SEC Names Stephanie Avakian as Deputy Director of Enforcement

The Securities and Exchange Commission today announced that Stephanie Avakian has been named deputy director of its Division of Enforcement.

Ms. Avakian comes to the SEC from the law firm of Wilmer Cutler Pickering Hale and Dorr LLP, where she is a partner in the New York office and a vice chair of the firm’s securities practice. Ms. Avakian previously worked in the SEC Enforcement Division as a branch chief in the New York Regional Office, and later served as a counsel to SEC Commissioner Paul Carey.

“Stephanie is widely respected because of her intelligence, her pragmatic approach, and her excellent judgment,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “I am delighted that she is rejoining the agency and look forward to partnering with her to build on the many successes of our enforcement program.”

Ms. Avakian said, “I am honored and excited to return to the Commission. I am looking forward to working with all of the dedicated staff in the Division of Enforcement to carry out the SEC’s mission to protect investors.”

At WilmerHale, Ms. Avakian has represented public companies, boards, and individuals in a broad range of investigations and other matters before the SEC and other agencies. She obtained her bachelor’s degree magna cum laude from the College of New Jersey, and her law degree magna cum laude from Temple University’s Beasley School of Law.

Ms. Avakian plans to begin her new role in late June.

SEC Charges Chicago-Based Investment Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Chicago-based investment fund manager accused of stealing money he raised from investors to pay personal and business expenses.

The SEC alleges that Neal V. Goyal told investors that the private funds he managed would invest in securities following a “long-short” trading strategy. However, Goyal actually did little trading and simply operated a Ponzi scheme that used new investor funds to pay redemptions to existing investors and fund his own lavish lifestyle. Goyal concealed the poor results of the few investments he did make by sending investors phony account statements that grossly overstated the performance of the funds.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced criminal charges against Goyal.

“From the beginning of his scheme, Goyal lied to investors and created fake account statements portraying positive trading returns in order to gain their trust and attract additional investments,” said David Glockner, director of the SEC’s Chicago Regional Office. “Goyal’s limited trading was unsuccessful, and he stole the vast majority of the money he raised.”

According to the SEC’s complaint filed in federal court in Chicago, Goyal raised more than $11.4 million in the last several years for investments in four private funds that he managed and controlled. Goyal’s investment strategy lost money from the outset, but he hid those losses from investors through the Ponzi payments and phony account statements. Meanwhile, Goyal misused investor funds to make down-payments and pay the mortgages on two homes he purchased. He also siphoned away investor money to invest in a Chicago tavern, fund two children’s clothing boutiques that his wife operates in Chicago, and purchase artwork and lavish furniture.

The SEC’s complaint filed on May 28 charges Goyal and two investment advisers that he owned and controlled –Blue Horizon Asset Management and Caldera Advisors – with violating the antifraud provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5, and Investment Advisers Act of 1940. The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Goyal, Blue Horizon Asset Management, and Caldera Advisors. The SEC named another Goyal-controlled entity Caldera Investment Group as a relief defendant in its complaint for the purpose of recovering any investor funds it received.

At the SEC’s request, Judge Rebecca R. Pallmeyer issued a permanent injunction and asset freeze on May 28 against Goyal and his firms, who consented to the order without admitting or denying the allegations in the SEC’s complaint. Under the court’s order, monetary remedies will be decided at a later date.

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SEC Obtains Asset Freeze to Halt Fraud at Illinois-Based Transfer Agent

The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against an Illinois-based transfer agent and its owner whose misappropriation scheme was exposed during an SEC examination of the firm.

Transfer agents are typically used by publicly traded companies or other issuers to keep track of individuals and entities owning their stocks and bonds.  Transfer agents can record changes of ownership of securities, maintain issuers’ security holder records, cancel and issue securities certificates, and distribute dividends.

In a complaint unsealed today in the U.S. District Court for the Northern District of Illinois, the SEC alleges that IST Shareholder Services and Robert G. Pearson were misusing money belonging to their corporate clients and the clients’ shareholders in order to fund their own payroll and business obligations.  Pearson admitted to the scheme during questioning by SEC examiners, and the agency subsequently filed an emergency action to obtain an asset freeze and place control of the firm under a third-party receiver appointed by the court.

IST Shareholder Services is registered with the SEC as a transfer agent under the name of Illinois Stock Transfer Company.

“Transfer agents perform a critical function in the securities markets and are entrusted with millions of dollars in client funds and securities,” said Tim Warren, associate director of the SEC’s Chicago Regional Office.  “We allege that Mr. Pearson and IST committed a serious violation of that trust.”

According to the SEC’s complaint, Pearson misappropriated more than $1.3 million during the past two years from an IST bank account holding the funds of clients who use IST as a paying agent to make cash disbursements to shareholders.  The account also holds money belonging to shareholders who sent IST dividend reinvestment checks in order to purchase additional securities.  When reviewing account records, SEC examiners discovered several unusual transactions that appeared to be related to IST’s own payroll rather than transfer agent activities.  When asked why it appeared that payroll payments were being made out of an account holding customer funds, Pearson initially said that the local suburban bank holding IST’s general operating account could not handle making direct deposits for payroll, so he utilized that account for the direct deposit function.  When asked whether IST generated enough of its own revenue in the customer account to cover those payroll expenses without siphoning customer funds, he responded by saying “probably not.”   In later interviews, it became clear that Pearson used funds from the account to meet payroll and payroll tax expenses because IST simply had not earned enough income to cover its business expenses.  The income setbacks were attributed to a number of factors including the loss of several clients and unanticipated expenses related to the relocation of the office.  Pearson claimed that he originally intended to repay the funds he took from the account, but lacked the funds to make full repayment in a timely manner.

The SEC’s complaint further alleges that under Pearson’s direction, IST committed multiple violations of the SEC’s transfer agent rules.  IST failed to safeguard funds and securities and did not properly report lost and stolen securities.  The firm did not file an accurate annual study and evaluation of internal accounting controls, and it failed to give notice of assumption and termination of transfer agent services.

The SEC’s complaint alleges that IST and Pearson violated Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c).  The complaint further alleges that IST violated Section 17A(d)(1) of the Exchange Act and Rules 17Ad-12, 17Ad-13, 17Ad-16, and 17f-1.  The complaint charges Pearson with aiding and abetting those violations.

The SEC’s investigation was conducted by Tracy Lo and Steven Klawans of the Chicago Regional Office.  The examination that led to the investigation was conducted by Antonita Caraan, Stephen Vilim, George Jacobus, Paul Mensheha, Laury Cornell, and Edwina Barlow.  The SEC’s litigation will be led by Daniel Hayes.

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CFO Charged With Accounting Fraud

The Securities and Exchange Commission today filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles.  Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold.  Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“Benson’s job as CFO was to protect the integrity of DGSE’s financial statements,” said David Woodcock, chair of the SEC Enforcement Division’s Financial Reporting and Audit Task Force and director of the Fort Worth Regional Office.  “Instead he took advantage of DGSE’s weak internal control environment to intentionally manipulate its public filings.”

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data.  The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores.  As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

 SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance.  The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars.  Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE.  Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE.  Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings.  Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws.  DGSE is charged with reporting, recordkeeping, and internal controls failures.  DGSE and Benson each consented to injunctions against future violations of these provisions.  DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

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SEC Announces Charges Against Four Former Officials at Clearing Firm Penson Financial Services for Regulation SHO Violations

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SEC Announces Charges Against Four Former Officials at Clearing Firm Penson Financial Services for Regulation SHO Violations

The Securities and Exchange Commission today announced charges against four former officials at clearing firm Penson Financial Services for their roles in Regulation SHO violations.

