SEC Charges Gary S. Bell for Illegal Short Selling Tactics

Source- http://www.sec.gov/news/press/2011/2011-264.htm

Washington, D.C., Dec. 13, 2011 — The Securities and Exchange Commission today charged an options trader in the Chicago area with violating short selling restrictions when he failed to locate and deliver the shares involved in short sales to broker-dealers and their institutional customers.

The trader agreed to pay more than $2 million to settle the SEC’s charges.

According to the SEC’s order instituting administrative proceedings, Gary S. Bell violated the “locate” and “close out” requirements of Regulation SHO, which require market participants to locate a source of borrowable shares prior to selling short and to deliver those securities by a specified date. Market makers who ensure liquidity in the market are excepted from these requirements if they are engaged in bona-fide market making activities in the security for which the exception is claimed.

The SEC’s order finds that Bell improperly relied on the market maker exception in his line of business that essentially loaned large amounts of hard-to-borrow stock to broker-dealers, who then provided their customers with locates on those shares and lucrative stock loans of those shares. The customers then sold short certain securities that they may not have otherwise been able to without Bell’s participation. However, because the stock being provided by Bell was not truly available for delivery to the broker-dealers or their short selling customers, Bell actually was effecting illegal “naked” short sales.

“Bell avoided the cost of borrowing shares while engaging in complex short selling transactions, thus earning significant profits with minimal risk and gaining an advantage over legitimate participants in the market,” said George S. Canellos, Director of the SEC’s New York Regional Office. “We’ll continue aggressively to pursue and punish abusive short sellers who attempt to circumvent regulatory requirements to make more money.”

According to the SEC’s order, Bell effected naked short sales from December 2006 to June 2007 while working as a broker-dealer himself and then later as the principal trader at Chicago-based broker-dealer GAS I LLC, which is no longer in business. Bell and GAS engaged in two specific types of transactions that violated the locate and close-out requirements of Regulation SHO. The first type of transaction — a “reverse conversion” or “reversal” — involves selling stock short and simultaneously selling a put option and buying a call option on the stock. The second type of transaction is a combined stock-and-option transaction that is essentially a sham and creates the illusion that the party subject to a close-out obligation has satisfied that obligation by buying the same kind and quantity of securities it has sold short.

The SEC’s order finds that Bell’s and GAS’s transactions created the false appearance of compliance with the requirements of Regulation SHO. The shares that were apparently purchased in the transactions were never actually delivered because they were purchased from a “naked” short seller, and left Bell and GAS with persistent “fail-to-deliver” positions, meaning that they did not deliver shares to make good on their sales of stock. The market maker exception to Regulation SHO was not available to either Bell or GAS because they were not engaging in bona-fide market making activities in these securities. As a result of his short selling violations, Bell received ill-gotten gains of at least $1.5 million.

Andrey C. Hicks Indicted for $2.5 Million Fraud Scheme in Connection with Purported Investment Fund

Source- http://www.fbi.gov/boston/press-releases/2011/hicks-indicted-for-2.5-million-fraud-scheme-in-connection-with-purported-investment-fund

BOSTON—A Boston area man was indicted today in federal court with wire fraud in connection with two entities he operated, Locust Offshore Management LLC and Locust Offshore Fund, Ltd.

Andrey C. Hicks, 27, most recently residing in Andover, was charged in an indictment with five counts of wire fraud.

The indictment alleges that since March 2011, Hicks has obtained more than $2.5 million from approximately 10 investors, using the two Locust entities which operated from a location in Cambridge, Mass. According to the indictment, Hicks misrepresented his background and experience and painted a false picture of the Locust entities in order to persuade his victims to invest. Among other things, it is alleged that Hicks falsely represented: that he held undergraduate and graduate degrees from Harvard University; that he had recently worked as a successful hedge fund manager for Barclays Capital; that the Locust Fund was registered as a British Virgin Islands Business Company, with Ernst and Young as its auditors and Credit Suisse Group as its “prime broker” and “custodian.” Hicks allegedly claimed that the Locust Fund had approximately $1.2 billion dollars under management, and that it had earned a nearly 80 percent profit in trading in 2011. According to the indictment, instead of investing the funds given to him and the Locust entities, Hicks used the funds for his own personal and business purposes.

If convicted Hicks faces up to 20 years in prison to be followed by three years of supervised release and a $250,000 fine on each count.

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John Farahi Indicted on Federal Charges of Bilking Primarily Persian Investors and Banks Out of at Least $20 Million

Source- http://www.fbi.gov/losangeles/press-releases/2011/former-fund-manager-indicted-on-federal-charges-of-bilking-primarily-persian-investors-and-banks-out-of-at-least-20-million

LOS ANGELES—A former investment fund manager has been charged with defrauding investors out of millions of dollars by falsely promising investors their money would be used to purchase corporate bonds backed by the Troubled Asset Relief Program and then collaborating with his corporate counsel to cover-up the fraud.

John Farahi, 54, of Bel Air Estates, was named in a 41-count indictment returned late yesterday afternoon by a federal grand jury. The indictment charges Farahi—a former member of the Reno, Nevada, City Council and Farsi-language radio investment advisor—with various fraud offenses that include making false statements to TARP-funded banks in relation to multi-million dollar loans.

