Joseph Angelo Sivigliano to Serve 96 Months in Prison for Conspiracy, Wire Fraud, and Money Laundering in Real Estate Ponzi Scheme

Source- http://www.fbi.gov/oklahomacity/press-releases/2012/city-man-to-serve-96-months-in-prison-for-conspiracy-wire-fraud-and-money-laundering-in-real-estate-ponzi-scheme

OKLAHOMA CITY—Today, Joseph Angelo Sivigliano, 80, of Oklahoma City, was sentenced by United States District Judge David L. Russell to serve 96 months in prison for conspiracy, wire fraud, and money laundering in connection with a real estate investment Ponzi scheme, announced Sanford C. Coats, United States Attorney for the Western District of Oklahoma. Judge Russell also ordered Sivigliano to serve three years of supervised release following his prison term and pay restitution in the amount of $2,214,577.25.

Sivigliano was indicted on October 4, 2011. Following a trial in April, the jury deliberated less than three hours before finding Sivigliano guilty on all 46 counts. Evidence at trial showed that beginning in 2005, Sivigliano did business selling “investment opportunities” as Helping Hearts and Hands Inc. (HHH) in Bethany, Oklahoma. Sivigliano held HHH out to investors as a legitimate 501(c)(3) charitable organization engaged in real estate investments to benefit philanthropic ventures, such as its Christian childcare facility “Teaching Little Hearts and Hands.” However, Sivigliano was not a registered investment advisor or broker-dealer in the state of Oklahoma, and HHH was not registered as a licensed securities firm or otherwise authorized to sell securities in the state of Oklahoma. Evidence showed that Sivigliano also owned and operated other businesses including Celebrity Limo and Valet Corporation (“Celebrity Limo”) and MC Productions Inc. (“MCP”), both in Oklahoma City, and Sivigliano’s daughter and grandson owned and operated Lansbrook Worship & Event Center (“Lansbrook WEC”) in Oklahoma City.

Evidence showed that from February 2005 through August 2007, Sivigliano solicited approximately 21 Oklahoma investors and 46 out-of-state investors to invest approximately $3.8 million in the HHH real estate investment scheme. Sivigliano used the investor funds in a Ponzi scheme to pay return on investment to earlier investors and to support himself, his associates, and his own businesses (i.e. Celebrity Limo, MCP, and Lansbrook WEC). Investors lost approximately $1.7 million.

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Hyung Lim Pleads Guilty in New York Federal Court to Insider Trading Scheme

Source- http://www.fbi.gov/newyork/press-releases/2012/former-tech-company-employee-pleads-guilty-in-new-york-federal-court-to-insider-trading-scheme

NEW YORK—Hyung Lim, a former technology company employee, pleaded guilty today in Manhattan federal court to conspiracy to commit securities fraud based on his involvement in an insider trading scheme, announced Preet Bharara, the U.S. Attorney for the Southern District of New York, and Mary Galligan, the Acting Assistant Director in Charge of the New York Field Office of the FBI. As part of the scheme, Lim obtained inside information from an employee of NVIDIA Corporation, a publicly traded company, and passed that information to an analyst at a wealth management company who then traded in NVIDIA stock. Lim also pleaded guilty to wire fraud for passing inside information that he obtained while working at Alterra Corporation, another publicly traded company. He pleaded guilty before U.S. District Judge Richard J. Sullivan.

According to the information to which Lim pleaded guilty, statements made during the plea proceeding, and other court documents:

Between 2008 and 2011, Lim obtained inside information from an NVIDIA employee who worked in the company’s finance department. The inside information included earnings information, quarterly revenues and gross margins that had not yet been publicly announced. Lim passed the inside information to Danny Kuo, a research analyst at a wealth management firm headquartered in California. Kuo then provided the information to a portfolio manager at his firm, who executed trades in NVIDIA stock. In exchange for the information, Lim received cash payments and other items of value from Kuo.

Between 2005 and 2008, while working in the marketing department of Alterra, Lim also passed inside information about Alterra to Kuo. At that time, Kuo worked as a research analyst at an investment firm in New York.