An SEC investigation found that Penson’s securities lending practices intentionally and systematically violated Rule 204 under Reg. SHO.  The SEC’s Enforcement Division alleges that Penson’s chief compliance officer Thomas R. Delaney II had direct knowledge that the firm’s procedures for sales of customer margin securities were resulting in rule violations, yet he didn’t take steps to bring Penson into compliance and instead affirmatively assisted the violations.  Penson’s president and CEO Charles W. Yancey ignored significant red flags about Delaney’s involvement in the violations and the fact that he was concealing them from FINRA and the SEC.  Penson has since filed for bankruptcy.

Two former Penson securities lending officials – Michael H. Johnson and Lindsey A. Wetzig – were charged in administrative proceedings and agreed to settle the charges.  The SEC Enforcement Division will litigate the charges against Delaney and Yancey in a separate proceeding.

“This enforcement action seeks to hold Penson executives responsible for choosing profits over compliance with Reg. SHO,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division.  “We will aggressively pursue those who disregard this important rule, especially when they take affirmative steps to mislead regulators.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “Compliance officers are a critical line of defense against violations of the securities laws, and we rely on them to help prevent infractions from happening in the first place.  Delaney, however, crossed the line when he participated in the firm’s Reg. SHO violations and affirmatively acted to perpetuate or conceal them.”

The SEC adopted Rule 204 in response to the 2008 financial crisis in order to address the negative effects that fails to deliver have on the markets.  The SEC’s Enforcement Division alleges that when Penson loaned securities held in customer margin accounts to third parties and the margin customers sold those securities, Penson waited until settlement date (T+3) to recall the stock loans.  This practice resulted in serial failures to deliver at the firm level.  Rule 204 required Penson to purchase or borrow sufficient shares to close out those failures to deliver no later than the beginning of regular market hours on the sixth business day after the sale (T+6).

According to the SEC’s orders instituting administrative proceedings, Penson’s securities lending personnel including Johnson and Wetzig knew about Reg. SHO’s close-out requirements, but determined not to comply with them.  Instead, they allowed the firm-level failures to deliver to persist until the borrowers returned the recalled shares, which often did not happen until the close of business on T+6.  In some circumstances, Penson’s securities lending personnel allowed the failures to deliver to persist beyond the close of business on T+6.

The SEC Enforcement Division alleges that Delaney discussed Penson’s non-compliant procedures with Johnson and learned that the firm’s non-compliance with the regulation was intentional.  He then agreed with Johnson not to change the procedures to bring Penson into compliance with Rule 204 because they did not want the firm to incur the costs of doing so.  Delaney also approved written supervisory policies and procedures (WSPs) that he knew concealed the non-compliant procedures at the firm, and then he further concealed the violations in numerous communications with the SEC and FINRA.  Meanwhile, Yancey failed reasonably to supervise Delaney and Johnson.  He ignored Delaney’s efforts to conceal the violations from regulators.  And despite being designated as Johnson’s direct supervisor, Yancey exercised no supervision over Johnson whatsoever.

Johnson consented to an SEC order finding that he willfully aided-and-abetted and caused Penson’s violations.  He agreed to pay a $125,000 penalty and be barred from the securities industry for at least five years.  He must cease and desist from committing or causing violations of Rule 204.  Wetzig consented to an order finding that he caused Penson’s violations.  He agreed to be censured and must cease and desist from committing or causing violations of Rule 204(a).  Johnson and Wetzig neither admitted nor denied the findings.

The SEC’s investigation was conducted by Jonathan Warner and Jay Scoggins of the Market Abuse Unit and Denver Regional Office.  The case was supervised by Mr. Hawke.  The SEC’s litigation will be led by Polly Atkinson and Nicholas Heinke of the Denver office.

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SEC Charges Vitamin Company's Former Board Member and Brothers With Insider Trading

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SEC Charges Vitamin Company's Former Board Member and Brothers With Insider Trading

The Securities and Exchange Commission today charged a former director of a Long Island-based vitamin company and others in his family circle with insider trading ahead of the company’s sale to a private equity firm.

The SEC alleges that board member Glenn Cohen learned that NBTY Inc. was negotiating a sale to The Carlyle Group and tipped his three brothers and a brother’s girlfriend with the confidential information.  Craig Cohen, Marc Cohen, Steven Cohen, and Laurie Topal all traded on the inside information that Glenn Cohen provided and reaped illicit profits totaling $175,000.

The four Cohens and Topal agreed to settle the SEC’s charges by paying a total of more than $500,000.

“As a board member at NBTY for more than 20 years, Glenn Cohen knew the importance of maintaining the confidentiality of company information.  Unfortunately, when presented with exclusive details about an impending sale, he breached his duty to NBTY shareholders in order to enrich his own family members,” said Amelia A. Cottrell, associate director in the SEC’s New York Regional Office.  “Directors of public companies who abuse their access to confidential company information at shareholder expense must be held accountable.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Glenn Cohen first learned in May 2010 that NBTY management was negotiating to sell the company.  He shared the nonpublic information with his three brothers and Topal, who is the girlfriend of Marc Cohen.  All four purchased NBTY shares as a result.  The next month, Glenn Cohen attended additional board meetings as negotiations between NBTY and Carlyle progressed.  As more information became available to the board, Steven and Craig Cohen purchased additional NBTY shares.  On July 15, Carlyle announced its acquisition of NBTY at a per-share price that was 47 percent above the prior day’s closing price, enabling the Cohens and Topal to profit significantly when they all sold their NBTY shares that same day. 

The SEC’s complaint charges the Cohens and Topal with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  In a settlement that would permanently enjoin them from violations of Section 10(b) and Rule 10b-5, they agreed to the following sanctions:

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  Glenn Cohen: penalty of $153,613.25 and barred from serving as an officer or director of a public company. 


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  Craig Cohen: disgorgement of $71,932, prejudgment interest of $9,606, and a penalty of $71,932.


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  Marc Cohen: disgorgement of $21,454, prejudgment interest of $2,865, and a penalty of $21,454.


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  Steven Cohen: disgorgement of $60,226, prejudgment interest of $8,042, and a penalty of $60,226.


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  Laurie Topal: disgorgement of $21,780, prejudgment interest of $2,908, and a penalty of $21,780. 

The Cohens and Topal neither admitted nor denied the charges in the settlement, which is subject to court approval.

The SEC’s investigation has been conducted by Daniel Marcus of the SEC’s Market Abuse Unit in New York along with Alexander Vasilescu and Jacqueline Fine of the New York Regional Office.  The case was supervised by Ms. Cottrell and Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

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SEC Announces Latest Charges in Joint Law Enforcement Effort Uncovering Penny Stock Schemes

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SEC Announces Latest Charges in Joint Law Enforcement Effort Uncovering Penny Stock Schemes

The Securities and Exchange Commission today announced the latest in a series of cases against microcap companies, officers, and promoters arising out of a joint law enforcement investigation to unearth penny stock schemes with roots in South Florida.

In complaints filed in federal court in Miami, the SEC charged five penny stock promoters with conducting various manipulation schemes involving undisclosed payments to induce purchases of a microcap stock to generate the false appearance of market interest.  The SEC also charged a Massachusetts-based microcap company and the CEO with orchestrating a pair of illicit kickback schemes and an insider trading scheme involving the company’s stock.  A stock promoter in Texas is charged for his role in the insider trading scheme.

“These stock promoters employed a menu of schemes, tricks, and deceits in their pursuit of unearned money at the expense of other investors,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Their bold misconduct highlights the continuing need for law enforcement action to aggressively root out microcap fraud.”

The SEC has now charged 48 individuals and 25 companies in this series of penny stock investigations out of the agency’s Miami Regional Office, which has worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation.  The first of the joint enforcement actions was announced in October 2010.

The U.S. Attorney’s Office for the Southern District of Florida today announced criminal charges against many of the same individuals charged today by the SEC.