The indictment also charges attorney David Tamman, 44, of Santa Monica, with conspiring with Farahi to obstruct a Securities and Exchange Commission investigation into Farahi’s fraud scheme. At the time of the alleged obstruction, Tamman, who is now a sole practitioner with offices in Century City, served as corporate counsel for Farahi’s investment company and was a law firm partner.

From 2005 until early 2010, Farahi ran the Beverly Hills-based New Point Financial Services, which he used to sell more than $20 million worth of investment instruments—which he called debentures—to more than 100 investors, most of whom are members of the Southland’s Iranian-Jewish community. Farahi attracted many of the investors through his daily radio show in which he touted a conservative investment philosophy. When Farahi met with investors he falsely told them New Point Financial Services invested in low-risk investments like certificates of deposit, TARP-backed corporate bonds, and deeds of trust backed by substantial amounts of borrower equity.

The indictment alleges that Farahi did not make these types of investments and that he instead used investor money for a variety of personal purposes, including to support his family’s lavish lifestyle, to make Ponzi payments to early clients of New Point Financial Services, and to trade in high-risk and speculative future options trading. Starting in 2008, Farahi allegedly failed to tell New Point Financial Services investors that he had lost at least $15 million through his undisclosed options trading—even as he continued to solicit investors for New Point Financial Services.

In the face of huge trading losses at the end of 2008, Farahi allegedly tried to extend the scheme by drawing down extensively on lines of credit at banks while making false statements to those banks about his financial condition. The victim banks included TARP recipients Bank of America and U.S. Bank, as well as Sun West Bank.

When the SEC opened an investigation into New Point Financial Services in April 2009, Farahi allegedly conspired with Tamman, who was the company’s longtime securities counsel, to cover-up and conceal the fraud scheme from the SEC. The indictment alleges that Farahi and Tamman engaged in a conspiracy to obstruct justice that involved, among other things, altering and backdating various documents to make it appear that New Point Financial Services investors were given full disclosures about the nature and risks of their investments, removing incriminating documents from investor files before they were produced to the SEC, and lying to the SEC in sworn testimony.

As a result of both his investment and loan fraud schemes, investigators believe that New Point Financial Services investors and financial institutions suffered losses of at least $20 million.

The SEC filed a federal complaint alleging violations of the federal securities laws against Farahi and others in January 2010 (see: http://www.sec.gov/news/press/2010/2010-3.htm). The SEC subsequently obtained a permanent injunction, as well as orders freezing Farahi’s and Newpoint’s assets and appointing a receiver over New Point Financial Services. In January 2011, the SEC initiated public administrative proceedings against Tamman, improper professional conduct during an SEC examination (see: http://www.sec.gov/news/press/2011/2011-29.htm).

The indictment returned yesterday charges Farahi with 16 counts of mail fraud, one count of wire fraud, five counts of offering for sale unregistered securities, four counts of loan fraud, one count of aggravated identity theft, one count of conspiring with Tamman, four counts of obstruction of justice, five counts of alteration of documents, one count of suborning perjury, one count of concealing a material fact, and one count of witness tampering. If he is convicted of the 40 counts in which he is charged, Farahi would face a statutory maximum sentence of 717 years in federal prison.

Tamman is charged with one count of conspiracy, three counts of obstruction of justice, five counts of alteration of records, and one count of being an accessory after the fact to the charged mail fraud and securities violations. If he is convicted of the 10 counts in which he is charged, Tamman would face a statutory maximum sentence of 190 years in federal prison.

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

Farahi has agreed to surrender to authorities Friday morning at United States District Court. He is expected to be arraigned on the indictment Friday afternoon.

Tamman will be summoned to appear in federal court for an arraignment that is expected to be scheduled for January 9.

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Kent R.E. Whitney Sentenced to 44 Months in Prison for Investment Fraud Scheme

Source- http://www.fbi.gov/chicago/press-releases/2011/former-chicago-options-trader-sentenced-to-44-months-in-prison-for-investment-fraud-scheme

CHICAGO—A former Chicago options trader was sentenced to 44 months in prison for engaging in an investment fraud scheme in which he swindled more than $600,000 from approximately 10 victims who invested with him. The defendant, Kent R.E. Whitney, had pleaded guilty to wire fraud in September, and was sentenced yesterday by U.S. District Judge Virginia Kendall in Federal Court. He was ordered to begin serving the sentence Jan. 26, 2012. Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, and Robert D. Grant, Special Agent in Charge of the Chicago Office of the Federal Bureau of Investigation, announced the sentence today.

Whitney, 29, of Chicago, at various times traded through different entities, including Lone Star Trading, and had trading privileges on CME Group, Inc. markets prior to and during 2009. He obtained more than $600,000 from approximately 10 investors since 2009, both for a purported commodity pool investment, and for trading in futures accounts to be held jointly between Whitney and the victims. He returned approximately $230,000 as so-called investor redemptions and misused most of the remaining funds for his own benefit and for the benefit of acquaintances. The CME Group owns and operates the three U.S. futures exchanges that formerly went by the names Chicago Mercantile Exchange, Chicago Board of Trade, and New York Mercantile Exchange.

