acting Special Agent in Charge of the FBI, Charlotte Division, joined U.S. Attorney Tompkins in making today’s announcement.

The federal criminal indictment was returned by a federal grand jury in Charlotte on Wednesday, December 12, 2012, and was unsealed today following the arrest of the lead defendant, John Femenia. Six other defendants named in the indictment have agreed to plead guilty to the charges against them. The indictment alleges that from about March 2010 through December 2012, the defendants were members of an insider trading conspiracy that stole material non-public information, including information about upcoming corporate mergers and acquisitions, from Wells Fargo and its clients and used that information to conduct illegal insider trading. Stealing material non-public inside information allows a trader to cheat and earn substantial profits by trading before such news becomes public, earning substantial profits by trading again once the news becomes public and impacts the price of a stock. The indictment alleges that the criminal conspiracy netted over $11 million in proceeds as a result of the illegal insider trading activities.

The indictment charges Femenia, 31; Shawn C. Hegedus, 32; and Danielle C. Laurenti, 31, all of New York, with conspiracy to commit insider trading, conspiracy to commit wire fraud, securities fraud, and money laundering. Femenia and Hegedus are also charged with bank fraud. Femenia was arrested this morning in New York and is expected to be released on bond conditions following his initial appearance in U.S. District Court. Hegedus and Laurenti are currently fugitives.

The remaining six defendants named in the indictment, Matthew J. Musante, 32, of Miami; Aaron M. Wens, 32, of Encinitas, California; Roger A. Williams, 51, of Georgetown, South Carolina; Kenneth M. Raby, 50, of Greer, South Carolina; Frank M. Burgess, Jr., 42, of Charlotte, North Carolina; and James A. Hayes, 38, also of Charlotte, have agreed to plead guilty to conspiracy to commit insider trading. Their individual plea agreements have been filed, and the defendants will appear upon a summons for their initial appearances and plea hearings on a date set by the court.

According to allegations contained in the indictment, Femenia, an investment banker who lived in Charlotte and New York, stole material, non-public information from his employer, Wells Fargo, and its clients about potential and upcoming mergers and acquisitions. The indictment alleges that Femenia provided the inside information to co-conspirators who traded on the information. These co-conspirators then passed the confidential inside information to other co-conspirators who also traded on that information, the indictment alleges. In total, the co-conspirators made over $11 million in profits when news of the mergers and acquisitions finally became public.

The indictment further alleges that Femenia was paid kickbacks for the stolen information in several forms. For example, according to the indictment, Hegedus, who was a stockbroker and Femenia’s high school friend, bought 550 gold bars with proceeds of the insider trading. Femenia then sold four of the gold bars for $70,877 to a precious metals dealer in Oklahoma. According to allegations contained in the indictment, Femenia also received kickbacks in cash, including by co-conspirators making cash deposits by ATM into an account in the name of Femenia’s girlfriend. The indictment also alleges that co-conspirators Hegedus and Laurenti laundered proceeds of the insider trading through a casino in Las Vegas. The indictment further alleges that Femenia and Hegedus engaged in mortgage fraud through the fraudulent purchase of a luxury home in Waxhaw, North Carolina.

The conspiracy to commit insider trading charge carries a maximum term of five years in prison and a $250,000 fine. The conspiracy to commit wire fraud charge carries a maximum term of 20 years in prison and a $250,000 fine. The securities fraud charge carries a maximum term of 20 years in prison and a $250,000 fine. The bank fraud charge carries a maximum term of 30 years in prison and a $1,000,000 fine. The money laundering conspiracy charge carries a maximum term of 20 years in prison and a $250,000 fine, or a fine of twice the amount of criminally derived proceeds.

An indictment is merely an allegation, and the defendants are presumed innocent unless and until proven guilty beyond reasonable doubt in a court of law. In addition, the agreement to plead guilty by any other person is not relevant to the guilt of any indicted person.

In announcing the insider trading indictment, U.S. Attorney Tompkins praised the investigative work of the FBI in Charlotte and thanked the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Wells Fargo for their assistance.