According to the SEC’s complaint against Boca Raton, Fla.-based stock promoters Kevin McKnight and Stephen C. Bauer, they engaged in market manipulation fraud involving the penny stock of Environmental Infrastructure Holdings Corp. (EIHC).  They generated the appearance of market interest in EIHC to induce investors to purchase the stock and artificially increase the trading price and volume.  In a separate complaint against Jeffrey M. Berkowitz of Jupiter, Fla., the SEC alleges that he participated in a market manipulation scheme involving the stock of Face Up Entertainment Group (FUEG) and similarly worked to falsely generate the appearance of market interest in that stock.  The SEC’s complaint against Eric S. Brown of Brooklyn, N.Y., alleges that he engaged in a pair of market manipulation schemes involving the stock of International Development & Environmental Holdings Corp. (IDEH) and DAM Holdings Inc. (DAMH), the latter of which is now known as Premier Beverage Group Corp. (PBGC).  And according to an SEC complaint against Boca Raton, Fla.-based stock promoter Richard A. Altomare, he engaged in market manipulation scheme involving the stock of Sunset Brands Inc. (SSBN). 

The SEC alleges in a separate complaint that North Andover, Mass.-based Urban AG Corp. (AQUM) and its president and CEO Billy V. Ray Jr. of Cumming, Ga., schemed to make an undisclosed kickback payment to a hedge fund manager in exchange for the fund’s purchase of restricted shares of stock in the company.  In a separate kickback scheme, Ray made an inducement payment to a stock promoter who would purchase shares of Urban on the open market ahead of planned press releases to help him manipulate the stock.  Meanwhile, stock promoter Wade Clark participated in Ray’s insider trading scheme involving Urban stock by providing the hedge fund fiduciary with an advance copy of a press release containing material nonpublic information about the company so the hedge fund manager would purchase stock prior to the news being issued.

The SEC’s complaints allege that Altomare, Bauer, Berkowitz, Brown, Clark, McKnight, Ray, and Urban AG Corp. violated Section 17(a)(1) of the Securities Act of 1933 and/or Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c).  The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions.  The SEC also seeks penny stock bars against all of the individuals charged in these cases as well as an officer-and-director bar against Ray.

The SEC’s investigations have been conducted by Michelle I. Bougdanos, Trisha D. Sindler, and Amy L. Weber under the supervision of Chedly C. Dumornay in the Miami Regional Office.  The SEC’s litigation of these complaints will be led by James Carlson, Patrick R. Costello, Russell Koonin, and Andrew Schiff.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida and the Miami division of the Federal Bureau of Investigation.

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SEC Charges Sarasota-Based Private Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme

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SEC Charges Sarasota-Based Private Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme

The Securities and Exchange Commission today charged a Sarasota, Fla.-based private fund manager with defrauding investors in a Ponzi scheme that ensued after he squandered their money on bad investments and personal expenses.

The SEC alleges that Gaeton “Guy” S. Della Penna raised $3.8 million from investors in three private investment funds that he operated.  Investors were told their funds would be used to trade securities or invest in small companies.  Despite depicting himself as a distinguished trader and profit-maker, Della Penna lost nearly all of their money by making unsuccessful investments and diverting more than a million dollars to himself for mortgage payments and money for his girlfriend.  In an effort to cover up his fraud as it unraveled, Della Penna began operating a Ponzi scheme by using money from newer investors to pay fake returns to prior investors.  He provided some investors with false account statements to mislead them into believing they were profiting by investing their money with him. 

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida today announced criminal charges against Della Penna.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

According to the SEC’s complaint filed in the U.S. District Court for the Middle District of Florida, many of the investors in Della Penna’s scheme were acquaintances who he met through his church.  He solicited investors to purchase notes in his private investment funds from 2008 to 2013, often promising 5 percent annual returns along with 80 percent of the trading profits generated with their investments.  He later promised some investors 10 percent returns on their money to be used for investing in small companies. All the while, Della Penna was siphoning away investor funds to the tune of about $1.1 million to make mortgage payments on his 10,000-square-foot home and make payments to his girlfriend who lived with him there.  Della Penna also transferred some investor funds into accounts at Gaeton Capital Advisors LLC, an entity that is named as a relief defendant in the SEC’s complaint for the purpose of recovering any investor funds in its possession.

 The SEC’s complaint alleges that Della Penna violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Della Penna. 

The SEC’s investigation was conducted by Raynette R. Nicoleau and supervised by Chedly C. Dumornay in the Miami Regional Office.  The SEC’s litigation will be led by Andrew Schiff.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Middle District of Florida and the Tampa division of the U.S. Secret Service.

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Investor.gov: Ponzi Schemes

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SEC Charges Former Deloitte Chief Risk Officer for Violations of Auditor Independence Rules

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SEC Charges Former Deloitte Chief Risk Officer for Violations of Auditor Independence Rules

The Securities and Exchange Commission today charged the former chief risk officer at Deloitte LLP for causing violations of the auditor independence rules that ensure audit firms maintain their objectivity and impartiality with respect to their clients.

An SEC order finds that certified public accountant James T. Adams repeatedly accepted tens of thousands of dollars in casino markers while he was the advisory partner on subsidiary Deloitte & Touche’s audit of a casino gaming corporation.  A marker is an instrument utilized by a casino customer to receive gaming chips drawn against the customer’s line of credit at the casino.  Adams opened a line of credit with a casino run by the gaming corporation client and used the casino markers to draw on that line of credit.  Adams concealed his casino markers from Deloitte & Touche and lied to another partner when asked if he had casino markers from audit clients of the firm.

Adams, who lives in California, agreed to settle the SEC’s charges by being suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“The transactions by which Adams accepted the casino markers were loans from an audit client that are prohibited by the auditor independence rules,” said Scott W. Friestad, associate director in the SEC’s Division of Enforcement.  “Auditor independence is critical to the integrity of the financial reporting process.  Through his extensive use of casino markers, Adams clearly violated the rules and put his own desires ahead of his client’s interests.”

According to the SEC’s order instituting a settled administrative proceeding, Adams drew $85,000 worth of markers in July 2009 that remained outstanding for 43 days.  In September, he drew $3,000 in markers that were outstanding for 13 days and $70,000 in markers that were outstanding for 27 days.  In October, he drew $110,000 in markers that were outstanding for 38 days.  In December, he drew $100,000 in markers that were outstanding for seven days, and later drew $110,000 in markers that remained outstanding when he retired from the firm in May 2010. 

The SEC’s order requires Adams to cease-and-desist from causing violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 13a-1.  Adams consented to the order without admitting or denying the SEC’s findings.  

The SEC’s investigation was conducted by Steve Varholik, Kam Lee, Robert Peak, and Jeffrey Infelise.  The case was supervised by David Frohlich.

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SEC Charges Two Clinical Drug Trial Doctors With Insider Trading

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SEC Charges Two Clinical Drug Trial Doctors With Insider Trading

The Securities and Exchange Commission today charged two California-based doctors with illegally trading on inside knowledge that the Food and Drug Administration (FDA) had halted the clinical trials of a new prostate cancer drug developed by biopharmaceutical company GTx Inc.

The SEC alleges that Dr. Franklin M. Chu and Dr. Daniel J. Lama were medical investigators in the drug trials of Capesaris and avoided significant trading losses by selling their GTx stock after being informed by the company that the FDA had halted the trials due to patient safety concerns.  After GTx publicly announced the negative development a few days later, its stock dropped more than 36 percent.




Dr. Chu and Dr. Lama, who practice at the San Bernardino Urological Associates Medical Group in San Bernardino, Calif., made more than $45,000 in illicit profits from their alleged insider trading.  They have agreed to settle the SEC’s charges by paying a combined total of $116,864.




