SEC Charges City of Victorville, Underwriter, and Others with Defrauding Municipal Bond Investors

Source- http://www.sec.gov/news/press/2013/2013-75.htm

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

“Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “Public officials have the same obligation as corporate officials to tell the truth to their investors.”

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said, “Investors are entitled to full disclosure of material financial arrangements entered into by related parties. Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable.”

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to “manage” the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

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Level Global Agrees to Pay More Than $21.5 Million to Settle SEC Insider Trading Charges

Source- http://www.sec.gov/news/press/2013/2013-76.htm

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today announced that Greenwich, Conn.-based hedge fund advisory firm Level Global Investors LP has agreed to pay more than $21.5 million to settle charges that its co-founder, who also served as a portfolio manager, and its analyst engaged in repeated insider trading in the securities of Dell Inc. and Nvidia Corp.

In January 2012, the SEC filed insider trading charges against Level Global, the firm's co-founder Anthony Chiasson, a former analyst Spyridon "Sam" Adondakis, and six other defendants, including five investment professionals and the hedge fund advisory firm Diamondback Capital Management.

The SEC's complaint, filed in federal court in Manhattan, alleged that Adondakis was a member of a group of closely associated hedge fund analysts who illegally obtained highly sensitive information regarding the financial performance of Dell and Nvidia before this information was made public. The illegally obtained information involved Dell and Nvidia's revenues and profit margins and sometimes indicated that the tech companies' quarterly results would differ significantly from the consensus expectations of Wall Street analysts.

According to the SEC, during 2008 and 2009, Adondakis passed the information on to Chiasson, who used it to execute trades on behalf of hedge funds managed by Level Global and reap millions of dollars in illegal profits. In 2011, following news reports of the government's investigation, Level Global, which had once managed as much as $4 billion, announced that it would close its business and begin returning money to its investors. It is presently in the process of winding down its business.

"The insider trading at Level Global was hardly an isolated event - it occurred repeatedly, and involved multiple companies and multiple quarterly announcements," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "This settlement serves as another reminder that the SEC will hold hedge fund managers accountable when their employees violate the securities laws."

The settlement with Level Global, which is subject to court approval, requires the firm to disgorge $10,082,725 in fees that it reaped from the alleged insider-trading scheme, to pay prejudgment interest of $1,348,824, and to pay a penalty of $10,082,725. Level Global has also agreed to the entry of an order permanently enjoining the firm from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Section 17(a) of the Securities Act of 1933.

Level Global neither admits nor denies the SEC's allegations. Adondakis previously pleaded guilty to parallel criminal charges and agreed to a settlement with the SEC in which he admitted liability for insider trading. The SEC is continuing to pursue its insider trading claims against the firm's co-founder Chiasson, who was convicted in December 2012 of securities fraud in a parallel criminal proceeding.

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FBI Arrests Shervin Neman for Allegedly Running Ponzi Scheme and Bilking Additional Victim After Being Sued by SEC

Source- http://www.fbi.gov/losangeles/press-releases/2013/fbi-arrests-century-city-man-for-allegedly-running-ponzi-scheme-and-bilking-additional-victim-after-being-sued-by-sec

LOS ANGELES—A Century City man was arrested this morning by FBI special agents after he was charged with running a Ponzi scheme and then bilking another victim out of millions of dollars that he used to pay back earlier victims after the SEC took him to court.

Shervin Neman, whose given name is Shervin Davatgarzadeh, 31, was arrested without incident this morning at his residence. Neman was arrested pursuant to a three-count fraud indictment that alleges he caused victims to suffer losses of more than $3 million.

The indictment alleges that Neman claimed to be a successful investor who made significant profits, but he in fact operated a Ponzi scheme from the summer of 2010 through last June by soliciting funds from investors with false claims that their money would be used to purchase foreclosed real estate and stocks, including pre-initial public offering shares. Instead of using investor funds to make these investments, the indictment alleges that Neman was spending most of the victims’ investment funds on personal expenditures and to repay other victims.

The Securities and Exchange Commission filed a civil complaint against Neman and his company, the Century City-based Neman Financial Inc., on April 11, 2012, in United States District Court in Los Angeles. The lawsuit alleged that Neman was operating a multi-million-dollar Ponzi scheme that was targeting primarily members of the Persian-Jewish community in Los Angeles. Subsequently, a federal judge issued orders prohibiting Neman from committing securities fraud (see, for example: https://www.sec.gov/litigation/litreleases/2012/lr22331.htm).

