Antonio Zappa was Sentenced to 36 Months for Investment Fraud Scheme

Source- http://www.fbi.gov/washingtondc/press-releases/2012/massachusetts-man-sentenced-to-36-months-for-investment-fraud-scheme

ALEXANDRIA, VA—Antonio Zappa, 50, of Lynn, Massachusetts, was sentenced to 36 months in prison, followed by three years of supervised release, for engaging in a fraudulent foreign investment scheme that defrauded at least 20 victims of more than $6.9 million.

Neil H. MacBride, United States Attorney for the Eastern District of Virginia; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Gary Barksdale, Inspector in Charge of the Washington Division of the United States Postal Inspection Service, made the announcement after sentencing by United States District Judge Gerald Bruce Lee.

Zappa pled guilty on July 11, 2012, to one count of conspiracy to commit wire fraud. According to a statement of facts filed with his plea agreement, from September 2005 through April 2008, Zappa conspired with James W. Massaro, 70, of Boxford, Massachusetts, and others to engage in a fraudulent scheme that required investors to pay a fee that would be used to secure large letters of credit through European financial institutions. Investors were told the initial payment was a commitment fee necessary to secure a multi-million-dollar letter of credit and that they would receive a percentage monthly return on the total amount of the letter of credit. Each investor entered into an escrow agreement with Massaro’s business, Tracten Corporation, which stated that the fee would be wired to an escrow attorney, who would, in turn, disburse the fee to Tracten after the escrow attorney received a commitment letter from the foreign bank on behalf of the investor.

Zappa admitted that in 2005, he and Massaro made multiple trips to Rome, Italy, to meet with bank officials to pitch the letter of credit program. Despite the bank’s refusal to participate, Zappa secured an Internet domain name to set up an e-mail account that would appear to come from a bank representative and created fraudulent bank letterhead that also appeared to come from the bank. Zappa, Massaro, and others used the e-mail account and letterhead to forge commitment letters purporting to be from bank officials that would be provided to escrow attorneys. Pursuant to the escrow agreement, the escrow attorneys relied on these fraudulent commitment letters to disburse the fees to Massaro.

According to the plea agreement, Zappa defrauded at least 20 investors who had together paid $6,936,985 in fees as part of the letter of commitment investment program

Massaro pled guilty to the same charge on July 3, 2012, and was sentenced to 87 months in prison on September 21, 2012.

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Manhattan U.S. Attorney Files Additional Charges Against Former Employees of Bernard L. Madoff Investment Securities LLC

Source- http://www.fbi.gov/newyork/press-releases/2012/manhattan-u.s.-attorney-files-additional-charges-against-former-employees-of-bernard-l.-madoff-investment-securities-llc

Preet Bharara, the United States Attorney for the Southern District of New York; Mary Galligan, the Acting Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (FBI); Toni Weirauch, the Acting Special Agent in Charge of the New York Field Office of the Internal Revenue Service, Criminal Investigations (IRS-CI); Robert L. Panella, Special Agent in Charge for the New York Regional Office of the U.S. Department of Labor’s Office of the Inspector General, Office of Labor Racketeering and Fraud Investigations (DOL-OIG); and Jonathan Kay, the Director for the New York Regional Office of the U.S. Department of Labor, Employee Benefits Security Administration (DOL-EBSA), announced today that Daniel Bonventre, Annette Bongiorno, Joann Crupi, a/k/a “Jodi,” Jerome O’Hara, and George Perez, long-time employees of Bernard L. Madoff Investment Securities LLC (BLMIS), were charged in a 33-count superseding indictment. As a result of the government’s continuing investigation into the fraud perpetrated at BLMIS, among other things, the superseding indictment, expands the timeframe during which the defendants allegedly participated in a conspiracy to defraud BLMIS’s investment advisory clients. Whereas the November 2010 indictment alleged that the conspiracy to defraud BLMIS’s clients began in or about 1992, the superseding indictment dates the conspiracy back to at least the early 1970s. In addition, the superseding indictment includes a variety of new charges against the defendants, including bank fraud charges related to both corporate and personal loans, and new tax offenses.

Manhattan U.S. Attorney Preet Bharara said, “As we have said repeatedly since this breathtaking fraud was first discovered four years ago, we will not rest until all the alleged participants and enablers are made to answer for their conduct. With the new charges we announce today against these five previously indicted defendants, the architecture of Madoff’s house of cards and each defendant’s alleged role in it becomes clearer.”

FBI Acting Assistant Director in Charge Mary Galligan said, “The charges in this indictment reinforce what we have known about the massive Madoff investment fraud for years. This largest-ever Ponzi scheme was not the work of one person. Each of the defendants in his or her way allegedly played a key role in designing, building, or maintaining the house of cards. The habitual doctoring of books and records, the fictitious trades, the phantom accounts were the core of the charade. As alleged, they were the work of these defendants.”

IRS-CI Acting Special Agent in Charge Toni Weirauch said, “The complex, fraudulent paper trail uncovered in this investigation was indeed the scheme’s backbone. One of its consequences is that it hindered the IRS from performing its lawful duty, thus harming our nation’s law-abiding taxpayers, along with the defrauded victims. IRS-Criminal Investigation will remain a proud member of this investigative team, as it continues to untangle the scheme and identify the culpabilities of the individuals involved.”

DOL-OIG Special Agent-in-Charge Robert L. Panella said, “Today’s indictments serve as warning to those who would allegedly undermine the financial well-being of workers and the integrity of employee benefit plan assets. The OIG will continue to work tirelessly with the U.S. Attorney and our law enforcement partners to investigate these types of allegations.”