Lim, 45, of Los Altos, California, pleaded guilty to one count of conspiracy to commit securities fraud and one count of wire 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 wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million. As part of his plea agreement, Lim agreed to forfeit the amount of proceeds obtained as a result of the offenses. He is scheduled to be sentenced by Judge Sullivan on March 4, 2013.

Kuo previously pleaded guilty on April 13, 2012, to conspiracy and securities fraud charges and awaits sentencing.

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Douglas F. Vaughan Sentenced to 12 Years for Federal Wire and Mail Fraud Charges Involving Ponzi Scheme

Source- http://www.fbi.gov/albuquerque/press-releases/2012/douglas-f.-vaughan-sentenced-to-12-years-for-federal-wire-and-mail-fraud-charges-involving-ponzi-scheme

ALBUQUERQUE—This afternoon in Santa Fe, New Mexico, Chief United States District Judge Bruce D. Black sentenced Douglas F. Vaughan, 64, of Albuquerque, to 12 years in federal prison for wire and mail fraud charges that involved a Ponzi scheme in which Vaughan fraudulently obtained more than $74 million from approximately 600 investors who were promised extraordinary returns. Vaughan will be on supervised release for six years after he completes his prison sentence.

In addition to the prison sentence, Judge Black also imposed a money judgment against Vaughan in the amount of $74,745,723.93, which represents a portion of the gross proceeds that Vaughan derived from his criminal conduct. Additionally, Vaughan has agreed to forfeit to the United States previously-seized funds in the amount of $38,298.24 and real property located in Spring Valley, Nevada.

The sentence was announced by U.S. Attorney Kenneth J. Gonzales; Carol K.O. Lee, Special Agent in Charge of the Albuquerque Division of the FBI; Richard Ferretti, Resident Agent in Charge of the U.S. Secret Service’s Albuquerque Office; and Daniel S. Tanaka, Director of the Securities Division of the New Mexico Regulation and Licensing Department.

Vaughan was charged in February 2011, in a 30-count indictment alleging that, between 2005 and 2010, Vaughan operated a promissory note investment program, which he marketed as a means of generating revenue to grow his real estate business, as a Ponzi scheme. It alleged that Vaughan owed more than $74 million in unpaid principal and interest payments to approximately 600 investors when the fraudulent scheme collapsed in early 2010.

On December 21, 2011, Vaughan pled guilty to counts one and four of the indictment charging him with wire fraud and mail fraud. Vaughan’s plea agreement included a 16-page addendum of stipulated facts in which Vaughan admitted the allegations in the indictment and described in detail how he established, marketed, and administered his Ponzi scheme.

According to the addendum, Vaughan was the chairman, chief executive officer, president, and majority shareholder of Vaughan Company, Realtors (VCR), a business that operated primarily as a residential real estate brokerage and was at one time the largest independent residential brokerage in New Mexico. In 1993, Vaughan began an investment program in which he accepted money on behalf of VCR in exchange for interest-bearing promissory notes. The typical note had a three-year term, an interest rate ranging from eight to 40 percent per year and provided for interest to be paid in monthly installments. At the end of the note’s term, Vaughan either paid off the principal or offered the investor the opportunity to “roll over” the principal into a new note. Vaughan signed each promissory note on behalf of VCR.

Vaughan led investors to believe that their investments in the promissory note program were actually or virtually risk-free because they were guaranteed by VCR, Vaughan’s personal guarantee and a $2.5 million deed of trust on certain real estate. Vaughan marketed his promissory note program by representing that the invested funds would be used to purchase real estate and to acquire smaller real estate companies. Instead, Vaughan used the promissory note program funds primarily for three undisclosed purposes: (1) to pay the interest and principal on promissory notes taken out by earlier investors; (2) to pay himself, under the guise of salary, bonuses, or some other personal transfers; and (3) to subsidize the operation of VCR, which was generating insufficient “legitimate” revenues to sustain itself.

