Hedge Fund Billionaire Raj Rajaratnam Found Guilty in Manhattan Federal Court of Insider Trading Charges

Source- http://www.fbi.gov/newyork/press-releases/2011/hedge-fund-billionaire-raj-rajaratnam-found-guilty-in-manhattan-federal-court-of-insider-trading-charges

PREET BHARARA, the United States Attorney for the Southern District of New York, announced that RAJ RAJARATNAM was found guilty today by a jury in Manhattan federal court of conspiracy and securities fraud crimes stemming from his involvement in the largest hedge fund insider trading scheme in history. RAJARATNAM was the Managing Member of Galleon Management, LLC (“Galleon”), the General Partner of Galleon Management, L.P., and a portfolio manager for Galleon Technology Offshore, Ltd., and certain accounts of Galleon Diversified Fund, Ltd. He was convicted after an eight-week trial before U.S. District Judge RICHARD J. HOLWELL.

Manhattan U.S. Attorney PREET BHARARA stated: “Raj Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over. Rajaratnam was among the best and the brightest—one of the most educated, successful, and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing. The message today is clear—there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have. Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market. It cheats the ordinary investor, victimizes the companies whose information is stolen, and is an affront not only to the fairness of the market, but the rule of law. In just over 18 months, this office has charged 47 individuals with insider trading crimes; Rajaratnam is the 35th person to be convicted. We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught.”

According to the superseding indictment filed in Manhattan federal court, other court documents, and statements made during related court proceedings:

From 2003 to March 2009, RAJARATNAM repeatedly traded on material, non-public information pertaining to upcoming earnings forecasts, mergers, acquisitions, and other business combinations (“Inside Information”). The Inside Information was given as tips by insiders and others at hedge funds, public companies, and investor relations firms—including Goldman Sachs, Intel, International Business Machines Corporation (“IBM”), McKinsey & Company (“McKinsey”), Moody’s Investor Services, Inc., Market Street Partners, Akamai Technologies, Inc. (“Akamai”), and Polycom, Inc. (”Polycom”). Based on the Inside Information, RAJARATNAM executed trades in the stock of public companies, including Goldman Sachs, Clearwire, Akamai, AMD, Intel, Polycom, and PeopleSupport, earning tens of millions of dollars.

The evidence at trial included, among other things, recordings of wiretapped phone calls between RAJARATNAM and his various co-conspirators, including: ANIL KUMAR, a senior partner and director at McKinsey; RAJIV GOEL, an employee of Intel; ADAM SMITH, a portfolio manager and analyst at Galleon; and DANIELLE CHIESI, an employee of the hedge fund New Castle Partners. RAJARATNAM engaged in overlapping conspiracies to commit securities fraud with these individuals, as well as with ROOMY KHAN, who traded securities on her own behalf.

KUMAR; GOEL; SMITH; CHIESI; MARK KURLAND, an employee at New Castle Partners; and ROBERT MOFFAT, a senior vice president at IBM, were charged with RAJARATNAM and have all previously pled guilty to insider trading charges. ROOMY KHAN was arrested on October 19, 2009 and has also pled guilty.

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SEC Charges Angelo Cuomo and George Garcy With Securities Fraud in New York-Based Beverage and Food Carrier Company

Source- http://www.sec.gov/news/press/2011/2011-110.htm

Washington, D.C., May 11, 2011 – The Securities and Exchange Commission today charged the co-founders of a New York-based beverage and food carrier company with orchestrating an $8 million securities fraud and spending at least half of investor money for their personal use.

The SEC alleges that Angelo Cuomo of Staten Island and George Garcy of Aventura, Fla., fraudulently obtained investments in E-Z Media Inc. while falsely telling investors that their company owned several patents for beverage and food carriers and had contracts to sell its carriers to such major companies as Heineken, Anheuser Busch, and Aramark Corporation. They also misrepresented their plans to conduct an initial public offering (IPO), their use of offering proceeds, and the projected share price. E-Z Media never actually had any contracts or other agreements to sell its carriers to any major company, including the brand-name companies that Cuomo and Garcy touted to investors. E-Z Media never took even the basic steps to prepare for a purported IPO.

“Garcy and Cuomo conducted an offering fraud that was rife with false statements and omissions to entice unsuspecting investors,” said George S. Canellos, Director of the SEC’s New York Regional Office. “Instead of using the offering proceeds to develop their business, Garcy and Cuomo treated E-Z Media’s bank account as a personal slush fund and diverted millions of dollars to line their pockets.”

According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of New York, E-Z Media designs carriers for use at concession stands at stadiums, arenas, movie theaters, and similar venues. E-Z Media is not registered nor does it file reports with the SEC.

The SEC alleges that Cuomo and Garcy (also known as Jorge Garcia) conducted their scheme from at least 2003 to 2009, making false statements and omissions about their company’s business prospects, assets, and liabilities. E-Z Media never disclosed that its claimed ownership of its main asset – certain patents for the carriers – was contingent on E-Z Media’s payment of $14.5 million to Cuomo, or that E-Z Media’s ownership of those patents may not have been valid in the first place.

