In the week ending with "April Fools Day," the Commission
continued to issue proposed regulations to implement the Dodd-Frank Wall Street
and Consumer Protection Act. SEC Enforcement focused on investment fund fraud
actions, filing or resolving seven cases. The Commission also brought a
significant insider trading case along with DOJ and a market manipulation
action. In the UK the long awaited guidance on the Bribery Act was issued. That
Act will now come into force in July of this year.
The SEC continued to issue proposed rules to implement Dodd-Frank including:
SEC Commissioner Luis Aguilar delivered remarks to the
NASAA/SEC 19(d) conference this week. The Commissioner focused on the basics of
regulation, improving transparency and the relationship between government
regulators and industry participants (here).
The SEC Inspector General issued two reports dated March
30, 2011 titled:
Investment fund fraud: SEC v. Clements, Civil Action No. 11-cv-60673
(S.D. Fla. Filed March 30, 2011) is an action against James Clements and Zeina
Smidi. The defendants operated a Ponzi scheme through a number of entities they
controlled, according to the SEC. From 2005 through 2006 investors were
solicited with claims of guaranteed monthly returns supposedly from trading
foreign currencies. Later investors were told that their funds would be placed
with the best Swiss banks and advisors. In reality the investment claims were false.
The defendants siphoned off much of the investor money for personal use. The
SEC's complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Section 10(b). The case is in litigation.
Investment fund fraud: SEC v. LandOak
Securities LLC, Civil Action No 3:08CV209 (E.D. TN Filed
May 23, 2008) is an action against the firm, a registered investment adviser,
Patrick Martin, an owner and associated person, and Michael Atkins, a former
owner and associated person. The complaint alleges violations of Advisers Act
Sections 204, 206(1), 206(2), 206(4) and 207. It claims that beginning in 1997
and continuing into the next year the individual defendants sold $3.6 million
in promissory notes and membership interests to thirty-five investors.
Eventually, according to the complaint, Messrs. Martin and Atkins
misappropriated most of the investor funds. The company and Mr. Martin settled,
consenting to the entry of a permanent injunction prohibiting future violations
of the sections cited in the complaint. The company and Mr. Martin were ordered
to pay disgorgement of $880,512.16 along with prejudgment interest. If the
parties do not agree on a civil penalty the Commission will file an appropriate
motion with the court.
Investment fund fraud: SEC v. Navigators
International Management Co., Ltd., Case No. 07-cv-04518
(S.D.Tx. Filed Dec. 27, 2007) is an action against the company, James Spurger
and Benjamin Young, Jr. The complaint, which alleges violations of Securities
Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a), centers on
two fraudulent unregistered offerings of securities. The company and Mr.
Spurger settled, consenting to the entry of permanent injunctions prohibiting
future violations of the sections cited in the complaint. In addition, the
company was ordered to pay a penalty of $45,000 while Mr. Spurger will pay
Investment fund fraud: SEC v. Aerokinetic
Energy Corp., Civil Action No. 8:08-CV-1409 (M.D. Fla.
Filed July 28, 2008) is an action against the company and its president
Randolph Bridwell. Defendants raised approximately $535,000 from 24 investors
between September 2006 and the filing of the complaint. Investors were told
that the company had developed a new green technology that created inexpensive
electrical energy and that it had patents and orders to purchase the finished
product. All of these claims were false, according to the Commission. Defendant
Bridwell is alleged to have misappropriated much of the investor funds for his
personal use. The complaint alleged violations of Securities Act Sections 5 and
17(a) and Exchange Act Section 10(b). Each defendant settled, consenting to the
entry of a permanent injunction prohibiting future violations of the sections
cited in the complaint. In addition, the final judgment imposes, jointly and
severally, an obligation to pay disgorgement of $555,000 along with prejudgment
interest. The company was ordered to pay a civil penalty of $250,000 while Mr.
Bridwell is required to pay $130,000.
