Enforcement Division’s Chief Operating Officer Adam Storch to Leave SEC

The Securities and Exchange Commission today announced that Adam D. Storch, chief operating officer and managing executive of the Enforcement Division, is leaving the agency next month.

Mr. Storch has served in the position since its creation in 2009 to manage all strategic planning and operational aspects of the Enforcement Division.  He played a key role in the design and implementation of the most significant restructuring in the Enforcement Division’s history, including the creation of specialized units as well as the Office of Market Intelligence and the Office of the Whistleblower to improve the collection and analysis of the tips, complaints, and referrals received by the agency each year.  Mr. Storch also oversaw the recent establishment of the Enforcement Division’s Center for Risk and Quantitative Analysis.

“As our first managing executive, Adam has left an indelible mark and helped transform our operations and technology functions,” said Andrew Ceresney, director of SEC’s Enforcement Division.  “Adam has been a strong advocate for the enforcement program, a well-respected voice on agency-wide issues, and an invaluable advisor.”

Mr. Storch said, “I am truly honored to have served as the Enforcement Division’s first chief operating officer and managing executive.  I’ve had the unique opportunity to serve under three directors during a time of extraordinary change and progress in the Enforcement Division, and I’m privileged to have worked alongside such a talented team of professionals dedicated to public service and investor protection.”

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SEC Announces Order for Tick Size Pilot Plan

The Securities and Exchange Commission today announced that it has ordered the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to act jointly to develop and file with the Commission a national market system plan to implement a targeted 12 month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain small capitalization stocks.  The Commission plans to use the program to assess whether these changes would enhance market quality to the benefit of U.S. investors, issuers, and other market participants.

“A robust pilot program will generate critical data for assessing the impact of wider tick sizes on the securities of smaller issuers,” said SEC Chair Mary Jo White.  “It is time for a careful assessment of the impact of decimalization on our equity market structure and the interests of investors and issuers.”

Decimalization of the U.S. equity markets occurred more than a decade ago. Prior to decimalization, the minimum pricing increment had been 1/8 of a dollar (12.5 cents) and 1/16 of a dollar (6.25 cents).  Minimum pricing increments are important because they affect the nature and extent of displayed liquidity in a stock as well as the transaction costs of investors and others when they seek to access displayed liquidity.  Since decimalization, the nature of trading, the structure of the markets, and the roles of market participants have changed significantly.  The pilot program should facilitate studies of the effect of tick size on liquidity, execution quality for investors, volatility, market maker profitability, competition, transparency, and institutional ownership.

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SEC Announces Fraud Charges Against Three Former Regions Bank Executives in Accounting Scheme

The Securities and Exchange Commission today announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes. As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions. Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009. Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies. The SEC’s Division of Enforcement will continue to litigate its case against Neely.

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• Regions Financial Paying $51M in Deal With US, Ala (abcnews.go.com)
• Regions Bank Settles (seclaw.blogspot.com)

SEC Charges Former Brokers with Trading Ahead of IBM-SPSS Acquisition

The Securities and Exchange Commission today announced it has charged two additional brokers with trading on inside information ahead of the $1.2 billion acquisition of SPSS Inc. in 2009 by IBM C

orporation.

The SEC alleged that former brokers Benjamin Durant III and Daryl M. Payton illegally traded on a tip about the acquisition from Thomas C. Conradt, a friend and fellow broker in the New York office of a Connecticut-based broker-dealer.  The SEC complaint, filed in federal court in Manhattan, seeks return of alleged ill-gotten trading gains of approximately $300,000, with interest, financial penalties, and permanent injunctions.

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

The SEC previously charged that Conradt and David J. Weishaus, another fellow broker and tippee, traded on confidential information that Conradt received from his roommate, Trent Martin, a research analyst who misappropriated it from an attorney working on the transaction.  Martin, Conradt, and Weishaus settled with the SEC and pled guilty last year to related criminal charges in the matter.