The SEC further alleges that E-Z Media also had no reasonable basis for the post-IPO price projections that Garcy and Cuomo presented to investors, because the company had no significant assets or revenues and had substantial liabilities. They never told investors that the SEC sanctioned Garcy in 1997 for improperly offering and selling stock of another company to the public.

According to the SEC’s complaint, Garcy and Cuomo misappropriated and diverted at least $4 million of funds obtained from investors to make payments on personal loans, private school tuition, and rent and mortgages as well as other personal uses. The SEC’s complaint also names four relief defendants for the purposes of recovering fraudulently transferred assets: Cuomo’s sons Ralph Cuomo and Vincent Cuomo, Cuomo’s sister Judith Guido, and New York-based attorney Joseph Lively.

The SEC’s complaint seeks a final judgment permanently enjoining Garcy and Cuomo from future violations of the federal securities laws, barring Garcy and Cuomo from acting as officers and directors of any public company, requiring Garcy and Cuomo to pay financial penalties, and requiring the defendants and relief defendants to disgorge all ill-gotten gains plus prejudgment interest, among other relief.

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Manosha Karunatilaka Pleads Guilty in Manhattan Federal Court to Conspiring to Engage in Insider Trading

Source- http://www.fbi.gov/newyork/press-releases/2011/former-tsmc-company-account-manager-pleads-guilty-in-manhattan-federal-court-to-conspiring-to-engage-in-insider-trading

PREET BHARARA, the United States Attorney for the Southern District of New York, announced that MANOSHA KARUNATILAKA pled guilty today in Manhattan federal court to conspiring to participate in an insider trading scheme in which he defrauded a public company to obtain material, non-public information (“Inside Information”) and provided that information to members of the investment community for the purpose of executing securities transactions. KARUNATILAKA participated in the insider trading conspiracy while working as an account manager for Taiwan Semiconductor Manufacturing Company, Ltd. (“TSMC”). He pled guilty before U.S. District Judge JED S. RAKOFF.

Manhattan U.S. Attorney PREET BHARARA stated: “Manosha Karunatilaka thought he could moonlight for an expert networking firm and sell out his employer in the process. With today’s guilty plea, it should now be abundantly clear that his short-term financial gain was hardly worth it.”

According to the information, a complaint previously filed in this case, and statements made during today’s guilty plea proceeding:

Between 2008 and 2010, KARUNATILAKA and his co-conspirators participated in a conspiracy to obtain Inside Information, including TSMC product sales and shipping information, that was material to both TSMC and TSMC’s customers. They used an “expert networking” firm (the “Firm”) for the purpose of facilitating “consultation calls,” during which KARUNATILAKA provided the Inside Information to Firm clients. Between January 2008 and June 2010, the Firm paid KARUNATILAKA more than $35,000 for his consultation calls.

On October 8, 2009, for example, KARUNATILAKA had a telephone conversation with a technology analyst at a financial institution in New York, New York, during which he provided material, non-public information about TSMC and TSMC’s customers, in violation of his fiduciary and other duties of trust and confidence to TSMC. In his plea agreement, KARUNATILAKA admitted that based on his participation in the conspiracy, the Inside Information that he provided to others resulted in trading gains of more than $1 million.

KARUNATILAKA, 37, of Marlborough, Massachusetts, pled guilty to one count of conspiracy to commit securities fraud and wire fraud. He faces 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 on the conspiracy count. In addition, KARUNATILAKA agreed to forfeit the proceeds he obtained as a result of the offense.

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Michael Morawski and Frank Constant Allegedly Obtained $16 Million From 300 Investors in Fraudulent Real Estate Investment Scheme

Source- http://www.fbi.gov/chicago/press-releases/2011/two-suburban-men-allegedly-obtained-16-million-from-300-investors-in-fraudulent-real-estate-investment-scheme

CHICAGO—Two businessmen who operated a defunct northwest suburban real estate investment company were charged today with engaging in an alleged investment fraud scheme that obtained more than $16 million from more than 300 investors. The defendants, Michael Morawski and Frank Constant, were each charged with one count of mail fraud and one count of wire fraud in a criminal complaint, announced Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, and Robert D. Grant, Special Agent in Charge of the Chicago Field Office of the Federal Bureau of Investigation. The defendants, who operated Michael Franks LLC, and several related business entities in Palatine, allegedly misused money they raised from investors for their own benefit and to make Ponzi-type payments to earlier investors.

Morawski, 53,of Sleepy Hollow, and Constant, 57, of West Dundee, are scheduled to voluntarily appear at 11 a.m. tomorrow before U.S. Magistrate Judge Sheila Finnegan in U.S. District Court.

According to the charges, Michael Franks offered investors passive ownership in multi-family residential properties, including apartment building complexes located in Illinois, Texas, and Alabama. Morawski and Constant offered two types of investments to the public: in one, they represented that investors’ funds would be used to acquire, improve, and operate specific apartment complexes for a period of three to five years, and for the most part, investors were told they would earn between seven and nine percent annually, and potentially more upon the sale of the property; in the second, they offered real estate-based “funds” to investors, which were executed using promissory notes, and often offered an annual interest payment of between 8 and 30 percent per year to investors. Through these purported investments, the defendants raised more than $16 million from more than 300 investors between 2006 and 2010.