The month after the SEC filed its lawsuit, Neman solicited $2 million from another victim with false promises that Neman could obtain pre-IPO shares in Facebook, according to the indictment. Neman allegedly used the funds obtained from the new victim to pay, among other things, most of his earlier victims and the law firm representing him in the SEC action. Neman then had victims who had been “paid back” write e-mails saying that Neman did not owe them money, according to the indictment, which goes on to say that Neman used these e-mails as part of his defense in the SEC case. In June 2012, Neman sent to the later victim a $2,235,800 check that purported to be the return on the Facebook investment, but that check bounced, according to the indictment.

Neman was charged in an indictment returned under seal Wednesday by a federal grand. That indictment, which was unsealed this morning after Neman’s arrest, charges him with two counts of wire fraud and one count of mail fraud.

An indictment contains allegations that a defendant has committed a crime. Every defendant is presumed to be innocent until and unless proven guilty in court.

The three fraud charges in the indictment each carry a statutory maximum sentence of 20 years in federal prison.

Neman is expected to be arraigned this afternoon in United States District Court in downtown Los Angeles.

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SEC Charges Capital One with Understating Auto Loan Losses

Source- http://www.sec.gov/news/press/2013/2013-72.htm

Washington, D.C., April 24, 2013 — The Securities and Exchange Commission today charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis.

An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.

Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.

“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” said George Canellos, Co-Director of the Division of Enforcement. “Capital One failed in this responsibility by underreporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis.”

According to the SEC’s order instituting settled administrative proceedings, beginning in October 2006 and continuing through the third quarter of 2007, Capital One Auto Finance (COAF) experienced significantly higher charge-offs and delinquencies for its auto loans than it had originally forecasted. The elevated losses occurred within every type of loan in each of COAF’s lines of business. Its internal loss forecasting tool assessed that its escalating loss variances were attributable to an increase in a forecasting factor it called the “exogenous” – which measured the impact on credit losses from conditions external to the business such as macroeconomic conditions. A change in this exogenous factor generally had a significant impact on COAF’s loan loss expense, and it was closely monitored by the company through its loss forecasting tool. Capital One determined that incorporating the full exogenous levels into its loss forecast would have resulted in a second quarter allowance build of $72 million by year-end. Since no such expense was incorporated for the second quarter, it would have resulted in a third quarter allowance build of $85 million by year-end.

However, according to the SEC’s order, instead of incorporating the results of its loss forecasting tool, Capital One failed to include any of COAF’s exogenous-driven losses in its second quarter provision for loan losses and included only one-third of such losses in the third quarter. The exogenous losses were an integral component of Capital One’s methodology for calculating its provision for loan losses. As a result, Capital One’s second and third quarter loan loss expense for COAF did not appropriately estimate probable incurred losses in accordance with accounting requirements.

The SEC’s order also finds that Schnall and LaGassa caused Capital One’s understatements of its loan loss expense by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. Schnall, who oversaw Capital One’s credit management function, took inadequate steps to communicate COAF’s exogenous treatment to the senior management committee in charge of ensuring that the company’s allowance was compliant with accounting requirements. Despite warnings, he also failed to ensure that the exogenous treatment was properly documented. LaGassa, who managed the COAF loss forecasting process, failed to ensure that the proper exogenous levels were incorporated into the COAF loss forecast. He also failed to ensure that the exogenous treatment was documented consistent with policies and procedures.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” said Gerald W. Hodgkins, Associate Director of the Division of Enforcement. “The SEC will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.

Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.

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SEC today announced fraud charges against Daniel F. Peterson and his company USA Real Estate Fund

Source- http://www.sec.gov/news/press/2013/2013-73.htm

Washington, D.C., April 25, 2013 — The Securities and Exchange Commission today announced fraud charges against a Spokane Valley, Wash., company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.

The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He preyed upon investors’ sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.

“We’ve brought this court action to stop Peterson’s fraud in its tracks before it picks up more steam,” said Michael S. Dicke, Associate Director in the SEC’s San Francisco Regional Office. “The JOBS Act is intended to help small businesses raise capital, not to legalize fraud or give unscrupulous entrepreneurs a right to make false claims to fleece investors.”