“Durant and Payton were licensed professionals who knowingly disregarded insider trading laws to enrich themselves at the expense of investors,” said Sharon B. Binger, director of the SEC’s Philadelphia Regional Office.  “The SEC is committed to taking action against those who undermine the public’s confidence in the markets by engaging in insider trading.”

According to the SEC’s complaint, in a private meeting with Martin, his attorney friend revealed nonpublic information about the acquisition, including the names of the companies and the anticipated transaction price.  The lawyer expected Martin to keep the information in confidence and refrain from trading on it but instead, Martin traded and tipped Conradt, who traded and tipped Durant and Payton, among others.  The SEC further alleges that on the day that IBM’s acquisition of SPSS was publicly announced, Durant, Payton, and others met at a Manhattan hotel room and discussed what to do if law enforcement officials contacted them about their trading in SPSS securities.

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SEC Charges Hedge Fund Advisory Firm and Others in South Florida-Based Scheme to Misuse Investor Proceeds

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SEC Charges Hedge Fund Advisory Firm and Others in South Florida-Based Scheme to Misuse Investor Proceeds

The Securities and Exchange Commission today charged a West Palm Beach, Fla.-based hedge fund advisory firm and its founder with fraudulently shifting money from one investment to another without informing investors.  The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.

The SEC alleges that Weston Capital Asset Management LLC and its founder and president Albert Hallac illegally drained more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc.  The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before.  Weston Capital’s former general counsel Keith Wellner assisted the activities.

The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000 in payments from Swartz IP.  Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm. 

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.  The court will determine monetary sanctions for Weston Capital and Hallac at a later date.  Wellner and Jeffrey Hallac each agreed to pay $120,000 in disgorgement.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately $230 million.  One of the funds managed by the firm was Wimbledon Fund SPC, which was segregated into five separate classes of investment portfolios.  The Class TT Segregated Portfolio was required to invest all of its investor money in a diversified multi-billion hedge fund called Tewksbury Investment Fund Ltd., that invested in short-term, low risk interest bearing accounts and U.S. Treasury Bills.

The SEC alleges that in violation of its stated investment strategy, Weston Capital and Hallac redeemed TT Portfolio’s entire investment in the Tewksbury hedge fund and transferred the money to Swartz IP.  The transaction was not disclosed to investors and Weston Capital and Hallac solicited and received investments for the TT Portfolio during this time while knowing the funds would not be invested in Tewksbury. As soon as Swartz IP received the money transfers, it disbursed the funds primarily to a special purpose entity created to support and finance varying medically related business ventures.

The SEC’s complaint alleges that Weston and Hallac violated federal anti-fraud laws and rules as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Wellner aided and abetted these violations.  Without admitting or denying the allegations, Weston Capital, Hallac, and Wellner consented to the entry of a judgment enjoining them from future violations of these provisions.   

The SEC’s investigation was conducted by Julie M. Russo and Karaz S. Zaki under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office and was assisted by Victor M. Pedroso III, Jean M. Cabot, and John C. Mattimore of the Miami office examination program.  The SEC’s litigation is being led by Russell Koonin.

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SEC Charges Private Equity Firm With Pay-to-Play Violations Involving Political Campaign Contributions in Pennsylvania

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SEC Charges Private Equity Firm With Pay-to-Play Violations Involving Political Campaign Contributions in Pennsylvania

The Securities and Exchange Commission today charged a Philadelphia-area private equity firm with violating “pay-to-play” rules by continuing to receive advisory fees from the city and state pension funds following campaign contributions made by an associate in 2011 to the governor of Pennsylvania and a candidate for mayor of Philadelphia.

In the SEC’s first case under pay-to-play rules for investment advisers, TL Ventures Inc. agreed to settle the charges by paying nearly $300,000.

Pay-to-play rules adopted in 2010 prohibit investment advisers from providing compensatory advisory services – either directly to a government client or through a pooled investment vehicle – for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets.