DOL-EBSA New York Regional Director Jonathan Kay said, “Today’s indictments mark an important step in a well-coordinated, wide-ranging multiagency investigation. EBSA is committed to holding these individuals accountable for the alleged wrongs they committed.”

According to the superseding indictment filed today in Manhattan federal court:

Bongiorno, an employee in the Investment Advisory (IA) business for 40 years, managed hundreds of IA accounts purportedly having a cumulative balance of approximately $8.5 billion dollars as of November 30, 2008. Bongiorno also supervised employees who worked for the IA business.

Crupi, an employee in the IA business for 25 years, managed several BLMIS IA accounts purportedly having a cumulative balance of approximately $900 million as of November 30, 2008. She also tracked the daily activity of the bank account into which billions of dollars of IA client money was deposited and from which IA client redemptions were paid.

During the course of managing IA accounts, Bongiorno and Crupi “executed” trades in the IA clients’ accounts only on paper, based on historically reported prices of securities that they researched in the Wall Street Journal and Bloomberg. Those trades achieved annual rates of return that had been pre-determined by Madoff. Bongiorno and Crupi also backdated the purchase dates of purported trades so that they could control the amount of gains reflected in the IA accounts. Further, Bongiorno processed exceptional gains in the IA accounts that purportedly occurred months before the IA accounts had been established. Bongiorno also asked certain IA clients to return previously issued BLMIS account statements so that she could alter them and often include additional backdated trades.

Crupi handled the receipt of funds sent to BLMIS by its clients for investment; transferred clients’ funds between and among various BLMIS bank accounts; handled client requests for redemptions sent to BLMIS by clients; monitored, on a daily basis, funds transferred into and out of the BLMIS bank account that was principally used to perpetrate the fraud; and prepared and assisted in the preparation of fabricated documents designed to deceive regulators and outside auditors. Further, Crupi provided banks with false information in connection with mortgage loans for other BLMIS employees.

Bonventre was employed at BLMIS for 40 years and served as its director of operations. Bonventre was responsible for maintaining and supervising the production of the principal internal accounting documents for BLMIS, including its general ledger (the G/L), financial statements, and stock record. Bonventre directed that false entries be made in the G/L that concealed the scope of the IA operations and understated BLMIS’s liabilities by billions of dollars. For example, from 1997 to 2008, more than $750 million of IA investor funds were used to support BLMIS’s Market Making and Proprietary Trading operations, but were not accounted for on BLMIS’s books and records, including the G/L, so as to conceal the true source of the funds. Moreover, as Bonventre knew, the G/L did not accurately reflect the assets contained in the bank and brokerage accounts into which IA investor funds were deposited and likewise did not reflect the liability of BLMIS to its IA clients that arose from the custody of IA client funds in those accounts. The assets and associated liabilities of BLMIS’s IA operations, which were omitted from the G/L, ranged from millions to billions of dollars.

BLMIS was required to file Financial and Operational Combined Uniform Single Reports (FOCUS Reports) with the SEC. Those FOCUS Reports require the production of basic information that amounts to a condensed version of a broker-dealer’s general ledger. Because the G/L was inaccurate, as Bonventre well knew, the FOCUS Reports were likewise false because they failed to accurately reflect BLMIS’s assets and liabilities. For example, one such report, for the month of April 2006, in the midst of a liquidity crisis, failed to reflect at least $299 million in BLMIS liabilities related to $154 million of an IA client’s bonds and the $145 million that BLMIS had borrowed using those bonds as collateral. Bonventre also provided false FOCUS Reports and other financial documents to banks in connection with BLMIS’s bank loans.

In addition, between 2004 and 2007, in connection with audits of Bernard L. Madoff’s U.S. Individual Income Tax Returns-Forms 1040s, Bonventre created false, backdated BLMIS records to show the tax auditors. Because Madoff had under-reported his income by tens of millions of dollars each year, Bonventre created false documents that appeared consistent with Madoff’s tax returns for the purposes of maintaining the falsity of Madoff’s tax returns and deceiving the auditors.

Further, between 2004 and 2008, BLMIS was subject to at least five reviews by the United States Securities and Exchange Commission (SEC) and a European accounting firm which was conducting a review of BLMIS’s operations on behalf of IA clients. As part of a concerted effort overseen by Madoff to deceive both the SEC and the European accounting firm, Bonventre, Crupi, O’Hara, and Perez participated in creating numerous false and fraudulent books and records.

O’Hara and Perez were employed as computer programmers at BLMIS beginning in 1990 and 1991, respectively. They were responsible for developing and maintaining computer programs that supported the operation of the BLMIS IA business. For example, O’Hara and Perez created special programs that, among other things: created books and records for a small subset of BLMIS IA clients to help hide the scope and nature of the IA business; changed the names of account holders to help explain why the SEC would not find IA client securities at the Depository Trust Company (DTC); altered details about the number of shares, execution times, and transaction numbers for trades reported on BLMIS trade blotters by employing algorithms that produced false and random results; created false and fraudulent order entry and execution reports that included fictitious times at which orders for equities transactions purportedly were placed; generated fraudulent commission reports; and created fraudulent IA client account statements in a format different from those sent to clients. O’Hara and Perez knew that the special programs they developed contained fraudulent information and that they were used in connection with the SEC and European accounting firm reviews.

