SEC Charges Arizona-Based Health Food Company NutraCea and Former Executives With Accounting Fraud

Source- http://www.sec.gov/news/press/2011/2011-10.htm

Washington, D.C., Jan. 13, 2011 — The Securities and Exchange Commission today charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate sales revenues at the Arizona-based company, which manufactures and sells health food products.

The SEC alleges that NutraCea booked false sales and engaged in improper revenue recognition practices to disguise its true operating results in its 2007 annual report and financial statements for the second and third quarters of 2007. The SEC charged NutraCea's former chief executive officer Bradley D. Edson, former chief financial officer Todd C. Crow, and former senior vice president and secretary Margie Adelman for their roles in the scheme. The SEC also charged NutraCea's former controller Joanne D. Kline and former director of financial services Scott Wilkinson.

NutraCea and four of the five individuals agreed to settle the SEC's charges against them, and the SEC's litigation continues against Crow.

"NutraCea, its former executives, and accounting personnel violated the public's trust by falsifying NutraCea's revenues to meet earnings and gross sales expectations throughout 2007," said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office.

The SEC's complaint filed in federal district court in Arizona alleges that NutraCea, Edson, Crow, and Adelman falsified NutraCea's sales revenues in 2007, and Kline and Wilkinson engaged in improper accounting by recording these false revenues. NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp. in the second quarter, resulting in overstated product sales revenue of as much as 35 percent.

According to the SEC's complaint, Edson instructed Bi-Coastal's president to falsify his family's financial statements to reflect a higher net worth in order to support the false sales to Bi-Coastal. In reality, Bi-Coastal's "down payment" for the $2.6 million sale came from NutraCea's former COO. When Kline tried to discuss with Crow in 2007 her discovery that the $1 million deposit for the Bi-Coastal sale came from a loan from the former COO to Bi-Coastal in order to justify NutraCea's recognition of revenue from this sale, she says that Crow "covered his ears and said, 'No, no, no, no, no, no, no, no, no. I don't want to hear it.'"

The SEC also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007. As a result the BiCoastal and ITV Global transactions alone, NutraCea overstated its product sales revenue by 36.8 percent for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by more than 89 percent in the second quarter of 2007, more than 17.6 percent in the third quarter, and nearly 7 percent for the fiscal year.

Without admitting or denying the SEC's allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settlements with the following terms:

NutraCea consented to the entry of an order that permanently enjoins it from future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.

Edson agreed to pay a $100,000 penalty, reimburse NutraCea $350,000 in bonuses he received in 2008, and agreed to a permanent officer and director bar. He consented to a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.

Adelman consented to a five-year officer and director bar and to a final judgment permanently enjoining her from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder.

Kline and Wilkinson agreed to each pay a penalty of $25,000 and consented to final judgments permanently enjoining them from future violations of Section 13(b)(5) of the Exchange Act, and Rules 13b2-1 and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. Kline and Wilkinson further consented to the issuance of administrative orders pursuant to Rule 102(e) of the SEC's Rules of Practice, suspending each of them from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after one year.

The settlements are subject to the approval of the U.S. District Court of Arizona.

The SEC's complaint against Crow alleges that he violated and aided and abetted violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws. The complaint also alleges that Crow violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. The SEC's complaint against Crow seeks a permanent injunction, a financial penalty, and an officer and director bar. The case against Crow is ongoing.

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SEC Charges Long Island-Based Money Manager Warren D. Nadel for Fraudulent Investment Scheme

Source- http://www.sec.gov/news/press/2011/2011-11.htm

Washington, D.C., Jan. 13, 2011 — The Securities and Exchange Commission today charged a Long Island-based money manager and his two firms with engaging in a fraudulent investment program that generated more than $8 million in illicit commissions and fees.

The SEC alleges that Warren D. Nadel, through his investment advisory firm Registered Investment Advisers (RIA) and his broker-dealer Warren D. Nadel & Co., induced clients to invest in a purportedly liquid, cash management strategy that engaged in market transactions. However, in numerous communications with clients and prospective clients, they deliberately overstated the value and liquidity of client holdings by concealing critical information about the way they were supposedly executing the strategy. Nadel inflated the value of clients' transactions and holdings on monthly statements he provided to them.

"Nadel and his firms abused their clients' trust by investing their assets in a strategy that they misrepresented in nearly every way," said George S. Canellos, Director of the SEC's New York Regional Office. "Nadel created the illusion of a liquid market for their holdings at inflated values, depriving his clients the opportunity to make meaningful investment decisions with their money."

According to the SEC's complaint filed in U.S. District Court for the Eastern District of New York, Nadel claimed he was investing client assets in preferred utility securities that they held for short periods of time in order to generate capital appreciation or dividends depending on their goals. However, Nadel and his firms knew by 2007 or earlier that the market was not sufficiently liquid to permit frequent, substantial purchases of these securities at attractive prices. Nadel fraudulently concealed these market conditions from clients.

The SEC alleges that Nadel simply exchanged these securities between clients, often at inflated prices he set. For example, Nadel and his firms informed clients repeatedly (orally and in writing) that they were executing open-market transactions on the clients' behalf. The vast majority of transactions, however, were not executed on the open market. In order to make it appear that he was engaging in market transactions, Nadel ensured that clients received confirmations that reflected market transactions, and also failed to disclose to clients that the counterparties to these transactions were other RIA clients or to obtain client consent for the trades he executed between clients before the completion of each transaction.

According to the SEC's complaint, Nadel also misrepresented RIA's assets under management, claiming that the firm managed more than twice its actual assets.