An SEC investigation found that TL Ventures violated pay-to-play rules by continuing to receive compensation from two public pension funds – Pennsylvania’s state retirement system and Philadelphia’s pension plan – within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania.  The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement.  Therefore, a mayor can influence the hiring of investment advisers for the public pension fund.  The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees.  Therefore, a governor can influence the hiring of investment advisers for the public pension fund.  After the contributions, TL Ventures improperly continued to receive compensation from the pension funds for those advisory services.

“We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences,” said Andrew Ceresney, director of the SEC Enforcement Division.  “As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations.” 

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “Public pension funds are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds.  When dealing with public pension fund clients, advisers to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions.” 

The SEC’s orders instituting settled administrative proceedings also charged TL Ventures and an affiliated adviser Penn Mezzanine Partners Management L.P. with improperly acting as unregistered investment advisers.  According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration in March 2012, however their operations were closely integrated and significantly overlapped.  Because they were not operationally independent of each other, TL Ventures and Penn Mezzanine should have been integrated as a single investment adviser for purposes of registration requirements or determining the applicability of any exemption.

The SEC’s order finds that TL Ventures violated Sections 203(a), 206(4) and 208(d) of the Investment Advisers Act of 1940 as well as Rule 206(4)-5.  TL Ventures is ordered to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000.  TL Ventures agreed to be censured and to cease and desist from committing or causing any violations and any future violations of the provisions referenced in the order.  TL Ventures neither admitted nor denied the findings in consenting to the SEC’s order.

The SEC’s investigation was conducted by Louis A. Randazzo and Martin F. Healey in the Boston Regional Office with assistance from Christopher McHugh of the Division of Investment Management.  Mr. Randazzo is a member of the Municipal Securities and Public Pensions Unit.

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Cicely LaMothe Named Associate Director in the Division of Corporation Finance

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Cicely LaMothe Named Associate Director in the Division of Corporation Finance

The Securities and Exchange Commission today announced that Cicely LaMothe has been named as an associate director in the agency's Division of Corporation Finance. 

In her new position, Ms. LaMothe will join associate directors Paul Belvin, James Daly, Karen Garnett, and Barry Summer in overseeing the division’s disclosure program under the leadership of deputy director Shelley Parratt.

“I am delighted to welcome Cicely to the division’s senior leadership team.  Her experience and skills as an accountant will enhance our oversight of corporate disclosure,” said Keith Higgins, director of the Division of Corporation Finance.

Ms. LaMothe joined the division in 2002 and has served since November 2013 as the acting assistant director of its Office of Real Estate and Commodities.  Since 2011, she has been the office’s senior assistant chief accountant, where she manages the accounting staff and leads reviews of public company financial statements and related disclosure.  She previously served as an accounting branch chief and as a staff accountant in the division’s disclosure operations program.

Before coming to the SEC, Ms. LaMothe worked for six years in the private sector, including as the financial reporting manager for a public company and as a senior associate with a national accounting firm.   She received her bachelor’s degree in accounting from Hampton University in 1996.  She was recognized at the SEC’s annual awards program this week by as the recipient of the Byron Woodside Award, given in recognition of outstanding contributions to the SEC’s full disclosure program.

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SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower

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SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower

The Securities and Exchange Commission today charged an Albany, N.Y.-based hedge fund advisory firm with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.   This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions.  The SEC also charged the firm’s owner with causing the improper principal transactions. 

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges.

According to the SEC’s order instituting a settled administrative proceeding, Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client.  Such principal transactions pose conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent.  Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction.

A Commission rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions based on retaliation against whistleblowers who report potential securities law violations to the agency.  The SEC’s order finds that after Paradigm learned that the firm’s head trader had reported potential misconduct to the SEC, the firm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation. 

