SEC Charges Eight in Georgia-Based Insider Trading Ring

Source- http://www.sec.gov/news/press/2012/2012-167.htm

Washington, D.C., Aug. 28, 2012 – The Securities and Exchange Commission today charged eight individuals living in the Griffin, Ga., area for their involvement in an insider trading ring that generated more than $500,000 in illegal profits based on nonpublic information about an upcoming company merger.

The SEC alleges that local accountant Thomas D. Melvin, Jr. exploited confidential information from a client who was on the board of directors at Chattem Inc., a Tennessee-based pharmaceutical company known for such over-the-counter products as Allegra, Gold Bond, and Icy Hot. In late 2009, after Chattem’s board was informed that French pharmaceutical manufacturer Sanofi-Aventis Inc. made a tender offer to purchase the company, Melvin’s client sought his professional advice on the financial impact of his Chattem stock options being involuntarily exercised due to a change in control of the company. Melvin breached his duty of confidentiality to the client and proceeded to tip four of his friends and associates about the likely increase in the company’s stock price as a result of the impending transaction. Those individuals then knowingly traded on the confidential information ahead of the public announcement of the merger, and some even tipped others who traded illegally as well.

Four of the eight men agreed to settle the SEC’s charges and pay back all of their ill-gotten gains plus interest and penalties for a combined total of more than $175,000.

“It is particularly troubling when professionals like Melvin violate their professional obligations and breach a client’s trust by misusing confidential information,” said William P. Hicks, Associate Director for Enforcement in the SEC’s Atlanta Regional Office. “These traders similarly jeopardized their reputations or careers by trading on information that was off-limits.”

According to the SEC’s complaint filed in federal court in Atlanta, the Chattem board member made clear to Melvin during their private conversations and meetings that the topic of discussion was confidential. The board member shared the likely increase in stock price ($20 to $25 per share) from the pending transaction as well as its potential timing. Nevertheless, Melvin illegally tipped three friends and a partner at his accounting firm Melvin, Rooks, and Howell PC.

The SEC alleges that each of Melvin's four tippees traded on the nonpublic information:

C. Roan Berry – Melvin’s friend who lives in Jackson, Ga.

Michael S. Cain – Melvin’s friend who lives in Griffin, Ga.

Joel C. Jinks – Melvin’s friend who lives in Griffin, Ga., and was a one-time candidate for local sheriff.

R. Jeffrey Rooks – Melvin’s longtime accounting partner who lives in Griffin, Ga.

The SEC alleges that Berry tipped his friend and neighbor in Jackson,Ashley J. Coots, who in turn tipped his friend and former co-worker Casey D. Jackson, who lives in Atlanta.

The SEC alleges that Cain, who works at a brokerage firm, tipped his friendPeter C. Doffing, who lives Milner, Ga. and purchased out-of-the-money call options based on the nonpublic information.

The four traders settling the SEC’s charges agreed to pay back all of their ill-gotten gains plus interest and penalties:

Berry agreed to pay disgorgement of $55,091.51, prejudgment interest of $4,860.37, and a penalty of $55,091.51.

Coots agreed to pay disgorgement of $17,360.43, prejudgment interest of $1,565.48, and a penalty of $13,231.80.

Jackson agreed to pay disgorgement of $2,369.78, prejudgment interest of $221.93, and a penalty of $1,184.89.

Rooks agreed to pay disgorgement of $18,482.14, prejudgment interest of $1,432.68, and a penalty of $4,620.54. Rooks also will be prohibited from appearing or practicing before the SEC as an accountant under SEC Rule of Practice 102(e). The terms of Rooks’ settlement reflect credit given to him for his cooperation and substantial assistance to the investigation.

Berry, Coots, and Rooks agreed to the entry of a final judgment providing permanent injunctive relief under Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. Jackson agreed to the entry of a final judgment providing permanent injunctive relief under Section 10(b) of the Exchange Act of 1934 and Rule 10b-5. All four neither admit nor deny the allegations, and their settlements are subject to court approval.

The SEC will proceed with its litigation against Melvin, Cain, Doffing, and Jinks.

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William J. Ferry and Dennis J. Clinton Were Convicted in California of High Yield Investment Fraud

Source-  http://www.justice.gov/opa/pr/2012/August/12-crm-1055.html 

WASHINGTON – William J. Ferry, a former stock broker and investment advisor, and Dennis J. Clinton, a former real estate investment manager, were found guilty by a federal jury in Santa Ana, Calif., today for their roles in a conspiracy to defraud a wealthy investor of $1 billion in a high-yield investment fraud scheme, announced Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division. The investor was, in reality, part of an undercover FBI team that posed as wealthy investors and investment managers in an effort to stop fraudsters before they actually harmed victims.

“Mr. Ferry and Mr. Clinton tried to dupe undercover agents into believing their high-yield investment program would earn them extremely high rates of return,” said Assistant Attorney General Breuer. “In fact, Ferry and Clinton were conspiring to steal their money, along with the money of trusting investors. Undercover operations are an integral part of our efforts to stop financial fraudsters before they wipe out the life savings of innocent victims. Based on today’s verdict, the defendants will now pay a heavy price for their conduct.”

Ferry, 70, of Newport Beach , Calif., and Clinton, 64, of San Diego, were each found guilty in U.S. District Court for the Central District of California of one count of conspiracy, two counts of mail fraud and six counts of wire fraud. They face a maximum penalty of 20 years in prison on each fraud count. They will be sentenced on Feb. 1, 2013.