The charges allege Morawski and Constant, through Michael Franks, engaged in a scheme to defraud investors about the nature of their investments and their use of investor funds. It alleges that they engaged in a Ponzi scheme by continually using funds raised from new investors to pay purported returns to earlier investors, all of which they concealed from both new and earlier investors.

In November 2010, Morawski and Constant turned over Michael Franks, its real estate projects, and investment funds to a company called Commercial Recovery Assets to act as a private trustee/receiver. Since then, federal agents learned that many of the real estate properties have gone into foreclosure and the secured lending banks will likely take possession of the properties and any proceeds, leaving investors to lose much, if not all, of the principal they invested in Michael Franks.

The charges allege that certain real estate projects undertaken by Michael Franks performed poorly and failed to generate enough revenue to meet operating expenses. The defendants began transferring funds from various investments to support poorly performing projects and to pay earlier investors with funds raised from new investors, without disclosing this information, the charges add. At the same time, they allegedly misused investor funds to pay employees, to make commission payments to individuals who raised new funds, and to pay themselves, as well as to make payments for Constant’s company car, country club payments, and to extend loans to certain friends of Morawski.

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Martin T. Sigillito, James Scott Brown and Derek J. Smith, Indicted for $52 Million Ponzi Scheme

Source- http://kansascity.fbi.gov/dojpressrel/pressrel11/kc050411.htm

KANSAS CITY, MO—Beth Phillips, United States Attorney for the Western District of Missouri, announced today that two attorneys, one residing in Webster Groves, Mo., and the other residing in Leawood, Kan., along with a real estate speculator in the United Kingdom, have been indicted by a federal grand jury for their roles in a fraud conspiracy that stole more than $52 million from their victims.

Martin T. Sigillito, 62, of Webster Groves; James Scott Brown, 66, of Leawood; and Derek J. Smith, 67, of Oxfordshire in the United Kingdom, were charged in a 22-count indictment returned under seal by a federal grand jury in St. Louis, Mo., on Thursday, April 28, 2011. That indictment was unsealed and made public today following Sigillito’s initial appearance in the U.S. District Court in St. Louis, Mo.

“The federal indictment alleges that conspirators stole more than $52 million through a Ponzi scheme that lasted nearly a decade,” Phillips said. “Combating financial fraud is a priority for the Department of Justice. We will aggressively prosecute those who illegally profit at the expense of their victims.”

“When it comes to Ponzi schemes, the amount of money stolen in this case is the largest in the history of the Eastern District of Missouri,” said Special Agent in Charge Dennis L. Baker of the FBI St. Louis Division. “No matter how elaborate the schemes, they all eventually collapse.”

“IRS Criminal Investigation is committed to investigating Ponzi schemes in an effort to protect the financial well being of the American public,” said C. Steve Howard, Acting Special Agent in Charge of IRS Criminal Investigation, St. Louis Field Office. “We will continue to work with our law enforcement partners to bring this investigation to a thorough and complete conclusion.”

Sigillito, Brown, and Smith are each charged with participating in a conspiracy to commit wire and mail fraud. The federal indictment alleges that, during a 10-year period from 2000 to 2010, investors in the United States loaned a total of $52.5 million to Smith through a Ponzi scheme that was known as the British Lending Program. Victims believed they were loaning money for legitimate real estate development projects, the indictment says, but in reality, most of their money was kept by Sigillito and Brown (or used to pay interest and principal to other lenders). According to the indictment, Sigillito gained nearly $8 million from the fraud scheme and used it to support an affluent lifestyle.

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John Bravata, Founder and Chairman of BBC Equities, Arrested at JFK International Airport in Connection with Investment Fraud Scheme

Source- http://www.fbi.gov/detroit/press-releases/2011/john-bravata-founder-and-chairman-of-bbc-equities-arrested-at-jfk-international-airport-in-connection-with-investment-fraud-scheme

John Bravata, the founder and chairman of BBC Equities, LLC, was arrested yesterday at JFK International Airport, announced U.S. Attorney Barbara L. McQuade. Bravata was arrested on an inbound flight from Italy. McQuade was joined in the announcement by Special Agent in Charge Andrew G. Arena, Federal Bureau of Investigation.

Bravata is charged in a criminal complaint with wire fraud in connection with his solicitation of investor funds for BBC, which Bravata characterized as a real estate investment fund. The complaint charges that from 2006 through 2009, Bravata knowingly participated in a scheme to defraud investors. Bravata and those working on his behalf made multiple misrepresentations to numerous prospective investors, including misrepresentations regarding how their investment funds would be utilized, the security of funds invested with BBC, and the returns that could be expected by investors of BBC.

Bravata also misled investors by telling them that managers of BBC would not earn money unless BBC was profitable. He also represented that the managers of BBC did not take fees, commissions, or a salary. In reality, Bravata and others received lucrative compensation from BBC and related entities despite that fact that BBC was never profitable. Bravata also used investor funds to pay for the construction of his roughly 18,000 square foot personal home and to pay for other personal expenses.