“Paradigm retaliated against an employee who reported potentially illegal activity to the SEC,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”

According to the SEC’s order, Paradigm’s head trader reported trading activity revealing that Paradigm engaged in prohibited principal transactions with affiliated broker-dealer C.L. King & Associates while trading on behalf of hedge fund client PCM Partners L.P. II.  The SEC’s subsequent investigation found that Paradigm engaged in the trading strategy from at least 2009 to 2011 to reduce the tax liability of the firm’s hedge fund investors.  As part of that strategy, Weir directed Paradigm’s traders to sell securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King.  The realized losses were used to offset the hedge fund’s realized gains.  Paradigm engaged in at least 83 principal transactions by selling 47 securities positions from the hedge fund to C.L. King and then repurchasing 36 of those positions for the hedge fund.

According to the SEC’s order, since Weir had a conflicted role as owner of the brokerage firm in addition to advising the PCM Partners hedge fund, merely providing written disclosure to her as the hedge fund’s general partner and obtaining her consent was insufficient.  Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve each of the principal transactions on behalf of the hedge fund. 

The SEC’s order finds that the conflicts committee itself, however, was conflicted.  The committee consisted of two people: Paradigm’s chief financial officer and chief compliance officer – who each essentially reported to Weir.  Furthermore, Paradigm’s CFO also served as C.L. King’s CFO, which placed him in a conflict.  Specifically, there was a negative impact on C.L. King’s net capital each time the broker-dealer purchased securities from the hedge fund.  The CFO’s obligation to monitor C.L. King’s net capital requirement was in conflict with his obligation to act in the best interests of the hedge fund as a member of the conflicts committee. 

According to the SEC’s order, because the conflicts committee was conflicted, Paradigm failed to provide effective written disclosure to its hedge fund client and failed effectively to obtain the hedge fund’s consent prior to the completion of each principal transaction.  The SEC’s order also finds that Paradigm’s Form ADV was materially misleading for failing to disclose the CFO’s conflict as a member of the conflicts committee.

“Paradigm’s use of a conflicted committee denied its hedge fund client the effective disclosure and consent to which it was entitled,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Advisers to pooled investment vehicles need to ensure that any mechanism developed to address conflicts in principal transactions actually mitigates those conflicts.”

According to the SEC’s order, Paradigm’s former head trader made a whistleblower submission to the SEC that revealed the principal transactions between Paradigm and C.L. King.  After learning that he had reported potential violations to the SEC, Paradigm immediately engaged in a series of retaliatory actions.  Paradigm removed him from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him. 

“For whistleblowers to come forward, they must feel assured that they’re protected from retaliation and the law is on their side should it occur,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower.  “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”

Paradigm and Weir consented to the entry of the order finding that Paradigm violated Section 21F(h) of the Securities Exchange Act of 1934 and Sections 206(3) and 207 of the Investment Advisers Act of 1940.  The order finds that Weir caused Paradigm’s violations of Section 206(3) of the Advisers Act.  They each agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings in the order.  Paradigm and Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000.  Paradigm also agreed to retain an independent compliance consultant.

The SEC’s investigation was conducted by Michael L. Riedlinger and Alex McCabe of the Asset Management Unit as well as Jacob Krawitz and David Williams.  The case was supervised by Anthony Kelly of the Asset Management Unit.

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SEC Charges Four California Residents in $12 Million Insider Trading Scheme

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SEC Charges Four California Residents in $12 Million Insider Trading Scheme

The Securities and Exchange Commission today charged four Northern California residents with insider trading in Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.

The SEC alleges that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif.  Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results.  Besides trading in his own brokerage account, Khan traded in his brother-in-law’s account as well as an account belonging to another acquaintance.  Khan also tipped his work colleagues Ranjan Mendonsa and Ammar Akbari so they too could trade in Ross stock options based on the nonpublic information.  The insider trading resulted in collective profits of more than $12 million. 

The SEC further alleges that at the outset of the scheme, Chaganlal gave $17,000 to Khan for the purpose of insider trading in Ross securities using the brother-in-law’s account.  They attempted to disguise the exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of a different surname.  Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries.  For example, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife.  Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly-built home. 