The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest.

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SEC charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements

Source- http://www.sec.gov/news/press/2011/2011-7.htm

Washington, D.C., Jan. 11, 2011 — The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.

The SEC also filed a complaint in federal court against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.

CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges. The SEC's case continues against the executives.

Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals — including large mutual fund providers — must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors."

Antonia Chion, Associate Director of the SEC's Division of Enforcement, said, "Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."

The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.

According to an administrative order issued by the SEC against the Schwab entities and the SEC's related complaints against the entities and the two executives filed in federal court in San Francisco, they failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.

The SEC found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.

According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months. As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing "very, very, very slight" and "minimal" investor redemptions. In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities. Similarly, Merk authored, reviewed and approved misleading statements about the fund, such as a false claim that the fund had a "short maturity structure" that "mitigated much of the price erosion" experienced by its peers.

The SEC also found that CSIM and CS&Co. did not have policies and procedures reasonably designed — given the nature of their businesses — to prevent the misuse of material, nonpublic information about the fund. For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund. As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.

Without admitting or denying the findings in the SEC's order or the allegations in the SEC's complaint, CSIM and CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149 penalty against CSIM, a $5 million penalty against CS&Co., and pre-judgment interest of $9,290,698. Some of CSIM's disgorgement may be deemed satisfied up to a maximum of $26,944,996 for payments made within the next 60 days to settle related investigations by FINRA or state securities regulators.

The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair Fund are subject to approval by the U.S. District Court for the Northern District of California.

CSIM, CS&Co. and Schwab Investments also consented to an SEC order requiring them to cease and desist from committing or causing future violations of the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.

In its order, the Commission found that:

CSIM and CS&Co. willfully violated anti-fraud provisions of the Securities Act of 1933, Sections 17(a)(2) and (3).

CSIM willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Section 206(4) and Rule 206(4)-8.

Schwab Investments willfully violated Section 13(a) of the Investment Company Act of 1940 by deviating from its concentration policy, and CSIM willfully aided and abetted and caused the violation.

CSIM and CS&Co. willfully aided and abetted and caused violations of the false filings provision of the Investment Company Act, Section 34(b).

CS&Co. violated Section 15(g) (formerly Section 15(f)) of the Securities Exchange Act of 1934, and CSIM violated Section 204A of the Advisers Act, both of which require policies and procedures that are reasonably designed, taking into consideration the nature of the entities' businesses, to prevent the misuse of material, nonpublic information.

The SEC's complaint against Daifotis and Merk alleges violations and aiding and abetting violations of the anti-fraud provisions of the Securities Act, Exchange Act, and Investment Advisers Act, including Section 10(b) and Rule 10b-5 of the Exchange Act, and other violations, including Sections 13(a) and 34(b) of the Investment Company Act.

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Expert Networking Firm Employee Bob Nguyen, Pleads Guilty in Manhattan Federal Court to Insider Trading Charges

Source- http://newyork.fbi.gov/dojpressrel/pressrel11/nyfo011111b.htm

PREET BHARARA, the United States Attorney for the Southern District of New York, announced today that BOB NGUYEN, a former employee at an "expert-networking" firm (the "Firm"), pled guilty in Manhattan federal court to an Information charging him with wire fraud and conspiracy to commit wire fraud and securities fraud.

According to the Information to which NGUYEN pled guilty and statements made during the plea proceeding before U.S. Magistrate Judge DEBRA FREEMAN:

NGUYEN worked for the Firm between January 2008 and February 2010. His primary role was to solicit employees of companies to become paid consultants for the Firm ("Firm Consultants"). According to NGUYEN's guilty plea allocution, one of the goals of the Firm was to recruit current employees of public companies as experts who would provide material, nonpublic information about their companies, including information about the company's revenues, to clients of the firm ("Firm Clients").

NGUYEN also obtained material, nonpublic information from Firm Consultants directly, and passed that information along to Firm Clients. Further, NGUYEN facilitated meetings and phone calls between Firm Consultants and Firm Clients knowing that material, nonpublic information would be disclosed. NGUYEN understood that certain of the Firm Clients were money managers, including hedge funds, who sought and obtained this material, nonpublic information from Firm Consultants in order to execute securities transactions. NGUYEN also knew that Firm Consultants included insiders at public companies who were prohibited from disclosing confidential information pertaining to their company's business and who violated fiduciary and other duties of trust and confidence owed to their employers by disclosing such information to Firm Clients.

NGUYEN, 32, of Stockton, California, faces a maximum sentence of 25 years in prison.

Mr. BHARARA praised the investigative work of the Federal Bureau of Investigation. He also thanked the U.S. Securities and Exchange Commission for their assistance. Mr. BHARARA also noted that the investigation is continuing.

This case was brought in coordination with President BARACK OBAMA's Financial Fraud Enforcement Task Force, on which Mr. BHARARA serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President OBAMA established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

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Yakov Babchinetskiy Sentenced to 100 Months in Prison

Source- http://www.justice.gov/opa/pr/2011/January/11-civ-029.html

PHILADELPHIA – Yakov Babchinetskiy, 43, of Huntingdon Valley, Pa., was sentenced today in Philadelphia by U.S. District Court Judge Legrome D. Davis to 100 months in prison plus three years of supervised release for his role in a conspiracy to alter odometers on used motor vehicles, provide false odometer statements, and commit wire and securities fraud, the Justice Department announced. He was also ordered to pay restitution of more than $4,098,165
to the victims of the fraud, which include consumers, retail automobile dealers and insurance companies.