The charge in the complaint, wire fraud, carries a maximum penalty of 20 years’ imprisonment and a $250,000 fine.

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George Speranza Pleads Guilty to Perjury in Connection with Investigation of Spongetech Delivery Systems, Inc.

Source- http://www.fbi.gov/newyork/press-releases/2011/marketing-company-executive-pleads-guilty-to-perjury-in-connection-with-investigation-of-spongetech-delivery-systems-inc

Earlier today, in federal court in Brooklyn, George Speranza, the operator of a marketing company that created and published Internet websites, pleaded guilty to a perjury charge and admitted that he gave false testimony before the U.S. Securities and Exchange Commission (SEC) in connection with the SEC’s investigation of Spongetech Delivery Systems, Inc. When sentenced by United States District Judge Dora L. Irizarry, Speranza faces a maximum sentence of five years in prison.

The guilty plea was announced by Loretta E. Lynch, United States Attorney for the Eastern District of New York.

As alleged in a superseding indictment and other court filings by the government, between approximately January 2007 and May 2010, the chief officers of Spongetech, together with others, executed a fraudulent scheme to (a) publicly report false and materially overstated sales figures to create artificial demand for, and increase the share price and trading volume of, Spongetech common stock; (b) issue restricted Spongetech common stock to entities controlled by Spongetech; (c) un-restrict and sell that stock; and (d) personally profit from the stock sales.

In 2009, the SEC commenced an investigation into Spongetech’s publicly reported sales figures and financial statements and as part of that investigation issued a subpoena to Speranza. Speranza appeared before an officer of the SEC and, in response to questions, lied under oath about aspects of work he performed for Spongetech as they related to creating websites and establishing virtual offices for purported customers of Spongetech. Specifically, Speranza lied about when he initially discussed creating the websites for Spongetech, and who at Spongetech asked him to establish the websites and virtual offices.

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Juan Carlos Guillen Zerpa Admits Conspiring to Obstruct SEC Investigation of Connecticut Hedge Fund Adviser

Source- http://newhaven.fbi.gov/dojpressrel/pressrel11/nh050411.htm

David B. Fein, United States Attorney for the District of Connecticut, announced that JUAN CARLOS GUILLEN ZERPA, 44, a citizen of Venezuela, pleaded guilty today before United States District Judge Stefan R. Underhill in Bridgeport to one count of conspiracy to obstruct an official proceeding of the U.S. Securities and Exchange Commission (SEC).

“The U.S. Attorney’s Office, FBI and our Connecticut Securities, Commodities, and Investor Fraud Task Force partners will pursue aggressively individuals who attempt to obstruct the SEC and its critically important mission of protecting investors and the integrity of American capital markets,” stated U.S. Attorney Fein.

According to court documents and statements made in court, Francisco Illarramendi, of New Canaan, Connecticut, acted as an investment adviser to certain hedge funds. In approximately 2006, one hedge fund he advised lost millions of dollars of the money he was charged with investing. Rather than disclose to his investors the truth about the losses incurred, Illarramendi intentionally chose to conceal this information by engaging in a long-running scheme to defraud and mislead his investors, creditors, and the SEC to prevent the truth about the losses from being discovered. As part of the scheme, Illarramendi and others created fraudulent documents, including a fictitious asset verification letter falsely representing that one of the hedge funds, the Short Term Liquidity Fund (STLF), had at least $275 million in credits as a result of outstanding loans, when Illarramendi and others knew it did not have any such credits.

GUILLEN is a resident and citizen of Venezuela who was the managing partner of a Venezuelan accounting firm associated with a major international accounting firm. In late 2010, GUILLEN agreed to prepare the asset verification letter that would falsely indicate that the STLF had made outstanding loans to Venezuelan companies. A co-conspirator then worked with other persons to create a fraudulent list of loans and to incorporate this list in the asset verification letter to be signed by GUILLEN.

In approximately January 2011, GUILLEN executed the false asset verification letter and sent it by e-mail to Illarramendi. Thereafter, GUILLEN learned that the false asset verification letter had been supplied to the U.S. Securities and Exchange Commission, and that the SEC had initiated a civil action against Illarramendi and others (SEC v. Illarramendi, et al., 3:11-CV-00078). In an effort to deceive and mislead the SEC and to prevent the SEC from learning during the civil action that the asset verification letter was false, GUILLEN, Illarramendi and others sought to create fraudulent documentation to falsely support the information contained in the letter. GUILLEN also participated in a telephone call with representatives of the SEC in January 2011 in which he intentionally misrepresented that the assertions in the asset verification letter about the existence of the hedge funds’ assets were true, when he knew they were false.

GUILLEN expected to receive approximately $1 million for his willingness to sign the false asset verification letter. As partial payment for GUILLEN’s services in this conspiracy, a co-conspirator caused $250,000 to be transferred to a third party for the benefit of GUILLEN.