“Khan and Chaganlal took advantage of confidential company data to systematically trade in Ross securities and reap millions of dollars in profits,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “Even when insider traders try to conceal their profits and kickbacks by using other accounts and intermediaries, we’re committed to piecing together these widespread schemes and catching the perpetrators.”

According to the SEC’s complaint filed in federal court in San Francisco, Khan separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation ahead of its 2012 acquisition by Oracle Corporation.  Khan began purchasing large numbers of options in Taleo six days before the merger announcement based on nonpublic information he received from an insider he knew at Oracle.  Khan had never previously traded in Taleo securities. 

The SEC alleges that the serial insider trading involving Ross securities began in August 2009 and continued until December 2012, when Chaganlal was terminated by the company.  He had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees.  Chaganlal regularly communicated the confidential details to Khan so he could trade ahead of impending monthly sales announcements by Ross.  Khan generated $5.4 million in profits in his own account, and $6 million in profits in his brother-in-law’s account.  Khan’s supervisor Mendonsa made approximately $800,000 in insider trading profits based on the nonpublic information that Khan in turn tipped to him.  Akbari made approximately $2,000 by insider trading on Khan’s illegal tips.

The SEC’s complaint names two relief defendants – Khan’s acquaintance Michael Koza and Khan’s brother-in-law Shahid Khan – for the purposes of recovering insider trading profits in their brokerage accounts through trades conducted by Khan.  They each have agreed to settle the matter by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.

The SEC’s complaint charges Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws.  The complaint seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties.  The complaint also seeks an officer-and-director bar against Chaganlal.

The SEC’s investigation, which is continuing, has been conducted by Victor Hong and Elena Ro.  The case has been supervised by Steven Buchholz and Jina L. Choi of the Market Abuse Unit and San Francisco Regional Office as well as Joseph G. Sansone of the Market Abuse Unit.  The SEC’s litigation will be led by Aaron Arnzen.  The SEC appreciates the assistance of the Options Regulatory Surveillance Authority.

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Chicago-Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering

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Chicago-Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering

The Securities and Exchange Commission today charged the founder of an investment advisory firm located in suburban Chicago with defrauding investors in connection with a real estate venture for which his firm offered securities.

After an SEC examination of Kenilworth Asset Management LLC detected potential misconduct that was referred to the agency’s Enforcement Division, the ensuing investigation found that Robert C. Acri misled clients in the offer and sale of promissory notes issued for the redevelopment of a retail shopping center near Hammond, Ind.  Despite saying the investments would specifically be used for this project and secured by a security interest in real estate, Acri misappropriated $41,250 of the proceeds for other uses and took no action to ensure that a security interest was recorded.  Acri failed to disclose several other material facts to investors, including a primary purpose behind the investment offer – Kenilworth was attempting to rescue money that other Acri clients had previously invested in the developer of the same real estate project.  Acri also concealed from investors that Kenilworth was to receive a five percent commission on each sale of notes. 

Acri, a licensed attorney who lives in Winnetka, Ill., agreed to settle the SEC’s charges by disgorging the misappropriated investor funds and undisclosed commissions plus interest and an additional penalty for a total of approximately $115,000 in monetary sanctions.  Acri also agreed to cease and desist from violations of the antifraud provisions of the federal securities laws and to be barred from the securities industry, from participating in penny stock offerings, and from appearing before the SEC as an attorney on behalf of any entity regulated by the agency.  Acri resigned from Kenilworth in August 2012.

“Acri wasn’t honest with his clients and hid serious conflicts of interest from them while blatantly disregarding his fiduciary duty as an investment adviser,” said Robert J. Burson, senior associate regional director of the SEC’s Chicago office.

According to the SEC’s order instituting a settled administrative proceeding, Acri controlled Kenilworth’s bank accounts, hired employees, and made significant decisions about the firm’s policies, practices, and investment offers to clients.  In early 2011, Acri decided to raise funds from Kenilworth clients for the Hammond, Ind., project when the project’s developer Praedium Development Corporation was unable to obtain financing from banks and other traditional lenders.  As part of this effort, Praedium created a new entity Prairie Common Holdings LLC to issue the notes.  One of Acri’s primary purposes for selling Prairie’s notes to Kenilworth clients was to give other Kenilworth clients who had invested in Praedium through a private fund several years earlier a chance to recover their money from that investment.  Praedium had previously defaulted on a half-million-dollar loan from the private fund.