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Friday, December 14, 2012

David Steven Goldfarb, 64, of Scottsdale, Arizona, was Sentenced to 36 Months in Federal Prison


Source- http://www.fbi.gov/phoenix/press-releases/2012/former-president-of-corf-licensing-services-sentenced-to-federal-prison-for-investment-fraud

PHOENIX—On December 11, 2012, David Steven Goldfarb, 64, of Scottsdale, Arizona, was sentenced by U.S. District Judge David G. Campbell to 36 months in federal prison. Judge Campbell also ordered Goldfarb to pay $19,567,512 in restitution. On September 19, 2012, Goldfarb pleaded guilty to conspiracy to commit mail fraud and transactional money laundering for his role in a multi-million-dollar investment fraud scheme.

Goldfarb, along with a few co-defendants, owned and operated CORF Licensing Services LP (CLS) and CORF Management Services LP (CMS) from 1999 until May 2003, when the companies declared bankruptcy. Goldfarb served as the president of both companies. During the life of CLS and CMS, the defendants convinced hundreds of investors to contract with CLS to establish a for-profit Comprehensive Outpatient Rehabilitation Facility (CORF), which they claimed would provide an alternative to hospitals for rehab services. For an investment fee in the range of $100,000 to $165,000, CLS was supposed to establish a profitable, Medicare-certified business for the investor. The defendants were very successful in acquiring investors: they entered 338 contracts and collected over $40,000,000. Unbeknownst to the investors, however, CLS was unable to establish medical businesses for over two thirds of its clients. In addition, at the facilities CLS did establish, its clients were losing substantial sums of money. Despite these problems, Goldfarb and his partners convinced hundreds of investors to pay CLS through an elaborate fraudulent scheme.

Goldfarb and his co-defendants placed ads in newspapers and magazines that falsely represented that an investor could expect to make $450,000 in net profit during the first year of operating a CORF. Goldfarb and his co-defendants held monthly, and sometimes bi-monthly, sales seminars at an upscale and exclusive country club in Scottsdale, Arizona, to convey the impression that CLS and its existing clients/investors were financially successful. In particular, during the sales seminars, CLS’s chief financial officer presented financial projections to the investors that showed a CORF generating over $1,000,000 in cash for its first year of operation. Investors were informed that the financial projections were based on actual CLS clients. This was false because most, if not all, of CLS’s clients were losing money. Goldfarb and his co-defendants gave prospective investors a false impression that CLS clients were successful and were collecting more than $1,000,000 a year by representing that the financial projections were “conservative,” “worst case-scenario,” and based on “averages.”

As part of the fraud scheme, investors were directed to speak to certain CORF owners who were identified as “independent” references. Again unbeknownst to the investors, Goldfarb and his co-defendants paid the “independent” references approximately $2,000,000 to provide misleading information. When speaking to prospective investors, the independent references falsely confirmed the financial representations Goldfarb and his co-defendants had made. In addition, the independent references failed to inform investors that they were being paid and that their own CORFs were losing tens of thousands of dollars a month.



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Thursday, December 13, 2012

Hedge Fund Manager to Pay $44 Million for Illegal Trading in Chinese Bank Stocks


Source- http://www.sec.gov/news/press/2012/2012-264.htm

Washington, D.C., Dec. 12, 2012 — The Securities and Exchange Commission today charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.

The SEC alleges that Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tiger Asia Management.

“Hwang today learned the painful lesson that illegal offshore trading is not off-limits from U.S. law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit, added, “Hwang betrayed his duty of confidentiality by trading ahead of the private placements, and betrayed his fiduciary obligations when he defrauded his investors by collecting fees earned from his attempted manipulation scheme.”

The SEC also charged Raymond Y.H. Park for his roles in both schemes as the head trader of the two hedge funds involved – Tiger Asia Fund and Tiger Asia Overseas Fund. Park, who lives in Riverdale, N.Y., also agreed to settle the SEC’s charges. Hwang lives in Tenafly, N.J.