According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states. In e-mails and in periodic e-newsletters that he used to solicit USA Real Estate Fund investors, Peterson said that he was preparing to raise billions of dollars in a second offering of additional “preferred” securities, which he claimed would be “secured” and have 10-year returns of up to 1,300 percent. Peterson claimed that two prominent Wall Street financial firms had partnered with him to bring his offering to market, and that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing. Peterson promised the early investors they would profit massively once the purported future offering was underway.

Peterson’s claims were false. He has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering, the SEC alleges.

The SEC alleges that Peterson used investor money to pay for his rent, food, entertainment, vacations, and a rented Mercedes Benz SUV. He also used investor funds on clothing for friends, luggage for his wife, and expenses at a Las Vegas casino.

The SEC’s complaint charges USA Real Estate Fund and Peterson with violating the anti-fraud provisions of the federal securities laws. The SEC is seeking a court order requiring USA Real Estate Fund and Peterson to return their allegedly ill-gotten gains, with interest, and pay financial penalties. It also is seeking a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme and restraining them from further violations of the securities laws.

David Berman and Tracy Davis of the SEC’s San Francisco Regional Office investigated the case. The SEC appreciates the assistance of the Washington State Department of Financial Institutions.

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Investors to Receive Their Entire Investments Back After SEC Halted Scheme Exploiting Immigration Program

Source- http://www.sec.gov/news/press/2013/2013-70.htm

Washington, D.C., April 23, 2013 — The Securities and Exchange Commission today announced that investors in a fraudulent investment scheme that offered foreign investors a path to citizenship will get their money back promptly thanks to the SEC’s recent court action. A federal district court judge has ordered the return of all investors’ principal investment in the fraudulent securities offering.

Just two months ago, the SEC charged Anshoo R. Sethi and two companieshe created in Chicago to sell more than $147 million in securities to purportedly finance the construction of a hotel and conference center near O’Hare Airport. The SEC alleged that Sethi and his companies misled Chinese investors about both the purported investment opportunity and the prospect of gaining legal U.S. residency through the EB-5 Immigrant Investor Pilot Program.

The SEC filed its complaint in federal court in Chicago and obtained an emergency court order to freeze investor assets that were at risk of being misappropriated. Sethi and his companies then terminated the offering and consented to the SEC’s motion to return all of the funds held in escrow to investors.

U.S. District Court Judge Amy St. Eve modified the asset freeze order on April 19 and directed the return of more than $147 million in escrowed funds to investors. The litigation continues as the SEC seeks further monetary relief and permanent injunctions against Sethi and his companies.

“Obtaining the speedy return of investor funds in cases like this is at the core of the SEC’s mission,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “We will continue to work closely with U.S. Citizenship and Immigration Services when questions arise about investments involving the EB-5 Program.”

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Charges Mark D. Begelman with Insider Trading On Nonpublic Information Obtained as Part of Professional Group

Source- http://www.sec.gov/news/press/2013/2013-66.htm

Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today charged a former corporate executive living in South Florida with insider trading based on confidential information that he learned as part of a professional organization.

The SEC alleges that Mark D. Begelman purchased stock in Bluegreen Corporation in advance of a public announcement by BFC Financial Corporation that it was acquiring the company. Begelman was a member of the World Presidents’ Organization (WPO), which is a global professional group of business leaders who are current or former executives at major companies. The WPO has a specific written policy that discussions of a confidential nature are to be kept confidential. Nonetheless, Begelman took advantage of confidential information he learned from another WPO member and illegally traded ahead of the merger announcement for nearly $15,000 in illicit profits.

Begelman has agreed to pay more than $30,000 to settle the SEC’s charges.

“As a longstanding member of a group of executive professionals, Begelman disregarded his obligation of trust and confidence by abusing and illegally profiting from his extraordinary access to material, nonpublic information,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Begelman joined the WPO in 1991 while he was president and chief operating officer at Office Depot. He later served as an officer at BankAtlantic Bancorp and as vice chairman of the board at Canyon Creek Food Company. Begelman was part of a small, tightly-knit group of WPO members called Forum 91. Begelman gleaned the nonpublic information about the merger from a fellow Forum 91 member who was a high-ranking executive at both Bluegreen and BFC.

According to the SEC’s complaint, Begelman and his fellow Forum 91 members gathered for their annual retreat in the Florida Keys from Nov. 1 to Nov. 3, 2011. During the retreat, Begelman learned from the executive that Bluegreen and BFC were in merger negotiations and planned to enter into a business combination. Begelman e-mailed his stockbroker on November 2 instructing him to buy 25,000 shares of Bluegreen. The next day, Begelman and his stockbroker spoke by phone, and minutes later the stockbroker entered an order to purchase 25,000 Bluegreen shares at $2.25 per share. The purchase order was filled by Nov. 9, 2011.