The SEC’s order finds that Acri purposely failed to disclose significant facts and conflicts of interest when offering the promissory notes to clients, who were not told about the prior loan or that Praedium and an affiliate had been delinquent in the payment of its mortgage, property taxes, and some contractor invoices.  In fact, Acri did not even disclose that Praedium was the developer behind the Prairie project or that one of Praedium’s owners was having personal financial difficulties and was Acri’s personal friend.

According to the SEC’s order, Acri misappropriated $41,250 from the client funds that were supposed to be used to develop the Hammond, Ind. Project.  Acri instead used that money to repay other clients and former clients, pay an individual to purportedly seek a loan for Praedium, and toward a settlement in a separate lawsuit that had been brought against him.  Acri also did not inform investors about the $13,750 that Kenilworth received in commissions for selling the promissory notes.

The SEC’s investigation was conducted by James J. Thibodeau and Sruthi Koneru of the Chicago Regional Office and supervised by James A. Davidson.  The examination that led to the investigation was conducted by Teresa A. Tyson, Matthew D. Harris, Gena M. Kusiak, and Erik J. Lillya of the Chicago Regional Office and supervised by Louis A. Gracia.

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SEC Charges New York-Based Dark Pool Operator With Failing to Safeguard Confidential Trading Information

The Securities and Exchange Commission today charged a New York-based brokerage firm that operates a dark pool alternative trading system with improperly using subscribers’ confidential trading information in marketing its services.

Regulations require an alternative trading system (ATS) to establish and enforce safeguards and procedures to protect the confidential trading information of its subscribers. Among them is limiting access to subscribers’ data to employees who operate the ATS or have a direct compliance role.

An SEC investigation found that Liquidnet Inc. violated its regulatory obligations and its own promises to its ATS subscribers during a nearly three-year period when it improperly allowed a business unit outside the dark pool operation to access the confidential trading data. Employees in that unit used the confidential information about Liquidnet’s dark pool subscribers during marketing presentations and various communications to other customers. Liquidnet also used subscribers’ confidential trading information in two ATS sales tools that it devised.

SEC examiners spotted potential data access problems during an examination of Liquidnet and referred the matter to the Enforcement Division for further investigation. Liquidnet has agreed to settle the SEC’s charges and pay a $2 million penalty.

“Dark pool operators violate the law when they fail to protect the confidential trading information that their subscribers entrust to them, as Liquidnet did here when it used this confidential information to try to expand its business,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “We will continue to aggressively police broker-dealers who operate an ATS and fail to rigorously ensure the protection of confidential trading information.”

According to the SEC’s order instituting a settled administrative proceeding, Liquidnet’s core business is operating a block-trading dark pool for large institutional investors. Liquidnet has represented to its dark pool subscribers that it would keep their trading information confidential and allow them to trade with maximum anonymity and minimum information leakage. In an effort to find additional sources of liquidity for its dark pool, Liquidnet launched an Equity Capital Markets (ECM) desk in 2009 to offer block execution services to corporate issuers and control persons of corporate issuers as well as private equity and venture capital firms looking to execute large equity capital markets transactions with minimal market impact.

The SEC’s order finds that Liquidnet provided ECM employees with access to the confidential trading information of dark pool subscribers from 2009 to late 2011, and they used it to market ECM’s services. For example, ECM employees would provide issuers with descriptions of ATS subscribers who had recently indicated interest in buying or selling shares of issuers’ stock. These descriptions included the geographic locations, approximate assets under management, and investment styles of those dark pool subscribers. ECM employees used dark pool subscribers’ trading data to advise issuers about which institutional investors they should meet during investor conferences or non-deal roadshows. They also used dark pool subscriber data to advise ECM customers when they should execute transactions in the ATS given the liquidity the ECM employees could see in the dark pool.