According to court documents, from mid-2009 through late 2010, Whitney made false representations to investors concerning the use of investors’ funds, the returns investors could expect to make, and already had made, on their investments, and the risks involved in the investments. Whitney admitted that he misappropriated most of the invested funds and concealed his misappropriation by creating and distributing phony account statements and making Ponzi-type payments of returns to investors.

In October 2009, one victim invested $40,000 with Whitney to trade options through Lone Star. Whitney told the victim that he would earn a 50 percent annual return trading options and they would split the profits evenly. Whitney gave the victim a phony document that purported to be a Lone Star account statement showing that the victim’s investment had grown to $47,250 in just over a month. Whitney did not use the victim’s funds to trade options, but instead used the funds for his own purposes, and a few days later most of the funds were used to buy a Maserati M128 GT Coupe.

In December 2009, another victim invested $15,500 from her daughter’s college fund in Lone Star through Whitney. Whitney told the victim that Whitney had earned approximately 22 to 26 percent interest per month trading her funds in Lone Star, when he actually misappropriated all of the funds.

Between January and November 2010, the CME Group suspended Whitney from trading on CME markets three times as a result of his unrelated options trading activity. Each trading suspension prohibited Whitney from trading, placing or taking trading orders for others, or soliciting any business concerning CME products. Nonetheless, Whitney solicited $240,000 from another victim between January 2010 through August 2010, purportedly for Whitney to trade options on behalf of the victim. Whitney did not disclose to the victim that Whitney was currently subject to a trading suspension. Whitney did not use the victim’s funds to trade options. However, Whitney provided the victim with phony documents purporting to be account statements from a trading firm showing the use of his funds to trade options. Whitney returned to the victim approximately $44,000 that Whitney claimed to be “returns” from the trading, but these “returns” were not profits from his trading but rather a return of some of the victim’s own funds invested with Whitney. The remainder of the victim’s invested funds were not traded, but were misappropriated by Whitney and were also used to make Ponzi-type payments to earlier investors.

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SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds

Source- http://www.sec.gov/news/press/2011/2011-257.htm

Washington, D.C., Dec. 8, 2011 – The Securities and Exchange Commission today charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.”

Wachovia Bank is now Wells Fargo Bank following a merger in March 2010.

When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

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SEC Freezes Assets of Four Chinese Citizens Charged with Insider Trading

Source- http://www.sec.gov/news/press/2011/2011-253.htm

Washington, D.C., Dec. 6, 2011 — The Securities and Exchange Commission today announced that it has frozen the assets of four Chinese citizens and a Chinese-based entity charged with insider trading in advance of a merger announcement by educational companies based in London and Beijing.

The SEC moved quickly to obtain an emergency court order to freeze assets just two weeks after the suspicious trading by Sha Chen, Song Li, Lili Wang, and Zhi Yao, who have U.S.-based brokerage accounts. Some of them already attempted to liquidate or transfer their illicit profits.

The SEC alleges that they purchased American Depository Shares (ADS) of Beijing-based Global Education and Technology Group in the two weeks leading up to a November 21 public announcement of a planned merger with London-based Pearson plc. Some of their brokerage accounts were dormant until they bet heavily on Global Education shares, and some of the purchases made either equaled or exceeded the stated annual income of that trader. After the agreement was announced, they immediately began selling some of their Global Education shares. Their illicit gains totaled more than $2.7 million.

“On the basis of non-public information, these traders suddenly purchased massive amounts of Global Education shares in U.S. brokerage accounts that had been largely inactive,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “We’re pleased the court immediately granted our order to freeze these accounts before proceeds from the illegal trades could be transferred outside U.S. jurisdiction.”

The SEC also charged All Know Holdings Ltd. and one or more unknown purchasers of Global Education stock in its complaint filed on December 5 in U.S. District Court for the Northern District of Illinois.

According to the SEC’s complaint, Pearson and Global Education each announced before trading began on November 21 that Pearson agreed to acquire all of Global Education’s outstanding stock for $294 million ($11.006 per share traded in the U.S.). Global Education’s stock price increased 97 percent that day, from $5.37 to $10.60.

The SEC alleges that Chen, Li, Wang, and Yao made their purchases of Global Education’s ADS shares while in possession of material, non-public information about the merger. A Global Education co-founder and Chairman of the Board apparently tipped Wang and possibly others about the potential acquisition. Wang then transferred new funds into her previously dormant brokerage account and bought 28,000 Global Education shares. The others also engaged in similarly suspicious trading in Global Education stock, which was typically thin. On November 18, the last trading day before the acquisition announcement, their purchases accounted for more than 35 percent of the entire day’s trading volume for the company’s shares, which trade on the NASDAQ.

The SEC alleges that the defendants each violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The emergency court order that the SEC obtained on December 5 on an ex parte basis freezes more than $2.7 million of defendants’ assets held in U.S. brokerage accounts and, among other things, grants expedited discovery and prohibits the defendants from destroying evidence.

