SEC Charges Wall Street Investment Banker With Insider Trading in Former Girlfriend’s Account to Pay Child Support

The Securities and Exchange Commission today announced an emergency action against a New York City-based investment banker charged with insider trading for nearly $1 million in illicit profits.

The SEC alleges that while working on Wall Street, Frank “Perk” Hixon Jr. regularly logged into the brokerage account of Destiny “Nicole” Robinson, the mother of his young child. He executed trades based on confidential information he obtained on the job, sometimes within minutes of learning it. Illegal trades also were made in his father’s brokerage account. When his firm confronted him about the trading conducted in these accounts, Hixon Jr. pretended not to recognize the names of his father or his child’s mother. However, text messages between Hixon Jr. and Robinson suggest he was generating the illegal proceeds in lieu of formal child support payments.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Hixon Jr.

“Hixon Jr. violated the trust of his employer and clients by abusing his special access to nonpublic market-moving information,” said David Woodcock, director of the SEC’s Fort Worth Regional Office. “Hixon Jr. went to great lengths to hide his wrongdoing and even denied knowing his father or the mother of his child.”

A federal judge has granted the SEC’s request and issued an emergency order freezing Robinson’s brokerage account, which the SEC alleges contains the majority of proceeds from Hixon Jr.’s illegal trading with a balance of approximately $1.2 million.

According to the SEC’s complaint unsealed today in federal court in Austin, Texas, Hixon Jr. illegally tipped or traded in the securities of three public companies. He traded ahead of several major announcements by his client Westway Group in 2011 and 2012. He traded based on nonpublic information he learned about potential client Titanium Metals Corporation ahead of its merger announcement in November 2012. And Hixon even illegally traded in the securities of his own firm Evercore Partners prior to its announcement of record earnings in January 2013. Hixon Jr. generated illegal insider trading profits of at least $950,000.

According to the SEC’s complaint, when Hixon Jr.’s employer asked him in 2013 whether he knew anything about suspicious trading in accounts belonging to Destiny Robinson and his father Frank P. Hixon Sr., who lives in suburban Atlanta, Hixon Jr. denied recognizing either name. When later confronted with information that he did in fact know these individuals, Hixon Jr. continued his false claims, saying he didn’t know Robinson as “Destiny” and asserting in a sworn declaration that when approached he didn’t recognize the name of the city where his father lived for more than 25 years. Hixon Jr. was subsequently terminated by his employer.

The SEC’s complaint alleges that Hixon Jr. violated the antifraud provisions of the Securities Exchange Act of 1934. In addition to the asset freeze, the complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. Hixon Sr. and Robinson have been named as relief defendants for the purposes of recovering the illegal trading profits held in their accounts.

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Private Equity Fund Manager Charged in Expense Misallocation Scheme

The Securities and Exchange Commission announced charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.

The SEC Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants. CEC and Brittenham did not disclose any such payment arrangement in fund offering documents. When the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.

“Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”

According to the SEC’s order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses. Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself. The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.

According to the SEC’s order, the expense misallocation scheme shrank the funds’ cash reserves. So CEC and Brittenham made unauthorized “loans” to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets. The loans jeopardized the funds because Brittenham had pledged fund assets as collateral. CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money. Brittenham also lied to a fund investor about his “skin in the game.” Brittenham claimed that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.

The SEC’s order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.

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SEC Announces Initiative Directed at Never-Before Examined Registered Investment Advisers

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SEC Announces Initiative Directed at Never-Before Examined Registered Investment Advisers

The Securities and Exchange Commission today announced that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years.  OCIE previously announced that examining these advisers is a priority in 2014.

As part of the initiative, OCIE will conduct examinations of a significant percentage of advisers that have not been examined since they registered with the SEC.  These examinations will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets.  Additional details on the examinations are available here.

“Our examinations will focus on areas most important to protecting investors,” said Jane Jarcho, national associate director of OCIE’s Investment Adviser/Investment Company examination program. “We will also promote compliance by engaging with these advisers through outreach efforts.”

Starting later this year, OCIE will invite SEC-registered investment advisers who have yet to be examined to attend regional meetings where they can learn more about the examination process.  Advisers also can find information regarding their obligations under the Investment Advisers Act of 1940 and other useful guidance on the SEC’s website.

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Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients

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Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients

The Securities and Exchange Commission today announced charges against Zurich-based Credit Suisse Group AG for violating the federal securities laws by providing cross-border brokerage and investment advisory services to U.S. clients without first registering with the SEC.

Credit Suisse agreed to pay $196 million and admit wrongdoing to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings, Credit Suisse provided cross-border securities services to thousands of U.S. clients and collected fees totaling approximately $82 million without adhering to the registration provisions of the federal securities laws.  Credit Suisse relationship managers traveled to the U.S. to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered to provide brokerage or advisory services, nor were they affiliated with a registered entity.  The relationship managers also communicated with clients in the U.S. through overseas e-mails and phone calls.

“The broker-dealer and investment adviser registration provisions are core protections for investors,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “As Credit Suisse admitted as part of the settlement, its employees for many years failed to comply with these requirements, and the firm took far too long to achieve compliance.”