Judge Underhill has scheduled sentencing for July 22, 2011, at which time GUILLEN faces a maximum term of imprisonment of 20 years and a fine of up to approximately $2.5 million. GUILLEN also has agreed to forfeit $250,000 to the government.

GUILLEN has been detained since his arrest by FBI special agents on March 3, 2011, in Florida. Following his guilty plea today, GUILLEN was released into home confinement under electronic monitoring after he posted a bond in the amount of $1.35 million, which is secured by $550,000 in cash and real property. GUILLEN will reside in an apartment in Miami, Florida while awaiting sentencing.

On March 7, 2011, Illarramendi waived his right to indictment and pleaded guilty to two counts of wire fraud, one count of securities fraud, one count of investment adviser fraud, and one count of conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the SEC. He awaits sentencing.

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SEC Charges UBS with Fraudulent Bidding Practices Involving Investment of Municipal Bond Proceeds

Source- http://www.sec.gov/news/press/2011/2011-105.htm

Washington, D.C., May 4, 2011 — The Securities and Exchange Commission today charged UBS Financial Services Inc. (UBS) with fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.

To settle the SEC’s charges, UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.

When investors purchase municipal securities, the municipalities generally temporarily invest the proceeds of the sales in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

The SEC alleges that during the 2000 to 2004 time period, UBS’s fraudulent practices and misrepresentations undermined the competitive bidding process and affected the prices that municipalities paid for the reinvestment products being bid on by the provider of the products. Its fraudulent conduct at the time also 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. The business unit involved in the misconduct closed in 2008 and its employees are no longer with the company.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, UBS played various roles in these tainted transactions. UBS illicitly won bids as a provider of reinvestment products, and also rigged bids for the benefit of other providers while acting as a bidding agent on behalf of municipalities. UBS at times additionally facilitated the payment of improper undisclosed amounts to other bidding agents. In each instance, UBS made fraudulent misrepresentations or omissions, thereby deceiving municipalities and their agents.

“Our complaint against UBS reads like a ‘how-to’ primer for bid-rigging and securities fraud,” said Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit. “They used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders, and money to bidding agents disguised as swap payments.”

According to the SEC’s complaint, UBS as a bidding agent steered business through a variety of mechanisms to favored bidders acting as providers of reinvestment products. In some cases, UBS gave a favored provider information on competing bids in a practice known as “last looks.” In other instances, UBS deliberately obtained off-market ”courtesy” bids or arranged “set-ups” by obtaining purposefully non-competitive bids from others so that the favored provider would win the business. UBS also transmitted improper, undisclosed payments to favored bidding agents through interest rate swaps. In addition, UBS was favored to win bids with last looks and set-ups as a provider of reinvestment products.

In a related enforcement action, the SEC barred former UBS officer Mark Zaino from associating with any broker, dealer or investment adviser, based upon his guilty plea last year in a criminal case charging him with two counts of conspiracy and one count of wire fraud for engaging in misconduct in the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission recognizes Zaino’s cooperation in the SEC’s investigation as well as investigations conducted by other law enforcement agencies.

Without admitting or denying the allegations in the SEC’s complaint, UBS has consented to the entry of a final judgment enjoining it from future violations of Section 15(c) of the Securities Exchange Act of 1934. UBS has agreed to pay a penalty of $32.5 million and disgorgement of $9,606,543 with prejudgment interest of $5,100,637. The settlement is subject to court approval.

This is the SEC’s second settlement with a major bank in an ongoing investigation into corruption in the municipal reinvestment industry. In December 2010, the SEC charged Banc of America Securities LLC (BAS) with securities fraud for similar conduct. In that matter, BAS agreed to pay more than $36 million in disgorgement and interest to settle the SEC’s charges, and paid an additional $101 million to other federal and state authorities for its misconduct.

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SEC Charges Six Executives With Financial Fraud at Brooke Corporation

Source- http://www.sec.gov/news/press/2011/2011-104.htm

Washington, D.C., May 4, 2011 – The Securities and Exchange Commission today charged six former leading executives affiliated with a Kansas-based financial corporation with hiding critical information from investors and conducting a financial fraud.

The SEC alleges that senior executives at Brooke Corporation and two subsidiaries – whose line of business was insurance agency franchising and providing loans to franchisees – misrepresented their deteriorating financial condition in filings to investors and other public statements in 2007 and 2008. Meanwhile, behind the scenes they engaged in various undisclosed schemes to meet almost weekly liquidity crises, and falsified reports and made accounting maneuvers to conceal the rapid deterioration of the loan portfolio.

Five of the six executives have agreed to settle the SEC’s charges against them. The Brooke companies are no longer in business.

“The unscrupulous senior corporate executives at Brooke Corporation orchestrated a massive scheme to conceal the company’s deteriorating financial condition through virtually any means necessary, including reporting inflated asset values, double-pledging collateral, and diverting funds for improper uses,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The fallout from their fraud had a devastating impact on the livelihood of hundreds of insurance franchisees that depended on Brooke and on the balance sheets of regional banks and other lenders, all of whom mistakenly relied on the good faith and honesty of these executives.”