From 2002 to 2005, Babchinetksiy conspired with other individuals to purchase high-mileage used motor vehicles, alter the mileage on the titles, roll back the odometers, and sell the vehicles at a false low-mileage to dealers and consumers. Co-defendants Mikhail Gokhman and Yan Hershman previously pleaded guilty to similar charges and were also sentenced by Judge Davis.

Mikhail Gokhman was sentenced in October 2008 to 10 years in prison; and Yan Hershman was sentenced in July 2008 to 48 months in prison. Hershman, who was an illegal alien, was deported to Israel after serving his sentence. Another co-defendant, Edvard Khakhan, remains a fugitive.

In a related case brought in the Middle District of Pennsylvania, James Russell Bradbury, a former Pennsylvania Department of Transportation title clerk, pleaded guilty and was sentenced in November 2006 by U.S. District Court Judge Yvette Kane to 21 months in prison for bribery concerning a program receiving federal funds.

"This type of financial fraud harms consumers making one of the biggest investments they will make: their automobile. Dishonest dealers who roll back odometers cheat customers out of their hard-earned money, impede informed buying choices, and raise safety concerns by misrepresenting the actual condition of the vehicles they sell," said Tony West, Assistant Attorney General for the Justice Department’s Civil Division. "The Justice Department will seek appropriately tough sentences for those engaging in these illegal practices."

"Consumers are entitled to know exactly what they are buying," said Zane Memeger, U.S. Attorney for the Eastern District of Pennsylvania. "The type of fraud committed by this defendant deprives the car buying public of the right-to-know how many miles a car has been driven prior to purchase. Such mileage could ultimately affect car safety and the costs of future repairs to the consumer."

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SEC Charges New York Hedge Fund Robert Feinblatt, and Wall Street Professionals in Galleon-Related Enforcement Actio

Source- http://www.sec.gov/news/press/2011/2011-6.htm

Washington, D.C., Jan. 10, 2011 — The Securities and Exchange Commission today charged additional individuals and entities in its SEC v. Galleon insider trading case, including a New York hedge fund advisory firm, its hedge fund manager, an analyst at the hedge fund, a senior corporate executive in the technology sector, and an investor relations firm employee.

The SEC alleges that Robert Feinblatt — a co-founder and principal of New York-based hedge fund investment adviser Trivium Capital Management LLC — and Trivium analyst Jeffrey Yokuty engaged in insider trading in the securities of Polycom, Hilton, Google and Kronos. The SEC further alleges that Polycom senior executive Sunil Bhalla and Shammara Hussain, an employee at investor relations consulting firm Market Street Partners that did work for Google, tipped the inside information that enabled the insider trading by Feinblatt and Yokuty on behalf of Trivium's hedge funds for illicit profits of more than $15 million.

"Today's action reveals disturbingly corrupt arrangements — faithless company executives who secretly pass corporate information to hedge fund managers willing to violate the law for profit," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Market participants need to understand that by engaging in such behavior they invite SEC scrutiny, and we will uncover their conduct and take aggressive action."

The SEC has now charged 27 defendants in its SEC v. Galleon enforcement action that has alleged widespread and repeated insider trading at numerous hedge funds including Galleon — a multi-billion dollar New York hedge fund complex founded and controlled by Raj Rajaratnam — and by other professional traders in the securities of 14 companies generating illicit profits totaling approximately $69 million.

In the SEC's complaint filed earlier today in federal court in Manhattan, the SEC alleges that Feinblatt and Yokuty traded on behalf of Trivium in connection with two corporate takeovers and two quarterly earnings announcements based on material nonpublic information that Feinblatt and Yokuty allegedly received from Roomy Khan, an individual investor who herself received such information from various sources.

The SEC's complaint alleges that Bhalla tipped Khan to inside information about Polycom's 2005 fourth quarter earnings, and Khan traded on that information and tipped others. The tippees included Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. Bhalla also tipped Khan with inside information about Polycom's 2006 first quarter earnings. Khan traded on the information and tipped Rajaratnam, who traded on behalf of Galleon based on the inside information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that she received from a Moody's rating agency analyst about an impending takeover of Hilton by The Blackstone Group. Feinblatt and Yokuty then traded on behalf of Trivium based on the inside information.

The SEC further alleges that Hussain tipped Khan among others with inside information about Google's 2007 second quarter earnings. Khan traded on the information and also tipped Feinblatt and Yokuty, who traded on behalf of Trivium based on the inside information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that she received about the impending acquisition of Kronos by Hellman & Friedman. Feinblatt and Yokuty then traded on behalf of Trivium based on the inside information.

The SEC's complaint charges the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Bhalla, with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Bhalla from acting as an officer or director of any registered public company.

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SEC Charges Former Portfolio Managers Kimball L. Young and Thomas S. Albright With Defrauding Utah Municipal Bond Fund

Source- http://www.sec.gov/news/press/2011/2011-5.htm

Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.

The SEC found that Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.

Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.

"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."

According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.

The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.

According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.

The SEC's orders found that Young violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and that Albright violated Section 206(2) of the Advisers Act. The SEC's orders further found that Young and Albright violated Section 17(e)(1) of the Investment Company Act of 1940, which prohibits any affiliated person of a registered investment company, or any affiliated person of such affiliated person, from receiving compensation from any source other than the investment company in connection with the sale of such company's property.

Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations.