According to the SEC’s order, Credit Suisse began conducting cross-border advisory and brokerage services for U.S. clients as early as 2002, amassing as many as 8,500 U.S. client accounts that contained an average total of $5.6 billion in securities assets.  The relationship managers made approximately 107 trips to the U.S. during a seven-year period and provided broker-dealer and advisory services to hundreds of clients they visited.  Credit Suisse was aware of the registration requirements of the federal securities laws and undertook initiatives designed to prevent such violations.  These initiatives largely failed, however, because they were not effectively implemented or monitored.

“As a multinational firm with a significant U.S. presence, Credit Suisse was well aware of the steps that a firm needs to take to legally conduct advisory or brokerage business with U.S. clients,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “Credit Suisse failed to effectively implement internal controls designed to keep its employees from crossing the line and being non-compliant with the federal securities laws.”

According to the SEC’s order, it was not until after a much-publicized civil and criminal investigation into similar conduct by Swiss-based UBS that Credit Suisse began to take steps in October 2008 to exit the business of providing cross-border advisory and brokerage services to U.S. clients.  Although the number of U.S. client accounts decreased beginning in 2009 and the majority were closed or transferred by 2010, it took Credit Suisse until mid-2013 to completely exit the cross-border business as the firm continued to collect broker-dealer and investment adviser fees on some accounts.

The SEC’s order finds that Credit Suisse willfully violated Section 15(a) of the Securities Exchange Act of 1934 and Section 203(a) of the Investment Advisers Act of 1940.  Credit Suisse admitted the facts in the SEC’s order, acknowledged that its conduct violated the federal securities laws, accepted a censure and a cease-and-desist order, and agreed to retain an independent consultant.  Credit Suisse agreed to pay $82,170,990 in disgorgement, $64,340,024 in prejudgment interest, and a $50 million penalty.

The SEC’s investigation was conducted by senior attorneys David S. Karp and Matthew R. Estabrook under the supervision of assistant director Laura B. Josephs and associate director Scott W. Friestad.  The SEC appreciates the assistance of the Swiss Financial Market Supervisory Authority.

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SEC Names Sharon Binger as Director of Philadelphia Regional Office

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SEC Names Sharon Binger as Director of Philadelphia Regional Office

The Securities and Exchange Commission today named Sharon B. Binger as director of the Philadelphia Regional Office, where she will oversee enforcement and examinations in the Mid-Atlantic region.

Ms. Binger joined the SEC’s Enforcement Division in 2008 has been an assistant regional director in the New York office since 2011.

Ms. Binger has handled enforcement cases ranging from offering frauds and insider trading to trading suspensions in microcap stocks.  She led the SEC’s investigation into Total S.A. for Foreign Corrupt Practices Act violations, which resulted in one of the largest-ever FCPA settlements.  Ms. Binger also has collaborated closely with the SEC’s National Exam Program, pursuing multiple referrals from examiners that led to enforcement actions.

“Sharon combines careful lawyering with infectious enthusiasm,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “She has distinguished herself with her excellent judgment, and I am pleased that she has agreed to lead the Philadelphia office.”

Andrew J. Bowden, director of the SEC’s National Exam Program, added, “Sharon has a strong track record of protecting investors.  She also has built effective working relationships with her colleagues in the exam program and across the Commission, and she will be a superb leader of our experienced exam team in Philadelphia.”

Ms. Binger said, “I am honored and thrilled to have been selected to serve as the head of the Philadelphia office, which has an outstanding record of accomplishments in the exam and enforcement arenas.  I look forward to leading the office’s dedicated and talented professionals.”

Ms. Binger earned her undergraduate degree from Northwestern University in 1998 and her law degree with honors from Duke University School of Law in 2001.  She was an associate in the litigation department of Willkie Farr & Gallagher LLP in New York from 2001 to 2008. 

Ms. Binger succeeds Daniel M. Hawke, who announced last fall that he was stepping down as regional director to concentrate his efforts on leading the Enforcement Division’s nationwide Market Abuse Unit.

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SEC Charges Three California Residents Behind Movie Investment Scam

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SEC Charges Three California Residents Behind Movie Investment Scam

The Securities and Exchange Commission today charged three California residents with defrauding investors in a purported multi-million dollar movie project that would supposedly star well-known actors and generate exorbitant investment returns.

The SEC alleges that Los Angeles-based attorney Samuel Braslau was the architect of the fraudulent scheme that raised money through a boiler room operation spearheaded by Rand Chortkoff of Encino, Calif.  High-pressure salespeople including Stuart Rawitt persuaded more than 60 investors nationwide to invest a total of $1.8 million in the movie first titled Marcel and later changed to The Smuggler.  Investors were falsely told that actors ranging from Donald Sutherland to Jean-Claude Van Damme would appear in the movie when in fact they were never even approached.  Instead of using investor funds for movie production expenses as promised, Braslau, Chortkoff, and Rawitt have spent most of the money among themselves.  The investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Braslau, Chortkoff, and Rawitt. 

“Braslau, Chortkoff, and Rawitt sold investors on the Hollywood dream,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “But the dream never became a reality because they took investors’ money for themselves rather than using it to make a movie.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Braslau set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds from investors for the movie project.  In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II.  Shortly thereafter, Mutual Entertainment began raising money from investors through a boiler room operation that Chortkoff operated out of Van Nuys, Calif.  