The SEC’s complaint filed in federal court in Kansas charged two brothers and four other leading executives at Brooke Corporation and its two publicly-traded subsidiaries – Brooke Capital Corporation (insurance agency franchisor) and Aleritas Capital Corporation (lender to insurance agency franchises and other businesses).

Robert D. Orr – founder and former chairman of the board of Brooke Corporation, former CEO and chairman of the board of Brooke Capital, former CFO of Aleritas.

Leland G. Orr – former CEO, CFO, and vice chairman of the board of Brooke Corporation, and former CFO of Brooke Capital.

Kyle L. Garst – former CEO, president, and member of the board of Brooke Capital.

Michael S. Hess – former CEO and member of the board of Aleritas.

Michael S. Lowry – former CEO and member of the board of Aleritas.

Travis W. Vrbas – former CFO of Brooke Corporation and Brooke Capital.

According to the SEC’s complaint, Brooke Capital’s former management inflated the number of franchise locations by including failed and abandoned locations in company totals. They concealed that the financial assistance to franchisees was so burdensome that Robert and Leland Orr secretly borrowed funds received from Brooke insurance customers to pay company operating expenses. That money was supposed to be held in trust for payment of insurance premiums. They also hid Brooke Capital’s inability to timely pay funds owed to profitable franchisees and creditors. Aleritas’s former management hid the company’s inability to repurchase millions of dollars of short-term loans sold to its network of regional lenders. They sold or pledged the same loans as collateral to multiple lenders, and improperly diverted payments from borrowers for the company’s operating expenses. Aleritas’s former management concealed the deterioration of the company’s loan portfolio by falsifying loan performance reports to lenders, understating loan loss reserves, and failing to write-down its residual interests in securitization and credit facility assets.

In October 2008, Brooke Corporation declared Chapter 11 bankruptcy and suspended most of their operations. The companies were unable to reorganize in bankruptcy. The rapid collapse of the Brooke Companies had a devastating regional impact as hundreds of its franchisees failed. As a result of losses suffered on Aleritas loans, several regional banks also failed.

The SEC’s complaint charges violations of, among other things, the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. The complaint seeks permanent injunctions, officer and director bars, and monetary remedies against the Brooke executives.

Robert Orr, Leland Orr, Hess, Lowry, and Vrbas agreed to settle the charges against them without admitting or denying the SEC’s allegations. The settlements are subject to the approval of the U.S. District Court for the District of Kansas. The executives each consented to orders of permanent injunction and permanent officer and director bars. Lowry agreed to pay a disgorgement of $214,500, prejudgment interest of $24,004, and a $175,000 penalty. Hess agreed to pay a $250,000 penalty, and Vrbas agreed to pay a $130,000 penalty. Robert Orr and Leland Orr agreed to pay penalties and disgorgement in amounts to be determined by the court.

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Joseph Anthony LaCoste former chief executive officer of Willamette Development Services, Indicted for Securities Fraud

Source- http://portland.fbi.gov/dojpressrel/pressrel11/pd050311.htm

EUGENE, OR—Joseph Anthony LaCoste, 46, former chief executive officer of Willamette Development Services, LLC (WDS), and Angela Marie McCoy, 43, former investment relations manager for WDS, were arraigned in federal court on May 2, 2011 on an indictment returned by a federal grand jury on April 20, 2011. LaCoste, McCoy, and WDS were charged with committing securities fraud, bank fraud, mail fraud, and wire fraud. In addition, the indictment seeks forfeiture of all proceeds traceable to the fraud. Trial is scheduled for January 25, 2012.

The indictment alleges that from April 2006 through December 2007, through misrepresentations by LaCoste and McCoy, WDS obtained approximately $5,272,300 from investors for the ostensible purpose of developing at least 10 profitable real estate projects, and that WDS incurred $14,115,825 of additional indebtedness from lenders. By January 2008, none of the projects were completed and WDS was insolvent. The investors lost their entire principal of $5,272,300. Secured lenders recovered portions of their loans through foreclosure actions.

The indictment also alleges that LaCoste lied about his academic background and that he failed to tell investors he had previously been fired from a financial institution for engaging in fraud and that he had previously filed bankruptcy. LaCoste and McCoy made various misrepresentations which caused people to invest with WDS. One of the misrepresentations was that investors were told their money would be used for specific projects, although in every project, investor proceeds were diverted to non-project purposes without investor consent. Investors were also told that WDS would receive no compensation for managing specific LLC projects, although in every project, substantial “management” and “consulting” fees were paid to WDS. Furthermore, the indictment alleges that investors were told that WDS would receive no fees or commissions for selling WDS securities, although in every project, sales fees and commissions were paid to WDS personnel for selling WDS securities.

On February 8, 2011, former WDS Chief Financial Officer Anthony James Tuomi pled guilty to conspiring with LaCoste and McCoy to commit securities fraud. He is scheduled to be sentenced on August 9, 2011 before U. S. District Judge Michael R. Hogan.