Offering fraud: SEC v. Frishbert,
Civil Action No 4:11-cv-0197 (S.D. Tx. Filed March 25, 2011). The action names
as a defendant, registered investment adviser Daniel Sholom Frishberg, a
principal of Daniel Frishberg Financial Services ("DFFS"). The case centers on
the sale of notes from two issuers to advisory clients. The first involved the
sale of notes of Business Radio Network L.P., from April 2008 through September
2009. About $5.5 million was raised in sales solicited by Albert Kaleta with
the approval of Mr. Frishbert. Note purchasers were not told that Mr. Frishberg
is the CEO and Mr. Kaleta is affiliated with the company. They also were not
told that both men drew a salary from the company or that it was in poor
financial condition and lacked the resources to repay the notes. The second
involved the sale of notes issued by Kaleta Capital Management, Inc., a company
controlled by Mr. Kaleta. Investors were not told that the company had no real
ability to repay the notes. Again Mr. Frishbert permitted a solicitation of
DFFS clients. In a related action the SEC claimed these notes were sold based
on fraudulent representations (SEC v. Kaleta, Civil Action No.
4:09-cv-3674 (S.D. Tx. Nov. 13, 2009). The complaint alleges violations of Advisers
Act Sections 206(1) and (2). Mr. Frishberg settled by consenting to the entry
of a permanent injunction prohibiting future violations of Section 206(2) and
from aiding and abetting violations of Sections 206(1) and (2). He also agreed
to pay a civil penalty of $65,000. He also consented to the filing of a related
administrative proceeding that will bar him from associating with an investment
Insider trading: SEC v. Liang,
Case 8:11-cv-00819 (D. Md. Filed March 29, 2011) and U.S. v. Liang (D.
Md. Filed March 29, 2011) are actions against FDA chemist Cheng Yi Liang. The
criminal case also names his son as a defendant. Mr. Lang is alleged to have
used confidential information from the FDA to trade in the stock of
pharmaceutical companies. Overall he made profits of $3.6 million from trades
placed through several accounts he controlled. The criminal complaint charges
the father and son with conspiracy to commit securities and wire fraud,
securities fraud and wire fraud relating to their trading in the securities of
five companies. The SEC complaint against the father alleges violations of
Securities Act Section 17(a) and Exchange Act Section 10(b). It is based on
trading in advance of 27 announcements involving 19 stocks. A civil forfeiture
action was also filed. All three cases are pending.
Investment fund fraud: SEC v. Quan,
Case no. 0:11-cv-00723 (D. MN Filed March 24, 2011) is an action against Marlon
Quan a hedge fund manager who operated Acorn Capital Group, LLC and Stewardship
Investment Advisors, LLC. The companies were used to manage several hedge
funds. From 2001 through 2008 Mr. Quan raised over $459,077,561from at least
165 investors. From the beginning Mr. Quan's funds fed millions of dollars of
investor money to fraudster Tom Petters who operated a huge Ponzi scheme. When
soliciting funds from investors Mr. Quan furnished them written materials which
assured investors that he had taken certain steps to protect their funds. The
claims were false. When the Petters entities began to default on the notes held
by the Quan funds, the defendant covered it up. Eventually a receiver for the
Petters entities authorized the payment of $14 million in settlement to the
Quan funds. A Quan controlled entity negotiated a deal to obtain the funds and planned
to divert them at the time the SEC filed its action and secured a freeze order.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act
Section 10(b) and Advisers Act Sections 206(4). The emergency order entered by
the Court at the request of the SEC froze the settlement funds, preserving the
money for the defrauded investors.
Investment fund fraud: SEC v. Clark,
Case No. 1:11-cv-00046 (D. Utah Filed March 25, 2011) is a Ponzi scheme case
which named as defendants John Clark, Impact Cash, LLC and Impact Payment
Systems, LLC. From March 2006 through September 2010 the defendants raised over
$47 million from at least 120 investors who were told their funds would be used
to fund payday loans. Instead the funds were diverted to the personal use of
Mr. Clark. The complaint alleges violations of Securities Act Sections 5 and
17(a) and Exchange Act sections 10(b) and 15(a). The Commission obtained an
emergency freeze order and the appointment of a receiver to preserve the
assets. The case is in litigation.