Paul R. Martin, a former senior vice president and managing director of Bankers Trust, was found guilty in U.S. District Court for the Central District of California for his role in the scheme in a separate trial on Aug. 3, 2012. Martin, 63, of New Jersey, was convicted of one count of conspiracy, two counts of mail fraud and six counts of wire fraud. At sentencing, scheduled for Feb. 1, 2013, Martin faces a maximum penalty of 20 years in prison on each fraud count.

On Aug. 21, 2008, Ferry, Clinton and Martin were indicted along with Oregon resident John Brent Leiske, Canadian citizen and resident Alex Chelak, Iowa resident Richard Arthur Pundt, California resident Brad Keith Lee and Florida resident Ronald J. Nolte.

Evidence at trial established that, from February to December 2006, Ferry, Clinton, Martin and others conspired to promote a high-yield investment fraud scheme promising an extremely high return at little or no risk to principal. The defendants claimed that their high-yield investment program (HYIP) was a “Fed trade program” regulated by the “Fed” (Federal Reserve Bank), that they had to follow strict Fed guidelines, and that a Fed trade administrator administered their program, with compliance duties handled by a Fed compliance officer.

Investors also were told that once they had passed compliance, they would become registered in Washington, D.C., with the Fed. The defendants falsely represented to FBI undercover agents that they would arrange for them to meet a Federal Reserve official and/or the chairman of the board of a major U.S. bank to confirm the existence of the defendants’ HYIP. The defendants falsely claimed that these Fed investment programs existed primarily to generate funds for project funding and humanitarian purposes, such as Hurricane Katrina relief. They further falsely claimed that the promised profits from investing in a Fed program had to be divided, in equal amounts, with one portion going for some humanitarian purpose, another portion for some kind of project financing, and the remainder to the investor. The defendants represented to the undercover agents that the agents’ offshore bank account would be managed by a Swiss banker who was already managing billions of dollars for the defendants. In the scheme: Ferry acted as an underwriter and member of the compliance team; Martin acted as a banking expert; Clinton acted as a troubleshooter during the compliance phase and transfer of funds to the Swiss banker; Lee acted as the contact with the Swiss banker; and Leiske acted as the trader. Chelak is charged with having acted as a compliance officer.

On April 13, 2009, Lee pleaded guilty to wire fraud and conspiracy to commit mail and wire fraud. On Jan. 11, 2010, he was sentenced to 24 months in prison.

Leiske’s case was transferred to the District of Oregon, where he pleaded guilty to all counts on Jan. 24, 2012. He is scheduled to be sentenced on Sept. 19, 2012.

Nolte was acquitted today of all charges by a jury in the Central District of California. In August 2010, charges against Pundt were dismissed by the government.

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SEC Charges Edward Bronson and E-Lionheart Associates LLC in Penny Stock Scheme

Source-  http://www.sec.gov/news/press/2012/2012-165.htm 

Washington, D.C., Aug. 22, 2012 – The Securities and Exchange Commission today charged a New York-based firm and its owner with conducting a penny stock scheme in which they bought billions of stock shares from small companies and illegally resold those shares in the public market.

The SEC alleges that Edward Bronson and E-Lionheart Associates LLC reaped more than $10 million in unlawful profits from selling shares they bought at deep discounts from approximately 100 penny stock companies. On average, Bronson and E-Lionheart were able to generate sales proceeds that were approximately double the price at which they had acquired the shares. No registration statement was filed or in effect for any of the securities that Bronson and E-Lionheart resold to the investing public, and no valid exemption from the registration requirements of the federal securities laws was available.

Additional Materials
SEC Complaint

“By violating the registration provisions of the securities laws and dumping billions of unregistered shares into the over-the-counter market, Bronson deprived investors of important information about the companies in which they were investing,” said Andrew M. Calamari, Acting Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Bronson lives in Ossining, N.Y. E-Lionheart, which also does business under the name Fairhills Capital, is located in White Plains. Acting at Bronson’s direction, E-Lionheart personnel systematically “cold called” penny stock companies quoted on the OTC Link to ask if they were interested in obtaining capital. If the company was interested, E-Lionheart personnel would offer to buy stock in the company at a rate that was deeply discounted from the trading price of the company’s stock at that time. Typically, Bronson and E-Lionheart immediately began reselling the shares to the investing public through a broker within days of receiving the shares from the company.

Bronson and E-Lionheart purported to rely on an exemption from registration under Rule 504(b)(1)(iii) of Regulation D, which exempts transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to these transactions. Bronson and E-Lionheart claimed to rely on a Delaware state law registration exemption, but the transactions in fact had little or no connection to the state of Delaware. The particular Delaware state law exemption claimed by Bronson and E-Lionheart is not an exemption that meets the specific requirements of Rule 504(b)(1)(iii). As a result, investors purchasing these shares did not have access to all of the information that a registration statement would have provided, including in many instances important information concerning the issuance of millions of new shares by the company to Bronson and E-Lionheart.

The SEC’s complaint charges E-Lionheart and Bronson with violations of the registration provisions of the federal securities laws, and seeks disgorgement of more than $10 million in ill-gotten gains, penalties. The SEC also seeks penny stock bars against E-Lionheart and Bronson. The complaint also names another entity owned and controlled by Bronson – Fairhills Capital Inc. – as a relief defendant for the purpose of recovering the illegal proceeds it received.

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Former President of Children’s Social Networking Company and Stockbroker Pino Baldassarre,Found Guilty of Securities Fraud and Commercial Bribery Charges

Source-  http://www.fbi.gov/newyork/press-releases/2012/former-president-of-children2019s-social-networking-company-and-stockbroker-found-guilty-of-securities-fraud-and-commercial-bribery-charges 

A federal jury in Brooklyn today returned guilty verdicts against Pino Baldassarre, the former president of Dolphin Digital Media, Inc. (“Dolphin”) and Robert Mouallem, a stockbroker, on conspiracy, securities fraud, and commercial bribery charges. These charges arose from the defendants’ scheme to sell their shares of Dolphin at inflated prices by bribing stockbrokers. When sentenced by United States District Judge Jack B. Weinstein, the defendants face a maximum sentence of 25 years’ imprisonment on the most serious charge.