The maximum statutory penalty for securities fraud is a 20-year term of imprisonment and a $5,000,000.00 fine, followed by a three-year term of supervised release. The maximum statutory penalty for mail fraud and wire fraud is a 20-year term of imprisonment and a $250,000.00 fine, followed by a three-year term of supervised release. The maximum statutory penalty for bank fraud is a 30-year term of imprisonment and $1,000,000.00 fine, followed by a five-year term of supervised release.

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Timothy Barham Jr., Nathan Montgomery and Ryan Reynolds Have Been Indicted for Conspiracy in Stock Manipulation Scheme

Source- http://www.justice.gov/opa/pr/2011/May/11-crm-557.html

WASHINGTON – Three stock promoters have been indicted for their roles in a stock manipulation scheme that defrauded investors, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division, U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida, Chief Postal Inspector Guy Cottrell of the U.S. Postal Inspection Service (USPIS) and James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office.

Timothy Barham Jr., 43, of Henderson, Tenn.; Nathan Montgomery, 30, of Henderson, Nev.; and Ryan Reynolds, 39, of Dallas, were each charged in a superseding indictment filed on April 28, 2011, in U.S. District Court for the Southern District of Florida. On April 29, 2011, Barham was arrested in Henderson, Tenn., and Montgomery was arrested in Las Vegas. Reynolds, who was in custody on previously filed civil charges, made his initial appearance today in U.S. District Court in Dallas.

The superseding indictment charges Barham, Montgomery and Reynolds each with one count of conspiracy to commit securities fraud, wire fraud and mail fraud. The superseding indictment also charges six individuals who were originally indicted in February 2010 for their roles in the fraud scheme: Jonathan Randall Curshen, 46, of Sarasota, Fla.; Michael Simon Krome, 49, Long Island, N.Y.; Ronald Salazar Morales, aka “Ronny Salazar,” 39, of Costa Rica; Robert Lloyd Weidenbaum, 44, of Miami; and Eric Ariav Weinbaum, 37, and Izhack Zigdon, 47, both of Israel.

According to the superseding indictment, Curshen was the principal behind Red Sea Management and Sentry Global Securities, two companies located in San Jose, Costa Rica, that provided offshore accounts and facilitated trading in penny stocks. The superseding indictment alleges that Weinbaum and Zigdon took control of the outstanding shares of a company calledCO2 Tech (ticker CTTD), which traded in the over-the-counter market through listings on Pink Sheets, an inter-dealer electronic quotation and trading system. Weinbaum and Zigdon allegedly obtained the shares by retaining Krome, a securities attorney. Krome allegedly evaded federal securities registration requirements in order to provide co-conspirators with millions of unregistered and “free-trading” shares of CO2 Tech that the co-conspirators could not have otherwise legally obtained.

The superseding indictment alleges that the shares were subsequently sold to the general investing public by Weinbaum, Zigdon, Curshen and Salazar, a Sentry Global stock trader, through Sentry Global’s stock trading floor. According to court documents, the defendants concealed from the investing public the actual financial condition and business operations of CO2 Tech by evading the registration requirements. The superseding indictment also alleges that Weidenbaum, Reynolds, Montgomery and Barham coordinated trades by purchasing shares of CO2 Tech on the open market from Curshen, Weinbaum, and Salazar. Weidenbaum was allegedly paid approximately $1 million by Weinbaum and Zigdon to participate in sham stock trades of CO2 Tech to make it appear that there were genuine investors in the market that were buying the shares.

As alleged in the superseding indictment, coordinated trades were often made between the co-conspirators in conjunction with the issuance of false and misleading press releases that were designed to make CO2 Tech appear that it had significant business prospects. According to these press releases, CO2 Tech purported to have a business relationship with Boeing to reduce polluting gases emitted from airplanes. The superseding indictment alleges that these relationships never existed.

After fraudulently “pumping” the market price and demand for CO2 Tech stock through these press releases and coordinated trades, Weinbaum, Curshen, Salazar, Reynolds, Montgomery and Barham allegedly “dumped” shares by selling them for large profits to the general investing public in the over-the-counter market through listings on Pink Sheets. These shares were allegedly purchased by unsuspecting investors, including in the Southern District of Florida, and were often rendered virtually worthless.

The superseding indictment further alleges that Curshen and Salazar engaged in a conspiracy to commit money laundering. Curshen, through Red Sea and Sentry Global, allegedly established domestic and offshore bank accounts through which the proceeds of stock manipulation schemes flowed. The superseding indictment alleges that Curshen and Salazar used these accounts to conceal the origin and ownership of the ill-gotten gains from these schemes.

The defendants are all charged with one count of conspiracy to commit securities, mail and wire fraud. Additionally, as in the original indictment, the superseding indictment charges Krome with one count of securities registration violation, one count of obstruction of justice and one count of wire fraud. Weinbaum and Zigdon also continue to be charged with three counts of wire fraud. In addition, Curshen and Salazar each are charged with two counts of mail fraud, and Weidenbaum and Weinbaum each are charged with one count of mail fraud. The superseding indictment also charges Curshen and Salazar with one count of conspiracy to commit money laundering. The superseding indictment seeks forfeiture in the amount of $7 million.