The SEC alleges that Braslau, Chortkoff, and Rawitt claimed that 63.5 percent of the funds raised from investors would be used for “production expenses.”  However, very little if any money was actually spent on movie expenses as they instead used the vast majority of investor funds to pay sales commissions and phony “consulting” fees to themselves and other salespeople.  Rawitt made numerous false claims to investors about the movie project.  For instance, he flaunted a baseless projected return on investment of about 300 percent.  He falsely depicted that they were just shy of reaching a $7.5 million fundraising goal and the movie was set to begin shooting in summer 2013.  He instilled the belief that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz.  And he falsely stated that investors would realize revenues from action figures and other products tied to the movie when in fact no such licensing rights had been sold.

According to the SEC’s complaint, Rawitt was the subject of a prior SEC enforcement action in 2009, when he was charged for his involvement in an oil-and-gas scheme.

“Investors can help protect themselves when approached for an investment opportunity by using the Internet to their advantage and researching the individual making the offer,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.  “In this case, a quick search of the SEC website reveals a copy of the complaint filed against Rawitt in federal court for participating in an offering fraud as well as an order barring him from the brokerage industry.”

The SEC’s complaint alleges that Braslau, Chortkoff, and Rawitt violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint further alleges that Chortkoff and Rawitt violated Section 15(a) of the Exchange Act, and Rawitt violated Section 15(b)(6)(B) of the Exchange Act.  The SEC seeks financial penalties and permanent injunctions against Braslau, Chortkoff, and Rawitt.

The SEC’s investigation, which is continuing, has been conducted by Peter Del Greco and Marc Blau of the Los Angeles office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Central District of California and the Federal Bureau of Investigation.    

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Stephen Luparello Named as Director of SEC’s Division of Trading and Markets

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Stephen Luparello Named as Director of SEC’s Division of Trading and Markets

The Securities and Exchange Commission today announced that it has named Stephen Luparello as director of its Division of Trading and Markets.

Mr. Luparello comes to the SEC from the law firm of WilmerHale, where he has been a partner in its Washington, D.C. office, specializing in broker-dealer compliance and regulation, securities litigation, and enforcement.  Mr. Luparello joined WilmerHale after a 16-year career at the Financial Industry Regulatory Authority (FINRA) and its predecessor, the National Association of Securities Dealers (NASD), where he most recently served as Vice Chairman of FINRA.

“The agency will greatly benefit from Steve’s knowledge, leadership and insight,” said Chair Mary Jo White.  “He is an experienced market regulator and well positioned to lead the division as we continue to fulfill the Commission’s mission.”

“Throughout my career I have been enormously impressed by the talent and dedication of the SEC’s Division of Trading and Markets,” Mr. Luparello said.  “I look forward to working with Chair White, the Commissioners, and SEC staff to address the opportunities and challenges of today’s markets.” 

The SEC's Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets.  The division regulates the major securities market participants, including broker-dealers, credit rating agencies, transfer agents, and self-regulatory organizations such as stock exchanges, FINRA, and clearing agencies.

As FINRA’s Vice Chairman, Mr. Luparello was responsible for its examination, enforcement, market regulation, international, and disclosure programs.  He played a key role in the creation of FINRA’s Office of the Whistleblower and its Office of Fraud Detection and Market Intelligence, and led the development of its Order Audit Trail System (OATS) and SONAR, technology used to monitor securities markets and detect suspicious trading.

Mr. Luparello joined the NASD in 1996 as vice president in the Office of Disciplinary Policy and was named head of its Market Regulation Department in 1999.  Prior to that, Mr. Luparello was the chief of staff to then-CFTC Chairman Mary Schapiro.  He spent nine years at the SEC, serving as branch chief in the Office of Inspections in the Division of Market Regulation, now the Division of Trading and Markets.

Mr. Luparello received his B.A. from LeMoyne College in 1981 and his law degree from Washington and Lee University in 1984.  He will succeed John Ramsay, who announced today that he is departing the agency after three and half years at the SEC, serving as acting director of Division of Trading and Markets since December 2012. 

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SEC Names Rick Fleming as Investor Advocate

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SEC Names Rick Fleming as Investor Advocate

The Securities and Exchange Commission today announced that Rick A. Fleming has been named as the first head of the agency’s Office of the Investor Advocate. 

As the Investor Advocate, Mr. Fleming will lead an office charged with assisting retail investors in interactions with the Commission and with self-regulatory organizations (SROs), identifying areas where investors would benefit from changes in, and analyzing the impact of, the rules and regulations of the Commission and SROs, identifying problems that investors have with financial service providers and investment products and proposing related changes to promote the interests of investors.

Mr. Fleming, currently deputy general counsel with the North American Securities Administrators Association (NASAA), will assume his new role on Feb. 24, 2014.

“I am very pleased that Rick will be joining the Commission as its inaugural director of our Office of the Investor Advocate,” said Mary Jo White, Chair of the SEC.  “Rick brings a depth of experience advocating for the interests of investors, a keen understanding of the markets, and a true passion for investor protection.”

Mr. Fleming has been NASAA’s deputy general counsel since October 2011, where he advocated for investors and represented the organization of state securities regulators before Congress and federal agencies, including the SEC.  Previously, he spent more than 20 years in state government in Kansas working in the Office of the Secretary of State, the Office of the Governor, and the Office of the Securities Commissioner.

“It is a great honor to be appointed as the first Investor Advocate at the Commission, where I will work alongside the many talented professionals at the SEC who have dedicated their careers to the protection of investors.  I look forward to helping ensure that investors are always heard and treated fairly,” said Mr. Fleming.