The verdicts were announced by Loretta E. Lynch, United States Attorney for the Eastern District of New York, and Janice K. Fedarcyck, Assistant Director in Charge, Federal Bureau of Investigation, New York Field Office.

According to the evidence at trial, Dolphin created secure social networking websites for children. Its stock was publicly traded on the Over The Counter Bulletin Board. In addition to serving as Dolphin’s President, Baldassarre was a substantial shareholder of the company. Baldassarre was fired from Dolphin in March 2009. Shortly thereafter, Baldassarre and another Dolphin shareholder met with an individual, identified as “John Doe,” who claimed to have access to a network of stockbrokers who managed client brokerage accounts and to have authority to trade in those accounts on behalf of their clients. John Doe agreed to have these stockbrokers purchase, through their clients’ accounts, Dolphin shares owned by Baldassarre and the other shareholder in exchange for a kickback of 30 percent of the sale proceeds. Baldassarre and the other shareholder arranged for Mouallem to act as their stockbroker to sell their Dolphin shares. Mouallem, who knew of the kickback arrangement, placed orders to sell the stock in such a way as to ensure that John Doe’s network of stockbrokers bought the conspirators’ Dolphin stock instead of other Dolphin stock that may have been available for sale. Unbeknownst to Baldassarre, Mouallem, or the other Dolphin shareholder, John Doe was a special agent of the Federal Bureau of Investigation acting in an undercover capacity. In March and April 2010, Baldassarre, Mouallem, and the other shareholder orchestrated five test sales of their Dolphin stock, supposedly to John Doe’s network of stockbrokers. In each case, Baldassarre paid the 30 percent kickback to John Doe.

“Rather than let the market set the true value of Dolphin stock, these defendants engaged in a bribery scheme to manipulate the market for Dolphin stock for corrupt personal gain,” stated United States Attorney Lynch. “It is essential for the securities markets to be free of such corruption in order to preserve investor confidence. Those who would engage in such manipulation schemes should consider whether their ‘partners’ in crime are actually working for the FBI.”

FBI Assistant Director in Charge Fedarcyk stated, “Schemes like this one not only stack the deck unfairly for the schemers and undermine investor faith in the integrity of the marketplace. If not for the presence of the FBI undercover agent, this scheme would have resulted in real shareholders unknowingly paying inflated prices for stock.”

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Andrew Brosnac was Charged in $16 Million Nationwide Sale/Leaseback Investment Fraud Scheme

Source- http://www.fbi.gov/philadelphia/press-releases/2012/real-estate-broker-charged-in-16-million-nationwide-sale-leaseback-investment-fraud-scheme

The United States Attorney’s Office for the Middle District of Pennsylvania announced the indictment today by a federal grand jury in Williamsport of Andrew Brosnac, age 47, Keller, Texas. Brosnac, a real estate broker and investment consultant, is charged with allegedly defrauding investors and lenders out of approximately $16 million in connection with the sale and leaseback of businesses in Pennsylvania, New York, North Carolina, and Wyoming.

According to United States Attorney Peter J. Smith, between 2006 and 2008 Brosnac, and co-conspirator Samuel Pearson, age 47, Hanover, York County, Pennsylvania, allegedly used a group of companies to buy Jiffy Lube stores, automotive service businesses, convenience store/gas stations and other commercial properties and then sell them to investors in Pennsylvania and California.

Brosnac allegedly arranged funding from banks and credit unions for investors to purchase the properties and then used other companies controlled by him and Pearson to lease and operate the properties for investors.

Brosnac allegedly provided investors and lenders with false and fraudulent financial information concerning the investment properties, which induced loans and investments totaling approximately $16 million.

Brosnac allegedly diverted funds from the sale of the properties to cover lease payments and expenses and to buy new properties and also allegedly received approximately $1.9 million in commissions and consulting fees from the sales of the properties.

The scheme included the use of companies under the names “Commercial Concepts,” “Realty Concepts,” “BF Oil,” “Peanut Oil,” “Viper Gas,” “Sierra Oil Management,” and “NYACOR,” allegedly controlled by Brosnac and/or Pearson and based in Hanover or Dalton, Pennsylvania; Fresno, California; and/or Nevada; and accounts at banks in Scranton and Hanover.

Peanut Oil and Sierra Oil Management filed for bankruptcy in the U.S. District Court in Scranton in 2008 and 2010 respectively.

The Federal Bureau of Investigation conducted an investigation. Pearson, operator of Peanut Oil, was charged separately with conspiracy to commit bank and wire fraud in a criminal information filed in March 2011 and pled guilty in April 2011 pursuant to a plea agreement. He is awaiting sentencing before Senior U.S. District Court Judge William C. Caldwell.

According to the indictment, Brosnac and Pearson allegedly sold the investment properties to BUR-CAM, a partnership based in Altoona, Pennsylvania, and to individual investors in Placerville, Modesto, and Fresno, California.

According to the indictment, the commercial properties involved in the fraud were located in Sayre, Erie, and Bethel, Pennsylvania; Syracuse and Canandaigua, New York; Mars Hill, North Carolina; and Sheridan, Wyoming. Financing and commercial loans were allegedly obtained from Indiana First Savings Bank, Bank of the West, California Credit Union, Travis Credit Union, and Great Lakes Credit Union.