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Former Investment Adviser Alexei P. Koval Pleads Guilty in Manhattan Federal Court to Insider Trading and Forfeits More Than $1.4 Million

Source- http://newyork.fbi.gov/dojpressrel/pressrel11/nyfo010711a.htm

NEW YORK—A registered investment adviser pled guilty today to conspiracy and securities fraud charges in connection with his participation in an insider trading scheme, announced U.S. Attorney for the Southern District of New York Preet Bharara. Alexei P. Koval, aka “Aleksey Koval,” admitted that he obtained inside information from his co-conspirator, Igor Poteroba, a former investment banker in the Healthcare Group of UBS Securities LLC, and then traded on that information. The information related to six mergers and acquisitions that certain UBS clients were contemplating. Koval pled guilty in Manhattan federal court before U.S. District Judge Paul A. Crotty.

“Alexei Koval flagrantly violated the securities laws to make a quick profit, and now he will pay for his crimes,” said U.S. Attorney Bharara. “Insider trading undermines faith in the market and cheats honest investors. It will not be tolerated. Together with our law enforcement partners, we will continue to prosecute and punish those who use their access to inside information to break the law.”

According to documents previously filed in Manhattan federal court, from May 2006 through at least 2009, Koval was a registered investment adviser. During approximately the same time period, Poteroba served as an executive director at UBS. In that capacity, Poteroba obtained material, non-public information regarding certain mergers and acquisitions involving the following six publicly traded healthcare companies: Guilford Pharmaceuticals Inc., Molecular Devices Corporations, PharmaNet Development Group Inc., Via Cell Inc., Millennium Pharmaceuticals Inc. and Indevus Pharmaceuticals Inc. In violation of his duties of trust and confidence, Poteroba then disclosed the UBS inside information to Koval, who in turn disclosed the UBS inside information to another co-conspirator (CC-1).

As part of the scheme, Koval typically received tips from Poteroba by telephone in advance of a public announcement about certain mergers and acquisitions. Shortly after receiving a tip from Poteroba, Koval and CC-1 purchased securities in one of the healthcare companies on the basis of the UBS inside information. Following the public announcement of the acquisition, Koval and CC-1 quickly sold the securities they had purchased. Koval and CC-1 executed dozens of securities transactions based on UBS inside information provided by Poteroba. Koval then paid a portion of the profits to Poteroba.

Koval pled guilty to three counts of securities fraud and one count of conspiracy to commit securities fraud. The securities fraud counts each carry a maximum sentence of 20 years in prison and a maximum fine of $5 million. 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. Koval agreed as part of his plea agreement to forfeit at least $1,414,290, representing the amount of proceeds obtained as a result of the securities fraud offenses.

Koval, 36, of Chicago, and Pasadena, Calif., will surrender to federal authorities on Jan. 14, 2011, and is scheduled to be sentenced by Judge Crotty on April 12, 2011, at 2:30 p.m.

Poteroba, 37, of Darien, Conn., pled guilty to similar charges before Judge Crotty on Dec. 21, 2010. He is scheduled to be sentenced on March 16, 2011.

U.S. Attorney Bharara praised the investigative work of the FBI. U.S. Attorney Bharara also thanked the U.S. Securities and Exchange Commission for its assistance in the investigation.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which U.S. Attorney Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.


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SEC Obtains Emergency Asset Freeze Against SJK Investment Management LLC and its CEO Stanley Kowalewski for Fraudulent Misuse of Fund Assets

Source- http://www.sec.gov/news/press/2011/2011-3.htm

Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission has charged a Greensboro, N.C.-based investment adviser firm and its owner with defrauding investors in two hedge funds by secretly diverting millions of dollars to themselves through various self-dealing transactions.

The SEC obtained an emergency court order late yesterday freezing the assets of SJK Investment Management LLC and its CEO Stanley Kowalewski, alleging that they raised more than $65 million since summer 2009 through marketing two hedge funds to various investors including pension funds, school endowments, hospitals and non-profit foundations. However, unbeknownst to these investors, Kowalewski placed $16.5 million of their money in an undisclosed, wholly-controlled, new fund that he created, and then misused it in a number of ways. For example, he purchased a vacation home for approximately $3.9 million. He also sold his personal home to the fund for nearly $1 million more than the price he paid for it, and then continued to live in the house essentially rent-free.

"Kowalewski treated these funds like his own personal bank account and siphoned off millions of dollars that his clients entrusted to him," said William P. Hicks, Associate Regional Director of Enforcement in the SEC's Atlanta Regional Office. "He breached his responsibilities as an investment adviser in the worst manner possible."

According to the SEC's complaint filed yesterday in federal court in Atlanta, SJK and Kowalewski began diverting investor money in August 2009 — almost immediately after receiving the first investor proceeds — to pay their personal and business overhead expenses under the pretense that they were "start-up" expenses for the funds.

The SEC alleges that SJK and Kowalewski never advised investors of the existence of the third fund, much less their complete control over it, the large amounts "invested" into it, or the existence and nature of their self-dealing transactions and misuses of investor money. To further perpetuate the scheme, Kowalewski and SJK sent fraudulent monthly account statements to investors showing substantial and positive — but illusory — investment returns.

According to the SEC's complaint, among other transactions, Kowalewski sold his personal home to the fund in February 2010 for $2.8 million, almost $1 million more than its 2006 purchase price. Kowalewski used approximately $3.9 million of investor money in May 2010 to buy his vacation house on Pawley's Island, S.C. In October 2010, SJK took $4 million of investor money in the form of a purported "administration fee" and "salary draw." Throughout last year, Kowalewski used investor money to pay personal expenses and SJK's rent and other overhead, in stark contrast to how he represented those monies would be used.