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SEC, U.S. Attorney and FBI Announce 13 Charged in Connection with Securities Kickback Schemes

Source- http://www.sec.gov/news/press/2011/2011-251.htm

Washington, D.C., Dec. 1, 2011 — The Securities and Exchange Commission, U.S. Attorney for the District of Massachusetts, and Federal Bureau of Investigation today announced parallel cases filed in federal court against several corporate officers, lawyers and a stock promoter alleging they used kickbacks and other schemes to trigger investments in various thinly-traded stocks.

The criminal case charged 13 defendants who engaged in criminal activity in the midst of an undercover FBI operation. According to the charges filed in U.S. District Court, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the insiders and promoters did not know was that the purported investment fund representative was actually an undercover agent.

The criminal defendants include Kelly Black-White and James Prange, both of whom were in the business of finding capital for emerging companies. The civil case names some of the individuals who were charged criminally, and the SEC also issued trading suspensions in the stocks of a number of the companies involved in the criminal cases.

The charges follow a year-long investigation focusing on preventing fraud in the micro-cap stock markets. Microcap companies are small publicly traded companies whose stock often trades at pennies per share. Fraud in the microcap stock markets is of increasing concern to regulators as such markets have proven to be fertile grounds for fraud and abuse. This is, in part, because accurate information about microcap stocks may be difficult for the average investor to find, since many microcap companies do not file financial reports with the SEC.

The SEC suspended trading in seven microcap companies involved in the kickback-for-investment schemes:

1st Global Financial Inc. (FGFB) based in Las Vegas

Augrid Global Holdings Corp. (AGHD) based in Houston

ComCam International, Inc. (CMCJ) based in West Chester, Pa.

MicroHoldings US, Inc. (MCHU) based in Vancouver, Wash.

Outfront Companies (OTFT) based in Fla.

Symbollon Corp./Symbollon Pharmaceuticals, Inc. (SYMBA) based in Medfield, Mass.

ZipGlobal Holdings Inc. (ZIPG) based in Hingham, Mass.

MicroHoldings and ZipGlobal are also charged civilly by the SEC with fraud.

These latest charges follow a series of similar cases filed by the SEC inOctober 2010 and June 2011 in which more than a dozen companies and penny stock promoters were charged in similar kickback-for-investment schemes.

“The public has a right to invest in an honest and fair market. Companies that agree to pay illegal kickbacks harm investors and undermine fair competition in the markets,” said United States Attorney Carmen Ortiz. “Hard working Americans who invest their savings should not be subjected to backroom deals like those alleged today.”

“We are committed to working with our law enforcement partners here in Massachusetts and around the country to stop abuses in the microcap sector and hold the perpetrators responsible,” said David Bergers, Director of the SEC’s Boston Regional Office. “Kickbacks and phony consulting agreements have no place in the financial strategies of any public company, and executives who engage in this kind of fraud are just selling out their own investors.”

“Boston FBI agents initiated an undercover operation aimed at identifying corporate insiders engaged in illegal investment schemes. No one who is engaged in illegal activity while participating in the markets, including CEOs, traders, fund managers, equities analysts, lawyers and publicists, is exempt from the FBI's scrutiny," said Richard DesLauriers, Special Agent in Charge of the FBI in Boston. "Because the nation's economic security is intertwined with our overall national security, the Boston division of the FBI places a substantial emphasis on investigating white collar crimes. During these difficult economic times, now, more than ever, the well-being of the global economy rests on the diligent enforcement of laws designed to ensure the fair and orderly operation of the capital markets. The FBI will continue to use undercover operations and other sophisticated investigative tools at its disposal to protect the integrity and transparency of financial markets.”

The following individuals were criminally charged today:

Kelly Black-White, 51, of Mesa, Ariz. (Operator of Premier Funding, Inc. and Premiere Services, Inc.), charged with wire fraud.

James Prange, 60, of Greenbush, Wis. (Northern Equity, Inc.), charged with wire fraud.

Michael Lee, 51, of Hingham, Mass. (CEO of ZipGlobal), charged with mail fraud and conspiracy to commit securities fraud.

Edward Henderson, 69, of Lincoln, R.I., charged with wire fraud.

Paul DesJourdy, 50, of Medfield, Mass. (CEO of Symbollon Pharmaceuticals), charged with mail fraud and conspiracy to commit securities fraud.

James Wheeler, 51, of Camas, Wash. (CEO MicroHoldings, Inc.), charged with mail fraud and conspiracy to commit securities fraud.

Steve Berman, 49, of Hillsboro, Ohio (CEO of China Wi-Max Communications), charged with mail and wire fraud.

Richard Kranitz, 68, of Grafton, Wis. (Board Member of China Wi-Max Communications), charged with mail and wire fraud.

JC Jordan, 60, of Cameron Park, Calif. (CEO of Vida Life International, LTD), charged with mail and wire fraud.

Karen Person, 61, of Naperville, Ill. (President of Small Business Company, Inc.), charged with mail and wire fraud.