The SEC alleges that Begelman purchased the shares despite the duty of trust and confidence he owed to the WPO member from whom he learned the material, nonpublic information. After BFC issued a press release on November 14 announcing the acquisition, Bluegreen’s share price rose nearly 46 percent and Begelman sold all 25,000 of his Bluegreen shares at higher prices for $14,949.34 in illegal trading profits.

The SEC’s complaint charges Begelman, who lives in Delray Beach, Fla., with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Without admitting or denying the charges, Begelman agreed to disgorge his ill-gotten gains of $14,949.34 and pay prejudgment interest of $377.22 and a penalty of $14,949.34. He also agreed to be prohibited from serving as an officer and director of a public company for a period of at least five years. The settlement is subject to court approval.

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Yusaf Jawed Defrauds Investors of $6.4 Million

Source- http://www.fbi.gov/portland/press-releases/2013/portland-man-defrauds-investors-out-of-6.4-million

PORTLAND, OR—Yusaf Jawed, 44, Portland, Oregon, entered a guilty plea in federal court to five counts of mail fraud and 12 counts of wire fraud in connection with an investment fraud scheme he orchestrated in Oregon, Washington, California, and other states. Sentencing has been scheduled for June 21, 2013 at 10:30 a.m.

The 17-count information alleges that from February 2008 through September 2009, Jawed raised approximately $6.4 million from investors in a hedge fund he controlled called the Alpha Qualified Fund. Contrary to representations by Jawed, very little of the money was actually invested and most of the funds were diverted to unrelated purposes such as payment of finders’ fees and commissions, repayment of loans, payment of office expenses, and payment to prior investors.

Each count of mail and wire fraud carries with it a maximum sentence of 20 years, a fine of $250,000, and five years of supervised release. As part of Jawed’s plea agreement, both parties will recommend a period of 78 months in prison. In addition, Jawed agreed to $6.4 million in forfeiture, to the extent assets exist, and to make restitution to investors as ordered by the court.

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Charged Umesh Tandon Chicago-Based Investment Adviser with Defrauding CalPERS and Other Clients

Source- http://www.sec.gov/news/press/2013/2013-64.htm

Washington, D.C., April 18, 2013 — The Securities and Exchange Commission today charged the CEO of Chicago-based investment advisory firm Simran Capital Management with lying to the California Public Employees' Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.

Institutional investors such as CalPERS often use assets under management (AUM) as a metric to screen prospective investment advisers soliciting their business. An SEC investigation revealed that while pitching Simran's services, Umesh Tandon falsely certified to CalPERS that his firm satisfied its minimum AUM requirements. After fraudulently obtaining the business from CalPERS, Tandon also falsely inflated Simran's AUM in communications with other potential clients with whom he touted his firm's relationship with CalPERS. Tandon also fraudulently reported an inflated AUM in filings with the SEC, and he later attempted to mislead SEC examiners during a routine examination of Simran.

Tandon, who previously lived in Chicago and now resides in Texas, has agreed to settle the SEC's fraud charges.

"Tandon deliberately undermined the CalPERS screening process by grossly misrepresenting his firm's purported assets under management," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "To make matters worse, he then used his association with CalPERS to lure other public institutional investors under false pretenses."

According to the SEC's order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.

According to the SEC's order, Tandon touted Simran's relationship with CalPERS to other prospective clients from 2008 to 2011, and he instructed other Simran employees to do the same. On more than a dozen occasions, Tandon and Simran employees falsely inflated the firm's AUM in communications with employee retirement systems and other prospective clients. Tandon and Simran also overstated the AUM in at least four of the firm's Form ADVs filed with the SEC. In February 2012, Simran withdrew its SEC registration as an investment adviser and has since ceased operations.

According to the SEC's order, Tandon violated Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

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Two Arizona-Based Brokers Charged With Defrauding Investors in Tankless Water Heater Venture

Source- http://www.sec.gov/news/press/2013/2013-63.htm

Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged two former brokers in Arizona with stealing investments in a project to develop tankless water heaters.