The Honorable Timothy C. Batten, Sr., U.S. District Judge for the Northern District of Georgia granted the SEC's request for an emergency asset freeze, temporary restraining order, and other remedies against Kowalewski and SJK Investment Management. In addition to the emergency relief for investors, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, financial penalties, and a financial industry bar against Kowalewski.

The SEC's complaint alleges that Kowalewski violated Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.


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Paul George Chironis Accused of Defrauding Elderly Nuns Settles Case With SEC

Source- http://www.sec.gov/news/press/2011/2011-2.htm

Washington, D.C., Jan. 6, 2011 — The Securities and Exchange Commission today announced that a Long Island, N.Y.-based broker has agreed to settle charges against him for defrauding a congregation of mostly elderly nuns in the Bronx.

The SEC, which instituted administrative proceedings against Paul George Chironis in April 2010, found that he churned two accounts owned by the Sisters of Charity — one account with money for care of nuns in assisted-living facilities and a second account to support the nuns' charitable endeavors. Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commissions and other revenue without regard to the customer's investment objectives. Chironis was formerly affiliated with Capital Growth Financial, Inc., a broker-dealer firm that was based in Boca Raton, Fla., and is no longer in business.

Chironis agreed to pay $350,000 to the Sisters of Charity in the SEC settlement.

"Chironis took advantage of the trust placed in him by the Sisters of Charity and convinced the nuns to engage in a high turnover trading strategy unfit for their investment needs," said George S. Canellos, Director of the SEC's New York Regional Office. "Chironis's irresponsible actions virtually guaranteed the convent's accounts would lose money due to the undisclosed and excessive costs being incurred while Chironis focused on generating substantial commissions for himself."

According to the SEC's order, Chironis defrauded the nuns from January 2007 to January 2008 by churning the two accounts with low-risk tolerance that held primarily mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, as well as certain closed-end bond funds. The order further found that Chironis charged the nuns' accounts excessive and undisclosed markups and markdowns in riskless principal transactions.

The SEC's order specifically found that during a 13-month period, the Sisters of Charity's accounts paid approximately 10.8 percent of their value to Chironis in transaction fees. The nuns' accounts were charged an average markup of 3.68 percent on 46 bond purchases including mortgage-backed securities, and 3.03 percent on 33 closed-end bond fund purchases. The congregation's accounts also were being charged an average markdown of 1.92 percent on 67 bond sales and 1.86 percent on 15 closed-end bond fund sales.

The SEC's order found that Chironis violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Without admitting or denying any of the allegations in the civil injunctive action against him, Chironis agreed to an order barring him from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor, or nationally recognized statistical ratings organization. The order also prohibits him from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.

Additionally, Chironis agreed to pay a $100,000 penalty and $250,000 in disgorgement that will be placed in a Fair Fund and distributed to the Sisters of Charity.


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SEC Charged Gendarme Capital Corporation With Illegally Dumping Billions of Penny Stock Shares

Source- http://www.sec.gov/news/press/2011/2011-1.htm

Washington, D.C., Jan. 6, 2011 — The Securities and Exchange Commission today charged Gendarme Capital Corporation and its two executives with engaging in an illegal stock distribution scheme.

The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. Through its two principals — CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. — Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.

"The federal securities laws are designed to ensure that buyers of stock in the open market have access to information about the companies in which they are investing," said Marc Fagel, Director of the SEC's San Francisco Regional Office. "Gendarme and its executives created a novel, but illegal, business plan to make an end-run around these investor protection laws, supposedly buying billions of shares of penny stock for investment purposes but instead turning around and dumping those shares into the market."

According to the SEC's complaint, filed today in federal district court in Sacramento, Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for "investment purposes only." Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets, profiting by more than $1.6 million from its unregistered stock distributions.

The SEC also alleges that Gendarme's outside attorney — Cassandra Armento of Greenwich, N.Y. — violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities. Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.


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SEC charged Paris-based telecommunications company Alcatel-Lucent, S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying bribes to foreign government officials to illicitly win business in Latin America and Asia.

Source- http://www.sec.gov/news/press/2010/2010-258.htm

The SEC alleges that Alcatel’s subsidiaries used consultants who performed little or no legitimate work to funnel more than $8 million in bribes to government officials in order to obtain or retain lucrative telecommunications contracts and other contracts. Alcatel agreed to pay more than $45 million to settle the SEC’s charges, and pay an additional $92 million to settle criminal charges announced today by the U.S. Department of Justice.

“Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Alcatel’s bribery scheme was the product of a lax corporate control environment at the company.”

Glenn S. Gordon, Associate Director for Enforcement in the SEC’s Miami Regional Office, added, “The serious sanctions Alcatel has agreed to, including paying back all net profits made on the contracts Alcatel illegally obtained, should serve as a reminder that we are committed to enforcing the FCPA and a level playing field for companies seeking to obtain or retain business in other countries.”

According to the SEC’s complaint filed in the Southern District of Florida, Alcatel’s bribes went to government officials in Costa Rica, Honduras, Malaysia, and Taiwan between December 2001 and June 2006. An Alcatel subsidiary provided at least $14.5 million to consulting firms through sham consulting agreements for use in the bribery scheme in Costa Rica. Various high-level government officials in Costa Rica received at least $7 million of the $14.5 million to ensure Alcatel obtained or retained three contracts to provide telephone services in Costa Rica.