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John Terzakis was Sentenced to 84 Months in Prison for Vesta Ponzi Scheme

Source- http://www.fbi.gov/sanfrancisco/press-releases/2012/chicago-area-developer-sentenced-to-84-months-in-prison-for-vesta-ponzi-scheme

SAN JOSE—John Terzakis was sentenced yesterday in federal court to 84 months in prison for conspiring to defraud the clients of Vesta Strategies, United States Attorney Melinda Haag announced. He was also ordered to pay full restitution, in an amount to be determined by the court.

Terzakis, formerly of Hinsdale, Illinois, owned Vesta through Single Site Solutions Corp., a Willowbrook, Illinois company that at one time managed land-development and commercial real estate projects in the Chicago area. Vesta was a qualified intermediary for the purpose of conducting tax-deferred real estate exchanges pursuant to Internal Revenue Service Code Section 1031 (26 U.S.C. § 1031).

Vesta, previously based in San Jose, California, collapsed in July 2008 with approximately $25 million owed to its Section 1031 depositors. Vesta lacked the ability to meet its redemption obligations because its owners, including Terzakis, and managers misappropriated the money themselves, and because new client deposits were used to pay off existing depositors.

The indictment alleged that Terzakis, along with Robert Estupinian, Vesta’s former CEO, and Peter Ye, the former vice president of operations and later president, used the company to defraud Vesta clients of their Section 1031 deposits and obtained money and property, namely, Vesta client deposits, by means of materially false and fraudulent pretenses. Among the false promises alleged were claims that Vesta was a safe and financially secure Section 1031 exchange company, that Vesta client deposits would be held by Vesta, and that Vesta client deposits would be returned at the time of redemption. The indictment alleged that new client deposits were used to pay off existing client obligations, in a Ponzi-like manner, in furtherance of the conspiracy. The indictment also alleged that the Vesta owners diverted Vesta client deposits to themselves.

In pleading guilty, Terzakis admitted to conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349 (count one); wire fraud, in violation of 18 U.S.C. § 1343 (count five); and money laundering, in violation of 18 U.S.C. § 1957 (count 10).

Co-defendant Peter Ye, of San Jose, California, pleaded guilty on June 21, 2010, to three felony counts of conspiracy to commit wire fraud, wire fraud, and money laundering. He remains free on a bond and is scheduled to be sentenced on November 15, 2012. His related case is CR 10-00044 DLJ.

Co-defendant Robert Estupinian, of San Jose, Illinoise, pleaded guilty on February 2, 2011, to three felony counts of conspiracy to commit wire fraud, wire fraud, and money laundering. He remains free on a bond and is scheduled to be sentenced on October 11, 2012.

Terzakis is currently on home confinement with electronic monitoring, secured by a bond, and ordered to self-surrender on December 4, 2012.

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Gregory Viola was Sentenced to More Than Eight Years in Federal Prison

Source- http://www.fbi.gov/newhaven/press-releases/2012/ponzi-schemer-sentenced-to-more-than-eight-years-in-federal-prison

David B. Fein, United States Attorney for the District of Connecticut, announced that Gregory Viola, 60, of Orange, was sentenced today by United States District Judge Vanessa L. Bryant in Hartford to 100 months of imprisonment, followed by three years of supervised release, for operating a Ponzi scheme that defrauded more than 50 investors of more than $6 million.

“This defendant Violated the trust of dozens of investors by stealing millions in funds, which he used to pay his mortgage and for jewelry purchases, country club memberships, and other personal expenses,” stated U.S. Attorney Fein. “There has been a rise in investment fraud schemes around the country, and the Department of Justice and our law enforcement and regulatory partners are committed to educating the public and helping prevent investor fraud before it happens. Citizens are strongly encouraged to research investment opportunities thoroughly and to be wary of promises of consistent and guaranteed returns. I commend the FBI, the Stamford Police and the Connecticut Department of Banking, all members of our Connecticut Securities, Commodities, and Investor Fraud Task Force, for bringing this defendant to justice.”

According to court documents and statements made in court, from 1989 to about 2006, Viola worked for various companies doing tax compliance. During much of that time, he also conducted an investment business in addition to preparing tax returns for profit. Although Viola was not a licensed or registered investment adviser, he solicited and received funds from investors, some of whom were his tax clients. Viola repeatedly represented to his investors that he would invest their funds and help them generate a return on their investments. Viola found investors based on referrals from existing investors rather than through any form of advertising. In some cases, Viola represented to investors that he would provide a dividend or interest payment in addition to the possibility of appreciation on the investments.

From approximately 2007 to July 2011, Viola engaged in a scheme to defraud his investors when he became unable to make the required dividend payments. As part of the scheme, Viola used funds obtained from investors to make payments to earlier investors. In order to prevent his investors from becoming aware that he was using new investor funds to make returns to older investors, he created and mailed fraudulent online account statements that falsely portrayed the value of investment accounts. As of May 2011, Viola falsely represented to victim investors that they had more than $10 million on account. In truth, $10 million in funds did not exist, and the funds that did exist were not fully invested in online trading accounts but were commingled with funds in Viola’s own personal bank accounts.

Through this scheme, Viola caused more than 50 investors to lose approximately $6.8 million. In addition to paying earlier investors about $2.5 million of the invested funds, Viola used invested funds to pay personal expenses, including his mortgage.

Numerous victims submitted victim impact statements to the court, and seven victims addressed the court during today’s sentencing proceeding. A married couple who lost more than $100,000 stated, “We are both 80 years old. We invested our life savings and now it’s gone. We are depressed [and] very worried about [our] last years of life.” Another victim who lost more than $114,000 and was forced to relocate from Connecticut explained, “I may not have lost as much as other victims, but I lost all that I had. I equate the financial losses I incurred, due to Greg Viola’s scheme, as devastating as the death of my husband....The words heartbroken, devastated, and embarrassed don’t scratch the surface of my feelings. The guilt that I allowed myself to be gullible enough to lose everything and jeopardize my daughters’ futures and add to their burden is overwhelming.”