Albert Reda, 65, of Tustin, Calif. (Treasurer of 1st Global Financial), charged with mail and wire fraud.

Steve Stuart, 48, of Monrovia, Md. (Major Shareholder in ComCam International, Inc.), charged with mail and wire fraud.

Muhammad (“M.J.”) Shaheed, 44, of Houston, Texas (CEO of Augrid Global Holdings Corporation), charged with mail and wire fraud.

Today, the SEC also filed civil charges of securities fraud against Desjourdy, Henderson, Lee and Wheeler alleging they defrauded investors through the use of kickbacks in financing transactions.

If convicted, the defendants charged with mail fraud and wire fraud each face up to 20 years in prison, to be followed by three years of supervised release and a $250,000 fine on each count. If convicted on the conspiracy to commit securities fraud charges, the defendants each face up to five years in prison, to be followed by three years of supervised release and a $250,000 fine on each count.

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Thirteen Charged in Connection with Securities Kickback Schemes

Source- http://www.fbi.gov/boston/press-releases/2011/thirteen-charged-in-connection-with-securities-kickback-schemes

BOSTON—The U.S. Attorney for the District of Massachusetts, the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission today announced parallel cases filed in federal court against several corporate officers, lawyers and a stock promoter alleging they used kickbacks and other schemes to trigger investments in various thinly traded stocks.

The criminal case charged 13 defendants who engaged in criminal activity in the midst of an undercover FBI operation. According to the charges filed in U.S. District Court, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the insiders and promoters did not know was that the purported investment fund representative was actually an undercover agent.

The criminal defendants include Kelly Black-White and James Prange, both of whom were in the business of finding capital for emerging companies. The civil case names some of the individuals who were charged criminally, and the SEC also issued trading suspensions in the stocks of a number of the companies involved in the criminal cases.

The charges follow a year-long investigation focusing on preventing fraud in the micro-cap stock markets. Microcap companies are small publicly traded companies whose stock often trades at pennies per share. Fraud in the microcap stock markets is of increasing concern to regulators as such markets have proven to be fertile grounds for fraud and abuse. This is, in part, because accurate information about microcap stocks may be difficult for the average investor to find, since many microcap companies do not file financial reports with the SEC.

The SEC suspended trading in seven microcap companies involved in the kickback-for-investment schemes:

1st Global Financial Inc. (FGFB) based in Las Vegas;
Augrid Global Holdings Corp. (AGHD) based in Houston;
ComCam International, Inc. (CMCJ) based in West Chester, Pa.;
MicroHoldings US, Inc. (MCHU) based in Vancouver, Wash.;
Outfront Companies (OTFT) based in Fla.;
Symbollon Corp./Symbollon Pharmaceuticals, Inc. (SYMBA) based in Medfield, Mass.;
ZipGlobal Holdings Inc. (ZIPG) based in Hingham, Mass.

MicroHoldings and ZipGlobal are also charged civilly by the SEC with fraud.

These latest charges follow a series of similar cases filed by the SEC in October 2010 and June 2011 in which more than a dozen companies and penny stock promoters were charged in similar kickback-for-investment schemes.

“The public has a right to invest in an honest and fair market. Companies that agree to pay illegal kickbacks harm investors and undermine fair competition in the markets,“ said United States Attorney Carmen Ortiz. “Hard working Americans who invest their savings should not be subjected to backroom deals like those alleged today.”

“We are committed to working with our law enforcement partners here in Massachusetts, and around the country, to stop abuses in the microcap sector and hold the perpetrators responsible,” said David Bergers, Director of the SEC’s Boston Regional Office. “Kickbacks and phony consulting agreements have no place in the financial strategies of any public company, and executives who engage in this kind of fraud are just selling out their own investors.”

“Boston FBI agents initiated an undercover operation aimed at identifying corporate insiders engaged in illegal investment schemes. No one who is engaged in illegal activity while participating in the markets, including CEOs, traders, fund managers, equities analysts, lawyers and publicists, is exempt from the FBI’s scrutiny,” said Richard DesLauriers, Special Agent in Charge of the FBI in Boston. “Because the nation’s economic security is intertwined with our overall national security, the Boston division of the FBI places a substantial emphasis on investigating white collar crimes. During these difficult economic times, now, more than ever, the well-being of the global economy rests on the diligent enforcement of laws designed to ensure the fair and orderly operation of the capital markets. The FBI will continue to use undercover operations and other sophisticated investigative tools at its disposal to protect the integrity and transparency of financial markets.”