“Liquidnet’s subscribers trusted and believed that the firm was safeguarding their confidential information,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit. “Instead, the firm breached its assurances of confidentiality and anonymity to them by allowing its ECM employees to improperly access subscriber trading data.”

According to the SEC’s order, Liquidnet also improperly used the confidential trading data of dark pool subscribers in two ATS sales tools. Liquidnet created “ships passing” alerts that alerted ATS sales employees to missed execution opportunities between subscriber algorithmic orders and subscriber indications. The firm also developed an application called Aqualytics, which identified subscribers to be contacted about Liquidnet’s recent dominance in certain stocks.

The SEC’s order charges Liquidnet with violating Section 17(a)(2) of the Securities Act of 1933, which prohibits obtaining money or property by means of materially false or misleading statements in the offer or sale of securities. Liquidnet also violated Rule 301(b)(2) of Regulation ATS, which requires that an ATS file certain amendments on Form ATS with the SEC, as well as Rule 301(b)(10) of Regulation ATS, which requires an ATS to establish adequate safeguards and procedures for protecting confidential trading information of its subscribers. Without admitting or denying the findings, Liquidnet consented to the SEC’s order, which censures the firm and requires it to pay the $2 million penalty and cease and desist from committing the violations.

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SEC Announces Charges Against Wedbush Securities and Two Officials for Market Access Violations

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SEC Announces Charges Against Wedbush Securities and Two Officials for Market Access Violations

The Securities and Exchange Commission today announced charges against a Los Angeles-based market access provider and two officials accused of violating the agency’s market access rule that requires firms to have adequate risk controls in place before providing customers with access to the market.

The SEC’s Enforcement Division alleges that Wedbush Securities Inc., which has consistently ranked as one of the five largest firms by trading volume on NASDAQ, failed to maintain direct and exclusive control over settings in trading platforms used by its customers to send orders to the markets.  Wedbush did not have the required pre-trade controls, failed to restrict trading access to people whom the firm preapproved and authorized, and did not conduct an adequate annual review of its market access risk management controls.  The Enforcement Division alleges that the firm’s violations of the market access rule were caused by Jeffrey Bell, the former executive vice president in charge of Wedbush’s market access business, and Christina Fillhart, a senior vice president in the market access division.

“Wedbush provided market access to overseas traders without preapproval and without ensuring that they complied with U.S. law,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The market access rule was adopted out of concerns that some broker-dealers did not have effective controls in place for their market access.  This enforcement action against Wedbush is a cornerstone of our ongoing efforts to hold accountable any broker-dealers who fail to effectively implement market access controls and procedures.”

According to the SEC’s order instituting administrative proceedings, the violations began in July 2011 and continued into 2013.  Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues by using trading platforms over which Wedbush did not have direct and exclusive control.  Bell was aware of the requirements of the market access rule and should have known that the firm’s risk management controls and supervisory procedures related to market access did not comply with the market access rule.  Fillhart also had responsibility for overseeing Wedbush’s market access business and received inquiries by exchanges about potential violations by Wedbush and its customers.  Despite these red flags, Fillhart did not take adequate steps to prompt the firm to adopt reasonably designed risk management controls.

According to the SEC’s order, in addition to violating the market access rule (Securities Exchange Act Rule 15c3-5), Wedbush violated other regulatory requirements as a result of trading by its market access customers.  These violations include Rule 203(b)(1) of Regulation SHO relating to short sales, Rule 611(c) of Regulation NMS related to intermarket sweep orders, Rule 17a-8 concerning anti-money laundering requirements, and Rule 17a-4(b)(4) concerning the preservation of records. 

The proceeding before an administrative law judge will determine whether Wedbush willfully violated these provisions of the federal securities laws, and whether Bell and Fillhart were causes of the firm’s violations of the market access rule.  The judge also will decide what sanctions, if any, are appropriate.