Brosnac is charged with 15 counts, including conspiracy, bank fraud, and wire fraud. Under U.S. Sentencing Commission Guidelines, he faces an estimated advisory imprisonment range of 11 to 14 years, plus fines and an order to make restitution.

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John Raffle and David Applegate Were Arrested in $400 Million Securities Fraud Scheme

Source- http://www.justice.gov/opa/pr/2012/August/12-crm-1038.html

WASHINGTON – Two former senior executives of Austin, Texas-based ArthroCare Corp., a publicly traded medical device company, were arrested this morning in Morristown, N.J. and Orange County, Calif., for their alleged roles in a scheme to defraud the company’s shareholders and members of the investing public by falsely inflating ArthroCare’s earnings by tens of millions of dollars, announced Assistant Attorney General Lanny A. Breuer of the Department of Justice’s Criminal Division and U.S. Attorney Robert Pitman for the Western District of Texas. The department said that the loss to the company’s shareholders and the investing public was more than $400 million.

A 16-count indictment was unsealed today in the U.S. District Court for the Western District of Texas against John Raffle, the former senior vice president of strategic business units of ArthroCare and David Applegate, the former senior vice president in charge of ArthroCare’s spine division. Raffle was arrested in Morristown and Applegate was arrested in Orange County.

The indictment, which was originally returned on Aug. 21, 2012, charges Raffle and Applegate with one count of conspiracy to commit wire, mail and securities fraud; four counts of wire fraud; eight counts of mail fraud; and three counts of securities fraud. The indictment also seeks forfeiture of assets held by Raffle and Applegate.

“The indictment unsealed today alleges that these senior corporate executives participated in a scheme to artificially inflate their company’s stock prices, cheating shareholders and the investing public out of hundreds of millions of dollars,” said Assistant Attorney General Breuer. “The Criminal Division will continue to vigorously pursue those who defraud American investors.”

According to the indictment, between in or about December 2005 through in or about December 2008, Raffle, Applegate and other senior executives and employees of ArthroCare allegedly inflated falsely ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. According to court documents, Raffle and Applegate determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders. Raffle, Applegate and others then allegedly caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter. ArthroCare would then report these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

According to the indictment, ArthroCare’s distributors agreed to accept shipment of millions of dollars of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other special conditions, allowing ArthroCare to inflate falsely its revenue by tens of millions of dollars. ArthroCare did not disclose the conditions of the purported sales to investors.

The indictment further alleges that Raffle, Applegate and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue. According to the indictment, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs at Raffle and Applegate’s direction.

According to court documents, between the fourth quarter of 2005 and the fourth quarter of 2007, ArthroCare reported more than $37 million in revenue in its publicly filed financial statements based on purported sales to DiscoCare. However, during the same time period, DiscoCare’s actual net cash payments to ArthroCare for the products were less than $50,000. Court documents further allege that, to conceal the fact that DiscoCare owed ArthroCare a substantial amount of money on unused inventory, Raffle and Applegate caused ArthroCare to acquire DiscoCare on Dec. 31, 2007.

According to the indictment, in the third quarter of 2007, Raffle and Applegate began a new program at ArthroCare, called “Son of DRS.” Under the Son of DRS program, ArthroCare allegedly shipped medical devices from its sports division to its customers free of charge and recorded the revenue once DiscoCare had been invoiced for the product. According to court documents, DiscoCare never was required to pay ArthroCare for any of the product DiscoCare purportedly purchased under the Son of DRS program because ArthroCare acquired DiscoCare before any payments came due. The indictment alleges that, between August and November 2007, Raffle and Applegate caused ArthroCare to falsely report more than $7 million in revenue in its publicly filed financial statements based on purported sales to DiscoCare under this program.

According to court documents, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Upon conviction, Raffle and Applegate face a maximum prison sentence of five years for the conspiracy charge and 20 years for each count of mail and wire fraud. Raffle and Applegate also face a maximum sentence of 25 years in prison for each securities fraud count.

An indictment is merely a charge, and the defendants are presumed innocent until proven guilty.

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SEC Brings Charges in Puerto Rico-Based Ponzi Scheme Targeting Evangelical Christians and Factory Workers

Source-  http://www.sec.gov/news/press/2012/2012-161.htm

Washington, D.C., Aug. 21, 2012 — The Securities and Exchange Commission today charged a Puerto Rico resident and his company with conducting a Ponzi scheme that targeted evangelical Christians and factory workers in Puerto Rico.

The SEC alleges that Ricardo Bonilla Rojas and his firm Shadai Yire raised at least $7 million from as many as 200 investors living primarily in Puerto Rico but also on the U.S. mainland in such states as Florida, New York, and North Carolina. Rojas actively solicited investors through personal discussions with individuals both over the phone and in person, and he also marketed the investment opportunity in presentations to evangelical Christian groups and factory workers who were often inexperienced investors. Rojas falsely assured investors that their principal contributions were “100% guaranteed” and promised returns up to 50 percent, telling them he’d be investing their money in commodities. But Rojas never actually invested any money in commodities and instead used new contributions to repay earlier investors in classic Ponzi scheme fashion. He stole $700,000 for himself.

In a parallel action, the U.S. Attorney’s Office for the District of Puerto Rico today announced criminal charges against Rojas.

“Rojas targeted novice investors who were often evangelical Christians, and he touted a long history of successful trading in commodities,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “In reality, he was fleecing the flock.”

According to the SEC’s complaint filed in U.S. District Court for the District of Puerto Rico, Rojas and Shadai Yire conducted the scheme from at least August 2005 to February 2009. Rojas, who resides in Arecibo, Puerto Rico, and his company Shadai Yire have never been registered with the SEC to offer securities.