Viola was ordered to pay restitution in the amount of $6,872,633.97.

Viola was arrested on August 11, 2011. On February 1, 2012, he pleaded guilty to two counts of mail fraud.

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Mark Adrian was Sentenced to Three Years in Prison for Defrauding 47 Investors of $2.3 Million Over Two Years

Source- http://www.fbi.gov/chicago/press-releases/2012/forex-trader-sentenced-to-three-years-in-prison-for-defrauding-47-investors-of-2.3-million-over-two-years

CHICAGO—A former floor trader at the Chicago Mercantile Exchange who later conducted spot foreign exchange trading in Florida was sentenced today to three years in federal prison for a fraud scheme in which he concealed trading losses and inflated investment returns that caused 47 investors to lose approximately $2.3 million. The defendant, Mark Adrian, was employed as a consultant at the bankrupt Avidus Trading Inc. in Boca Raton, which conducted foreign exchange (FOREX) trading at its discretion for investors. Adrian was responsible for communicating with an investment group in Chicago that solicited and pooled individuals’ investment funds for Avidus. These investors and others lost savings, retirement, and other funds as a result of the fraud scheme.

Adrian, 54, of Delray Beach, Florida, and formerly of Chicago, was ordered to start serving his 36-month prison term on January 7, 2013. U.S. District Judge Ruben Castillo also ordered Adrian to pay $2.3 million in restitution. Adrian pleaded guilty to one count of wire fraud in October 2010.

According to his plea agreement, between July 2006 and October 2008, Avidus’ trading was not profitable and resulted in the $2.3 million loss for investors. Adrian concealed the losses in order for Avidus to retain the investors’ business. He prepared and sent false monthly spreadsheets concealing the losses to the investment group in Chicago, knowing that it would report the false information to other investors. Adrian also hid the losses from other employees at Avidus by creating fake brokerage statements that showed an inflated balance for client funds that were on deposit with the broker.

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SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information

Source- http://www.sec.gov/news/press/2012/2012-204.htm

Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

According to the SEC’s order instituting a settled administrative proceeding, eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program. Dark pools do not display quotations to the public, meaning that investors who subscribe to a dark pool have access to potential trade opportunities that other investors using public markets do not. eBX inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL. eBX instead allowed an outside technology firm to use information about LeveL subscribers’ unexecuted orders for its own business purposes. The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.

eBX agreed to pay an $800,000 penalty to settle the charges.

“Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.”

According to the SEC’s order, eBX and the outside firm it hired to run LeveL signed a subscription agreement in February 2008, after which the outside firm’s separate order routing business began to use certain LeveL subscribers’ confidential trading data. In November 2008, eBX signed a new agreement with the outside firm that allowed its order routing business to remember and use all LeveL subscribers’ unexecuted order information. As a result of the agreements, the outside firm’s order routing business began to fill far more of its orders than other LeveL users did. Its order router also knew how other eBX subscribers’ orders in LeveL were priced and could use that information to determine whether to route orders to LeveL or another venue based on where it knew it might get a better price for its own customers’ orders.

According to the SEC’s order, eBX failed to disclose in required SEC filings that it allowed LeveL subscribers’ unexecuted order information to be shared outside of LeveL.

In addition to the $800,000 penalty, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

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SEC Charges Joseph Hilton in South Florida with Fraudulently Offering Investments Tied to Oil Drilling Projects

Source- http://www.sec.gov/news/press/2012/2012-205.htm

Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of a South Florida man who has been charged with fraudulently offering investments in oil drilling projects.

The SEC’s complaint unsealed today in federal court in West Palm Beach, Fla., alleges that Joseph Hilton made numerous misrepresentations to investors while selling limited partnership units in two oil drilling projects earlier this year through his firm Pacific Northwestern Energy LLC. Hilton falsely told potential investors that Pacific acquired its wells from Exxon Mobil Corp., and he overstated Pacific’s experience in the oil and gas industry and the historical accomplishments of its drillers. Hilton raised approximately $789,000 from investors. The SEC’s action froze the assets of Hilton, Pacific, and the two limited partnerships — Rock Castle Drilling Fund LP and Rock Castle Drilling Fund II LP. Hilton’s securities offerings were not registered with the SEC as required under the federal securities laws.

The SEC’s complaint also includes allegations against Hilton, Pacific, and another company controlled by Hilton called New Horizon Publishing Inc. Through Pacific and New Horizon, Hilton additionally sold $2.5 million worth of investments in oil drilling projects sponsored by United States Energy Corp. while deceiving investors about his identity, the anticipated returns on the investments, the amount of oil being produced by U.S. Energy’s wells, and the existence of natural gas wells. Hilton also operated a boiler room of sales representatives paid on a commission basis.

According to the SEC’s complaint, Hilton changed his name from Joseph Yurkin late last year following a final judgment for fraud in a previous SEC enforcement action against him for securities offerings he made through another company he worked for — Homeland Communications Corp.

“By changing his name, Hilton thought he could evade further SEC scrutiny and keep the investing public from finding the truth in his background,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC is committed to pursuing repeat offenders and ensuring the open and transparent sale of securities to investors.”