The SEC alleges that the same Alcatel subsidiary bribed officials in the government of Honduras to obtain or retain five telecommunications contracts. Another Alcatel subsidiary made bribery payments to Malaysian government officials in order to procure a telecommunications contract. An Alcatel subsidiary also made illegal payments to various officials in the government of Taiwan to win a contract to supply railway axle counters to the Taiwan Railway Administration.

According to the SEC’s complaint, all of the bribery payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct.

The SEC’s complaint charges that Alcatel violated Section 30A of the Securities Exchange Act of 1934 by making illicit payments to foreign government officials, through its subsidiaries and agents, in order to obtain or retain business. Alcatel violated Section 13(b)(2)(B) of the Exchange Act by failing to have adequate internal controls to detect and prevent the payments. Alcatel violated Section 13(b)(2)(A) of the Exchange Act by improperly recording the payments in its books and records. Alcatel violated Section 13(b)(5) of the Exchange Act when its subsidiaries knowingly failed to implement a system of internal controls and knowingly falsified their books and records to camouflage bribes as consulting payments. Without admitting or denying the SEC’s allegations, Alcatel has consented to a court order permanently enjoining it from future violations of these statutory provisions; ordering the company to pay $45.372 million in disgorgement of wrongfully obtained profits, and ordering it to comply with certain undertakings including an independent monitor for a three-year term. The settlement is subject to court approval.

The SEC’s case was investigated by Ernesto Palacios and Thierry Olivier Desmet of the Division of Enforcement’s FCPA Unit and by Teresa J. Verges and Fernando Torres – all of the Miami Regional Office.

The SEC acknowledges and appreciates assistance from the U.S. Department of Justice, Fraud Section; the Federal Bureau of Investigation; the Office of the Attorney General in Costa Rica, the Fiscalía de Delitos Económicos, Corrupción y Tributarios in Costa Rica; and the Service Central de Prévention de la Corruption in France.


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Randy M. Cho Was Charged With Allegedly Swindled Nearly $8 Million from More Than 50 Victims in Investment Fraud Scheme

Source- http://chicago.fbi.gov/dojpressrel/pressrel10/cg122710.htm

CHICAGO—A former Chicago man was charged with allegedly engaging in an investment fraud scheme, swindling nearly $8 million from more than 50 victims who were led to believe they were buying shares of stock in well-known companies. The defendant, Randy M. Cho, was charged with one count of wire fraud and one count of filing a false federal income tax return in a criminal information filed in U.S. District Court. Cho allegedly misused a significant portion of the funds he raised from investors for his own personal benefit, while using other funds he fraudulently obtained from new investors to make Ponzi-type payments to previous investors. Cho, 39, of Newton, Mass., and formerly of Chicago, will be arraigned at a later date in U.S. District Court, Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation; and Alvin Patton, Special Agent-in-Charge of the Internal Revenue Service Criminal Investigation Division in Chicago, announced today.

According to the charges, Cho held himself out as a self-employed securities trader, who, from approximately 2001 to 2009, lived and worked at various times in Chicago, Seattle, Boston and Newton, Mass. Cho purportedly offered and sold more than $9,642,507 of shares of stock in wellknown companies to more than 50 U.S. and foreign investors, including some in the Chicago area. Cho claimed to have access to sell stock in these companies, which he offered as part of a “friends and family” investment pool, often in anticipation of purported initial public offerings. Cho allegedly misrepresented that he had a special relationship with Goldman Sachs and was able to purchase discounted shares, and further misrepresented the timing or existence of public offerings, the potential profitability and safety of investments, and the use of the funds raised from investors.

At various times during the alleged scheme, Cho falsely told investors that he could purchase specially-discounted shares of companies, including AOL/Time warner, Inc., Google, Inc., Rosetta Stone, Inc., and Facebook, Inc., prior to their initial public offerings, the charges allege. For example, Cho induced one victim to invest approximately $20,000 by falsely representing that he had Google stock available to sell for $1 per share, when, in fact, Cho knew that shares of Google were publicly trading at $425 per share or more. Cho also knew that he had no Google shares at a lower price and had no intent to purchase any Google stock on the victim’s behalf, the charges add.

Similarly, Cho allegedly falsely lulled another investor into believing that the victim had made a $1 million profit by investing in shares of Google stock when no such investment or profit existed. As part of the scheme, Cho used more than $1.5 million in new investor funds to make Ponzi-type payments to previous investors, and Cho caused investors to lose approximately $7,960,707, according to the charges.

The tax count alleges that Cho filed a false federal income tax return for 2005, reporting total income of $118,475, when he knew he had received income totaling approximately $1,1,72,862.

The government is being represented by Assistant U.S. Attorney Felicia Manno Alesia. The U.S. Securities and Exchange Commission assisted in the investigation.

Wire fraud carries a maximum penalty of 20 years in prison and a $250,000 fine, and restitution is mandatory. The Court may also impose a fine totaling twice the loss to any victim or twice the gain to the defendant, whichever is greater. Filing a false tax return carries a maximum penalty of three years in prison and a $250,000 fine. In addition, a defendant convicted of tax offenses faces mandatory costs of prosecution and remains liable for any taxes owed, as well as a civil fraud penalty up to 75 percent of any underpayment plus interest. If convicted, however, the Court must impose a reasonable sentence under the advisory United States Sentencing Guidelines.

The investigation falls under the umbrella of the Financial Fraud Enforcement Task Force, which includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.


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SEC Charges Benjamin P. Chui, Triffany Mok and Charles E. Hall Jr. with defrauding investors in a $100 million hedge fund that invested in subprime automobile loans.