Mr. Fleming worked from 1996 until 2011 in the Office of the Securities Commissioner in Kansas, first as associate general counsel and later as general counsel, where he represented the state in disciplinary proceedings against broker-dealers and investment advisers, prosecuted civil and criminal securities-fraud cases, reviewed public securities offerings, drafted legislation, and testified before the state legislature on securities and investor-protection matters.

Mr. Fleming received his bachelor’s degree with a dual major in finance and economics from Washburn University and holds a law degree from Wake Forest University. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act established an Office of the Investor Advocate at the SEC and required appointment of an Investor Advocate to report to the Chair, to lead the new office.  

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Elizabeth Murphy Named as Associate Director in the Division of Corporation Finance

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Elizabeth Murphy Named as Associate Director in the Division of Corporation Finance

The Securities and Exchange Commission today announced that Elizabeth Murphy has been named an associate director in its Division of Corporation Finance. 

For the past five years, Ms. Murphy has served as the Secretary of the Commission, heading the office that prepares, reviews, and maintains records of Commission action and advises the Commission and the SEC staff on administrative practices and procedures.  From 2000 to 2009, she was the chief of the Division of Corporation Finance’s Office of Rulemaking, which plays a leading role in rulemaking projects undertaken by the division.

In her new role, Ms. Murphy will oversee the work of three offices within the division: the Office of Rulemaking, Office of Small Business Policy, and Office of Enforcement Liaision.  The Office of Small Business Policy coordinates the division’s activities involving smaller public companies and limited, private, and intrastate securities offerings.  The division’s Office of Enforcement Liaison coordinates with the Division of Enforcement on investigative matters, including those involving corporations that are delinquent in filing quarterly, annual, and other reports. 

“I am excited to welcome Betsy back to the division, and look forward to her leadership in this new role,” said Keith Higgins, director of the Division of Corporation Finance.  “Betsy’s strong relationships with staff inside and outside of the division, including with Commissioners and their counsel, will serve the agency extremely well in her new role.  Her deep knowledge of the securities laws and the Commission’s rulemaking processes will also strengthen our ability to ensure the effective implementation of the rules required by the Dodd-Frank Act and the JOBS Act.”

Ms. Murphy first joined the division in 1986 as an attorney-advisor and was promoted to special counsel in 1987.  She was made a special counsel in the division’s Office of the Chief Counsel in 1996 and later served as counsel to Commissioner Laura S. Unger.  As chief of the division’s Office of Rulemaking, she overaw teams working on numerous rules, including many required by the Sarbanes-Oxley Act of 2002.

Ms. Murphy received a bachelor’s degree from the University of Virginia in 1982 and her law degree from the University of Notre Dame in 1985.

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SEC to Hold Cybersecurity Roundtable

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SEC to Hold Cybersecurity Roundtable

The Securities and Exchange Commission today announced that it will host a roundtable next month to discuss cybersecurity and the issues and challenges it raises for market participants and public companies, and how they are addressing those concerns. 

The growing interest in cybersecurity across financial markets and other sectors has raised questions about how various market participants can effectively manage cybersecurity threats.  Cybersecurity breaches have focused public attention on how public companies disclose cybersecurity threats and incidents. 

The roundtable will be held at the SEC’s Washington, D.C. headquarters on March 26 and will be open to the public and webcast live on the SEC’s website.  Information on the agenda and participants will be published in the coming weeks.   

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Two Hong Kong-Based Firms to Pay $11 Million for Insider Trading Ahead of Nexen Acquisition by Company in China

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Two Hong Kong-Based Firms to Pay $11 Million for Insider Trading Ahead of Nexen Acquisition by Company in China

The Securities and Exchange Commission today announced that two Hong Kong-based asset management firms whose accounts were frozen in a major insider trading case have agreed to pay nearly $11 million to settle the charges against them.

The SEC obtained an emergency asset freeze in July 2012 against unknown traders just days after the announcement that China-based CNOOC Ltd. had agreed to acquire Canadian energy company Nexen Inc., causing more than a 50 percent spike in the price of Nexen shares.  The SEC filed the emergency action after discovering that traders using brokerage accounts in Hong Kong and Singapore stood to make more than $13 million in potentially illicit profits.  

Combined with earlier settlements in the case, the SEC has now obtained nearly $30 million in ill-gotten gains plus financial penalties from foreign traders who purchased Nexen stock while in possession of nonpublic information about the pending acquisition.   

“The SEC’s swift action in this case ensured that traders located on the other side of the globe were not only deprived of their illegal insider trading profits but eventually paid steep penalties,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “Our efforts have recouped nearly $30 million and sent a strong deterrent message that insider trading in the U.S. even if carried out from overseas simply doesn’t pay.”

CITIC Securities International Investment Management (HK) Limited and China Shenghai Investment Management Limited agreed to pay $6.6 million and $4.3 million respectively.  These two firms managed the last remaining frozen accounts in the case.  Once SEC investigators located the suspicious accounts and froze their assets, they worked with foreign regulators and carefully scrutinized the trading records to identify the traders, setting the stage for a string of settlements by firms and individuals:

• 
  Hong Kong-based firm Well Advantage agreed to a $14.2 million settlement in October 2012.