The SEC’s complaint charges Hilton, Pacific, Rock Castle I and Rock Castle II with violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). The complaint also charges Hilton with violations of Securities Act Section 17(a)(1), (2), and (3) and Exchange Act Sections 15(a), 10(b) and Rule 10b-5(a), (b) and (c). Pacific and New Horizon are charged with Exchange Act Section 15(a) violations in connection with their historical U.S. Energy related conduct. The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions against Hilton and his entities.

The court has appointed David Mandel — an attorney with the law firm of Mandel & Mandel LLP in Miami — as a receiver over Pacific, Rock Castle I, and Rock Castle II. Among other things, the receiver is responsible for marshaling and safeguarding assets held by these entities.

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SEC Charges Hedge Fund Managers with Defrauding Investors

Source- http://www.sec.gov/news/press/2012/2012-206.htm

Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today separately charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their respective hedge funds. The charges are the latest in a series of actions taken by the SEC Enforcement Division and its Asset Management Unit against hedge fund-related misconduct in the markets.

In one case, the SEC alleges that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

Since the beginning of 2010, the SEC has filed more than 100 cases involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest. The SEC today issued an investor bulletindetailing some of those cases as examples of why investors must rigorously evaluate a hedge fund investment before making one.

“These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry.”

In the past few weeks alone, the SEC has charged an Atlanta-based private fund manager and his firm with defrauding investors in a purported “fund-of-funds” and then trying to hide trading losses, charged a hedge fund adviser in Oregon with running a $37 million Ponzi scheme through several hedge funds he managed, and charged a New York-based hedge fund manager who touted a diversified and controlled-risk investment strategy for his fund while in reality misusing investor assets to prop up a failing private company. The New York-based fund manager also failed to disclose conflicts of interest, and he falsely overstated his firm’s assets under management in various magazine articles he authored.

“The most serious hedge fund frauds involve advisers who play fast and loose with investor money,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Investors can complement the SEC’s vigilant enforcement against hedge fund misconduct by becoming increasingly wary of hedge fund managers who boast extreme performance measures and asking well-informed questions about investment strategy, fees, and potential conflicts of interest.”

According to the SEC’s complaint filed against Banet and Lion Capital Management in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy. Instead, Banet brazenly took the teacher’s investment totaling $550,000 and used it to pay unauthorized personal and business expenses, including his home mortgage, office rent, and staff salaries. Banet also provided phony account statements showing non-existent investment gains and listing an independent administrator that performed no actual work for the fund.

In a parallel action, the U.S. Attorney’s Office for the Northern District of California today announced criminal charges against Banet. The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office, Federal Bureau of Investigation (FBI), and Immigration and Customs Enforcement (ICE).

According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services filed in federal court in Chicago, investors in the hedge fund were not told that its adviser removed various performance hurdles when calculating fees. Furthermore, inappropriate capital withdrawals were made from the fund. Goldstein, Gatherum, and their firm never told their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state. But even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisers.

The SEC’s investigation of Lion Capital Management was conducted by Sahil Desai and Robert Leach of the Asset Management Unit in the San Francisco Regional Office. John Yun is leading the SEC’s litigation. The SEC’s investigation of GEI Financial Services – which stemmed from an Asset Management Unit initiative to detect misconduct by pursuing registered investment advisers with repeated compliance examination deficiencies – was conducted by Andrew Shoenthal, Jeson Patel, Malinda Pileggi, Vanessa Horton, and Paul Montoya of the Chicago Regional Office. John E. Birkenheier is leading the litigation.

The SEC’s investor bulletin on hedge funds was prepared by the Office of Investor Education and Advocacy. It recommends that investors understand a hedge fund’s investment strategy and its use of leverage and speculative techniques before making the investment. It also explains the need to evaluate a hedge fund manager’s potential conflicts of interest and take other steps to research those managing the fund.

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Edward Lincoln Forehand was Indicted in Securities Fraud Scheme

Source-  http://www.fbi.gov/mobile/press-releases/2012/dothan-man-indicted-in-securities-fraud-scheme 

MONTGOMERY, AL—Edward Lincoln Forehand, age 68, of Dothan, Alabama, was indicted on charges of securities fraud, mail fraud, wire fraud, and money laundering, announced Sandra J. Stewart, First Assistant United States Attorney, and Joseph P. Borg, Director of the Alabama Securities Commission (ASC).

According to court records, between 2006 and November 2009, Forehand, used the business name “USA Marketing,” to solicit investments from people, mainly in the Dothan, Alabama; Pensacola, Florida; and Panama City, Florida areas. Forehand told investors that he had a relationship with an individual (the “associate”), whom Forehand identified only as “an acquaintance of several years” and as a longtime family friend.

According to Forehand, the associate had a business, Elite Marketing (“Elite”), which had agreements with colleges and universities to sell them cookware, which the schools would, in turn, resell as a fundraiser. Elite required financing to purchase the cookware, but the profit margin on the cookware was so large that Elite could afford to pay extraordinarily high rates of returns to those who would provide the financing.

Prospective investors received these representations either directly from Forehand or indirectly from persons who had passed on what they had heard about investing in Elite. Forehand provided most investors with a document stating that the purpose of the investment was to invest in Elite and promising an annual rate of return ranging from 175 percent to 325 percent.

Forehand failed to disclose to investors the fact that he was using investors’ money for purposes other than investment and was only forwarding to Elite approximately 20 percent of the money that he was receiving from investors. In particular, during the period from 2006 to November 2009, Forehand received $6.2 million from investors but only sent $1,605,790 to Elite or to the associate. Forehand used the remaining funds either to repay previous investors or for Forehand’s personal expenses, including cash, purchase of real estate, improvements to houses, repayment of personal loans, and other personal needs.