The SEC alleges that Jeffrey Stebbins of Mesa, Ariz., and Corbin Jones of Gilbert, Ariz., diverted at least $1.8 million of investor money for their personal use and fraudulently obtained more than $6 million in stock for themselves to the detriment of investors. Typically used in residences, tankless water heaters are generally designed to instantly heat water as it passes through pipes rather than in large containers like traditional water heaters. Stebbins and Jones personally told investors that all of the money they raised would be used to develop the tankless water heater venture. Instead, they diverted nearly 30 percent of the funds they raised to pay unrelated business expenses and support their lavish lifestyles, including the lease of luxury automobiles.

“Stebbins and Jones secretly misappropriated investor funds for their personal use and defrauded investors at every turn,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the District of Arizona, Stebbins and Jones solicited investors for the tankless water heater project during a three-year period by offering securities through a variety of companies. Besides misappropriating $1.8 million for themselves, they fraudulently duped certain shareholders in one of the companies, Noble Systems, to swap their private shares for publicly-traded shares in another company, Noble Innovations. This turned out to be nothing more than a fraudulently orchestrated stock swap enabling Stebbins and Jones to reap more than $6 million worth of Noble Innovations stock at the expense of these shareholders who were left with almost nothing. Stebbins and Jones also deprived early investors in the water heater venture of more than $1 million of Noble Innovations stock that rightfully belonged to them. Throughout much of this time, Stebbins and Jones traded Noble Innovations stock by using 28 accounts in 18 different names with 14 separate brokers to ultimately profit by more than $557,000. Stebbins and Jones never reported their significant holdings in Noble Innovations as they were required to do under the securities laws.

The SEC’s complaint charges Stebbins and Jones with violating the antifraud, broker-dealer registration, and beneficial ownership reporting provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, financial penalties, injunctions, and penny stock bars.

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Richard Bruce Moore SEC Charges Canada-Based Investment Banker with Insider Trading

Source- http://www.sec.gov/news/press/2013/2013-62.htm

Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged an investment banker in Toronto with insider trading by using information that he obtained through his job of pitching investment ideas to the Canada Pension Plan Investment Board (CPPIB).

The SEC alleges that Richard Bruce Moore, who worked at the Canadian Imperial Bank of Commerce (CIBC), was attempting to obtain a role in a pending acquisition when he learned facts that allowed him to conclude that U.K.-based engineering and manufacturing company Tomkins plc was the CPPIB’s target. Moore misappropriated the information by purchasing Tomkins American Depositary Receipts (ADRs), which trade on the New York Stock Exchange, during the weeks leading up to the acquisition. After the acquisition offer was announced, the closing price of Tomkins ADRs rose 27 percent, and Moore made more than $163,000 in illicit profits.

Moore has agreed to settle the SEC’s charges by paying more than $340,000. The Ontario Securities Commission today announced a related action against Moore for insider trading in Tomkins common stock.

“Moore spent approximately one-third of his total net worth on purchases of Tomkins securities based on information he learned in the course of his employment,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “In today’s interconnected markets, the cooperative relationships among securities regulators mean that those who choose to engage in international insider trading should expect to face consequences across the globe.”

According to the SEC’s complaint filed in federal court in Manhattan, the CPPIB was one of Moore’s top clients at CIBC in 2010. His primary contact was a CPPIB managing director who was responsible for taking public companies private. Through Moore’s interactions with the CPPIB, he learned that the Board was working on a large transaction in the United Kingdom. He pieced together nonpublic information to conclude that the Board was going to make an offer to acquire Tomkins.

The SEC alleges that Moore used an account in the Channel Islands to purchase 51,350 Tomkins ADRs on the New York Stock Exchange on June 28, 2010. He also purchased a large number of Tomkins common shares on the London Stock Exchange. The CPPIB and a Canadian private equity firm announced the acquisition offer for Tomkins on July 19, 2010.

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SEC Charges Scott Reiman Denver-Based Businessman with Insider Trading

Source- http://www.sec.gov/news/press/2013/2013-61.htm

Washington, D.C., April 15, 2013 — The Securities and Exchange Commission today charged a prominent Denver-based businessman with insider trading based on confidential information he obtained from the CEO of an oil and gas company that was about to secure a huge investment.

An investigation by the SEC’s Enforcement Division found that Scott Reiman obtained inside information about Delta Petroleum ahead of the company’s announcement that it had secured a $684 million investment from private investment firm Tracinda. After the major investment was publicly announced, Delta Petroleum’s stock price jumped almost 20 percent and Reiman reaped substantial illicit profits. The SEC previously charged Reiman’s source, then-CEO Roger Parker, as well as another trader, Michael Van Gilder, in this insider trading investigation.