The following individuals were charged criminally today:

Kelly Black-White, 51, of Mesa, Ariz. (Operator of Premier Funding, Inc. and Premiere Services, Inc.), charged with wire fraud;

James Prange, 60, of Greenbush, Wis. (Northern Equity, Inc.), charged with wire fraud;

Michael Lee, 51, of Hingham, Mass. (CEO of ZipGlobal), charged with mail fraud and conspiracy to commit securities fraud;

Edward Henderson, 69, of Lincoln, R.I., charged with wire fraud;

Paul DesJourdy, 50, of Medfield, Mass. (CEO of Symbollon Pharmaceuticals), charged with mail fraud and conspiracy to commit securities fraud;

James Wheeler, 51, of Camas, Wash. (CEO MicroHoldings, Inc.), charged with mail fraud and conspiracy to commit securities fraud;

Steve Berman, 49, of Hillsboro, Ohio (CEO of China Wi-Max Communications), charged with mail and wire fraud;

Richard Kranitz, 68, of Grafton, Wis. (Board Member of China Wi-Max Communications), charged with mail and wire fraud;

JC Jordan, 60, of Cameron Park, Calif. (CEO of Vida Life International, LTD), charged with mail and wire fraud;

Karen Person, 61, of Naperville, Ill. (President of Small Business Company, Inc.), charged with mail and wire fraud;

Albert Reda, 65, of Tustin, Calif. (Treasurer of 1st Global Financial), charged with mail and wire fraud; Steve Stuart, 48, of Monrovia, Md. (Major Shareholder in ComCam International, Inc.), charged with mail and wire fraud;

Muhammad (“M.J.”) Shaheed, 44, of Houston, Texas (CEO of Augrid Global Holdings Corporation), charged with mail and wire fraud.

Today, the SEC also filed civil charges of securities fraud against Desjourdy, Henderson, Lee and Wheeler, alleging they used kickbacks to manipulate trading in microcap stocks.

If convicted, the defendants charged with mail fraud and wire fraud each face up to 20 years in prison, to be followed by three years of supervised release and a $250,000 fine on each count. If convicted on the conspiracy to commit securities fraud charges, the defendants each face up to five years in prison, to be followed by three years of supervised release and a $250,000 fine on each count.

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SEC Charges Multiple Hedge Fund Managers with Fraud in Inquiry Targeting Suspicious Investment Returns

Source- http://www.sec.gov/news/press/2011/2011-252.htm

Washington, D.C., Dec. 1, 2011 — As part of an initiative to combat hedge fund fraud by identifying abnormal investment performance, the Securities and Exchange Commission today announced enforcement actions against three separate advisory firms and six individuals for various misconduct including improper use of fund assets, fraudulent valuations, and misrepresenting fund returns.

Under the initiative — the Aberrational Performance Inquiry — the SEC Enforcement Division’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny.

In particular, the SEC alleges that the firms and managers engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.

“We’re using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement — earlier detection and prevention,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This approach, especially in the absence of a tip or complaint, minimizes both the number of victims and the amount of loss while increasing the chance of recovering funds and charging the perpetrators.”

Robert Kaplan and Bruce Karpati, Co-Chiefs of the SEC Enforcement Division’s Asset Management Unit, added, “The extraordinary returns reported by these advisers and portfolio managers were, in most cases, too good to be true. In other cases, outlier returns were a telltale sign that something else was amiss. We are applying analytics across the investment adviser space — beyond performance and beyond hedge funds.”

The SEC has filed several enforcement actions to date stemming from this initiative. Of the four actions announced today, three were filed in federal court and one was brought as an administrative proceeding.

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John S. Morgan Sentenced to 10 Years for Investment Fraud

Source- http://www.fbi.gov/tampa/press-releases/2011/sarasota-man-sentenced-to-10-years-for-investment-fraud

TAMPA, FL—U.S. Attorney Robert E. O’Neill announces that U.S. District Judge Susan Bucklew today sentenced John S. Morgan (52, Sarasota) to 10 years and one month in federal prison for conspiring to commit wire fraud and engaging in money laundering. In addition, the court also ordered Morgan to forfeit a 2003 Fountain Lightning Fever Powerboat and entered a money judgment in the amount of $10,085,375, the proceeds of the offenses.

John S. Morgan pleaded guilty on June 15, 2011 pursuant to a plea agreement.

According to the plea agreement, from about March 2005 through August 2009, John S. Morgan, Marian I. Morgan, his wife, and others perpetrated an investment fraud scheme through a Danish entity named Morgan European Holdings APS (“MEH”), which the Morgans had formed. MEH was purportedly in the business of investments commonly called “prime bank instrument trading programs.” John Morgan and others falsely represented to investors that MEH trading programs would yield returns of 30-70 percent per month or 200 percent per 90-120-day period, and that the investors’ funds would never be put at risk. Morgan and others explicitly promised investors that their funds would be held in escrow in a Danske Bank account for MEH and maintained by Danish attorney Eli Hecksher, who has been charged as a co-conspirator in the scheme. Instead of safeguarding the investors’ funds in escrow, John Morgan and others disposed of the funds by: 1) paying fees and expenses associated with the fraud; 2) providing refunds of principal to select investors; and 3) stealing and converting monies for their own personal benefit. When investors did not receive the promised investment returns, and became concerned about the trading program, John Morgan and others provided a litany of excuses, assuring the investors that their funds were still on deposit and that the delays were caused by circumstances beyond their control.

In all, John Morgan and others caused investors to transfer more than $28 million to MEH accounts. Approximately $10.8 million of this total was then used by the Morgans for their personal benefit. John and Marian Morgan used investors’ funds to purchase a waterfront residence and adjoining lot in Sarasota, to fund extensive renovations on a second Sarasota residence, and to purchase or lease several luxury automobiles, including a Maserati and two Jaguars. More than eighty investors located throughout the United States, Canada, and Europe entrusted the Morgans with their funds.