The SEC alleges that Rojas hired some sales agents to help him solicit investors, and paid commissions based on a percentage of the investor funds they raised. Rojas and his sales agents pitched the investment opportunity to individuals as a risk-free way to earn high returns in a short period of time. Rojas also created phony account statements that were sent to investors to hide his misuse of investor money and lead them to believe their investments were growing.

The SEC’s complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Rojas and Shadai Yire to enjoin them from future violations of the federal securities laws.

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SEC Issues First Whistleblower Program Award

Source-  http://www.sec.gov/news/press/2012/2012-162.htm 

Washington, D.C., Aug. 21, 2012 — A whistleblower who helped the Securities and Exchange Commission stop a multi-million dollar fraud will receive nearly $50,000 — the first payout from a new SEC program to reward people who provide evidence of securities fraud.

The award represents 30 percent of the amount collected in an SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed by the whistleblower law.

“The whistleblower program is already becoming a success,” said SEC Chairman Mary L. Schapiro, who advocated for the program. “We’re seeing high-quality tips that are saving our investigators substantial time and resources.”

The award recipient, who does not wish to be identified, provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims. The whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. The court is considering whether to issue a final judgment against other defendants in the matter. Any increase in the sanctions ordered and collected will increase payments to the whistleblower.

“This whistleblower provided the exact kind of information and cooperation we were hoping the whistleblower program would attract,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had this whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized.”

The SEC did not approve a claim from a second individual seeking an award in this matter because the information provided did not lead to or significantly contribute to the SEC’s enforcement action, as required for an award.

The 2010 Dodd-Frank Act authorized the whistleblower program to reward individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered. Awards can range from 10 percent to 30 percent of the money collected. The Dodd-Frank Act included enhanced anti-retaliation employment protections for whistleblowers and provisions to protect their identity. The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.

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SEC Shuts Down $600 Million Online Pyramid and Ponzi Scheme

Source- http://www.sec.gov/news/press/2012/2012-160.htm

Washington, D.C., Aug. 17, 2012 – The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze to halt a $600 million Ponzi scheme on the verge of collapse. The emergency action assures that victims can recoup more of their money and potentially avoid devastating losses.

The SEC alleges that online marketer Paul Burks of Lexington, N.C. and his company Rex Venture Group have raised money from more than one million Internet customers nationwide and overseas through the website ZeekRewards.com, which they began in January 2011.

According to the SEC’s complaint filed in federal court in Charlotte, N.C., customers were offered several ways to earn money through the ZeekRewards program, two of which involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

The SEC alleges that investors were collectively promised up to 50 percent of the company’s daily net profits through a profit sharing system in which they accumulate rewards points that they can use for cash payouts. However, the website fraudulently conveyed the false impression that the company was extremely profitable when, in fact, the payouts to investors bore no relation to the company’s net profits. Most of ZeekRewards’ total revenues and the “net profits” paid to investors have been comprised of funds received from new investors in classic Ponzi scheme fashion.

“The obligations to investors drastically exceed the company’s cash on hand, which is why we need to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors,” said Stephen Cohen, an Associate Director in the SEC’s Division of Enforcement. “ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing. In reality, their cash was just going to the earlier investor.”

The SEC’s complaint alleges that the scheme is teetering on collapse with investor funds at risk of dissipation without its emergency enforcement action. Last month, ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million. If customers continue to increasingly elect to receive cash payouts rather than reinvesting their money to reach higher levels of rewards points, ZeekRewards’ cash outflows would eventually exceed its total revenue.

Burks has agreed to settle the SEC’s charges against him without admitting or denying the allegations, and agreed to cooperate with a court-appointed receiver.

According to the SEC’s complaint, ZeekRewards has paid out nearly $375 million to investors to date and holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds will be frozen under the emergency asset freeze granted by the court at the SEC’s request. Meanwhile, Burks has personally siphoned several million dollars of investors’ funds while operating Rex Venture and ZeekRewards, and he distributed at least $1 million to family members. Burks has agreed to relinquish his interest in the company and its assets plus pay a $4 million penalty. Additionally, the court has appointed a receiver to collect, marshal, manage and distribute remaining assets for return to harmed investors.

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New Charges in Insider Trading Case Include Former CEO and Professional Baseball Player

Source- http://www.sec.gov/news/press/2012/2012-159.htm

Washington, D.C., Aug. 17, 2012 – The Securities and Exchange Commission today announced a second round of charges in an insider trading case involving former professional baseball players and the former top executive at a California-based medical eye products company that was the subject of the illegal trading.

The SEC brought initial charges in the case last year, accusing former professional baseball player Doug DeCinces and three others of insider trading on confidential information ahead of an acquisition of Advanced Medical Optics Inc. DeCinces and his three tippees made more than $1.7 million in illegal profits, and they agreed to pay more than $3.3 million to settle the SEC’s charges.

Now the SEC is charging the source of those illegal tips about the impending transaction – DeCinces’s close friend and neighbor James V. Mazzo, who was the Chairman and CEO of Advanced Medical Optics. The SEC also is charging two others who traded on inside information that DeCinces tipped to them – DeCinces’ former Baltimore Orioles teammate Eddie Murray and another friend David L. Parker, who is a businessman living in Utah.

The SEC alleges that Murray made approximately $235,314 in illegal profits after Illinois-based Abbott Laboratories Inc. publicly announced its plan to purchase Advanced Medical Optics through a tender offer. Murray agreed to settle the SEC’s charges by paying $358,151. The SEC’s case continues against Parker and Mazzo, the latter of whom was directly involved in the tender offer and tipped the confidential information to DeCinces along the way.