• 
  A Chinese businessman, his private investment company, and his wife and her brokerage customers agreed to a $3.3 million settlement in March 2013.


• 
  A Singapore-based businesswoman agreed to a $566,000 settlement in May 2013. 

The settlement with China Shenghai, approved earlier today by Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York, requires disgorgement of all ill-gotten gains totaling $4,268,057.16 by the firm and eight clients on whose behalf Nexen stock trades were made in the week leading up to the public announcement: Biggain Holdings Limited, Classictime Investments Limited, Feng Hai Yan, Gao Mei, Sparky International Trade Co., Stephen Wang Sang Wong, Zhang Jing Wei, and Zheng Rong.  They neither admitted nor denied the allegations.

The settlement with CITIC Securities, approved by the court in late January, requires the firm to pay $3,299,596.84 in disgorgement and a $3,299,596.84 penalty for purchasing shares of Nexen stock in the U.S. for the accounts of two of its affiliates.  The firm neither admitted nor denied the allegations.  The disgorgement amount represents the total profits that the firm and its affiliates obtained.  The SEC acknowledges the cooperation of CITIC Securities and its parent company CITIC Securities International Company Limited in the investigation.

The SEC’s investigation was conducted by Simona Suh, Charles D. Riely, Michael P. Holland, and Joseph G. Sansone of the Enforcement Division’s Market Abuse Unit as well as Elzbieta Wraga and Aaron Arnzen of the New York Regional Office.  The case has been supervised by Daniel M. Hawke and Sanjay Wadhwa.  The SEC appreciates the assistance of the Hong Kong Securities and Futures Commission and the Financial Industry Regulatory Authority.

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David Fredrickson Named Chief Counsel in the Division of Corporation Finance

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David Fredrickson Named Chief Counsel in the Division of Corporation Finance

The Securities and Exchange Commission today announced that David Fredrickson has been named associate director and chief counsel in the agency's Division of Corporation Finance.  He is expected to assume his new position in March.

Mr. Fredrickson has been assistant general counsel in the SEC’s Office of General Counsel since 1998, where he is responsible for providing legal and policy advice to the Division of Corporation Finance.  During his tenure, he has advised the division and the Commission on implementation of numerous rulemakings, including rules to implement the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Jumpstart Our Business Startups (JOBS) Act. 

In his new role, Mr. Fredrickson will oversee the work of the division’s Office of Chief Counsel and Office of Capital Markets Trends.  He will be responsible for the no-action, interpretive, and exemptive positions taken by the division on the securities registration process and exemptions from it, and on deregistration, disclosures by corporate officers, directors and principal shareholders, executive compensation disclosure, CEO succession, and rules regarding proxy solicitation and shareholder proposals.

“I am delighted that David will be joining the division’s senior leadership team,” said Division of Corporation Finance Director Keith Higgins.  “His exceptional legal expertise, analytical skills, and judgment are widely known throughout the agency and will be a tremendous asset to the division’s disclosure program and our mission to provide legal support, advice, and recommendations to the Commission.”

Before joining the Office of General Counsel in 1997, Mr. Fredrickson spent three years as an enforcement attorney in the SEC’s San Francisco Regional Office.  Prior to that, he spent eight years in private law practice, where he specialized in commercial and civil litigation. 

Mr. Fredrickson received his bachelor’s degree from the University of California at Berkeley in 1982 and his law degree from Georgetown University in 1986.

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Michael Maloney New Chief Accountant in Enforcement Division

The Securities and Exchange Commission  announced that Michael F. Maloney has been named the new chief accountant in the SEC’s Division of Enforcement.

Mr. Maloney joins the SEC enforcement staff from Navigant Consulting Inc., where he is a managing director and oversees the firm’s forensic accounting practice. He has led teams conducting complex forensic investigations in high-profile accounting, securities, and other fraud matters. Mr. Maloney has more than 25 years of experience advising on financial accounting and reporting, including GAAP, GAAS, and SEC filings. He is a certified public accountant and certified fraud examiner, and he holds a certification in financial forensics.

Mr. Maloney is planning to begin work at the SEC later this month.

“Our capital markets depend heavily on access to reliable information, and I am pleased that Michael will join the Enforcement Division’s efforts to pursue financial reporting and accounting fraud,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “His energy and deep expertise will be a great help to us in this priority area.”

Earlier in his career, Mr. Maloney performed and supervised financial statement audits at public and private entities in a variety of industries. Mr. Maloney’s work experience includes many analyses performed for people under civil and criminal investigations for accounting, auditing, and financial reporting-related violations. He has provided expert witness assistance on a variety of subject matters, including testifying at trials.

“I am honored and excited for the opportunity to join the Division of Enforcement as chief accountant,” Mr. Maloney said. “I look forward to working and collaborating with the division’s dedicated and talented professionals in ongoing efforts to protect investors from accounting, financial reporting, and other types of fraud.”

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SEC Seeks Stop Orders Against 20 Purported Mining Companies With Misleading Registration Statements

The Securities and Exchange Commission announced the filing of stop order proceedings against 20 purported mining companies believed to have included false information in their registration statements.

The SEC’s Enforcement Division alleges that all of the companies are controlled by John Briner, a promoter who was the subject of a prior SEC enforcement action and was suspended from practicing as an attorney on behalf of any entity regulated by the SEC.  However, each registration statement falsely stated that management consisted of a different individual who controlled and solely governed the company.  The named individuals varied by company.