“Dr. Chu and Dr. Lama were promptly notified about the FDA hold so they could safely remove patients from the drug trials.  It’s disheartening that they immediately misused that information for personal financial gain,” said Scott Friestad, associate director in the SEC’s Division of Enforcement.  “Clinical drug trial information often is critical to investors in this sector, so we will continue to vigorously investigate and prosecute those who illegally trade on this information before it’s available to the market.”




According to the SEC’s complaints filed in U.S. District Court for the Central District of California, the purpose of the clinical trials was to test the safety and efficacy of Capesaris in anticipation of GTx applying for approval of the drug by the FDA.  Beginning in early 2011, GTx and San Bernardino Urological Associates Medical Group entered into a series of clinical trial agreements (CTAs) in which GTx paid compensation to the medical practice for each patient it enrolled in the study.  The CTAs contained strict confidentiality provisions that prohibited Dr. Chu and Dr. Lama from using nonpublic information about the trials for any purpose other than rendering services.




The SEC alleges that on Feb. 17, 2012, Dr. Chu and Dr. Lama each learned from GTx that the FDA was placing a hold on the Capesaris clinical trials because of concerns about an increased risk of blood clots in participating patients.  Immediately after learning this material, nonpublic information, Dr. Chu and Dr. Lama breached their duty to GTx and sold company stock held in their personal accounts.  Dr. Chu sold 16,000 shares and Dr. Lama sold 5,400 shares at an average sale price of $5.82 per share.  After GTx’s public announcement on Feb. 21, 2012, the stock price dropped sharply to close at $3.69 per share.  Dr. Chu and Dr. Lama avoided trading losses of approximately $34,081 and $11,502 respectively.




The SEC further alleges that when Dr. Lama was initially contacted by SEC investigators, he provided false information and claimed that he had no knowledge of the FDA hold at the time of his trading.




The SEC’s complaint charges Dr. Chu and Dr. Lama with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933.  To settle the SEC’s charges, they consented to a final judgment permanently enjoining them from future violations and ordering them to pay financial sanctions without admitting or denying the allegations.  Dr. Chu agreed to pay disgorgement of $34,081, prejudgment interest of $2,014, and a penalty of $34,081.  Dr. Lama agreed to pay disgorgement of $11,502, prejudgment interest of $680, and a penalty of $34,506.  Dr. Lama’s penalty is three times the amount of his illicit trading profits.




The SEC’s investigation was conducted by Daniel Weinstein and Brian Vann.  The case was supervised by Brian O. Quinn.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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SEC Charges Rafferty Capital Markets With Illegally Facilitating Trades for Unregistered Firm

The Securities and Exchange Commission today charged New York-based Rafferty Capital Markets with illegally facilitating trades for another firm that wasn’t registered as a broker-dealer as required under the federal securities laws.

Rafferty agreed to settle the SEC’s charges by disgorging all of the profits it received in the arrangement with the unregistered firm plus interest and a penalty for a total of nearly $850,000.  The SEC’s investigation is continuing.

According to the SEC’s order instituting settled administrative proceedings, Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm.  While Rafferty held the necessary licenses and processed the trades, it was the unregistered firm that managed the business.  Five of the firm’s employees became registered representatives with Rafferty but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation.  Rafferty had no involvement in the trading or compensation decisions while the registered representatives executed the trades through Rafferty’s systems on behalf of the unregistered firm.  Based on the agreement, Rafferty kept 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

According to the SEC’s order, during the course of this arrangement from May 2009 to February 2010, Rafferty did not preserve communications with its registered representatives working on behalf of the unregistered firm.  Rafferty did not ensure that the unregistered firm performed such recordkeeping duties either.  Due in part to Rafferty’s lack of recordkeeping, one of the registered representatives was able to conceal two trades from Rafferty, which caused its books and records to be inaccurate.

The SEC’s order finds that Rafferty willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(1) and 17a-4(b)(4).  Rafferty also willfully aided and abetted and caused the unregistered broker-dealer’s violation of Section 15(a) of the Exchange Act.  Without admitting or denying the findings, Rafferty consented to a cease-and-desist order that censures the firm and requires the disgorgement of $637,615 as well as payment of $82,011 in prejudgment interest and a $130,000 penalty.

The SEC’s investigation has been conducted by Joshua Pater and Daniel Michael with assistance from Adam Bacharach, Caroline Forbes, and Yvette Panetta in the Office of Compliance Inspections and Examinations.  The case has been supervised by Celeste Chase.

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Chief Accountant Paul Beswick to Leave SEC

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Chief Accountant Paul Beswick to Leave SEC

The Securities and Exchange Commission today announced that Chief Accountant Paul A. Beswick is leaving the agency to return to the private sector.  He will remain for a transitional period to help ensure continuity in the agency’s Office of the Chief Accountant (OCA).

Mr. Beswick has served as the SEC’s chief accountant since 2012.  He joined the SEC staff in September 2007 as senior advisor to the chief accountant and later was named deputy chief accountant of OCA’s accounting group, which is responsible for resolving accounting practice issues, rulemaking, and oversight of private sector standard-setting.  Mr. Beswick also served as deputy chief accountant for OCA’s professional practice group, which has lead responsibility for auditor independence and interactions with the Public Company Accounting Oversight Board.

Among other accomplishments, during his six-year tenure at the SEC, Mr. Beswick:

• 
  Served as staff director for the SEC Staff’s Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, which concluded with the publication of the SEC Staff Final Report


• 
  Advised on the accounting and professional practice implications of numerous Commission rulemakings and initiatives, including those required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups (JOBS) Act


• 
  Helped lead the preparation of the congressionally mandated Study on Mark-to-Market Accounting.


• 
  Worked closely with the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR)

SEC Chair Mary Jo White said: "Paul’s leadership, critical analysis and sound judgment earned him the respect and admiration of his colleagues and staff.  He has been an invaluable asset to our accounting and auditing program.  I will miss his wise counsel and insight." 

“I have truly been fortunate to serve as chief accountant under two chairs and alongside the talented and highly dedicated staff in the Office of the Chief Accountant,” said Mr. Beswick. “Throughout my service at the Commission, the staff of the Office of the Chief Accountant has faced many challenges and opportunities.  I have been continually impressed with how they rise to the occasion in the interest of investors and the U.S. capital markets.  I will miss the many relationships I have developed throughout the Commission during my service.”

Before joining the SEC staff, Mr. Beswick was a partner with Ernst & Young LLP, where he worked in the firm's Professional Practice and Risk Management Group.  He also served as a practice fellow at the Financial Accounting Standards Board, where he assisted in the development of accounting guidance on evolving accounting issues.

Mr. Beswick is a graduate of Miami University in Oxford, Ohio.

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SEC Warns Investors About Marijuana-Related Investments Amid Recent Trading Suspensions

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SEC Warns Investors About Marijuana-Related Investments Amid Recent Trading Suspensions

The Securities and Exchange Commission today cautioned investors about the potential for fraud in microcap companies that claim their operations relate to the marijuana industry after the agency suspended trading in the fifth such company within the past two months.

The SEC issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industry to lure investors with the promise of high returns.  “For marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances,” the SEC’s alert says.  “When publicly available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors.”

Spearheaded by its Microcap Fraud Task Force, the SEC Enforcement Division scours the microcap market and proactively identifies companies with publicly disseminated information that appears inadequate or potentially inaccurate.  The SEC has the authority to issue trading suspensions against such companies while the questionable activity is further investigated.

As the markets opened today, the SEC suspended trading in Denver-based FusionPharm Inc., which claims to make a professional cultivation system for use by cannabis cultivators among others.  According to the SEC’s order, the trading suspension was issued “because of questions that have been raised about the accuracy of assertions by FusionPharm” concerning the company’s assets, revenues, financial statements, business transactions, and financial condition.