Forehand also failed to disclose that in August 2009, six checks from Elite to USA Marketing totaling $600,000 bounced, that Elite never made good on the checks, and, that from that point forward, Forehand stopped sending any investor money to Elite. Forehand also concealed the associate’s true identity and the fact that the associate had two prior criminal convictions based on fraudulent conduct.

On November 10, 2009, the associate died, and neither the associate nor Elite had any significant assets. Subsequent to the associate’s death, Forehand paid no further funds to investors, and 87 investors lost $2,991,654 of the money they had given to Forehand for the purpose of investing in Elite.

Each of the eight mail and wire fraud counts carries a statutory maximum sentence of 20 years’ imprisonment. Each of the four money laundering counts carries a maximum 10-year sentence, and each of the two securities fraud counts carries a maximum five-year sentence. The indictment also seeks the forfeiture of real estate in Sevierville, Tennessee, that was allegedly obtained as a result of the fraud.

Forehand had initial appearance today before United States Magistrate Judge Wallace Capel, who released Forehand on a $25,000 bond. Arraignment is set in this case for September 26, 2012, at 9:30 a.m.

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Michael J. Spak Pleads Guilty to Multi-Million-Dollar Investment Fraud

Source-  http://www.fbi.gov/newark/press-releases/2012/hedge-fund-ceo-pleads-guilty-to-multi-million-dollar-investment-fraud 

CAMDEN, NJ—The former CEO of the hedge fund management company Osiris Partners LLC admitted today to conspiring with others to defraud investors of more than $4 million, U.S. Attorney Paul J. Fishman announced.

Michael J. Spak, 44, of Chesterfield, New Jersey, pleaded guilty before U.S. District Judge Joseph H. Rodriguez in Camden federal court to an information charging him with conspiracy to commit wire fraud.

According to documents filed in this case and statements made in court:

Spak and his co-conspirators solicited investors to invest in the Osiris Fund, which they pitched to prospective investors as a hedge fund for the “little guys” and “moms and pops.” Over time, more than 75 people invested $12 million in the Osiris Fund. Beginning in January 2010, however, Spak and his co-conspirators at the Osiris Fund began improperly diverting investors’ funds for their own use. In January and February 2010, Spak and his co-conspirators spent $300,000 of investors’ money to purchase a luxury sport-fishing boat called the “Fintastic.” In total, in 2010 and 2011, Spak and his co-conspirators fraudulently diverted more than $4 million. Spak failed to disclose these diverted payments to the Osiris Fund investors, and in the financial statements that they sent to investors, Spak and his co-conspirators continued to characterize these diverted funds as “assets” of the fund.

In April and May 2010, the Osiris Fund incurred trading losses of approximately $4.5 million, about half the value of the fund. Spak and his co-conspirators never disclosed these losses to investors. They instead created false financial statements, which included a fictitious $5 million “asset,” and sent them to investors. Even though this fictitious asset never existed, Spak and his co-conspirators charged investors a three percent management fee to manage it and fraudulently overcharged investors millions of dollars in management fees.

The charge of conspiracy to commit wire fraud is punishable by a maximum potential penalty of 20 years in jail and a $250,00 fine. Sentencing is scheduled for January 9, 2013.

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Jon Horvath Pleads Guilty in New York Federal Court to Insider Trading Charges

Source-  http://www.fbi.gov/newyork/press-releases/2012/former-hedge-fund-research-analyst-pleads-guilty-in-new-york-federal-court-to-insider-trading-charges 

NEW YORK—Jon Horvath, 42, of San Francisco, a former research analyst at a hedge fund in New York, pleaded guilty today in New York City federal court to charges arising from his involvement in a $61.8 million insider trading scheme, announced Preet Bharara, the U.S. Attorney for the Southern District of New York. The alleged scheme involved multiple analysts and portfolio managers at different hedge funds and investment firms who allegedly exchanged material, non-public information (inside information) about publicly traded technology companies, including Dell Inc. and NVIDIA Corp. Horvath was arrested and charged by complaint in January 2012 and was further charged in a superseding indictment in August 2012. He pleaded guilty before U.S. District Judge Richard J. Sullivan.

According to the superseding indictment to which Horvath pleaded guilty, statements made during the plea proceeding, and other court documents:

Horvath was part of a circle of research analysts at different investment firms who obtained inside information from 2007 to 2009, both directly and indirectly, from employees who worked at public companies. The analysts, including Horvath, then shared the inside information with each other and with the hedge fund portfolio managers for whom they worked. For example, Horvath admitted receiving inside information concerning Dell and NVIDIA from other members of this circle of analysts, knowing that it came from employees at public companies, in breach of their duties of loyalty to their companies. Horvath then provided the inside information to the portfolio manager for whom he worked. Horvath caused trades in Dell and NVIDIA to be executed based on the inside information he received from the circle of analysts. In exchange, Horvath provided the circle of analysts with inside information concerning other technology stocks that he obtained directly from public company employees.

Horvath pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud. The conspiracy count carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. The securities fraud counts each carry a maximum sentence of 20 years in prison and a maximum fine of $5 million or twice the gross pecuniary gain or loss derived from the offense. As part of his plea agreement, Horvath agreed to forfeit his share of the proceeds obtained as a result of the offenses. He is scheduled to be sentenced by Judge Sullivan on March 31, 2013.