According to the SEC’s complaint filed in federal court in Newark, N.J., from December 2008 to January 2009, Hwang and his advisory firms participated in two private placements for Bank of China stock and one private placement for China Construction Bank stock. Before disclosing material nonpublic information about the offerings, the placement agents required wall-crossing agreements from Park and the firms to keep the information confidential and refrain from trading until the transaction took place. Despite agreeing to those terms, Hwang ordered Park to make short sales in each stock in the days prior to the private placement. Hwang and his firms illegally profited by $16.2 million by using the discounted private placement shares they received to cover the short sales they had entered into based on inside information about the placements.

The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange. These stocks were among the largest short position holdings in the hedge funds’ portfolios. The more assets the hedge funds had under management, the greater the management fee that Tiger Asia Management was entitled to collect. So Hwang directed Park to place losing trades in order to depress the stock prices, which would inflate the calculation of the management fees. Hwang and Tiger Asia Management made approximately $496,000 in fraudulent management fees through this scheme.

The SEC’s complaint charges Hwang, his firms, and Park with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. Hwang and his firms also are charged with violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Park is charged with aiding and abetting those violations.

The settlements, which are subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest — including $16,257,918 that Tiger Asia Management will pay directly to criminal authorities. Each of them has agreed to pay a penalty of $8,294,348 for a grand total of $44 million. Park agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.

The SEC’s investigation was conducted by Thomas P. Smith, Jr., Sandeep Satwalekar, and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York, and Frank Milewski of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, the Japanese Securities and Exchange Surveillance Commission, and the Hong Kong Securities and Futures Commission.



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Wednesday, December 12, 2012

SEC Charges New York-Based Fund Manager Steven B. Hart with Conducting Fraudulent Trading Schemes


Source- http://www.sec.gov/news/press/2012/2012-261.htm

Washington, D.C., Dec. 11, 2012 — The Securities and Exchange Commission today charged a New York-based fund manager with conducting a pair of illegal trading schemes to financially benefit his investment fund Octagon Capital Partners LP.

The SEC alleges that Steven B. Hart made $831,071 during a four-year period through illicit trading while he also worked as a portfolio manager and employee at a New Jersey-based firm that served as an adviser for several affiliated investment funds. In one scheme, Hart illegally matched 31 pre-market trades to benefit his own fund at the expense of one of his employer’s funds. In the other scheme, Hart conducted insider trading in the securities of 19 issuers based on nonpublic information he learned in advance of their offering announcements. Furthermore, Hart signed two securities purchase agreements in which he falsely represented that he had not traded the issuer's securities prior to the public announcement of the offerings in which he had been confidentially solicited to invest.

Hart agreed to pay more than $1.3 million to settle the SEC’s charges.

“By engaging in more than 50 instances of illegal activity in his securities trading, Hart showed a complete disregard for the securities laws and our markets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Hart also misused his position of authority as a portfolio manager of his employer’s fund in order to make handsome profits for his own fund.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Hart conducted his schemes from 2007 to 2011. He caused Octagon to purchase stock in small, thinly traded issuers at the going market price so that he could sell the same stock the following day to his employer’s fund at a price substantially above the prevailing market price. Each of the sales from Octagon to the employer’s fund occurred in pre-market trading, thus Hart was able to ensure that the trades matched. Later that same day or within a few days of the matched trades, Hart directed the employer’s fund to sell the recently-acquired stock on the open market at a loss. Hart generated ill-gotten gains of $586,338 for Octagon in this scheme.

According to the SEC’s complaint, Hart was confidentially solicited by 19 issuers to invest in securities offerings where he expressly agreed to go “over-the-wall” and keep confidential the information he received and not trade on it. Nevertheless, Hart traded for Octagon on the basis of material nonpublic information about the offerings in breach of his duty of trust or confidence. Hart’s illegal trades involved PIPE offerings, registered direct offerings, and confidentially marketed public offerings. Octagon derived ill-gotten gains of $244,733 as a result of Hart’s misconduct.