“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud,” said Elisha Frank, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Wherever we see incomplete or misleading disclosures, we act quickly to protect investors.”

Other marijuana-related companies in which the SEC recently suspended trading are Irvine, Calif.-based Cannabusiness Group Inc., Woodland Hills, Calif.-based GrowLife Inc., Colorado Springs-based Advanced Cannabis Solutions Inc., and Bedford, Texas-based Petrotech Oil and Gas Inc.

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.  More information about the trading suspension process is available in an SEC investor bulletin on the topic.

“We know from experience that fraudsters follow the headlines,” said Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy, which prepared the investor alert.  “Given the attention that marijuana-related companies have attracted recently, we urge investors to exercise caution when looking at investments in this space.  Always thoroughly research the company – and the person selling the investment – before making a decision.”

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SEC Charges Unregistered Securities Salesman for Selling Millions of Dollars in Oil-and-Gas Investments

The Securities and Exchange Commission today charged a Tiburon, Calif.-based securities salesman for selling millions of dollars in oil-and-gas investments without being registered with the SEC as a broker-dealer or associated with a registered broker-dealer.

Behrooz Sarafraz has agreed to settle the SEC’s charges by paying disgorgement of his commissions, prejudgment interest, and a penalty for a total of more than $22 million.

“By failing to become associated with a registered broker-dealer, Sarafraz denied investors the protections of regulatory oversight and firm supervision,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “The SEC is committed to holding such unregistered salespeople accountable for their conduct.”

According to the SEC’s complaint filed in federal court in San Francisco, Sarafraz acted as the primary salesman on behalf of TVC Opus I Drilling Program LP and Tri-Valley Corporation, which were based in Bakersfield, Calif.  From February 2002 to April 2010, these companies raised more than $140 million for their oil-and-gas drilling venture.  While Sarafraz was raising money for these entities, he was not associated with any broker-dealer registered with the SEC.

The SEC's complaint charges Sarafraz with violating Section 15(a) of the Securities Exchange Act of 1934, which requires securities salesmen to be associated with broker-dealers that are registered with the SEC.

According to the SEC’s complaint, Sarafraz worked full-time locating investors for the Opus and Tri-Valley oil-and-gas ventures.  He described the investment program to investors and recommended they purchase Opus partnership interests or securities of Tri-Valley and its affiliated entities.  In return, Sarafraz received commissions that ranged from seven to 17 percent of the sales proceeds that he and members of a sales network generated.  The SEC alleges that Opus and Tri-Valley paid Sarafraz approximately $18.3 million in sales commissions.  He paid approximately $1.9 million to others as referral fees and kept the remaining $16.4 million for himself.

Sarafraz has agreed to settle the SEC’s charges by consenting to entry of a final judgment ordering him to pay a total of $22,482,318.87 without admitting or denying the allegations.  The sum consists of $16,406,459 in disgorgement, $6,075,859.87 in prejudgment interest, and a $50,000 penalty.  The final judgment will also permanently enjoin him from violating Section 15(a) of the Exchange Act.  The settlement is subject to court approval.


More information: Investor Alert: Private Oil and Gas Offerings

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SEC Names Gina Talamona as Communications Director

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SEC Names Gina Talamona as Communications Director

The Securities and Exchange Commission today announced that Gina Talamona has been named communications director.  Ms. Talamona, who will report to Chair Mary Jo White, will provide strategic advice on a variety of communications issues relating to the SEC’s mission to protect investors, facilitate capital formation, and maintain the integrity of the nation’s markets.

“Gina has dedicated her professional life to public service and brings a wealth of communications expertise,” said Chair White.  “We are very fortunate to have her join us in our efforts to keep investors and the American public informed about the important work of the Commission.”

Ms. Talamona said, “I look forward to a new chapter in my public service career and am excited to join the SEC team and to be a part of this distinguished organization, which is vital to the American economy.”

Prior to joining the SEC, Ms. Talamona spent her public service career at the U.S. Department of Justice.  She joined the department in 1986 in the Attorney General’s speechwriting unit.  In 1999, she became deputy director of DOJ’s Office of Public Affairs, serving in the highest role for a career official.  Over this time, Ms. Talamona served as a spokesperson for various litigating divisions, developed and implemented media strategies for high-profile law enforcement and policy matters, and has extensive experience working with the business media.

During her tenure at the Department of Justice, Ms. Talamona also was the liaison to the 94 U.S. Attorneys’ Offices around the country, providing them with communications counsel.  She developed the DOJ’s Office of Public Affairs’ first crisis communications plan, which has been used in dealing with national incidents. 

Ms. Talamona received numerous awards for her work at the Department of Justice, including the Antitrust Division’s Award of Distinction. 

Ms. Talamona received her undergraduate and graduate degrees from American University in Washington D.C.

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SEC Charges Three Sales Managers With Insider Trading Ahead of Major Acquisition

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SEC Charges Three Sales Managers With Insider Trading Ahead of Major Acquisition

The Securities and Exchange Commission today charged three former sales managers at San Diego-based Qualcomm Inc. with insider trading ahead of a major acquisition announcement.

The SEC alleges that Derek Cohen, Robert Herman, and Michael Fleischli learned through work e-mails that Qualcomm was planning a big announcement.  A sales meeting later revealed that Qualcomm was negotiating an acquisition of Atheros Communications. Armed with the nonpublic information, all three sales managers purchased Atheros securities while exchanging a series of suspiciously-timed phone calls.  As news leaked about the impending acquisition and the two companies subsequently announced it in a joint news release, Atheros’ stock price jumped 20 percent.  Cohen, Herman, and Fleischli sold their securities to realize quick profits.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today announced criminal charges against Cohen and Herman.

“As alleged in our complaint, Qualcomm placed trust in these sales managers who proceeded to exploit the confidential information shared with them and conduct insider trading for their personal gain,” said Michele Wein Layne, director of SEC’s Los Angeles Regional Office. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of California, Cohen and Herman live in San Diego and Fleischli lives in Newport Beach, Calif.  Qualcomm had an insider trading policy that clearly explained that it was illegal for employees to trade securities while possessing material nonpublic information.  Cohen, Herman, and Fleischli each acknowledged receipt of the Qualcomm insider trading policy included in the company’s code of business conduct. 

However, the SEC alleges that after learning confidentially that Atheros was the target of a Qualcomm acquisition, all three sales managers proceeded to purchase Atheros securities on Jan. 4, 2011.  None of them had ever previously traded in Atheros securities.  News of the acquisition began leaking out through media reports that same afternoon, and the two companies formally announced the merger agreement on January 5.  After selling all of the securities they had purchased, Cohen’s illegal trading profits mounted to more than $200,000, and Herman and Fleischli made profits of $30,000 and $3,000 respectively.

The SEC’s complaint charges Cohen, Herman, and Fleischli with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions.

The SEC’s investigation was conducted by Janet Weissman and Alka N. Patel of the Los Angeles Regional Office.  The SEC’s litigation will be led by John Berry.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of California, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

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Three Software Company Founders to Pay $5.8 Million to Settle Charges of Insider Trading Ahead of Sale

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Three Software Company Founders to Pay $5.8 Million to Settle Charges of Insider Trading Ahead of Sale

The Securities and Exchange Commission today filed insider trading charges against three software company founders for taking unfair advantage of incorrect media speculation and analyst reports about the company’s acquisition.


They agreed to pay nearly $5.8 million to settle the SEC’s charges.