Horvath was originally charged in January 2012 with three co-conspirators—Danny Kuo, Todd Newman, and Anthony Chiasson. Kuo pleaded guilty in April 2012 to one count of conspiracy to commit securities fraud and two counts of securities fraud. He is scheduled to be sentenced by Judge Sullivan at a later date. Newman and Chiasson are scheduled for trial before Judge Sullivan on October 29, 2012, and the charges against them are merely accusations. They are presumed innocent unless and until proven guilty.

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Rajiv Goel was Sentenced in Manhattan Federal Court for Insider Trading

Source-  http://www.fbi.gov/newyork/press-releases/2012/former-intel-executive-rajiv-goel-sentenced-in-manhattan-federal-court-for-insider-trading 

Preet Bharara, the United States Attorney for the Southern District of New York, announced that Rajiv Goel, a former executive at Intel Corporation (Intel), was sentenced today to two years of probation for his participation in an insider trading scheme in which Goel provided material, non-public information (“inside information”) about Intel to Raj Rajaratnam, the head of Galleon Group (Galleon). Rajaratnam then traded based, in part, on the inside information. Goel pled guilty in February 2010 to one count of conspiracy to commit securities fraud and one count of securities fraud pursuant to a cooperation agreement with the government. He was sentenced in Manhattan federal court by U.S. District Judge Barbara S. Jones.

According to the information, statements made during Goel’s guilty plea proceeding, and Goel’s testimony during the criminal trial of Rajaratnam:

In April 2007, Goel provided inside information to Rajaratnam relating to Intel’s quarterly earnings before Intel publicly announced its very positive results. Upon receipt of the inside information from Goel, Rajaratnam executed, and caused others to execute, securities trades. When Intel disclosed its quarterly earnings, Rajaratnam sold his stock and illegally earned over $2.4 million. Subsequently, on multiple occasions in 2008, Goel provided Rajaratnam with inside information about Intel’s investment in Clearwire Corporation. Upon receipt of the inside information from Goel, Rajaratnam executed, and caused others to execute, securities trades. Based on Goel’s information, Rajaratnam illegally earned over $850,000.

In addition to his prison term, Goel, 54, was ordered to pay forfeiture in the amount of $266,649, a $10,000 fine, and a $200 special assessment fee.

Rajaratnam was convicted in a jury trial on May 11, 2011, of 14 counts of conspiracy and securities fraud. He was sentenced on October 13, 2011, to 11 years in prison and was ordered to pay forfeiture in the amount of $53,816,434 and a $10 million fine.

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SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer

Source-  http://www.sec.gov/news/press/2012/2012-199.htm 

Washington, D.C., Sept. 27, 2012 – The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its former investment bankers with “pay-to-play” violations involving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor.

Pay-to-play schemes involve campaign contributions or other payments made in an attempt to influence the awarding of lucrative public contracts for securities underwriting business. This marks the first SEC enforcement action for pay-to-play violations involving “in-kind” non-cash contributions to a political campaign.

According to the SEC’s order against Goldman Sachs, Neil M.M. Morrison was a vice president in the firm’s Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008. Morrison also was substantially engaged in working on Cahill’s political campaigns from November 2008 to October 2010. Morrison at times conducted campaign activities from the Goldman Sachs office during work hours and using the firm’s phones and e-mail. Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions. Nevertheless, Goldman Sachs subsequently participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees.

While the SEC’s case against Morrison continues, Goldman Sachs agreed to settle the charges by paying $7,558,942 in disgorgement, $670,033 in prejudgment interest, and a $3.75 million penalty, which is the largest ever imposed by the SEC for Municipal Securities Rulemaking Board (MSRB) pay-to-play violations. The SEC coordinated this enforcement action with a related action filed by the Massachusetts Attorney General against Goldman Sachs.

“The pay-to-play rules are clear: municipal finance professionals that use their firm’s resources to campaign on behalf of political candidates compromise themselves and the firms that employ them,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “Fighting efforts to improperly influence the underwriting selection process is one of the unit’s top priorities. These practices result in undisclosed conflicts of interest and undermine public confidence in the integrity of the municipal securities market.”

According to the SEC’s orders against Morrison and Goldman Sachs, among the campaign activities that Morrison engaged in for Cahill were fundraising, drafting speeches, communicating with reporters, approving personnel decisions, and interviewing at least one possible running mate. Morrison at times referenced his campaign work while soliciting underwriting business in an apparent attempt to curry favor during the selection process. Morrison sent e-mails to a deputy treasurer in Cahill’s office making the following statements while discussing the selection of underwriters:

“The boss [Cahill] mentioned to me this morning that he spoke to [the Assistant Treasurer] and that it is looking good for us [Goldman Sachs] on the build America bond deal.”

“From my standpoint as an advisor/consultant/friend I am saying, PLEASE don’t give these [underwriter] slots away willy-nilly. You are in the fight of your lives and need to reward loyalty and encourage friendship. If people aren’t willing to be creative with their support then they shouldn’t expect business. This has to be a political decision.”

“We have discussed the Build American Bond transaction and how important it is to me. You have been great keeping me up to speed. This is my number 1 priority and most important ask. Having Goldman as the lead and getting 50% of the economics would be such a home run for me.”

According to the SEC’s orders, in addition to his direct campaign work for Cahill, Morrison made an indirect cash contribution to Cahill by giving cash to a friend who then wrote a check to the Cahill campaign. Morrison’s campaign work and his indirect financial contribution created a conflict of interest that was not disclosed by Goldman Sachs in the relevant municipal securities offerings in violation of pay-to-play rules. Morrison himself acknowledged the existence of this conflict in an e-mail to a campaign official, saying, “I am staying in banking and don’t want a story that says that I am helping Cahill, who is giving me banking business. If that came out, I’m sure I wouldn’t get any more business.”