The SEC’s Enforcement Division and the agency’s Division of Corporation Finance collaborate to essentially weed out false or materially misleading registration statements before they become effective.  The purpose of a stop order is to prevent the sale of privately held shares to the public under a registration statement that is materially misleading or deficient.  If a stop order is issued, no new shares can enter the market pursuant to that registration statement until the company has corrected the deficiencies or misleading information in the prospectus.

“By seeking stop orders, we can proactively protect investors from the harmful consequences of investing in companies with materially misleading and deficient offering documents,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “These particular registration statements failed to give investors an accurate depiction of who is running the companies.”

The 20 companies that are the subjects of the stop order proceedings are:

• Braxton Resources Inc.
• Bonanza Resources Corp.
• Canyon Minerals Inc.
• CBL Resources Inc.
• Chum Mining Group Inc.
• Clearpoint Resources Inc.
• Coronation Mining Corp.
• Eclipse Resources Inc.
• Gaspard Mining Inc.
• Gold Camp Explorations Inc.
• Goldstream Mining Inc.
• Jewel Explorations Inc.
• Kingman River Resources Inc.
• La Paz Mining Corp.
• Lost Hills Mining Inc.
• PRWC Energy Inc.
• Seaview Resources Inc.
• Stone Boat Mining Corp.
• Tuba City Gold Corp.
• Yuma Resources Inc.

The SEC’s Enforcement Division alleges that the companies also falsely stated that they had no material agreements with an undisclosed control person or promoter when in fact they did with Briner.  The SEC’s Enforcement Division also alleges that some of these issuers obstructed the SEC staff and refused to permit examinations of their registration statements.

The SEC instituted the proceedings against the issuers pursuant to Section 8(d) of the Securities Act of 1933 to determine whether the Enforcement Division’s allegations are true and afford each issuer an opportunity to establish any defenses to the allegations.  The proceedings will determine whether a stop order should be issued suspending the effectiveness of the registration statement or statements.

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Fraud Charges Filed Against Two Wall Street Traders Involved in Parking Scheme

The Securities and Exchange Commission today announced charges against two Wall Street traders involved in a fraudulent “parking” scheme in which one temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus.

The SEC’s Enforcement Division alleges that Thomas Gonnella solicited the assistance of Ryan King to evade a policy at his firm that penalizes traders financially if they hold securities for too long. Gonnella arranged for King, who worked at a different firm, to purchase several securities with the understanding that Gonnella would repurchase them at a profit for King’s firm. By parking the securities in King’s trading book in order to reset the holding period when he repurchased them, Gonnella’s intention was to avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory.

The alleged round-trip trades caused Gonnella’s firm to lose approximately $174,000. The SEC’s Enforcement Division alleges that after Gonnella’s supervisor began inquiring about the trades, Gonnella and King took steps to evade detection by interposing an interdealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. Gonnella and King were eventually fired by their firms for the misconduct.

King, who has cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry. Any additional financial penalties will be determined at a later date. The Enforcement Division’s litigation against Gonnella continues in a proceeding before an administrative law judge.

“Gonnella conducted trades for the purpose of avoiding his firm’s aged-inventory policy and protecting his own bonus,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “Even though Gonnella misled his employer and resorted to text messages on his cell phone to avoid detection, his tricks failed and we are holding him accountable for these deceptive trades.”

According to the SEC’s administrative orders, Gonnella parked a total of 10 securities with King. The scheme began on May 31, 2011, when Gonnella offered to sell King several asset-backed bonds issued by Bayview Commercial Asset Trust (BAYC). Gonnella wrote in an instant message to King, “i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging purposes ... i like these bonds ... and would more than likely have a higher bid for these later this wk when the calendar turns ...” Gonnella’s reference to “aging purposes” was his firm’s aged-inventory policy. After King agreed, Gonnella sold him the securities and repurchased them before they had even settled in the account at King’s firm.

The SEC’s Enforcement Division alleges that Gonnella contacted King again a few months later on August 29, writing, “let’s talk tmrw. Have some aged bonds that I might offer you, if you’re game ... maybe do what we did a few months ago w/ some of those bayc’s ...” After Gonnella sold three BAYC bonds to King, he repurchased two but did not immediately repurchase the other security. He later did so at a loss to King’s firm, but made them whole by selling two other bonds at prices favorable to King’s firm and unfavorable to his own firm. King then used the resulting profit on the two bonds to offset the original loss incurred.

As their scheme began to unravel, the SEC’s Enforcement Division alleges that Gonnella and King discussed their trading plans via cell phone and text messaging in an effort to avoid detection. Cell phone records show that they rarely contacted one another that way in the prior four years. For example, after discussing some trades in instant messages, Gonnella told King, “Check your text [messages] in like 3 minutes.” King responded, “haha, ok ... sneaky sneaky.”

The order against Gonnella alleges that he willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The order alleges that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3.

The order against King finds that he willfully aided and abetted and caused Gonnella’s violations. The Commission took into account King’s cooperation when agreeing to the settlement. King agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66. The cease-and-desist order bars King from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization as well as participating in any penny stock offering, with the right to apply for re-entry after three years.

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Microcap Fraud Crackdown Continues

The Securities and Exchange Commission announced the latest actions in its microcap fraud-fighting initiative known as Operation Shell-Expel, suspending trading in 255 dormant shell companies ripe for abuse in the over-the-counter market.