“It is truly disappointing when role models, particularly those who have achieved so much in their professional careers, give in to the temptation of easy money,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit and Director of the Philadelphia Regional Office. “Mazzo had repeated personal contacts and communications with DeCinces, who promptly traded and tipped Murray, Parker and others that a deal involving Mazzo’s company was imminent. CEOs and other employees of public companies must resist the lure of sharing confidential information with their friends and always put the interests of their shareholders and company first.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, the total unlawful profits resulting from Mazzo’s illegal tipping was more than $2.4 million. Once Mazzo began tipping DeCinces with confidential information about the upcoming transaction, DeCinces began to purchase Advanced Medical Optics stock in several brokerage accounts. DeCinces bought more and more shares as the deal progressed and as he continued communicating with Mazzo. DeCinces tipped at least five others who traded on the inside information, including Murray, Parker, and the three traders who settled their charges along with DeCinces last year – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.

According to the SEC’s complaint, Mazzo and DeCinces had been close friends for quite some time and lived in the same exclusive gated community in Laguna Beach, Calif. They socialized together with their wives, belonging to the same Orange County country club and vacationing together overseas. They also communicated frequently by e-mail and through phone calls. Mazzo invested in the restaurant business of DeCinces’ son, and DeCinces’ daughter provided interior decorating services for Mazzo and his wife. Mazzo was directly involved in the impending Advanced Medical Optics/Abbott transaction from its inception in October 2008. With knowledge of confidential information about the deal and his duty not to disclose it, Mazzo illegally tipped DeCinces, who made significant purchases of Advanced Medical Optics shares on Nov. 5, 2008, and continuing up until and near the time of the public announcement of the acquisition.

The SEC alleges that Parker and DeCinces had been friends and business associates at the time of the illegal trading. Between Jan. 6 and Jan. 8, 2009, Parker bought 25,000 shares of Advanced Medical Optics stock on the basis of confidential information received from DeCinces about the impending transaction. Parker made approximately $347,920 when he sold the stock on the same day as the public announcement. Meanwhile on January 7, Murray used all of the available cash in his self-directed brokerage account to purchase 17,000 shares of Advanced Medical Optics stock on the basis of the confidential information that DeCinces communicated to him. Murray sold all of his shares following the public announcement.

Murray agreed to settle the charges against him without admitting or denying the SEC’s allegations by consenting to the entry of a final judgment permanently enjoining him from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Murray agreed to pay disgorgement of $235,314, prejudgment interest of $5,180, and a penalty of $117,657 for a total of $358,151. The settlement is subject to final approval by the court.

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SEC Charges Oracle Corporation With FCPA Violations Related to Secret Side Funds in India

Source- http://www.sec.gov/news/press/2012/2012-158.htm

Washington, D.C., Aug. 16, 2012 — The Securities and Exchange Commission today charged Oracle Corporation with violating the Foreign Corrupt Practices Act (FCPA) by failing to prevent a subsidiary from secretly setting aside money off the company's books that was eventually used to make unauthorized payments to phony vendors in India.

The SEC alleges that certain employees of the India subsidiary of the Redwood Shores, Calif.-based enterprise systems firm structured transactions with India's government on more than a dozen occasions in a way that enabled Oracle India's distributors to hold approximately $2.2 million of the proceeds in unauthorized side funds. Those Oracle India employees then directed the distributors to make payments out of these side funds to purported local vendors, several of which were merely storefronts that did not provide any services to Oracle. Oracle's subsidiary documented certain payments with fake invoices.

Oracle agreed to pay a $2 million penalty to settle the SEC's charges.

"Through its subsidiary's use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office. "It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds."

According to the SEC's complaint filed in U.S. District Court for the Northern District of California, the misconduct at Oracle's India subsidiary - Oracle India Private Limited - occurred from 2005 to 2007. Oracle India sold software licenses and services to India's government through local distributors, and then had the distributors "park" excess funds from the sales outside Oracle India's books and records.

For example, according to the SEC's complaint, Oracle India secured a $3.9 million deal with India's Ministry of Information Technology and Communications in May 2006. As instructed by Oracle India's then-sales director, only $2.1 million was sent to Oracle to record as revenue on the transaction, and the distributor kept $151,000 for services rendered. Certain other Oracle India employees further instructed the distributor to park the remaining $1.7 million for "marketing development purposes." Two months later, one of those same Oracle India employees created and provided to the distributor eight invoices for payments to purported third-party vendors ranging from $110,000 to $396,000. In fact, none of these storefront-only third parties provided any services or were included on Oracle's approved vendor list. The third-party payments created the risk that the funds could be used for illicit purposes such as bribery or embezzlement.

The SEC's complaint alleges that Oracle violated the FCPA's books and records provisions and internal controls provisions by failing to accurately record the side funds that Oracle India maintained with its distributors. Oracle failed to devise and maintain a system of effective internal controls that would have prevented the improper use of company funds.

Without admitting or denying the SEC's allegations, Oracle consented to the entry of a final judgment ordering the company to pay the $2 million penalty and permanently enjoining it from future violations of these provisions. The settlement takes into account Oracle's voluntary disclosure of the conduct in India and its cooperation with the SEC's investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.

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SEC Charges Jim Donnan a College Football Hall of Fame Coach in $80 Million Ponzi Scheme

Source- http://www.sec.gov/news/press/2012/2012-157.htm

Washington, D.C., Aug. 16, 2012 – The Securities and Exchange Commission today announced fraud charges against a former college football coach who teamed with an Ohio man to conduct an $80 million Ponzi scheme that included other college coaches and former players among its victims.