According to the SEC’s orders against Goldman Sachs and Morrison, Goldman Sachs terminated Morrison in December 2010.

The SEC’s order against Goldman Sachs found that the firm violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-37(b), which prohibits firms from underwriting offerings for municipal issuers within two years after any contribution to an official of such issuer. The SEC’s order found that Goldman Sachs did not disclose any of the contributions on MSRB Forms G-37, and did not make or keep records of the contributions in violation of MSRB Rules G-37(e), G-8 and G-9. The order found that Goldman Sachs did not take steps to ensure that the attributed contributions or campaign work or the conflicts of interest raised by them were disclosed in the bond offering documents, in violation of MSRB Rule G-17, which requires broker-dealers to deal fairly and not engage in any deceptive, dishonest, or unfair practice. The order found that Goldman Sachs failed to effectively supervise Morrison in violation of MSRB Rule G-27.

Goldman Sachs consented to the SEC’s order without admitting or denying the findings. In addition to paying disgorgement, prejudgment interest, and the penalty, Goldman Sachs agreed to be censured and to cease and desist from committing or causing any violations and any future violations of the provisions referenced in the order.

In its order against Morrison, the SEC’s Enforcement Division alleges that Morrison violated MSRB Rule G-37(d) by making a secret, undisclosed cash campaign contribution to Cahill, that he violated MSRB Rule G-37(c) by soliciting campaign contributions for Cahill, and that he violated MSRB Rule G-17 by failing to disclose conflicts of interest to the purchasers of municipal securities. The Division of Enforcement further alleges that Morrison caused Goldman Sachs to violate Rule G-8, Rule G-9, Rule G-37(b) and Rule G-37(e).

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SEC Charges Bank Executives in Nebraska With Understating Losses During Financial Crisis

Source-  http://www.sec.gov/news/press/2012/2012-198.htm 

Washington, D.C., Sept. 25, 2012 – The Securities and Exchange Commission today charged three former bank executives in Nebraska for participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis. One of the executives and his son also are charged with insider trading.

The SEC alleges that Gilbert G. Lundstrom, who was the CEO and chairman of the board at Lincoln, Neb.-based TierOne Bank, along with president and chief operating officer James A. Laphen and chief credit officer Don A. Langford played a role in TierOne understating its loan-related losses as well as losses on real estate repossessed by the bank. TierOne had expanded into riskier types of lending in Las Vegas and other high-growth geographic areas in Arizona and Florida, and the bank was experiencing a significant rise in high-risk problem loans. TierOne’s primary banking regulator, the Office of Thrift Supervision (OTS), directed TierOne to maintain higher capital ratios as a result of the bank’s increase in high-risk problem loans. To appear to comply with the heightened capital requirements, Lundstrom, Laphen, and Langford disregarded information showing that the collateral securing certain TierOne loans and real estate repossessed by the bank was overvalued due to the bank’s reliance on stale and inadequately discounted appraisals. The losses were understated by millions of dollars in multiple SEC filings.

Lundstrom and Laphen agreed to settle the SEC’s charges as did Lundstrom’s son Trevor A. Lundstrom, who is charged with illegally trading on nonpublic information from his father about an anticipated asset sale. The Lundstroms and Laphen agreed to collectively pay nearly $1.2 million in the settlements, which are subject to court approval. The SEC’s case continues against Langford.

“A fundamental test of management integrity is whether executives make full and honest disclosure in times of company stress, the exact point when shareholders have the greatest need for accurate information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The SEC’s complaints allege that as Tier One’s financial condition worsened, these executives utterly failed that test by understating losses on the bank’s troubled loans and concealing the bank’s deterioration from shareholders and regulators alike.”

According to the SEC’s complaints filed in U.S. District Court for Nebraska, the truth about TierOne’s losses did not become publicly known until late 2009 after OTS required TierOne to obtain new appraisals for its impaired loans. TierOne, in turn, disclosed more than $130 million in loan losses. Had these loss provisions been booked in the proper quarters, the bank would have missed its required capital ratios as far back as the fourth quarter of 2008. Following the announcement of these loss provisions, TierOne’s stock price dropped more than 70 percent, and the bank filed for bankruptcy shortly after it was shut down by OTS in June 2010.

With regard to the insider trading charges against the Lundstroms, the SEC alleges that Gilbert Lundstrom tipped his son in 2009 with confidential details about a proposed asset sale between TierOne and Great Western Bank. Based on this material, nonpublic information, Trevor Lundstrom bought nearly 210,000 TierOne shares between June and September 2009 in anticipation of the asset sale. Following a September 4 public announcement about the transaction, Lundstrom sold his TierOne holdings for $225,921 in illicit profits.

The SEC’s complaints charge Gilbert Lundstrom, Laphen, and Langford with violations of the antifraud, deceit of auditors, reporting, recordkeeping, and internal controls provisions of the federal securities laws. In settling the SEC’s charges without admitting or denying the allegations, Gilbert Lundstrom, who lives in Lincoln, agreed to pay a $500,921 penalty and Laphen, who resides in Omaha, agreed to pay a $225,000 penalty. They also consented to permanent officer and director bars. Trevor Lundstrom, who lives in Birmingham, Ala., settled his insider trading charges without admitting or denying the SEC’s allegations. He agreed to pay disgorgement of $225,921 plus prejudgment interest and a $225,921 penalty. Langford, who lives in Gibsonia, Pa., has not settled the charges.

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