By 2005, the promissory note program was an important source of funding for VCR and, without the infusion of capital generated by new promissory note program investors, VCR was insolvent. Despite this, Vaughan continued to distribute the same marketing materials for the promissory note program, sign the same promissory notes, and make the same corporate and personal guarantees. Although Vaughan represented to investors that he would not extend more than $2,500,000 in promissory notes, end-of-year financial records reflect that the aggregate principal balance owed to note holders far exceeded this amount:

2004—$24,351,605
2005—$32,299,363.37
2006—$39,969,110.68
2007—$49,984,845.80
2008—$62,844,445.57
2009—$74,386,623.38

From at least 2005 through February 2010, Vaughan used funds from new promissory note program investors to make interest payments to existing note holders and thus lulled existing investors into believing that they were being paid returns from VCR’s legitimate business revenues. However, VCR’s corporate tax returns reflected the following annual losses:

2004—$4,041,048
2005—$5,595,285
2006—$7,461,409
2007—$9,913,893
2008—$13,313,323
2009—$13,907,738

In the addendum, Vaughan admitted that, when his Ponzi scheme began to collapse and he became unable to meet the monthly interest payments to note holders, he made false and misleading excuses to investors and failed to disclose that VCR had insufficient revenue to make the interest payments. In February 2010, when Vaughan filed for personal and corporate bankruptcy, the aggregate principal balance owned to approximately 600 note holders was approximately $74,745,723.93, and the interest expense owed to note holders exceeded $1 million per month.

As part of his plea agreement, Vaughan resolved two other pending cases: a civil case filed against Vaughan by the Securities and Exchange Commission (SEC) in federal court, and a bankruptcy case initiated by Vaughan in federal bankruptcy court. In the SEC case, Vaughan consented to the entry of a judgement that permanently enjoins him from violating the federal securities laws. Vaughan also consented to an order by the SEC in an administrative proceeding that bars him from associating with any broker, dealer, or investment advisor and from participating in any stock offerings. In the bankruptcy case, Vaughan entered into a stipulated judgment that denied him a discharge from bankruptcy.

As required by the plea agreement, the U.S. Attorney’s Office moved to dismiss the remaining 28 counts of the indictment after sentence was imposed on Vaughan.

In announcing Vaughan’s sentence, U.S. Attorney Gonzales said, “The name Doug Vaughan will be associated in New Mexico with the terms greed and insidious theft for a very long time. He destroyed a once reputable company and wrecked the livelihood and financial security of hundreds of good, trusting people in order to perpetuate his scheme and ridiculously lavish lifestyle. The money his investors lost is gone forever, and no prison sentence will make them whole. But my hope is that this prosecution will bring some solace to his victims and put others on fair notice of the unscrupulous operators out there. If a deal sounds too good to be true, it probably is. My sincere appreciation to the FBI, the U.S. Secret Service, and the New Mexico Securities Division for bringing this scheme to light and for diligently pursuing justice.”

“Today’s sentencing is a warning to con artists who would finance their lavish lifestyles by stealing the savings of hard-working Americans,” said Special Agent in Charge Carol K.O. Lee, of the Albuquerque Division of the FBI. “It also is a lesson to investors to be cautious and to question promises of exorbitant rates of return. While Mr. Vaughan will have plenty of time behind bars to think about his actions, the many victims he harmed are forced to rebuild their lives as best they can. The Albuquerque FBI Division will continue working with the U.S. Attorney’s Office and our law enforcement partners to pursue those who, out of an abundance of greed, threaten to undermine the public’s confidence in our economic system and way of life.”

“I applaud the collaborative work of state and federal law enforcement in this case,” said Resident Agent in Charge Ferretti of the U.S. Secret Service. “Specifically, the New Mexico Securities Division did an outstanding job in uncovering and stopping this fraudulent scheme. These Ponzi schemes are a dangerous and growing trend, and cooperative work by law enforcement, across jurisdictions, is critical to effectively prosecuting these types of cases. As long as criminals, such as Doug Vaughan, target investors in order to further their criminal enterprises, the U.S. Secret Service will continue to target those responsible.”

“No prison sentence can ever make whole those who were victimized by Mr. Vaughan. He did not just take their money. Mr. Vaughan callously robbed many of their sense of security and the dignified retirement they had worked their lifetime to achieve,” said Director Tanaka of the New Mexico Securities Division. “Prison is a pale shadow of the justice Mr. Vaughan deserves, but we must take a small measure of comfort in the knowledge that he will never be able to exploit others as he did here. My heart goes out to those who fell prey to this insidious scheme. Please rest assured that we continue to work tirelessly in pursuit of those who would exploit our citizens.”