The SEC alleges that Lawson Software’s co-chairman Herbert Richard Lawson tipped his brother William Lawson and family friend John Cerullo with nonpublic information about the status of the company’s 2011 merger discussions with Infor Global Solutions, a privately-held software provider.  Lawson Software’s stock price had begun to climb following media and analyst reports that the company was considering a sale and multiple bidders were possible.  However, Richard Lawson knew reports about possible multiple bidders were incorrect, and the merger share price offered by the lone bidder was significantly lower than what journalists and analysts were speculating.  While in possession of the accurate, inside information from his brother, William Lawson sold more than one million shares of his family’s Lawson Software stock holdings.  He also suggested that another trader sell shares.  Cerullo sold approximately 175,000 of his company shares on the basis of the nonpublic information.  When Lawson Software later announced the merger agreement at the lower-than-anticipated share price, the company’s stock value dropped 8.7 percent.  By selling their shares at the inflated stock prices prior to the merger announcement, the traders collectively profited by more than $2 million.


“Richard Lawson conveyed material information that was contrary to what was being publicly reported, and his brother and friend made a windfall when they subsequently sold their company shares at inflated prices,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement. "When news surfaces about the possibility of a merger and details of the media reports are incorrect, it is illegal for insiders who know the true facts to trade and profit.”


According to the SEC’s complaint filed in federal court in San Francisco, Lawson Software was founded by the Lawsons and Cerullo in 1975 and based in St. Paul, Minn.  William Lawson and Cerullo each retired in 2001, but Richard Lawson was still serving as co-chairman of the board of directors when the company began considering a possible sale.  After Lawson Software and Infor Global Solutions entered into a non-disclosure agreement and met about a possible merger, Richard Lawson and other members of the board were regularly informed about the ongoing merger discussions.  While Infor conducted its due diligence in late February 2011, Lawson Software began a “market check” in which its financial adviser reached out to five competitors to gauge their interest in acquiring the company.  The market check elicited little-to-no interest, and Richard Lawson and the board were kept informed throughout the process.


Meanwhile, according to the SEC’s complaint, a March 8 article reported that Lawson Software had retained a financial adviser to explore a possible sale.  The article identified other companies as potential acquirers of Lawson Software and led to a 13-percent jump in Lawson Software’s stock price that day.  The article also fueled widespread – and incorrect – media speculation about potential acquirers of Lawson Software and possible merger prices.  Soon thereafter, Lawson Software publicly confirmed an acquisition offer from Infor for $11.25 per share.  Nevertheless, ensuing media and analyst reports still incorrectly suggested that other potential purchasers would likely enter the bidding and submit competing higher offers for Lawson Software.  Some reports suggested a merger price of up to $15-16 per share.  In reality, the same companies being speculated as potential purchasers already had informed Lawson Software that they weren’t interested in an acquisition.  But fueled in part by the reports, Lawson Software’s stock price closed at $12.24 per share on March 14 – nearly $1 higher than Infor’s offer of $11.25.  The stock price had increased approximately 23 percent since the March 8 article.


The SEC alleges that Richard Lawson knew that these media and analyst reports were inaccurate and the very entities mentioned as possible acquirers had in fact told the company they were not interested.  He knew that Infor was the lone bidder and would not increase its offer.  Richard Lawson also knew that Lawson Software’s financial adviser and board of directors viewed Infor’s bid as reasonable.  After Richard Lawson tipped his brother and Cerullo with nonpublic information about the planned deal, they proceeded to sell their shares at approximately $1 per share higher than the eventual merger price of $11.25.  Following the merger announcement on April 26, Lawson Software’s stock price dipped to $11.06 per share at market close.  The merger became effective in July 2011.


Richard Lawson agreed to settle the SEC’s charges by paying a penalty of $1,557,384.57 for tipping his brother and Cerullo. The penalty amount is equivalent to the ill-gotten gains received by William Lawson and Cerullo.  Richard Lawson also agreed to be barred from serving as an officer or director of a public company.  William Lawson agreed to pay disgorgement of $1,853,671.28, prejudgment interest of $162,442.60, and a penalty of $1,853,671.28 for a total of $3,869,785.16.  William Lawson’s disgorgement amount includes the ill-gotten gains of the other trader who he suggested sell shares.  Cerullo agreed to pay disgorgement of $178,481.29, prejudgment interest of $15,640.81, and a penalty of $178,481.29 for a total of $372,603.39.  Without admitting or denying the SEC’s allegations, the Lawsons and Cerullo agreed to the entry of final judgments enjoining them from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The settlement is subject to court approval. 

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SEC Announces Charges and Asset Freeze Against Hedge Fund Advisory Firm Distributing Falsified Performance Results

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SEC Announces Charges and Asset Freeze Against Hedge Fund Advisory Firm Distributing Falsified Performance Results

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a New York-based investment advisory firm and two executives for distributing falsified performance results to prospective investors in two hedge funds they managed. 

The SEC alleges that Aphelion Fund Management’s chief investment officer Vineet Kalucha fraudulently altered an outside audit firm’s report reviewing the performance of an investment account he managed.  Aphelion’s chief financial officer George Palathinkal allegedly learned about Kalucha’s falsifications, which essentially changed an investment loss into a major investment gain in the account.  Nevertheless, the falsified report showing the phony gain instead of the actual loss was distributed to prospective investors.  Furthermore, investors were separately provided false information about Aphelion’s assets under management and Kolucha’s litigation history.

Kalucha, who is majority owner and managing partner of the firm in addition to chief investment officer, also is charged with siphoning investor proceeds for his luxury car payments and settlements of legal actions against him personally that are unrelated to Aphelion.

“We allege that on multiple occasions, Aphelion, Kalucha, and Palathinkal intentionally overstated the success of their investment strategy,” said Robert J. Burson, associate director of the SEC’s Chicago Regional Office.  “Kalucha also has been using investor money as his own, and emergency action was necessary to protect the interests of investors.”

In response to the SEC’s request for emergency relief for investors, U.S. District Court Judge Jed S. Rakoff issued a temporary restraining order, imposed an asset freeze to protect client assets, and temporarily prohibited the defendants from soliciting new investors or additional investments from existing investors.  A hearing on the SEC’s motion for a preliminary injunction has been scheduled for May 15 before Judge Richard M. Berman. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Aphelion serves as the investment adviser and general partner for two unregistered hedge funds: Aphelion US Fund LP and Aphelion Offshore Fund Ltd.  Kalucha has been managing investor funds since 2009 using a proprietary investment model that he developed.  The outside auditor’s report showed an investment loss of more than 3 percent during a 15-month period in an account that Kalucha managed.  However, the fraudulent report distributed to investors showed a phony investment gain of 30 percent during an 18-month period.  In addition to distributing the altered report, Aphelion, Kalucha, and Palathinkal also misled investors about Aphelion’s assets under management.  While Kalucha and Palathinkal told investors at various times during 2013 that Aphielion had $15 million or more in assets under management, the firm never had more than $5 million in assets under management at any point during that year. 

The SEC’s complaint further alleges that the defendants misrepresented Kalucha’s litigation history to investors.  Under the legal proceedings section in a due diligence questionnaire included in Aphelion’s marketing materials, Kalucha answered “None” and added a lengthy, materially misleading explanation of a civil proceeding in which he was involved.  The proceeding, which he did not identify by name, was a case against him by the U.S. Department of Labor for breaching fiduciary duties.  By virtue of a consent judgment in the case, Kalucha and Aphelion are prohibited from acting as investment advisers to many types of common retirement plans, which often invest in hedge funds.  Investors were deprived of this information in the due diligence questionnaire.

According to the SEC’s complaint, Aphelion, Kalucha, and Palathinkal raised $1.5 million in investments for Aphelion from 2013 to March 2014 by representing to investors that the funds would be used for Aphelion’s operating expenses.  Kalucha actually used more than 40 percent of the funds raised in 2013 for his personal benefit.  He has withdrawn investor proceeds for such things as settlement of a foreclosure action involving his personal residence, settlement of a breach of contract action filed against him in his personal capacity, down payment of a luxury BMW sedan, and payment for tax and accounting services for his personal finances.  Palathinkal approved all of Kalucha’s withdrawals.