Source- http://www.sec.gov/news/press/2010/2010-254.htm

Washington, D.C., Dec. 21, 2010 — The Securities and Exchange Commission today charged two San Francisco-based investment adviser firms along with their former CEO, former general counsel, and former portfolio manager with defrauding investors in a $100 million hedge fund that invested in subprime automobile loans.

The SEC found that former CEO Benjamin P. Chui and former portfolio manager Triffany Mok — who managed the American Pegasus Auto Loan Fund — together with former general counsel Charles E. Hall, Jr., engaged in improper self-dealing, misused client assets, and failed to disclose conflicts of interest.

The firms — American Pegasus LDG and American Pegasus Investment Management —and Chui, Hall, and Mok settled the SEC’s charges by agreeing to sanctions including bars from the industry and more than $1 million in penalties and repayments to the fund.

“Fund advisers have a duty to disclose conflicts of interest and act in the best interests of clients whose assets they are entrusted to manage,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Instead, Chui, Hall, and Mok created a tangled financial web, using investor funds for their personal benefit and then attempting to paper over the misconduct by inflating the value of fund assets.”

The SEC’s order instituting administrative proceedings finds that unbeknownst to investors, in mid-2007, Chui used more than $18 million in loans and advances from the Auto Loan Fund to buy the fund’s sole supplier of auto loans for himself, Hall, and Mok. This created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the fund’s performance while at the same time had an interest in generating profits for the loan supplier they secretly owned.

The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. By late 2008, roughly 40 percent of the Auto Loan Fund’s assets consisted of “loans” to the fund managers’ related businesses — with fund investors being charged fees based on these undisclosed related-party payments.

According to the SEC’s order, Chui, Hall, and Mok then essentially wiped much of this debt to the fund off the books by selling assets to the fund at a 300 percent mark-up. Chui, with help from Hall and Mok, purchased an auto loan portfolio for $12 million in February 2009 — then sold it to the Auto Loan Fund the same day for more than $38 million. The fraudulently inflated sale was used to erase money owed to the fund for the various related-party transactions.

The Commission’s order finds violations of multiple antifraud statutes by Chui, Hall, Mok, and their two adviser firms. Without admitting or denying the SEC’s findings, the respondents agreed to the following settlement terms. Chui, who lives in San Carlos, Calif., agreed to pay a $175,000 penalty and be barred from associating with an investment adviser for five years. Hall, who lives in Carlisle, Penn., agreed to pay a $100,000 penalty and be barred from associating with an investment adviser for three years and from appearing or practicing before the Commission as an attorney for three years. Mok, who lives in Fremont, Calif., agreed to pay a $75,000 penalty and be suspended from associating with an investment adviser for one year. The two adviser firms must disgorge $850,000 in management fees deemed improper by the SEC.


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SEC charged a former Executive Vice President of children's clothing marketer Carter's Inc. Joseph M. Elles's for engaging in financial fraud and insider trading.

Source- http://www.sec.gov/news/press/2010/2010-252.htm

Washington, D.C., Dec. 20, 2010 — The Securities and Exchange Commission today charged a former Executive Vice President of children's clothing marketer Carter's Inc. for engaging in financial fraud and insider trading. The SEC alleges that Joseph M. Elles's misconduct caused an understatement of Carter's expenses and a material overstatement of its net income in several financial reporting periods.

The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct. The non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC's new cooperation initiative earlier this year.

"Elles's trickery in secretly awarding excessive discounts deceived and damaged Carter's investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "While that was the wrong thing to do, Carter's did the right thing by promptly self-reporting the misconduct, taking thorough remedial action, and extensively cooperating with our investigation, for which it received the benefits of a non-prosecution agreement. In such circumstances, incentivizing appropriate corporate response to misconduct through the use of non-prosecution agreements is in the best interest of companies, shareholders and the SEC alike."

William P. Hicks, Associate Director of Enforcement in the SEC's Atlanta Regional Office, added, "Elles deceived accounting personnel at Carter's and caused financial misstatements to investors. After his misconduct inflated the company's earnings, Elles exercised options for the purchase of Carter's common stock and sold the resulting shares for his personal gain."

According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Elles conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of discounts that Carter's granted to its largest wholesale customer — a large national department store — in order to induce that customer to purchase greater quantities of Carter's clothing for resale. Elles then concealed his misconduct by persuading the customer to defer subtracting the discounts from payments until later financial reporting periods. He created and signed false documents that misrepresented to Carter's accounting personnel the timing and amount of those discounts.

The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the company's initial disclosure relating to the fraud on Oct. 27, 2009, immediately after which the company's common stock share price dropped 23.8 percent.

After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.

Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC staff as well as in the enforcement action filed against Elles.

The SEC's complaint alleges that Elles violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles.

The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter. The SEC's investigation is continuing.


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SEC charged a self-described power company Alternate Energy Holdings Inc. (AEHI) with fraudulently raising funds

Source- http://www.sec.gov/news/press/2010/2010-249.htm

Washington D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged a self-described power company in Idaho with fraudulently raising funds for a $10 billion nuclear power project. The SEC is seeking an emergency court order to freeze the assets of the company and two executives.

The SEC alleges that Alternate Energy Holdings Inc. (AEHI) has raised millions of dollars from investors in Idaho and throughout the U.S. and Asia while fraudulently manipulating its stock price through misleading public statements that conceal the secret profits reaped by its CEO Donald L. Gillispie and Senior Vice President Jennifer Ransom. Gillispie has touted the company as a tremendous investment opportunity that could rival Exxon Mobil in profitability, despite the fact that AEHI has essentially no revenue and minimal operations.