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SEC Charges Solar Manufacturer With Concealing Agreement to Transfer Ownership Stake in Its Chinese Subsidiary

Source- http://www.sec.gov/news/press/2012/2012-181.htm

Washington, D.C., Sept. 6, 2012 – The Securities and Exchange Commission today charged a solar panel manufacturer headquartered in South San Francisco and three of its former executives with defrauding investors by concealing the transfer of nearly half of the ownership stake in its Chinese subsidiary to three individuals in China who manage the subsidiary.

The SEC alleges that Worldwide Energy and Manufacturing USA Inc. (WEMU) raised nearly $9 million from U.S. investors in early 2010 in order to expand its solar subsidiary based in Rugao City, China. The Chinese subsidiary represented the bulk of WEMU’s operations and generated 77 percent of the company’s revenue the previous year. In a power point presentation at road shows and in other communications with investors, the company’s founder and chairman of the board Jimmy Wang and the company’s president Jeffrey Watson touted the solar subsidiary’s success as the primary growth area for the company and represented that the company fully owned its Chinese subsidiary. They neglected to tell investors that WEMU actually was set to transfer 49 percent of the equity in the Chinese subsidiary to its three managers. This critical ownership deal was not disclosed in the company’s filings or offering documents. Later, Wang and his wife Mindy Wang, who served as the company’s vice president, secretary and treasurer, went so far as to sign additional agreements to effectuate the transfer that were concealed from WEMU’s board and auditors.

Additional Materials
SEC Complaint

WEMU, the Wangs, and Watson agreed to settle the SEC’s charges.

“WEMU and its executives deliberately withheld the fact that its investors would not have a full ownership stake in its largest and most profitable subsidiary,” said Marc J. Fagel, Director of the SEC’s San Francisco Regional Office. “The decreased ownership interest in the subsidiary would be a key piece of information for anyone investing in a company with significant offshore operations.”

According to the SEC’s complaint filed in federal court in San Francisco, because the company’s future success depended on the technical expertise and sales connections of the three Chinese solar managers, WEMU entered into a stock option agreement with them in January 2008 that included consideration for a future change in organizational structure. The Chinese subsidiary grew dramatically over the next year and quickly became WEMU’s most profitable subsidiary. In February 2009, Jimmy Wang signed two key agreements on behalf of WEMU to share 49 percent of the Chinese subsidiary’s net profits with the solar managers and to transfer 49 percent of the subsidiary’s equity to them in February 2010. Failure to disclose these agreements resulted in WEMU filing false and misleading quarterly reports for the first three quarters of 2009 and first quarter of 2010.

According to the SEC’s complaint, WEMU management began planning a capital raise in the fall of 2009 so it could expand its solar operations by building a factory in China to manufacture solar panels. When Jimmy Wang and Watson went out to raise money from investors in early 2010, there was no mention of the agreement to transfer an ownership stake. Instead, in order to avoid informing investors about the profit sharing arrangement and contractual obligation to transfer equity to the Chinese subsidiary’s managers, Jimmy and Mindy Wang traveled to China in March 2010 to secretly sign a set of side agreements that allowed the solar managers to begin the registration process with the Chinese government to effectuate the transfer. Both Jimmy and Mindy Wang concealed these side agreements from WEMU’s auditors, other executives, and its board of directors. The company’s failure to report the transfer of the solar subsidiary resulted in a material overstatement of net income to WEMU’s reported financial statements.

Without admitting or denying the SEC’s allegations, WEMU agreed to pay a $100,000 penalty and be permanently enjoined from future violations of antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Wangs and Watson consented to permanent bars from serving as officers or directors of a public company and agreed to be permanently enjoined from future violations of the antifraud and other provisions of the federal securities laws. Mindy Wang and Watson each agreed to pay penalties of $50,000. The terms of the settlement with Jimmy Wang reflect credit given to him by the Commission for his substantial assistance in the investigation and the fact that he has entered into a cooperation agreement to assist in the ongoing investigation.