The SEC’s complaint alleges that Aphelion, Kalucha, and Palathinkal violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  In addition, the complaint alleges that Kalucha and Aphelion Fund Management violated, and Palathinkal aided and abetted violations of, the antifraud provisions of the Investment Advisers Act of 1940.  

The SEC’s investigation and litigation have been conducted by David Benson, Paul Montoya, Eric Phillips, Delia Helpingstine, Kristine Rodriguez, and Joan Price-McLaughlin of the Chicago Regional Office.

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SEC Charges Ohio-Based Investment Adviser and President for Fraudulently Hiding Account Shortfall

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SEC Charges Ohio-Based Investment Adviser and President for Fraudulently Hiding Account Shortfall

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Columbus, Ohio-based investment advisory firm and its president for repeatedly hiding a shortfall of more than $700,000 in client assets. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Ohio, a shortfall in a money market fund account managed by Professional Investment Management (PIM) was discovered when the SEC conducted an examination of the firm to verify the existence of client assets.  PIM reported in account statements sent to clients that the firm held a total of approximately $7.7 million in a particular money market fund when in fact the account reflecting these investments held less than $7 million.

The SEC further alleges that Douglas Cowgill, who is the chief compliance officer as well as president of the firm, attempted to disguise this shortfall from SEC examiners by entering a fake trade in PIM’s account records.  The purported trade was later reversed.  Cowgill allegedly provided additional falsified reports to SEC staff, and he later transferred funds from a cash account at another financial institution to eliminate the shortfall in the money market fund account.  However, that cash account also was held for the benefit of clients, thus Cowgill merely moved the shortfall from one asset holding to another in an effort to avoid detection.

“Our complaint alleges that Cowgill went to extraordinary lengths to hide a significant shortfall in client assets, even providing manufactured documents to SEC staff,” said Robert J. Burson, associate director of the SEC’s Chicago Regional Office.  “Fortunately our examiners and investigators diligently tested Cowgill’s false statements and confirmed the existence of the shortfall in an account holding the investments of many clients.”

In response to the SEC’s request for emergency relief for investors, U.S. District Court Judge Algenon L. Marbley issued a temporary restraining order and imposed an asset freeze to protect client assets.

According to the SEC’s complaint unsealed on May 2, PIM manages approximately $120 million in assets for approximately 325 clients, including a significant number of retirement plans.  PIM was registered with the SEC as an investment adviser from 1978 until Sept. 30, 2013, when it withdrew its registration.  The firm had custody of client assets through various omnibus securities and cash accounts, and therefore was required to comply with the “Custody Rule” under the Investment Advisers Act of 1940.  The Custody Rule is designed to protect advisory clients from misuse of their funds and securities. 

According to the SEC’s complaint, the SEC commenced an examination of the firm in November 2013 after learning that for four consecutive years, PIM had failed to arrange for independent verification of client assets as required by the Custody Rule, and had filed a notice withdrawing its registration with the SEC. 

The SEC’s complaint alleges that PIM and Cowgill violated the antifraud provisions of the federal securities laws.  The complaint further alleges that PIM violated the registration and custody provisions of the Investment Advisers Act, and Cowgill aided and abetted and caused the violations.  A hearing on the SEC’s motion for a preliminary injunction has been scheduled for May 12.

The SEC’s investigation arose from the examination conducted by Will Davis, Michael Lockhart, Nathan Haselhorst, and Jack Howard of the Chicago Regional Office.  The ongoing investigation and litigation are being conducted by David Benson, Ann Tushaus, Paul Montoya, John Birkenheier, and Michael Foster of the Chicago office.

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SEC Charges Toronto-Based Consultant and Four Others in Reverse Merger Schemes Involving China-Based Companies

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SEC Charges Toronto-Based Consultant and Four Others in Reverse Merger Schemes Involving China-Based Companies

The Securities and Exchange Commission today charged a Toronto-based consultant and four associates with conducting illegal reverse merger schemes to bring a pair of China-based companies into the U.S. markets so they could manipulate trading and reap millions of dollars in illicit profits.

The SEC alleges that S. Paul Kelley and three of the associates acquired controlling interests in two U.S. public shell companies in order to orchestrate reverse mergers with China Auto Logistics Inc. and Guanwei Recycling Corp.  They then hired stock promoter Shawn A. Becker of Overland Park, Kan., and others to tout the two companies’ unregistered stock to investors.  Kelley and his associates engaged in various forms of manipulative trading in order to further drive up the price and volume of China Auto and Guanwei Recycling stock, and they profited when they dumped their shares into the inflated market they created.

Kelley and two associates – Roger D. Lockhart of Holiday Island, Ark., and Robert S. Agriogianis of Florham Park, N.J. – have agreed to settle the SEC’s charges.  Kelley agreed to pay more than $6 million and will be barred from the securities industry as well as participation in any penny stock offering.  Lockhart agreed to pay more than $3 million and Agriogianis entered into a cooperation agreement.  The SEC’s litigation continues against Becker and another Kelley associate, George Tazbaz of Oakville, Ontario.

“Kelley and his associates concealed their acquisition and control of public shell companies, and they manipulated trading in two China-based companies following reverse mergers with those shells,” said Julie Lutz, director of the SEC’s Denver Regional Office.  “The SEC has exposed their scheme with persistence and the help of fellow regulators.”

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the schemes involving China Auto and Guanwei Recycling occurred in 2008 and 2009.  Becker, Lockhart, and Tazbaz orchestrated manipulative trading in a third China-based issuer Kandi Technologies in 2009 and 2010.

The SEC alleges that Kelley, Tazbaz, Lockhart, and Agriogianis reached secret oral agreements with management at China Auto and Guanwei Recycling in which they covered all of the costs to take the companies public in the U.S. in exchange for approximately 30 to 40 percent of the resulting stock.  Kelley and his associates then acquired controlling interests in the two U.S. public shell companies used to conduct the reverse mergers with China Auto and Guanwei.  They concealed their controlling interest in the public shell companies and the reverse merger transactions by having others create at least nine Hong Kong-based companies to hold their shares.  Despite their concealment efforts, the SEC was able to obtain documents and testimony to corroborate the suspected conduct with assistance from the Ontario Securities Commission.

The SEC’s complaint charges Kelley, Tazbaz, Lockhart, Agriogianis, and Becker with violating the antifraud, securities registration, and securities ownership reporting provisions of the federal securities laws.  Becker is charged with violating the antifraud and securities registration provisions.  Kelley and Becker also are charged with violating the broker-dealer registration provisions.  The SEC’s complaint seeks disgorgement of ill-gotten gains plus prejudgment interest and financial penalties as well as penny stock bars. 

In the settlements, Kelley agreed to pay disgorgement of $2,828,353.53, prejudgment interest of $560,812.47, and penalty of $2,828,353.53.  Lockhart agreed to pay disgorgement of $1,819,211.77, prejudgment interest of $332,268.15, and a penalty of $1 million.  Lockhart also consented to a bar from participation in any penny stock offering.  Agriogianis entered into a cooperation agreement with the SEC under terms that reflect his assistance in the investigation and anticipated cooperation in the pending litigation.  Agriogianis agreed to a penny stock bar, and financial sanctions will be determined by the court at a later date upon the SEC’s motion.  Kelley, Lockhart, and Agriogianis consented to the entry of final judgments including permanent injunctions without admitting or denying the allegations.  The settlements are subject to court approval.

The SEC’s investigation was conducted by Jennifer A. Ostrom and Kurt L. Gottschall in the Denver office.  The SEC’s litigation will be led by Leslie J. Hughes and Nicholas Heinke.  The SEC appreciates the assistance of the Ontario Securities Commission.

