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Securities Litigation This Week: U.S., UK Courts hand Down Sentences For Securities Fraud

The price of gold continues to spiral upward this week while the European banking crisis continued. As the crisis has unfolded European regulators took steps to preclude the short sale of shares in financial institutions. At the same time FINRA issued an investor warning cautioning the public regarding possible scams in connection with the sale of shares in companies with gold mines. The SEC settled with two defendants in a long running enforcement action centered on a manipulative short selling scheme.

Courts in the U.S. and the UK handed down sentences for securities fraud. In New York a former brokerage firm account executive was sentenced to prison for running up unauthorized trading losses in one client account and then trying to conceal them with fraudulent cash transfers from the account of another firm client. A CEO was sentenced to prison for fraudulently inflating the revenue of his company and a former attorney was sent to prison for insider trading. In the U.K. a father and his two sons were sentenced to prison for running a large cross-boarder boiler room operation.

SEC enforcement - filings and settlements

Short selling scheme: SEC v. Andreas Badian, Civil Action No. 06 CV 2621 (S.D.N.Y. Filed Apr. 4, 2006). The SEC settled with two defendants in this on-going litigation centered on manipulative short selling. The action named as defendants Andreas Badian, an employee of unregistered investment adviser Rhino Advisors; three registered representatives then employed by now defunct Refco Securities, Jacob Spinner, Mottes Drillman, and Jeffrey Graham; and Pond Securities Corp., a registered broker dealer, along with two of its employees, Ezra Birnbaum and Shaye Hirsch. Mr. Badian, acting for Rhino, directed the scheme to manipulate down the share price of Sedona Corporation, according to the Commission. Under an agreement with Sedona, Amro International, S.A., a Rhino client, loaned Sedona $2.5 million. Three months later Amro was to be paid $3 million by Sedona. The agreement permitted Amro to convert Sedona's debenture debt to shares of Sedona stock on certain specified dates. The lower the share price, the more shares Amro would receive. The agreement prohibited the company from selling Sedona's shares short. Nevertheless, the defendants drove the share price down with a short selling scheme from about $1.43 per share in early 2001 to about $0.75 per share by March 23, 2001. Amro then exercised its conversion rights, receiving over 1.6 million shares of Sedona stock in repayment of $1.1 million due under the Agreement.

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For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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