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SEC Charges Renee White Fraser and her firm Fraser Communications Trading in Client's Stock

Source- http://www.sec.gov/news/press/2012/2012-179.htm

Washington, D.C., Sept. 5, 2012 – The Securities and Exchange Commission today charged the CEO of a Los Angeles-based public relations firm with insider trading on nonpublic information she learned from a client that was about to acquire a bank in a deal assisted by the Federal Deposit Insurance Corporation (FDIC).

The SEC alleges that Renee White Fraser and her firm Fraser Communications were contacted by Pasadena-based East West Bancorp (EWBC) for marketing and public relations support during its acquisition of San Francisco-based United Commercial Bank. The very next day after agreeing to take on EWBC as a client, Fraser bought 10,000 shares of EWBC stock. She sold all of her shares after EWBC’s stock price jumped 55 percent after the public announcement of the acquisition.

Additional Materials
SEC Complaint

Fraser agreed to settle the SEC’s charges by paying $91,530.36, which is more than double what she gained in illegal profits from her alleged insider trading.

“Fraser’s client entrusted her with highly sensitive nonpublic information, and she tried to turn that into a quick side profit,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office. “Consultants in public relations or any career field cannot exploit their client relationships for an illegal payday in the stock market.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, EWBC contacted Fraser Communications on Oct. 14, 2009, and shared material, nonpublic information about its upcoming FDIC-assisted transaction for the confidential corporate purpose of allowing Fraser and her employees to prepare marketing and public relations materials ahead of that acquisition. EWBC formally engaged Fraser’s firm on October 15 to assist EWBC with public relations work.

The SEC alleges that Fraser, who lives in Santa Monica, purchased 10,000 EWBC shares on October 16 after learning the previous day about the impending EWBC-United Commercial Bank transaction. EWBC announced the acquisition of United Commercial Bank’s banking operations on November 6. Fraser proceeded to sell 7,500 of her EWBC shares on November 10, the second trading day after the announcement. She sold the remaining 2,500 shares on June 24, 2011, for total combined profits of $43,868.

In settling the SEC’s charges without admitting or denying the allegations, Fraser agreed to pay $43,868 in disgorgement, $3,794.36 in prejudgment interest, and a $43,868 penalty. She consented to a permanent injunction from further violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Fraser also agreed to a permanent bar prohibiting her from serving as an officer or director of a public company.

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John A. Zdanecis was Arrested and Charged with Commodities Fraud

Source- http://www.fbi.gov/buffalo/press-releases/2012/rochester-man-arrested-and-charged-with-commodities-fraud

ROCHESTER, NY—U.S. Attorney William J. Hochul, Jr. announced today that John A. Zdanecis, 77, of Rochester, New York, was arrested and charged by criminal complaint with commodities fraud. The charge carries a maximum penalty of 25 years in prison, a $250,000 fine, or both.

Assistant U.S. Attorney John J. Field, who is handling the case, stated that according to the complaint, from 2003 through 2010, Zdanecis defrauded two investors in a commodity pool that he operated under the name of Comtra Limited. The defendant promised to invest their money in commodities but instead used it for his personal and business expenses. The complaint further states that Zdanecis concealed his scheme by providing fake account statements to the clients which misrepresented their holdings and the disposition of their money. The two investors lost a total of $160,000.

The arrest today is the result of investigative efforts by special agents of the Federal Bureau of Investigation, under the direction of Special Agent in Charge Christopher M. Piehota.

The defendant is due back in court for further proceedings on October 4, 2012, at 9:00 a.m.

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Three Former UBS Executives Convicted for Frauds Involving Contracts Related to the Investment of Municipal Bond Proceeds

Source- http://www.fbi.gov/newyork/press-releases/2012/three-former-ubs-executives-convicted-for-frauds-involving-contracts-related-to-the-investment-of-municipal-bond-proceeds

WASHINGTON—A federal jury in New York City today convicted three former financial services executives for their participation in frauds related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.

Peter Ghavami, Gary Heinz, and Michael Welty, all former UBS AG executives, were found guilty on conspiracy and fraud charges in the U.S. District Court in New York City. Ghavami was found guilty on two counts of conspiracy to commit wire fraud and one count of substantive wire fraud. Heinz was found guilty on three counts of conspiracy to commit wire fraud and two counts of substantive wire fraud. Welty was found guilty on three counts of conspiracy to commit wire fraud. Heinz was found not guilty on one count of witness tampering, and Welty was found not guilty on one count of substantive wire fraud.