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SEC Issues Partial Stay of Conflict Minerals Rules

The Securities and Exchange Commission today issued an order staying the effective date for compliance with the portions of Exchange Act Rule 13p-1 and Form SD that would require statements by issuers that the Court of Appeals held would violate the First Amendment (see Nat’l Ass’n of Mfrs. v. SEC, No. 13-5252, D.C. Cir., Apr. 14, 2014).

In its order, the SEC denied the motion filed by the National Association of Manufacturers, Chamber of Commerce, and Business Roundtable for a stay of the entire rule.

The Commission stated that a stay of these portions of the rule avoids the risk of First Amendment harm pending further proceedings.  The Commission also stated that staying only these portions of the rule furthers the public’s interest in having issuers comply with the remainder of the rule, which was mandated by Congress and upheld by the Court of Appeals.

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Chief Economist and Division of Economic and Risk Analysis Director Craig Lewis to Leave SEC

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Chief Economist and Division of Economic and Risk Analysis Director Craig Lewis to Leave SEC

The Securities and Exchange Commission today announced that Chief Economist and Division of Economic and Risk Analysis (DERA) Director Craig M. Lewis will leave the agency today.   He will return to his position as the Madison S. Wigginton Professor of Finance at Vanderbilt University’s Owen Graduate School of Management.

Dr. Lewis has headed the division since May 2011 and led a broad range of activities, including providing economic analysis to support SEC rulemaking and developing sophisticated analytical tools to assist in risk assessment and enforcement.

“Craig has demonstrated extraordinary leadership, judgment and vision during his tenure as chief economist,” said SEC Chair Mary Jo White.  “Under Craig’s direction, the Division of Economic and Risk Analysis has grown and thrived.  I truly valued the insightful and thoughtful analysis he brought to every task.  I will miss working with him and his wise counsel.” 

Dr. Lewis significantly enhanced the development and use of analytical tools and models to assist the Division of Enforcement, the Office of Compliance Inspections and Examinations, and other SEC divisions and offices, including in the detection of potentially illegal activities.  He also was central to the development of the 2012 guidance by staff in the SEC’s Office of the General Counsel and DERA that identifies best practices for economic analysis in support of SEC policy development and rulewriting. 

In addition to being a key figure in the SEC’s ongoing commitment to economic analysis, Dr. Lewis oversaw a significant reorganization and expansion of the division as the breadth and complexity of its activities grew.  DERA now has nearly 100 staff, up from 60 in 2011, with further significant expansion planned for 2014.

“It has been an honor and a privilege to serve the Commission and work with incredibly talented staff across the agency,” Dr. Lewis said.  “My time here has been a busy one, and I am proud of the many ways that DERA supports the SEC’s mission.  I am grateful to Chairman Schapiro for giving me the opportunity to serve as chief economist and to Chairman Walter and Chair White for allowing me to continue in that role.” 

Dr. Lewis, 58, served as a visiting academic fellow in 2010 in what was then the Division of Risk, Strategy, and Financial Innovation.  He returned in that role in 2011 and was named chief economist and director several months later.  A member of the Vanderbilt faculty since 1986, he practiced as a certified public accountant for Arthur Young and Company and received his bachelor’s degree in accounting from the Ohio State University.  His doctorate in finance is from the University of Wisconsin at Madison.

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SEC Charges NYSE, NYSE ARCA, and NYSE MKT for Repeated Failures to Operate in Accordance With Exchange Rules

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SEC Charges NYSE, NYSE ARCA, and NYSE MKT for Repeated Failures to Operate in Accordance With Exchange Rules

The Securities and Exchange Commission today announced an enforcement action against the New York Stock Exchange and two affiliated exchanges for their failure to comply with the responsibilities of self-regulatory organizations (SROs) to conduct their business operations in accordance with Commission-approved exchange rules and the federal securities laws.  Also charged was the NYSE exchanges’ affiliated routing broker Archipelago Securities.

The NYSE exchanges agreed to settle the SEC’s charges by retaining an independent consultant and together with Archipelago Securities paying a $4.5 million penalty. 

“The SEC regulates exchanges, in part, by reviewing rules proposed by the exchanges that govern exchange activities and allow market participants to decide how and where to place orders,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them.”

As SROs, the NYSE exchanges are required to conduct their operations in accordance and compliance with their own rules as well as the federal securities laws.  They are required to file all proposed rules and rule changes with the Commission, which publishes them for public comment, before they take effect.  This transparency enables all participants trading on the exchanges to understand how their orders are processed and executed.  

According to the SEC’s order instituting settled administrative proceedings, the NYSE exchanges repeatedly engaged in business practices that either violated exchange rules or required a rule when the exchanges had none in effect.  For example, all of the NYSE exchanges used an error account maintained at Archipelago Securities to trade out of securities positions taken on as a result of their operations despite not having rules in effect that permitted them to maintain and use such an account.  In another example, NYSE Arca failed to execute a certain type of limit order under specified market conditions despite having a rule in effect that stated that NYSE Arca would execute such orders.

“The order highlights instances where the exchanges conducted business without a rule in place due to weak or inadequate policies and procedures,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement.  “In other instances, the exchanges did not operate in compliance with their effective rules.  Both failures reflect a troubling lack of compliance with the requirements and obligations imposed on securities exchanges.” 

The violations detailed in the SEC’s order occurred during periods of time from 2008 to 2012.  The SEC’s order finds that the NYSE exchanges violated Section 19(b) and 19(g) of the Securities Exchange Act of 1934 through misconduct that included the following:

• 
  NYSE, NYSE Arca, and NYSE MKT (formerly NYSE Amex) used an error account maintained at Archipelago Securities to assume and trade out of securities positions without a rule in effect that permitted such trading and in a manner inconsistent with their rules for the routing broker, which limited Archipelago Securities’ activity primarily to outbound and inbound routing of orders on behalf of those exchanges.

• 
  NYSE provided co-location services to customers on disparate contractual terms without an exchange rule in effect that permitted and governed the provision of such services on a fair and equitable basis.
  
  


• 
  NYSE operated a block trading facility (New York Block Exchange) that for a period of time did not function in accordance with the rules submitted by NYSE and approved by the SEC.
  
  


• 
  NYSE distributed an automated feed of closing order imbalance information to its floor brokers at an earlier time than was specified in NYSE’s rules.

• 
  NYSE Arca failed to execute Mid-Point Passive Liquidity Orders (MPLOs) in locked markets (where the bid and ask prices are the same) contrary to its exchange rule in effect at the time.

In addition, the SEC’s order finds that NYSE Arca accepted MPLOs in sub-penny amounts for National Market System stocks trading at over $1.00 per share, in violation of Rule 612(a) of Regulation NMS.

The SEC’s order further finds that Archipelago Securities failed to establish and maintain policies reasonably designed to prevent the misuse of material, nonpublic information in connection with error account trading.  Archipelago Securities also violated and failed to give the SEC timely notice of its violation of the net capital rule – a critical federal securities law provision intended to ensure that brokers and dealers remain solvent and can meet their financial obligations.   

Now wholly-owned subsidiaries of IntercontinentalExchange Inc., NYSE, NYSE Arca, NYSE MKT, and Archipelago Securities have consented to the SEC’s order without admitting or denying the findings.  They agreed to collectively pay the penalty of $4.5 million, and the NYSE exchanges agreed to complete significant undertakings including retaining an independent consultant to complete a comprehensive review of their policies and procedures for determining whether (1) a new business practice or a change to an existing business practice requires the filing with the SEC of a proposed rule or rule change, and (2) business practices requiring an exchange rule are conducted pursuant to and in accordance with an effective exchange rule.

The SEC’s investigation was conducted by Jason Litow, Vinyard Cooke, and Kevin Gershfeld.  The case was supervised by Yuri Zelinsky and Antonia Chion.

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