Pump-and-dump schemes are among the most common types of fraud involving microcap companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

Since Operation Shell-Expel began in 2012, the SEC Enforcement Division’s Office of Market Intelligence has been cleaning up the microcap marketplace by scrutinizing penny stocks nationwide and identifying clearly inactive companies. This has enabled the SEC to proactively suspend trading in several hundred dormant shell companies before fraudsters have an opportunity to manipulate them.

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

Today’s massive trading suspension involves dormant shell companies uncovered in 26 states and two foreign countries. Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it is still operational. It is extremely rare for a company to fulfill this requirement, so the trading suspension essentially renders the shells worthless and useless to scam artists.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence. “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

In addition to Ms. Cain, the Operation Shell-Expel initiative has been led by William Hankins, Robert Bernstein, Victoria Adraktas, Jessica P. Regan, Leigh Barrett, John Gibbons, and Megan Alcorn in the Office of Market Intelligence with assistance from the Enforcement Division’s Delinquent Filings Group. The SEC appreciates the assistance of the FBI’s Economic Crimes Unit.

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SEC Publishes Draft Strategic Plan For Public Comment

The Securities and Exchange Commission today published for public comment its Draft Strategic Plan that outlines the agency’s strategic goals for fiscal years 2014 to 2018.

The draft plan was prepared in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and performance goals for a five-year period.

The SEC’s draft plan surveys the forces shaping its environment and outlines more than 70 initiatives designed to support its primary strategic goals.

To comment on the 2014-2018 Draft Strategic Plan, send an e-mail to PerformancePlanning@sec.gov by March 10, 2014.

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New York Based Money Manager and Firm for Misleading Advertisements

The Securities and Exchange Commission today a New York-based money manager and his firm with making false claims through Twitter, newsletters, and other communications about the success of their investment advice and a mutual fund they manage.

An SEC order against Mark A. Grimaldi and Navigator Money Management (NMM) finds that they selectively touted the past performance of the Sector Rotation Fund (NAVFX) and specific securities recommendations they made to clients. They cherry-picked highlights but ignored less favorable recommendations and other data that would have made the facts complete.

Grimaldi and NMM agreed to settle the SEC’s charges.

“The securities laws require investment advisers to be honest and fully forthcoming in their advertising to give investors the full picture,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office. “Grimaldi and his firm are being held accountable for using social media and widely disseminated newsletters to cherry-pick information and make misleading claims about their success in an effort to attract more business.”

According to the SEC’s order, Grimaldi is majority owner, president, and chief compliance officer at NMM, which is based in Wappingers Falls, N.Y. Grimaldi particularly used a newsletter called The Money Navigator to solicit clients for NMM and investors for the Sector Rotation Fund. The Money Navigator had more than 60,000 subscribers. In 2008, the SEC conducted an examination of NMM and a fund it managed. SEC exam staff notified NMM that the newsletters could be considered advertisements under Rule 206(4)-1, which generally prohibits false or misleading advertisements by investment advisers. SEC staff also noted that the newsletters could be considered advertisements under Rule 482, which governs advertisements for mutual funds and other investment companies and has specific requirements for ads containing performance data.

The SEC’s order details several misleading advertisements made by NMM and Grimaldi in newsletters following that SEC examination. For example, they misleadingly claimed in a December 2011 newsletter that Sector Rotation Fund was “ranked number 1 out of 375 World Allocation funds tracked by Morningstar.” However, a time period of Oct. 13, 2010 to Oct. 12, 2011 was cherry-picked to broadly acclaim that ranking, and Sector Rotation Fund had a poorer relative performance during other time periods. From Jan. 1 to Nov. 30, 2011, the day before Grimaldi published the ad, at least 100 other mutual funds in that same Morningstar category outperformed Sector Rotation Fund.

According to the SEC’s order, NMM was advertised as a “five-star (Morningstar) money manager” in the newsletters as well as on websites and in e-mail correspondence with potential investors. This claim was materially misleading because Morningstar rates mutual funds not investment advisers. And since February 2009, NMM has not been the investment manager of any mutual fund rated five stars by Morningstar.

The SEC’s order finds that Grimaldi also made misleading statements on Twitter. He claimed responsibility for model portfolios in his newsletters that “doubled the S&P 500 the last 10 years.” However, Grimaldi made the claim even though he had no involvement in the model portfolio performance for the first three years.

The SEC’s order finds that NMM violated Sections 17(a) of the Securities Act of 1933, Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-1(a)(2), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8 as well as Section 34(b) of the Investment Company Act of 1940. Grimaldi violated many of the same provisions and aided and abetted and caused NMM’s violations.

Grimaldi agreed to pay a penalty of $100,000, and he and the firm agreed to be censured and comply with certain undertakings including the retention of an independent compliance consultant for three years. Without admitting or denying the SEC’s findings, NMM and Grimaldi are required to cease and desist from future violations of these sections of the securities laws.

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SEC Charges Two College Professors in Naked Short Selling Scheme

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SEC Charges Two College Professors in Naked Short Selling Scheme

The Securities and Exchange Commission today charged a pair of college professors in Tallahassee, Fla., with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits.