The SEC suspended trading in AEHI stock earlier this week.

“In light of AEHI’s ongoing efforts to raise funding while promoting itself through a daily deluge of press releases, we needed to take immediate action to get to the bottom of the company’s misleading statements,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Documents we have obtained to date indicate a scheme to personally enrich the CEO at the expense of investors.”

According to the SEC’s complaint filed today in federal district court in Boise, AEHI’s fundraising was facilitated by a scheme to drive up the company’s stock price, both through frequent press releases (at least 87 in 2010 alone) and efforts of paid stock promoters to manipulate the stock price. The SEC alleges that the company has made multiple misrepresentations, including claims that its executives had such confidence in AEHI that they had not sold a single share of company stock. Records obtained by the SEC show that Gillispie and Ransom have instead secretly unloaded extensive stock holdings and funneled the money back to Gillispie.

The SEC’s complaint also alleges that AEHI reported to the SEC and investors that Gillispie’s compensation was $133,000. However, Gillispie has actually reaped approximately six times that amount in 2010.

The SEC’s complaint charges AEHI, Gillispie, and Ransom with violations of the anti-fraud provisions of the federal securities laws, and names as relief defendants two companies controlled by Gillispie and Ransom (Executive Energy Consulting LLC and Bosco Financial LLC). In a motion filed simultaneously with the enforcement action, the SEC seeks emergency relief for investors including an asset freeze and a temporary restraining order enjoining the defendants from further violations of the securities laws.

The SEC’s case was investigated by Kristin Waldron, David Berman, Heather Marlow, and Tracy Davis of the San Francisco Regional Office. The SEC acknowledges the assistance of the Idaho Department of Finance and FINRA in this matter. The SEC’s investigation is continuing.


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SEC Charged Jonathan Star Bristol, attorney for former financial advisor Kenneth Ira Starr, with aiding and abetting Starr's multi-million dollar fraud by allowing Starr to use his attorney trust accounts as conduits when Starr stole money from advisory clients.

Source- http://www.sec.gov/news/press/2010/2010-248.htm

Washington, D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged Jonathan Star Bristol, attorney for former financial advisor Kenneth Ira Starr, with aiding and abetting Starr's multi-million dollar fraud by allowing Starr to use his attorney trust accounts as conduits when Starr stole money from advisory clients.

The SEC alleges that more than $25 million belonging to Starr's clients flowed through Bristol's attorney trust accounts. Without his clients' authorization, Starr would transfer their funds into the attorney trust accounts, and then Bristol would transfer the stolen funds to Starr and his two companies for personal use.

The SEC alleges that Bristol never disclosed the existence of the attorney trust accounts to the prominent international law firm where he worked at the time. Monthly account statements clearly listing the names of Starr's clients as the source of the incoming transfers were sent directly to Bristol's home address instead of the law firm. Meanwhile, Bristol touted his relationship with Starr to his colleagues and others, claiming that Starr managed $70 billion in assets. In fact, Starr managed only a fraction of that amount.

"Bristol had a legal and professional responsibility not to assist Ken Starr in conduct that he knew was unlawful," said George S. Canellos, Director of the SEC's New York Regional Office. "Bristol crossed the line from lawyer to conspirator when he failed to safeguard funds entrusted to him, helped Starr steal client money, and lied to the victims to perpetuate the scheme."

The SEC previously charged Starr, Starr Investment Advisors LLC, and Starr & Company LLC with violating securities laws pertaining to custody of clients' assets and misusing client funds to buy a multi-million dollar luxury condominium on Manhattan's Upper East Side among other things.

The SEC's amended complaint, filed today in federal court in Manhattan, adds Bristol as a defendant, alleging that beginning around November 2008 and continuing until Starr's arrest in May 2010, Bristol repeatedly allowed Starr to use his attorney trust accounts to funnel money stolen from Starr clients. Notwithstanding his personal role in the scheme, Bristol represented Starr and his companies throughout the SEC's investigation and in an investment advisory examination by SEC staff.

According to the SEC's amended complaint, Bristol was confronted by one of Starr's victims about an unauthorized $1 million transfer from the victim's account. Bristol lied to the victim that the funds were being bundled with other clients' funds for an investment with UBS Financial Services. In fact, Bristol had already used the misappropriated funds to pay a multi-million dollar legal settlement with one of Starr's former clients. Bristol subsequently sought to represent that same victim after the victim was contacted by SEC staff in its investigation. In addition to the fact that such representations violated the ethical obligations of lawyers, Bristol's clear intent was to obstruct and undermine the SEC's investigation in order to conceal the wrongdoing.

The SEC's amended complaint charges Bristol with aiding and abetting the Starr Parties' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest and financial penalties. The SEC also will seek an order barring Bristol from practicing before the Commission pursuant to Rule 102(e) of the Commission's Rules of Practice.

Sanjay Wadhwa, Maureen F. Lewis, Timothy Casey and Sandeep Satwalekar, all members of the SEC's Market Abuse Unit in New York, and George O'Kane of the New York Regional Office conducted the agency's investigation, which is continuing. The SEC's litigation effort will be led by Todd Brody. The SEC thanks the U.S. Attorney's Office for the Southern District of New York, the New York County District Attorney's Office, and the New York Office of the Internal Revenue Service's Criminal Investigation Division for their assistance in this matter.


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