To settle the SEC’s charges, Reiman agreed to pay nearly $900,000 and be barred from the securities industry and from serving as an officer or director of a public company for at least five years.

“Reiman took advantage of highly confidential information that he obtained through his friendship with Parker and traded on it for significant and entirely illegal profits,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “These enforcement actions against Reiman, Parker, and Van Gilder show that the SEC will unravel the story behind suspicious trades and root out corporate insiders who give away confidential information as well as those who can’t resist the temptation to trade on it.”

According to the SEC’s order instituting proceedings, Reiman is the founder and president of the Denver-based investment firm Hexagon Inc. He received repeated tips from Parker about Tracinda’s potential investment in Delta Petroleum. On three occasions in late November and early December 2007, Reiman bought Delta Petroleum stock or highly speculative option contracts shortly after speaking to Parker, including once within minutes after getting off the phone with him. When Delta publicly announced the Tracinda investment on Dec. 31, 2007, the value of Reiman’s fraudulently obtained Delta Petroleum securities soared nearly 20 percent.

The SEC’s order charged Reiman with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Reiman neither admitted nor denied the charges. Reiman agreed to pay disgorgement of $398,000 plus prejudgment interest of $93,567 and a penalty of $398,000. The order bars Reiman from acting as an officer or director of any public company for a period of five years, bars him from the securities industry with the right to reapply for reentry after five years, and requires him to cease-and-desist from future violations.

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SEC Charges David Miller Securities Broker for Rogue Trades That Brought Down Firm

Source- http://www.sec.gov/news/press/2013/2013-60.htm

Washington, D.C., April 15, 2013 — The Securities and Exchange Commission today charged a former employee at a Connecticut-based brokerage firm with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC's charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

"Miller's scheme was deliberate, brazen, and ultimately ill-conceived," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit. "This is a wake-up call to the brokerage industry that the unchecked conduct of even a single individual in a position of trust can pose grave risks to a firm and potentially to the markets and investors."

According to the SEC's complaint filed in federal court in Connecticut, Miller entered purchase orders for 1.625 million shares of Apple stock on Oct. 25, 2012, with the company's earnings announcement expected later that day. His plan was to share in the customer's profit from selling the shares if Apple's stock price increased. Alternatively, if Apple's stock price decreased, Miller planned to claim that he inadvertently misinterpreted the size of the customer's order, and Rochdale would then take responsibility for the unauthorized purchase and suffer the losses.

According to the SEC's complaint, Apple's stock price decreased after Apple's earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm's available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.

The SEC's complaint charges Miller with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.

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Jauyo Lee Investment Banker and His Associate Plead Guilty in San Francisco to Insider Trading Scheme

Source- http://www.fbi.gov/sanfrancisco/press-releases/2013/former-investment-banker-and-his-associate-plead-guilty-in-san-francisco-to-insider-trading-scheme

SAN FRANCISCO—A former San Francisco investment banker and his college friend both pleaded guilty today for their roles in an insider trading scheme involving two impending corporate mergers, announced U.S. Attorney Melinda Haag and Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division.

Jauyo Lee, aka “Jason Lee,” 29, of New York, and Victor Chen, 29, of Sunnyvale, California, both pleaded guilty before U.S. District Judge Richard Seeborg in the Northern District of California to one count of conspiracy to commit securities fraud and one count of securities fraud. Lee and Chen were charged in a criminal information on March 21, 2013.

“Securities professionals cannot exploit their positions of trust to enrich themselves and their friends,” said U.S. Attorney Haag. “Those tempted to corrupt our markets in this manner should know the government will get to the bottom of suspicious trading and prosecute securities fraud vigorously.”

“Insider trading undermines ordinary investors’ faith in our financial markets, and the Justice Department has zero tolerance for it,” said Acting Assistant Attorney General Raman. “Today’s guilty pleas show that you cannot trade on inside information, pocket the profit, and expect to escape responsibility. Having now admitted their conduct, Mr. Lee and Mr. Chen must face the consequences.”

According to the plea agreements, Lee, who worked as an investment banker in the San Francisco office of Leerink Swann LLC, disclosed inside information to Chen, a friend from college, about two impending mergers involving Leerink clients. Between August 26, 2009 and September 5, 2009, Lee disclosed inside information to Chen about the merger of Leerink’s client, Syneron Medical Ltd., and Candela Corporation, a medical device company publicly traded on the NASDAQ stock market. Chen used the inside information to buy shares of Candela. After the merger was announced, Candela’s stock price increased more than 40 percent, and Chen sold his shares for a gain of approximately $62,589.