The SEC alleges that Jim Donnan, a College Football Hall of Fame inductee who guided teams at Marshall University and the University of Georgia and later became a television commentator, conducted the fraud with his business partner Gregory Crabtree through a West Virginia-based company called GLC Limited. Donnan and Crabtree told investors that GLC was in the wholesale liquidation business and earning substantial profits by buying leftover merchandise from major retailers and reselling those discontinued, damaged, or returned products to discount retailers. They promised investors exorbitant rates of return ranging from 50 to 380 percent. However, only about $12 million of the $80 million raised from nearly 100 investors was actually used to purchase leftover merchandise, and the remaining funds were used to pay fake returns to earlier investors or stolen for other uses by Donnan and Crabtree.

“Donnan and Crabtree convinced investors to pour millions of dollars into a purportedly unique and profitable business with huge potential and little risk,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office. “But they were merely pulling an old page out of the Ponzi scheme playbook, and the clock eventually ran out.”

According to the SEC’s complaint filed in federal court in Atlanta, the scheme began in August 2007 and collapsed in October 2010. Donnan recruited the majority of investors by approaching contacts he made as a sports commentator and as a coach. For instance, he capitalized on his influence over one former player by telling him, “Your Daddy is going to take care of you” … “if you weren’t my son, I wouldn’t be doing this for you.” The player later invested $800,000.

The SEC’s complaint alleges that Donnan touted GLC’s success and profitability and told investors that the company could enter into even more merchandise deals with more capital. Donnan and Crabtree offered and sold investments that were short-term (2 to 12 months) and purportedly high-yield, with returns paid to investors in monthly or quarterly installments or in a one-time payment. Donnan told investors their money was being used to purchase specific items of merchandise that was often presold, so there was little to no risk to investing in any deal. However, much of the merchandise that GLC actually purchased was merely left unsold and abandoned in warehouses in West Virginia and Ohio.

The SEC alleges that Donnan typically assured investors that he was investing along with them in any merchandise deal that he offered. He touted that he and other prominent college football coaches had successfully and profitably invested in GLC. But by the time the scheme collapsed, Donnan had actually siphoned more than $7 million away from GLC, and Crabtree misappropriated approximately $1.08 million in investor funds.

The SEC’s complaint charges Donnan, who lives in Athens, Ga., and Crabtree, who resides in Proctorville, Ohio, with violations of the antifraud and registration provisions of the federal securities laws. The complaint also names two of Donnan’s children and his son-in-law as relief defendants for the purpose of recovering illicit funds that Donnan steered to them.

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SEC Halts Denver-Based Ponzi Scheme

Source- http://www.sec.gov/news/press/2012/2012-156.htm

Washington, D.C., Aug. 15, 2012 – The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against a Denver-based company and two Colorado residents carrying out a $15.7 million Ponzi scheme harming more than 120 investors nationwide.

The SEC alleges that Michael J. Turnock of Denver and William P. Sullivan II of Highlands Ranch, Colo., sold promissory notes to investors through Bridge Premium Finance LLC, which purports to be in the business of insurance premium financing. They promised investors annual returns of up to 12 percent, and represented that investor funds would be used to make short-term loans to small businesses to enable them to pay their up-front commercial insurance premiums. Turnock and Sullivan assured investors that Bridge Premium’s business was performing well and that investor funds were “100% Protected” through various forms of collateral on the underlying loans.

However, according to the SEC’s complaint filed yesterday in federal court in Denver, Bridge Premium has been paying investor returns with funds from other investors since 2002. Bridge Premium’s business has been unprofitable and its obligations to noteholders have far exceeded its total assets. Because most funds were diverted for Ponzi payments, any collateral available on Bridge Premium’s underlying loan portfolio will only protect a small fraction of its promissory note investors. Furthermore, Bridge Premium’s offering was not registered with the SEC as required under the federal securities laws.

The court granted the SEC’s request for a temporary restraining order to freeze the assets that Bridge Premium, Turnock, and Sullivan derived from the scheme.

“Turnock and Sullivan raised millions from investors by claiming they could pay high interest rates through Bridge Premium's safe and unique business model,” said Julie Lutz, Associate Director of the SEC’s Denver Regional Office. “They hid the fact that Bridge Premium’s purported business lost money every year for more than a decade and had devolved into a Ponzi scheme long ago.”

The SEC alleges that in numerous in-person meetings and telephone conversations throughout the promissory note offering process, Turnock consistently told investors contemplating additional investments that Bridge Premium was performing well. In meetings with investors as recently as May 2012, Turnock said that the company was “doing great” and that it “had more business than cash.” Turnock also claimed that Bridge Premium could pay the promised annual interest rates as high as 12 percent because it received annual interest rates exceeding 30 percent from its insurance premium borrowers. Sullivan similarly told investors that Bridge Premium was “doing well” and that if the company “had more money, it could make more loans.”

According to the SEC’s complaint, in stark contrast to the continually positive portrayal of Bridge Premium’s financial condition, the company was actually not profitable, had negative cash flow from operations, and its liabilities to existing noteholders far exceeded its total assets. Turnock and Sullivan specifically withheld from investors that Bridge Premium has not been profitable in any year since at least 1998, and has lost more than $3 million during the past five years. In May 2012 after more than a decade of Ponzi payments and operational losses, Bridge Premium owed investors more than $6.2 million, yet its insurance premium loan portfolio totaled less than $250,000 and its assets totaled less than $500,000.

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SEC Charges Wells Fargo for Selling Complex Investments Without Disclosing Risks

Source- http://www.sec.gov/news/press/2012/2012-155.htm

Washington, D.C., Aug. 14, 2012 – The Securities and Exchange Commission today charged Wells Fargo’s brokerage firm and a former vice president for selling investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors.