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John Bennett Pleads Guilty in Manhattan Federal Court to Insider Trading Scheme

Source- http://www.fbi.gov/newyork/press-releases/2011/film-producer-and-former-investment-professional-pleads-guilty-in-manhattan-federal-court-to-insider-trading-scheme

Preet Bharara, the United States Attorney for the Southern District of New York, announced today that JOHN BENNETT, a film producer and former investment professional, pled guilty to conspiracy and securities fraud charges in connection with his participation in an insider trading scheme in which he obtained material, non-public information (“Inside Information”) about mergers and acquisitions from a co-conspirator, Scott Allen, a former consultant at a global human resources consulting firm (the “Consulting Firm”). BENNETT gained more than $1 million in illegal profits from the scheme. He pled guilty today before U.S. District Judge Deborah A. Batts.

Manhattan U.S. Attorney Preet Bharara stated: “John Bennett used his friendship with a well-connected insider to make a quick and easy profit, and despite efforts to conceal the criminal conduct, meticulous investigation uncovered the scheme. Today’s guilty plea proves yet again that we will continue to root out insider trading wherever it goes on.”

According to documents previously filed in Manhattan federal court:

In his role as a principal of the Consulting Firm, Allen allegedly learned Inside Information concerning the April 2008 acquisition of Millennium Pharmaceuticals, Inc. (“Millenium”), by Takeda Pharmaceutical Company Limited, and the September 2009 acquisition of Sepracor, Inc. (“Sepracor”), by Dainippon Sumitomo Pharma Co., Ltd. Prior to the public announcements of those acquisitions, Allen disclosed the Inside Information to BENNETT, a longtime friend, who used it to execute securities transactions that earned him over $1.1 million in illegal profits.

For example, between February 29, 2008, and April 2, 2008, BENNETT purchased approximately 1,090 Millennium call options at a total cost of about $17,000. Following the public announcement of the Millennium acquisition on April 10, 2008, Millennium’s stock price rose approximately 50%, and BENNETT sold all of his call options for around $619,000. Additionally, between May 27, 2009, and July 22, 2009, BENNETT purchased approximately 1,700 Sepracor call options at a total cost of about $227,000. Following the public announcement of the Sepracor acquisition on September 3, 2009, Sepracor’s stock price rose approximately 26 percent, and BENNETT sold all 1,100 of his unexpired call options for around $682,000.

In exchange for providing the Inside Information, BENNETT gave Allen more than $100,000 in cash payments that he delivered in person over the course of more than 20 occasions between April 2008 and the summer of 2010.

BENNETT and Allen also attempted to conceal the insider trading scheme from authorities and to avoid detection. For example, in October 2010, when interviewed at his home by FBI agents, Allen falsely claimed that he had not spoken to BENNETT in three or four years. In fact, he had met with and spoken to BENNETT repeatedly through at least July 2010. Rather than use his cell phone or another phone that was traceable to him, Allen repeatedly communicated with BENNETT in person and contacted him by using a public phone at LaGuardia Airport.

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Jeffrey Wallace "J.W." Edwards Sentenced for Investment Scheme

Source- http://www.fbi.gov/atlanta/press-releases/2011/bremen-man-sentenced-for-investment-scheme

ROME, GA—JEFFREY WALLACE “J.W.” EDWARDS, 46, of Bremen, Georgia, was sentenced today by United States District Judge Robert L. Vining, Jr. to prison on federal charges of wire fraud, mail fraud, and money laundering.

United States Attorney Sally Quillian Yates said, “Mr. Edwards tricked investors from all walks of life into turning over their life savings to him, with outrageous promises of high returns. Rather than investing the money they entrusted to him, as he had promised, he used it to buy luxury goods and land. This case should serve as a warning to potential investors: don’t believe promises that are too good to be true. And to the con artists out there like this defendant: one day, when the house of cards you are building on a foundation of lies comes tumbling down, you could end up serving a significant federal prison sentence, just like this defendant.”

IRS Criminal Investigation Special Agent in Charge Rodney E. Clarke said, “The sentence today does not replace the losses that were incurred due to this scheme. However, it does illustrate that IRS CI along with our law enforcement partners, are committed to pursuing individuals who commit these types of crimes.”

EDWARDS was sentenced to nine years in prison, to be followed by three years of supervised release. The court stated that it would issue an order within 90 days, specifying the restitution Edwards would be required to pay to victims. The Court also ordered EDWARDS and FRONTIER HOLDINGS to forfeit their interests in four parcels of real property located in Haralson County, Georgia that were purchased with the proceeds of the scheme to defraud, four additional parcels of real property that EDWARDS previously owned, a 2006 Cadillac Escalade, a 2006 Lincoln Town Car, and a 2006 Lincoln Mark LT truck. In addition, the court ordered EDWARDS and FRONTIER HOLDINGS each to pay personal money judgments of $2,043,626, which represents the amount of proceeds they obtained as a result of the mail and wire fraud offenses, and $3,240,687, which represents the amount of laundered money. EDWARDS was convicted of 17 counts of wire fraud, two counts of mail fraud, and 11 counts of money laundering, on August 30, 2011, after a two-week jury trial.