Between June 1 and 13, 2010, Lee also provided Chen with inside information about the impending merger of Somanetics Corporation and a subsidiary of Covidien plc. Leerink was the lead financial advisor to Somanetics, which also was publicly traded on the NASDAQ. Chen used the inside information to buy shares and options of Somanetics. Following the merger announcement, the price of Somanetics stock increased more than 30 percent, and Chen ultimately realized a profit of approximately $547,510.

Lee and Chen are scheduled for sentencing on July 23, 2013, before Judge Seeborg. The maximum penalty for conspiracy to commit securities fraud is five years in prison, and the maximum penalty for securities fraud is 20 years in prison.

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Evan Brent Dooley Sentenced to Five Years in Prison for Causing MF Global to Lose $141 Million on Unauthorized Futures Trades

Source- http://www.fbi.gov/chicago/press-releases/2013/tennessee-man-sentenced-to-five-years-in-prison-for-causing-mf-global-to-lose-141-million-on-unauthorized-futures-trades

CHICAGO—A suburban Memphis man was sentenced today to five years in federal prison for causing $141 million in losses to his clearing firm after executing large, unauthorized overnight trades on wheat futures contracts through the Chicago Board of Trade in February 2008. The defendant, Evan Brent Dooley, an “associated person” in the Memphis office of MF Global Inc., traded on his own account through the CME Globex electronic trading platform, via MF Global’s OrderXpress order entry system, knowing that he placed trading orders exceeding his ability to pay for potential losses resulting from those trades.

Dooley, 45, of Mt. Pleasant, Tennesee, and formerly of Olive Branch, Mississippi, was also ordered to pay $141,024,294 in restitution to the MF Global Inc. bankruptcy estate by U.S. District Judge Robert M. Dow, Jr., who imposed the sentence in federal court in Chicago. Dooley, who pleaded guilty in December 2012 to two counts of violating the Commodity Exchange Act by speculative position limits, was ordered to begin serving his 60-month sentence on June 18.

[Dooley’s] “willful criminal conduct caused a staggering loss to MF Global,” the government argued in a sentencing memo. “The public, and in this case the financial services industry, needs to know that the courts will deter and incapacitate individuals like [the] defendant.”

The sentence was announced by Gary S. Shapiro, United States Attorney for the Northern District of Illinois, and Cory B. Nelson, Special Agent in Charge of the Chicago Office of the Federal Bureau of Investigation.

According to the indictment returned in April 2010, Dooley was allowed to trade on his own account as well as for clients from September 2006 to February 2008, and he transmitted orders from a home computer. The indictment alleged that Dooley induced MF Global to open a trading account and act as his financial guarantor by providing false information about his financial condition on his account application.

As part of his guilty plea, Dooley admitted that during overnight trading starting on February 26, 2008, he executed a series of large buy and sell orders for approximately 31,964 wheat futures contracts, knowing that he did not have the ability to pay for potential losses. (Each wheat futures contract called for the delivery of 5,000 bushels of wheat.) At the start of the session, Dooley had a negative balance of approximately $3,000 in his MF Global account and intended that the risks associated with his trading activity be borne directly and solely by MF Global. During the trading session, Dooley established a substantial “short” position, and by 6 a.m. on February 27, 2008, he was short 16,174 May 2008 wheat futures contracts. During the same session, Dooley also traded contracts for March, July, and December wheat futures, causing his overall position to exceed regulatory limits for both a single month (May 2008) and for all months combined.

On the morning of February 27, 2008, when the price for May 2008 contracts rose rapidly as Dooley attempted to liquidate his short position, Dooley again executed a series of sell orders. By mid-morning, Dooley was short 17,181 contracts for May 2008 wheat futures and the price had gone “limit up” to approximately $13.495 per bushel. After MF Global representatives learned of Dooley’s overnight trading, MF Global deactivated his account and liquidated the remainder of his position. MF Global, as the clearing member on these trades, paid the CBOT’s clearing house the realized loss of $141,021,489, which Dooley was unable to cover, resulting in a loss of approximately $141,024,294 to MF Global, including the initial negative balance in his account.