The trial began on July 30, 2012. Ghavami, Heinz, and Welty were initially indicted on December 9, 2010.

“For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects,” said Scott D. Hammond, Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program. “Today’s convictions demonstrate that the division is committed to holding accountable those who seek to unfairly and illegally undermine competitive markets.”

According to evidence presented at trial, while employed at UBS, Ghavami, Heinz, and Welty participated in separate fraud conspiracies and schemes with various financial institutions and with a broker at various time periods from as early as March 2001 until at least November 2006. These financial institutions, or providers, offered a type of contract—known as an investment agreement— to state, county, and local governments and agencies and not-for-profit entities throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

According to evidence presented at trial, while acting as providers, Ghavami, Heinz, and Welty, with their provider and broker co-conspirators, corrupted the bidding process for more than a dozen investment agreements to increase the number and profitability of the agreements awarded to UBS. At other times, while acting as brokers, Ghavami, Heinz, Welty, and their co-conspirators arranged for UBS to receive kickbacks in exchange for manipulating the bidding process and steering investment agreements to certain providers.

Ghavami, Heinz, and Welty deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities to refinance outstanding debt and for various public works projects, such as for building or repairing schools, hospitals, and roads. Evidence at trial established that they cost municipalities around the country and the U.S. Treasury millions of dollars.

During the trial, the government presented specific evidence relating to approximately 26 corrupted bids and approximately 76 recorded conversations made by the co-conspirator financial institutions. Among the issuers and not-for-profit entities whose agreements or contracts were subject to the defendants’ schemes were the Commonwealth of Massachusetts, the New Mexico Educational Assistance Foundation, the Tobacco Settlement Financing Corporation of Rhode Island, and the RWJ Health Care Corp at Hamilton.

“Corrupt bidding schemes serve to weaken the public’s trust in the municipal bond market and prevent public entities from enjoying the benefits of a true competitive bidding process,” said Mary E. Galligan, Acting Assistant Director in Charge of the FBI in New York. “Today’s conviction is further proof of our efforts to weed out these corrupt criminals and ensure justice is served.”

“Today’s verdict is important because it confirms that these complex, seemingly uninteresting backroom deals have a real impact on taxpayers, who should benefit from a municipal bond issue and are ultimately responsible for paying it off,” said Richard Weber, Chief, Internal Revenue Service-Criminal Investigation (IRS-CI). “Today’s convictions send a strong message to the municipal bond industry and demonstrates the commitment of the Internal Revenue Service and the Justice Department to rid the industry of corrupt practices.”

A total of 20 individuals have been charged as a result of the department’s ongoing municipal bonds investigation. Including today’s convictions, a total of 19 individuals have been convicted or pleaded guilty, and one awaits trial. Additionally, one company has pleaded guilty.

Two of charged fraud conspiracies carry a maximum penalty per count of 30 years in prison and a $1 million fine. A third fraud conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. The two wire fraud charges carry a maximum penalty per count of 30 years in prison and a $1 million fine. These maximum fines per count may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either amount is greater than the statutory maximum fine.

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Brian Ray Dinning was Charged in South African Ponzi Scheme

Source- http://www.fbi.gov/norfolk/press-releases/2012/virginia-attorney-charged-in-south-african-ponzi-scheme-1

NORFOLK, VA—Brian Ray Dinning, 47, of Toronto, Canada, has been indicted by a federal grand jury on wire fraud charges.

Neil H. MacBride, United States Attorney for the Eastern District of Virginia, made the announcement after the indictment was returned by the grand jury. Dinning has been charged with 25 counts of wire fraud, which each carry a maximum penalty of 20 years in prison, if convicted.