Market manipulation: SEC v. Catapano,
Civil Action No. 11 Civ. 1476 (E.D.N.Y. March 25, 2011) is an action against
Joseph Catapano and Michael Piervinanzi alleging that they engaged in a scheme
to manipulate the shares of Euro Solar Parks, Inc. The complaint, which alleges
violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1)
and 10(b), claims that from mid-February 2011 the two defendants engaged in a
scheme in which they agreed to pay a 30% kickback to an unidentified individual
who purported to represent a group of registered representatives with
discretion over the accounts of wealthy investors. The kickback was to purchase
the shares of Euro solar. At one point defendant Catapano instructed the
individual to arrange the purchase of 130,000 shares of Euro Solar stock for
about $31,000 through matched trades. An $8,800 bribe was paid to follow
precise instructions on the size, price and timing of the purchase orders. The
case is in litigation.
Investment fund fraud: SEC v. Cantens,
Case No. 10-cv-20635 (S.D. Fla. Filed March 3, 2010) is an action against
Gaston Cantens and Terestia Cantens. The complaint claims that the two
defendants are the founders and co-owners of Royal West Properties, Inc., a
real estate developer. Defendants raised approximately $135 million from over
400 investors who were promised annual returns of 9 to 16% from notes backed by
mortgage assignments. Investors were assured that the notes were safe and that
the two defendants had a very substantial net worth. In fact the company did
not generate sufficient revenue to pay the notes and, since at least 2002, the
company was operated as a Ponzi scheme. About $20 million in investor funds was
diverted to the personal use of the two defendants. This week the Commission
settled with the two defendants who consented to the entry of a permanent
injunction prohibiting future violations of Securities Act Sections 5 and 17(a)
and Exchange Act Section 10(b). In addition, the two defendants will be jointly
and severally liable for the payment of disgorgement of $5,276,750 along with
prejudgment interest. A penalty was waived based on the financial condition of
Customer fraud: SEC v. Vianna,
Case No. 10 Civ. 1842 (S.D.N.Y. Filed March 9, 2010) is an action against Jose
Vianna, a former registered representative of Maxim Group LLC, a registered
broker-dealer. According to the complaint, between July 2007 and March 2008 Mr.
Vianna diverted profitable trades from the account of a large Spanish bank to
the account of relief defendant Creswell Equities, Inc. He did this by placing
simultaneous orders in each account and then diverting profitable trades to
Creswell. The defendant settled with the Commission, consenting to the entry of
a permanent injunction prohibiting future violations of Securities Act Section
17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement of
$306,412 along with prejudgment interest and a civil penalty. Creswell
previously settled with the SEC by consenting to the entry of a judgment
requiring the payment of $1,661,650.18 as disgorgement. The SEC Litigation
Release did not specify that Mr. Vianna had agreed to resolve any
The CFTC, along with the National Futures Association and
AARP, is co-sponsoring a program titled "Don't Lose Your Life Savings to
Investment Fraud" during Money Smart Week (April 2 - 9). The program will be
conducted on Friday, April 8, 2011 from 12:00 p.m. to 1:00 p.m. at the AARP
Illinois office at 222 N. LaSalle, Suite 710, Chicago, Ill. Approximately 450
free classes, seminars and activities promoting financial education will be
held during Money Smart Week Chicago. The program is being coordinated by the
Federal Reserve Bank of Chicago.
U.S. v. Levin,
Case No. 1 cr 00032 (S.D.N.Y.) is an investment fund fraud action against Igor
Levin and Yevgeny Sevartsshteyn. Previously each man pleaded guilty to
conspiracy to commit wire fraud. As part of their pleas they agreed to forfeit
$7 million. This week each defendant was sentenced to 87 months in prison.
According to the charges in the underlying case, from 2005 through 2006 the two
defendants controlled and operated A.R. Capital which was the general partner
of A.R. Capital Global Fund, LP The fund claimed to be involved in real estate,
oil, gas and other commodities. In reality it was a fraud. The $7 million in
investor funds was wired to various accounts in Easter Europe. The fund
continued in operation until halted by an suit filed by the SEC.
The Director of Public Prosecutions and the Director of
the Serious Fraud office issued joint guidance for prosecutions under the
Bribery Act 2010. The guidance reviews the Act and its legal framework and
discusses the applications of various sections. It is available here.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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