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Scott London Charged in Los Angeles with Insider Trading

Source- http://www.fbi.gov/losangeles/press-releases/2013/former-senior-audit-partner-at-kpmg-charged-in-los-angeles-with-insider-trading

LOS ANGELES—A former senior partner from the accounting firm KPMG LLP who oversaw KPMG’s audit practice for the Pacific Southwest was charged today for his involvement in an alleged insider trading scheme, announced U.S. Attorney for the Central District of California André Birotte, Jr. and Bill L. Lewis, Assistant Director in Charge of the FBI in Los Angeles.

Scott London, 50, of Agoura Hills, California, is charged in a federal complaint with one count of conspiracy to commit securities fraud through insider trading. The 24-page affidavit filed in support of the federal criminal complaint alleges that London provided confidential information about KPMG clients to Bryan Shaw, a close friend of his, over a period of several years and that Shaw used this information to make highly profitable securities trades that generated more than $1 million dollars in illegal proceeds.

“The public has every right to fully expect a level playing field in our financial markets,” said U.S. Attorney Birotte. “As alleged in the complaint, Mr. London chose to betray the trust placed in him as a financial auditor and to tip the trading scales for the benefit of insiders like himself.”

“Mr. London’s alleged activity paints a disturbing picture in which confidential information was compromised for personal greed at the expense of the investing public,” said Assistant Director in Charge Lewis. “The FBI is committed to investigating allegations of insider trading and holding its beneficiaries accountable.”

In a separate action today, the U.S. Securities and Exchange Commission (SEC) announced the filing of civil charges against London and Shaw.

According to the criminal complaint filed today:

London was a senior partner at KPMG who supervised more than 500 accounting professionals at the firm and personally handled audits for major KPMG clients, including Herbalife Ltd. and Skechers USA Inc. As a result of his position, London had access to confidential information about KPMG’s clients before that information was disclosed to the public.

From late 2010 and continuing until March 2013, London secretly passed highly sensitive and confidential information to Shaw regarding upcoming earnings announcements by certain KPMG clients, including Herbalife, Skechers, and Deckers Outdoor Corporation, before that financial information was disclosed to the public. On some occasions, London called Shaw two to three days before press releases were issued for KPMG clients and read confidential information from the draft releases to Shaw. London also disclosed to Shaw confidential information about impending mergers concerning KPMG clients before that information was made public. At times, London even discussed with Shaw how to structure Shaw’s purchases of the stock in certain companies in order to protect them from being discovered.

In exchange for passing the confidential information about KPMG’s clients, Shaw gave London tens of thousands of dollars in cash, typically arranging with London to meet him on a side street near Shaw’s business in order to give him bags containing $100 bills wrapped in $10,000 bundles. Shaw also gave London a Rolex Daytona Cosmograph watch worth an estimated $12,000, as well as jewelry and concert tickets, in exchange for the confidential information. Shaw profited more than $1 million from illegal securities trades based on the confidential information given to him by London.

As part of the government’s investigation of London’s insider trading scheme, Shaw agreed to cooperate with federal authorities and recorded conversations with London. In recorded conversations, London told Shaw specific details about upcoming earnings announcements for Herbalife and Deckers. In one call, London referenced rumors that had been spread about Herbalife going private and told Shaw that if that took place, “[t]hat is going to be where you make a ton of money.” He suggested to Shaw that if London learned that Herbalife was going to go private, “what we oughta do is, when I know that it’s gonna start happening, what you do is you start just buying in small blocks, right, so it doesn’t draw attention and then, you know, then it doesn’t look unusual at all.”

On two occasions, acting at the direction of the FBI, Shaw met with London and gave him cash as supposed payment for confidential information about KPMG clients. In the first instance, London met with Shaw on a street corner in Encino, California, and accepted a bag with $5,000 in cash as payment for confidential information about Herbalife’s earnings announcement in February 2013. London later met with Shaw in a parking lot in Woodland Hills, California, and accepted another bag with $5,000 in cash, which was supposedly London’s share of the illegal profits from trades based on confidential information about Decker’s February 2013 earnings announcement. In accepting the money, London told Shaw that they would have more opportunities to make money in the future.

London is expected to make his initial court appearance in U.S. District Court this afternoon at the Roybal Federal Courthouse in downtown Los Angeles.

The federal charge of conspiracy to commit securities fraud through insider trading carries a statutory maximum penalty of five years in prison and a fine of $250,000 or twice the gross gain or loss from the offense.

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