According to United States Attorney Yates, the charges, and other information presented in court: The evidence at trial showed that between February 2006 and February 2007, EDWARDS promised investors they would receive returns of between 41 and 1066 percent on the money they placed in the “high yield” investment programs that he had with the Federal Reserve Bank. The evidence showed that EDWARDS also claimed to own a bank, to have access to lucrative but confidential investment opportunities, and to be a “special agent” of the Federal Reserve. Thirty-one victims mailed or electronically transferred over $7 million to EDWARDS. He spent the money quickly, and when the victims started demanding payment, he blamed “the banking industry” and “the powers that be” for delaying payment from his phantom investments.

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Geoffrey A. Gish and Myra J. Ettenboroug Sentenced for Running Ponzi Scheme That Cost Investors $18 Million

Source- http://www.fbi.gov/atlanta/press-releases/2011/georgia-couple-sentenced-for-running-ponzi-scheme-that-cost-investors-18-million

ATLANTA—GEOFFREY A. GISH, 57, of Lawrenceville, Georgia, and MYRA J. ETTENBOROUGH, 56, of Roswell, Georgia, were sentenced to prison late today by United States District Judge Charles A. Pannell, Jr. on charges of conspiracy, mail fraud, and wire fraud.

“These defendants tricked investors into handing over millions of dollars with promises of high yield trading programs that supposedly offered safety, security, and extraordinarily high returns,” said United States Attorney Sally Quillian Yates. “These well-known schemes are all too common, and investors should be skeptical of offers that sound too good to be true. As long as these scams exist, we will continue to use every resource to bring thieves like these to justice.”

Brian D. Lamkin, Special Agent in Charge, FBI Atlanta Field Office, said, “The defendants in this case defrauded investors over numerous years while eluding State investigators by providing false information. Mr. Gish and Ms. Ettenborough exhibited total disregard for their victim investors while displaying an almost limitless level of personal greed. They will now be held accountable for their actions.”

GISH was sentenced to 20 years in prison to be followed by three years of supervised release, and ordered to pay restitution in the amount of $17,245,275.

ETTENBOROUGH was sentenced to seven years in prison to be followed by three years of supervised release, and also and ordered to pay restitution in the amount of $17,245,275. Both were convicted of the charges on September 23, 2011, after a trial which lasted over two weeks.

According to United States Attorney Yates, the charges, and other information presented in court: Beginning in 2004 and continuing to May 17, 2006, GISH and ETTENBOROUGH defrauded investment clients of “Weston Rutledge,” an investment firm, by misrepresenting the ways in which they used investor monies and the purported earnings from those monies. During this period, GISH and ETTENBOROUGH raised approximately $29 million from their clients for investment in three pooled funds. The investors were promised guaranteed returns of as much as 15 percent per quarter, and regular, monthly statements that GISH and ETTENBOROUGH caused Weston Rutledge to send to the investors, purported to show these high returns.

Investors in the largest pooled fund, which supposedly involved “high yield trading programs” between top-tier banks, also were promised that their money was safe and kept in a “blocked” or reserve account.

In reality, GISH and ETTENBOROUGH used the monies raised from investors for a variety of purposes that were different than the purposes and uses represented to investors. None of these uses returned any principal, earnings, or profits to Weston Rutledge consistent with and supporting the representations that GISH and ETTENBOROUGH made to investors about the earnings and profits generated with their funds. Some investors who requested payment of the earnings reflected on their investment statements were paid from monies raised from other investors, which is a common technique in a Ponzi-type investment fraud scheme.

During the course of their scheme, GISH and ETTENBOROUGH were advised on several occasions that they were engaged in or using investor monies for fraudulent activity. In particular, GISH and ETTENBOROUGH were advised that the “high-yield trading programs” were fraudulent, although they ignored this advice and continued to promise investors that their money was safe and being used for such programs. In 2005 and 2006, the Georgia Secretary of State’s Office investigated GISH and his company in connection with the three pooled funds being offered to investors, and whether GISH was violating an earlier state order to cease and desist from acting as an unregistered investment advisor. In response to the Secretary of State’s subpoenas and requests for information, GISH and ETTENBOROUGH provided false and misleading information in an attempt to conceal their scheme and keep it going.

GISH and ETTENBOROUGH’s scheme did not come to an end until May 2006, when the United States Securities and Exchange Commission obtained an order placing Weston Rutledge and the three pooled investment funds into receivership. Of the $29 million that had been raised from investors, GISH and ETTENBOROUGH had used $11 million to pay investors who requested withdrawals or payment of the supposed earnings that their investments were making. The remaining $18 million was gone, used for a variety of purposes that were inconsistent with the promises that GISH and ETTENBOROUGH had made to investors. This included approximately $1.2 million that went to GISH and/or his benefit, including to purchase a house in his name and for the purchase and upkeep of multiple automobiles.

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