The SEC alleges that in order to induce two issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that Octagon had not traded the issuers’ securities after he had been solicited. Despite going “over-the-wall” during the solicitations conducted by the two issuers, Hart directed short sales of these issuers’ securities and obtained insider trading profits. He subsequently signed the securities purchase agreements misrepresenting that he hadn’t traded in their securities in the days leading up to the public announcements about the offerings.

The SEC’s complaint against Hart alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Hart agreed to pay $831,071 in disgorgement, $103,424 in prejudgment interest, and a $394,733 penalty to settle the SEC’s charges without admitting or denying the allegations. Hart also consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. The settlement is subject to court approval.



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Tuesday, December 11, 2012

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation


Source- http://www.sec.gov/news/press/2012/2012-259.htm

Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.

The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

“Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned assets.”

The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.

The eight fund directors named in today’s SEC enforcement action are:
J. Kenneth Alderman of Birmingham, Ala.
Jack R. Blair of Germantown, Tenn.
Albert C. Johnson of Hoover, Ala.
James Stillman R. McFadden of Germantown
Allen B. Morgan Jr. of Memphis
W. Randall Pittman of Birmingham
Mary S. Stone of Birmingham
Archie W. Willis III of Memphis

According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.

The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.



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Monday, December 10, 2012

SEC Charges Claudio Osorio Prominent Entrepreneur in Miami-Based Scheme


Source- http://www.sec.gov/news/press/2012/2012-258.htm

Washington, D.C., Dec. 7, 2012 — The Securities and Exchange Commission today charged a prominent Miami-based entrepreneur with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. Claudio Osorio stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.

The SEC alleges that Osorio, who is a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. Osorio sometimes solicited investors one-on-one at political fundraising events. To add an air of legitimacy to his company, Osorio assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. Osorio falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.

The SEC also charged InnoVida's chief financial officer Craig Toll, a certified public accountant living in Pembroke Pines, Fla., who helped Osorio create the false financial picture of InnoVida.

The SEC alleges that besides his Miami Beach mansion, Osorio illegally used investor money to pay for his Maserati, a Colorado mountain retreat home, and country club dues. He stole at least $8.1 million in investor funds.

"From his lap of luxury, Osorio concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

In a parallel action, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, the scheme began in 2007 and lasted until 2010. InnoVida was purportedly in the business of manufacturing building panels used to construct houses and other structures resistant to fires and hurricanes. The company entered bankruptcy in 2011.

To induce funds from investors, Osorio and Toll allegedly produced false pro forma financial statements. A pro forma financial statement for March 31, 2009, stated that InnoVida had more than $35 million in cash and cash equivalents and more than $100 million of equity. A pro forma financial statement for Dec. 31, 2009, listed more than $39 million in cash and cash equivalents and $122 million of equity. In reality, the company's bank accounts held less than $185,000 on March 31, 2009, and less than $2 million on Dec. 31, 2009. Toll failed to review all of InnoVida's bank account statements when he drafted financial statements. Instead, he accepted Osorio's misrepresentations that InnoVida had these assets in an account to which Toll did not have access.

The SEC alleges that Osorio offered bogus share prices to prospective investors based on false valuations. He told one investor that InnoVida was valued at $250 million, and then a week later told a different investor that the company was worth $50 million. The latter investor purchased $100,000 of Osorio's stake in the company for five cents per share.

The SEC further alleges that Osorio lied to an investor when he said that he had personally invested tens of millions of dollars into InnoVida. He had in fact made no such investment. Osorio also enticed an investor to increase an investment in InnoVida by touting a supposed $500 million deal he was negotiating with a Middle Eastern sovereign wealth fund that would significantly benefit InnoVida investors. Osorio went so far as to create a document showing the investor how much he would make once the sovereign wealth deal closed and was funded. Based on Osorio's misrepresentations, the investor was able to raise approximately $700,000 and later borrowed $3 million from a close friend. However, no sovereign wealth buyout deal ever materialized, and InnoVida investors never benefited as promised.

The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against InnoVida, Osorio, and Toll to enjoin them from future violations of the federal securities laws. The complaint also seeks an order barring Osorio and Toll from serving as an officer or director of a public company.



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