The SEC found that Wells Fargo improperly sold asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities and collateralized debt obligations (CDOs) to municipalities, non-profit institutions, and other customers. Wells Fargo did not obtain sufficient information about these investment vehicles and relied almost exclusively upon their credit ratings. The firm’s representatives failed to understand the true nature, risks, and volatility behind these products before recommending them to investors with generally conservative investment objectives.

Wells Fargo agreed to pay more than $6.5 million to settle the SEC’s charges. The money will be placed into a Fair Fund for the benefit of harmed investors.

“Broker-dealers must do their homework before recommending complex investments to their customers,” said Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “Municipalities and other non-profit institutions were harmed because Wells Fargo abdicated its fundamental responsibility as a broker to have a reasonable basis for its investment recommendations to customers.”

According to the SEC’s order instituting settled administrative proceedings against Minneapolis-based Wells Fargo Brokerage Services (now Wells Fargo Securities), the improper sales occurred from January 2007 to August 2007. Registered representatives in Wells Fargo’s Institutional Brokerage and Sales Division made recommendations to institutional customers to purchase ABCP issued by limited purpose companies called structured investment vehicles (SIVs) and SIV-Lites backed largely by mortgage-backed securities and CDOs. Wells Fargo and its registered representatives did not review the private placement memoranda (PPMs) for the investments and the extensive risk disclosures in those documents. Instead, they relied almost exclusively on the credit ratings of these products despite various warnings against such over-reliance in the PPM and elsewhere. Wells Fargo also failed to establish any procedures to ensure that its personnel adequately reviewed and understood the nature and risks of these commercial paper programs.

The SEC’s order finds that Wells Fargo and its registered representatives failed to have a reasonable basis for their recommendations. They also failed to disclose to their customers the risks associated with the complex SIV-issued ABCP investments, including the nature and volatility of the underlying assets. A number of customers purchased SIV-issued ABCP as a result of Wells Fargo’s recommendations, and many of them ultimately suffered substantial losses after three SIV-issued ABCP programs defaulted in 2007.

The SEC charged former vice president Shawn McMurtry for his improper sale of SIV issued ABCP. McMurtry exercised discretionary authority in violation of Wells Fargo’s internal policy and selected the particular issuer of ABCP for one longstanding municipal customer. McMurtry did not obtain sufficient information about the investment and relied almost entirely upon its credit rating.

Wells Fargo and McMurtry were, at a minimum, negligent in recommending the relevant ABCP programs without obtaining adequate information about them to form a reasonable basis for recommending these products and without disclosing the material risks of these products. As a result, they violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s order finds that Wells Fargo has taken a number of remedial measures since 2007 to ensure that its registered representatives have adequate information about the nature and risk of the securities they recommend to customers, and that relevant information about those securities will be fully disclosed to customers.

Wells Fargo and McMurtry consented to the SEC’s order without admitting or denying the findings. Wells Fargo agreed to pay a $6.5 million penalty, $65,000 in disgorgement, and $16,571.96 in prejudgment interest. McMurtry agreed to be suspended from the securities industry for six months and pay a $25,000 penalty.

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SEC Charges Mutual Fund Adviser With Failing to Turn Over Records to SEC Examiners

Source- http://www.sec.gov/news/press/2012/2012-154.htm

Washington, D.C., Aug. 10, 2012 – The Securities and Exchange Commission today charged a Florida-based investment manager and his firm for failing to provide SEC examiners with records of a mutual fund advisory business that invested in NASCAR-related stocks.

The SEC examiners sought records from David W. Dube and Peak Wealth Opportunities LLC while examining a mutual fund they advised called the Stock Car Stock Index Fund. Despite repeated requests, Dube and Peak Wealth failed to furnish certain records to the SEC.

“After promising multiple times to provide the requested records, Dube failed to live up to his regulatory obligations and turn over the records,” said Bruce Karpati, Chief of the Enforcement Division’s Asset Management Unit. “When financial professionals fail to cooperate with SEC exams, they force the agency to expend greater resources to pursue investigations.”

According to an SEC order initiating administrative proceedings, Peak Wealth was the adviser to the Stock Car Stock Index fund from 2008 to June 2010. SEC examination staff requested records from Peak Wealth and Dube in 2010 while examining Peak Wealth’s advisory business and the operations of the fund.

The SEC further alleges that Dube and Peak Wealth:

Failed to make and keep certain required financial records.

Failed to withdraw Peak Wealth’s registration with the SEC and make other required filings.

Failed to provide the fund’s board of directors with information reasonably necessary to assess Peak Wealth’s advisory fees.

Simultaneously with the SEC’s examination in 2010, the fund’s board requested information from Peak Wealth and Dube as part of the fund’s required annual evaluation of its advisory agreements. The annual evaluations are required under Section 15(c) of the Investment Company Act of 1940, which also requires advisers to provide their boards with information reasonably necessary to conduct those evaluations. Despite requesting additional time to respond to the board, Peak Wealth and Dube failed to provide any of the requested documents. The board subsequently terminated Peak Wealth’s advisory agreement and liquidated the fund by returning the money to investors.

“A fully-informed board is crucial to the advisory fee setting process, yet Dube failed to provide the board with the most basic of information,” said Chad Alan Earnst, an Assistant Regional Director in the Enforcement Division’s Asset Management Unit.

Under the relevant rules, the SEC could seek to permanently bar Dube from association with an SEC registered investment adviser or broker dealer. The SEC alleges that Peak Wealth willfully violated Sections 203A and 204 of the Advisers Act of 1940 and Rules 203A-1(b)(2), 204-1(a)(1), 204-2(a)(1), (2), (4), (5), and (6) thereunder, and Section 15(c) of the Investment Company Act. The SEC charged Dube with willfully aiding and abetting and causing Peak Wealth’s violations.

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