The fraud conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. Each count of wire fraud and mail fraud carries a maximum penalty of 20 years in prison and a $250,000 fine. The securities registration violation carries a maximum penalty of five years in prison and a $10,000 fine and the obstruction count carries a maximum penalty of 20 years in prison and a $250,000 fine. The money laundering conspiracy charge carries a maximum penalty of 20 years in prison.

Curshen, Krome, Salazar, Weinbaum, Zigdon and Weidenbaum were also charged by the Securities and Exchange Commission in February 2010 in a related civil matter.

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

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Dorothy Shields Talbot Indicted for Stealing Over $400,000 in Donations

Source- http://www.fbi.gov/baltimore/press-releases/2011/former-united-way-employee-indicted-for-stealing-over-400-000-in-donations

BALTIMORE, MD—A federal grand jury indicted Dorothy Shields Talbot, age 48, of Baltimore, today for wire fraud in connection with a scheme to steal at least $400,788 in donations issued to her employer, United Way of Central Maryland.

The indictment was announced by United States Attorney for the District of Maryland Rod J. Rosenstein and Special Agent in Charge Richard A. McFeely of the Federal Bureau of Investigation.

According to the two count indictment, the United Way of Central Maryland was a non-profit charitable organization located in Baltimore. United Way received charitable donations and disbursed funds as directed by donors to support charities in the central Maryland area of Baltimore City and the counties of Baltimore, Anne Arundel, Carroll, Harford and Howard. From September 2001 until December 2010, Talbot worked in United Way’s finance department and was responsible for depositing donations into a corporate operating bank account.

The indictment alleges that in December 2004, Talbot became responsible for closing a checking account that had been used for employee activities. Instead of closing that account, however, Talbot allegedly deposited donor checks issued to United Way into that account, rather than into the corporate operating account. Talbot caused the mailing address for the checking account to be changed from United Way’s office to her home. From December 2004 to December 2010, Talbot allegedly withdrew over $400,000 of the monies deposited into the checking account, which she used for her own personal benefit.

The indictment seeks forfeiture of $400,788 or more.

Talbot faces a maximum sentence of 20 years in prison followed by three years of supervised release and a fine of $250,000. Talbot’s initial appearance has not been scheduled.

An indictment is not a finding of guilt. An individual charged by indictment is presumed innocent unless and until proven guilty at some later criminal proceedings.

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Corey N. Johnston Sentenced for Operating $80 Million Ponzi Scheme with Bank Money

Source- http://minneapolis.fbi.gov/dojpressrel/pressrel11/mp042811.htm

Earlier today in federal court in Minneapolis, Corey N. Johnston, age 41, of Lakeville, was sentenced to a total of six years for operating a Ponzi scheme that defrauded 18 lenders in Minnesota and several other states. According to the government, the lenders suffered losses in excess of $79.9 million. United States District Court Judge David S. Doty sentenced Johnston to 72 months in prison on one count of bank fraud and one count of filing a false income tax return. Johnston was charged on August 6, 2010, and pleaded guilty on September 2, 2010. Johnston will also be ordered to pay restitution.

In his plea agreement, Johnston admitted that from 2005 through March of 2009, he oversold participation in large commercial and personal loans arranged by him through his company, First United Funding ("FUF"). Loan participation is a common banking practice through which a bank pays the original lender all or a portion of the subject loan and then assumes that loan, along with its associated risk. From that point on, the bank, not the original lender, receives the loan payments from the borrower, as if the bank had made the loan in the first place.

Johnston's scheme involved selling more than 100-percent participation in at least ten different loans arranged through FUF. In other words, he purportedly sold loan participation to banks after already selling that same participation to other banks. In each instance, Johnston failed to disclose that the total participation exceeded 100 percent of the original loan, making it impossible for the participating banks to receive the money expected.

For example, Johnston oversold loan participation for a project known as White Out Way Investments. The original White Out Way loan, arranged through FUF, was for $7 million.

Johnston sold 100-percent participation in that loan to Western National Bank. At the same time, however, he convinced several other banks to participate in the loan, including 100-percent participation by The National Bank in Bettendorf, Iowa, as well as partial participation by four other lending institutions. In all, Johnston solicited and received $23.65 million from six banks for that one $7 million loan.

In addition, Johnston oversold loan participation for a project known as JM Land Development II. The original JM Land Development loan was for $8 million, and once again, Johnston sold 100-percent participation in the loan to Western National Bank. However, he simultaneously obtained full loan participation from Choice Financial, The National Bank, and Hillcrest Bank, along with partial participation from four other banks. Johnston solicited a total of $38.65 million for an $8 million loan. Six additional lenders also were defrauded during the course of this scheme by overselling participation in other loans.

Johnston used some of the proceeds of the fraud to repay other loans and perpetuate the scheme. He also diverted fraud proceeds for his personal use as well as for use by family members. Furthermore, Johnston failed to report the fraudulent income on his 2005 federal income tax return. That failure resulted in an underpayment of taxes to the U.S. in 2005 of approximately $508,905.

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