Abusive naked short selling occurs when shares are sold without having the shares to deliver, and then intentionally failing to deliver the securities within the standard three-day settlement period.  An SEC investigation found that Gonul Colak and Milen Kostov repeatedly engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy.  Colak and Kostov were required to deliver the securities underlying their short positions within the standard three days.  Instead, their sham reset transactions created the illusion that they had delivered the underlying securities when in fact they had taken no steps to do so.  They maintained the uncovered naked short positions and profited.

Colak and Kostov agreed to settle the SEC’s charges by paying more than $670,000.

Colak and Kostov used multiple brokerage accounts to disguise the spurious nature of the sham transactions, moving a short position from one brokerage firm to another every few days in order to spread the failures to deliver across multiple firms in an effort to avoid detection.  SEC investigators uncovered the complicated scheme while looking into unusual trading in one of the companies whose options were being traded by Colak and Kostov.  An SEC examiner separately noted Kostov’s large volume options trading in a different company.  By cross referencing their findings and crunching blue sheet data, it became clear that Colak and Kostov were likely trading with one another.  SEC investigators pieced together the complex trading strategy – which involved literally thousands of trades – by tracing one of the trading sequences from start to finish.

“Colak and Kostov engaged in trickery and deceit to avoid their delivery obligations and conceal their short selling scheme,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  “No matter how complex the trading scheme, we are committed to exposing and halting abusive naked short selling and holding wrongdoers like Colak and Kostov accountable for their misconduct.”

According to the SEC’s order instituting settled administrative proceedings, Colak and Kostov set their scheme in motion in early 2010 and went on to sell more than $800 million worth of call options in more than 20 companies.  Their trading strategy involved purchasing and writing two pairs of options for the same underlying stock, and targeting options in hard-to-borrow securities in which the price of the put options was higher than the price of the call options.  Colak and Kostov profited by avoiding the cost of instituting and maintaining the short positions caused by their paired options trading. 

The SEC’s order finds that Colak and Kostov violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-21 thereunder.  Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty.  Kostov agreed to pay $134,400 in disgorgement, $10,340 in prejudgment interest, and a penalty of $70,000.  Without admitting or denying the findings, Colak and Kostov agreed to cease and desist from committing or causing such violations.

The SEC’s investigation was conducted by Jason Breeding and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office with assistance from the unit’s securities operations specialist Patrick McCluskey.  The investigation was supervised by Daniel M. Hawke and Joseph G. Sansone.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).

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Scottrade Agrees to Pay $2.5 Million and Admits Providing Flawed “Blue Sheet” Trading Data

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Scottrade Agrees to Pay $2.5 Million and Admits Providing Flawed “Blue Sheet” Trading Data

The Securities and Exchange Commission today charged Scottrade with failing to provide the agency with complete and accurate information about trades done by the firm and its customers, which is commonly called “blue sheet” data.

Scottrade, which is headquartered in St. Louis, agreed to settle the charges by paying a $2.5 million penalty and admitting it violated the recordkeeping provisions of the federal securities laws.

According to the SEC’s order instituting settled administrative proceedings, broker-dealers like Scottrade are required upon request to electronically provide the SEC with blue sheet data so the agency can use it to identify and analyze trades in the course of investigations and other work.  Blue sheets contain the details of each equity or options trade that is routed through clearing broker-dealers.  The term “blue sheet” stems from the color of the forms originally mailed to broker-dealers to complete and return to the SEC.  The process shifted to an electronic format in the 1980s.

“Blue sheet information is the lifeblood of many SEC investigations and examinations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “When firms fail to provide us with accurate or complete trade data, it risks compromising our ability to detect and investigate securities law violations.”

According to the SEC’s order, the SEC staff sent electronic blue sheet requests to Scottrade in December 2011 in connection with an investigation the agency was conducting into suspicious trades made in a Scottrade online brokerage account that was the apparent victim of account intrusion.  After receiving the blue sheet information, SEC staff discovered that Scottrade’s submission was incomplete as it failed to include data from a number of trades that resulted from unauthorized account intrusions.  After the SEC staff contacted Scottrade questioning the data, the firm informed the agency that a computer coding error had resulted in the inadvertent omission of the trades. 

The SEC’s order finds that Scottrade’s computer coding error resulted in the omission of trades from blue sheet responses it made to the SEC from March 2006 to April 2012.  During that time, Scottrade failed to provide the required blue sheet information on 1,231 occasions.  Scottrade has corrected the deficient code responsible for its inaccurate and incomplete blue sheet responses.

“Scottrade’s failure over six years to provide accurate and complete blue sheet trading data was egregious and violated its obligations under the securities laws,” said Daniel M. Hawke, director of the SEC’s Philadelphia Regional Office and chief of the Enforcement Division’s Market Abuse Unit.  “Firms need to ensure that that they comply with their blue sheet production obligations or, as in Scottrade’s case, they will pay a heavy price if they fail to do so.”

Scottrade admits the facts underlying the charges made in the SEC’s order, which requires Scottrade to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(j), 17a-25, and 17a-4(f)(3)(v).  In addition to the $2.5 million penalty, Scottrade has agreed to undertake such remedial measures as retaining an independent consultant to review its supervisory, compliance, and other policies and procedures designed to detect and prevent securities laws violations related to blue sheet submissions.

The SEC’s investigation was conducted by Lawrence Parrish and Daniel Koster of the Philadelphia Regional Office.  The case was supervised by Kingdon Kase.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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