According to the indictment, Dinning was a graduate of Regent University Law School and also obtained an LL.M in tax from the Georgetown University Law Center. From early 2005 until the present, Dinning allegedly recruited approximately 23 individuals to invest in his numerous “for-profit” corporations that he had established. He did this by falsely advising investors that they would accrue significant financial gains from South African projects, such as a luxury Oceanside housing development, a luxury Oceanside hotel and private residence club, as well as diamond and gold mining operations. The indictment alleges that Dinning also used “not-for-profit” corporations to obtain donations purportedly for charitable, environmental, agricultural, medical, and community projects for the tribal people of South Africa, as well as developing wildlife habitats for native African species.

Regardless of whether his investors made investments for profit or donations for charitable causes to Dinning’s various corporations, upon receipt of these funds from his investors, Dinning is alleged to have immediately used their money for personal and family gain, for payment of his and his family’s expenses, for payment of alimony and child support to his ex-wife, for payment of private school tuition for his children, and to make the down payment and subsequent mortgage payments on his new $975,000 home in Suffolk. As a result, Dinning allegedly obtained more than $2.9 million from his investors, of which he retained more than $2 million for his and his family’s benefit.

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SEC Charges Fabrizio Neves and Jose Luna for Defrauding Brazilian Public Pension Funds in Markup Scheme

Source- http://www.sec.gov/news/press/2012/2012-168.htm

Washington, D.C., Aug. 29, 2012 — The Securities and Exchange Commission today charged two former brokers in Miami with fraud for overcharging customers approximately $36 million by using hidden markup fees on structured notes transactions.

The SEC alleges that Fabrizio Neves conducted the scheme while working at LatAm Investments LLC, a broker-dealer that is no longer in business. He was assisted by Jose Luna. The pair defrauded two Brazilian public pension funds and a Colombian institutional investor that purchased from LatAm the structured notes issued by major commercial banks. To conceal the excessive markups that Neves charged customers, Neves directed Luna to alter the banks' structured note term sheets in half of the transactions by either whiting out or electronically cutting and pasting the markup amounts over the actual price and trade information, and then sending the forged documents to customers. Neves and Luna further concealed the egregious markups in most transactions by first purchasing the notes into accounts in the name of nominee entities they controlled in the British Virgin Islands.

"Neves lined his pockets with millions of dollars by charging customers exorbitant, fraudulent markups," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Neves and Luna thought they could hide their scheme and evade regulators by using offshore nominee companies and forged documents, but they thought wrong."

The SEC also instituted an administrative proceeding against LatAm's former president Angelica Aguilera, who was the direct supervisor over Neves and Luna. The SEC's Enforcement Division alleges that Aguilera failed reasonably to supervise Neves and Luna and effectively follow or implement LatAm's supervisory policies and procedures to ensure the fairness of markups and markdowns they charged to LatAm customers. As a result, Neves and Luna were able to carry out the fraudulent markup scheme undetected.

According to the SEC's complaint against Neves and Luna filed in U.S. District Court for the Southern District of Florida, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers' behalf from 2006 to 2009. But instead of purchasing the notes for his customers' accounts for prices around the banks' issuance amounts - which totaled approximately $70 million - in most transactions Neves first traded the notes with one or more accounts in the name of offshore nominee entities that he and Luna controlled. Neves then sold the notes to his customers with undisclosed markups as high as 67 percent. Neves had no reasonable basis to mark up the prices that significantly.

The SEC alleges that as a result of the markup scheme, the Brazilian funds overpaid by approximately $24 million and the Colombian institutional investor overpaid by approximately $12 million due to the undisclosed, excessive fees. Neves enjoyed a financial boon from the scheme as LatAm paid him millions of dollars in inflated sales commissions for the structured note transactions that he made at inflated prices. Luna received hundreds of thousands of dollars in inflated salary and commissions from LatAm and tens of thousands of dollars in additional compensation from a company that Neves controlled.

The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Neves to enjoin him from future violations of the federal securities laws.

Luna has agreed to the entry of a judgment ordering him to pay disgorgement of $923,704.85, prejudgment interest of $241,643.51, and a penalty amount to be determined. The judgment permanently enjoins him from violations of the antifraud provisions of the federal securities laws. Luna neither admitted nor denied the allegations in the SEC's complaint. Luna also agreed to settle a related SEC administrative proceeding by agreeing to be barred from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or credit rating agency.

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SEC Charges Eight in Georgia-Based Insider Trading Ring

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additional Materials
SEC Complaint

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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