The SEC’s investigation was conducted by Steven Buchholz of the Market Abuse Unit and San Francisco Regional Office as well as Jina Choi, who formerly worked in the Market Abuse Unit and is now director of the San Francisco office.  The case was supervised by Mr. Hawke and Robert Cohen, co-deputy chief of the Market Abuse Unit.  The Enforcement Division’s litigation will be led by Lloyd Farnham and John Yun of the San Francisco office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation

The Securities and Exchange Commission today announced a whistleblower award of more than $875,000 to be split evenly between two individuals who provided tips and assistance to help the agency bring an enforcement action.

The SEC’s whistleblower program authorized by the Dodd-Frank Act rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.

By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

“These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “Whistleblowers who report their concerns to the SEC perform a great service to investors and help us combat fraud.”

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SEC Charges Albany, N.Y.-Based Investment Adviser With Defrauding Clients

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SEC Charges Albany, N.Y.-Based Investment Adviser With Defrauding Clients

The Securities and Exchange Commission today filed an emergency enforcement action to halt an ongoing fraud by an investment adviser based in Albany, N.Y., who is charged with lying to clients about the success of their investments while stealing their money for his personal use.

The SEC alleges that Scott Valente and his firm The ELIV Group LLC have fraudulently raised more than $8.8 million from approximately 80 clients by falsely claiming they achieve consistent and outsized positive returns among other misrepresentations about the safety of the investments.  ELIV Group has in fact earned no positive results at all, instead sustaining consistent investment losses for the past three years. Meanwhile, Valente has been making substantial cash withdrawals of client funds and spending their money on his home improvements and mortgage payments as well as jewelry and a vacation condominium.  Valente’s unsuccessful trading strategies and misappropriations have severely diluted the amount of client funds on hand at ELIV Group, and the SEC is seeking an asset freeze to halt the fraud as Valente continues to solicit new clients with his false claims.  ELIV Group has offices in Albany and Warwick, N.Y.

“Valente used his one-man advisory firm to fraudulently lure unsuspecting investors in the Albany and Warwick communities to invest millions of dollars with him as advisory clients,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “He said all the right things to make investors believe he was making the right investments and taking the right precautions with their money, but he was merely telling blatant false tales about the safety and success of the investments.”

Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York office, added, “Beyond the lies to his clients regarding his investment performance, Valente’s abuse of his fiduciary obligations included the theft of at least $2.66 million in client funds for personal spending, including hefty credit card bills, a vacation home, and jewelry.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Valente misleadingly told his clients that he has a 30-year record of investing experience “dedicated to the highest standards of service” and that he founded ELIV Group after leaving the “corporate financial industry” upon concluding there “had to be a better way for clients to achieve financial independence.”  What he failed to disclose was that he twice filed for bankruptcy and started ELIV Group only after the Financial Industry Regulatory Authority (FINRA) permanently expelled him from the broker-dealer industry in 2009 for engaging in serial misconduct against numerous customers. 

The SEC alleges that Valente and ELIV Group attracted clients by falsely assuring them that the principal amount of their investments was fully liquid and “guaranteed” because it was backed by a large money market fund.  Client funds were in fact never guaranteed or backed by any money market funds, and the majority of ELIV Group’s investments were in highly illiquid investments in privately-held companies.  Valente and ELIV Group also assured clients that the firm’s books and records were audited independently.  However, ELIV Group never had an auditor, and the firm sent clients monthly investment reports in which they actually inflated the monthly returns, assets under management, and client account values.

The SEC’s complaint charges Valente and ELIV with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) as well as Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.  The SEC is seeking a temporary restraining order to freeze their assets and prohibit Valente and ELIV from committing further violations of the federal securities laws.  The SEC seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties.

The SEC’s investigation, which is continuing, has been conducted by Gerald Gross, Richard Primoff, and Barry O’Connell of the New York Regional Office.  The inquiry that led to the investigation was conducted by Richard Heaphy, Yvette Panetta, Dee-Ann DiSalvo, and Edward Cody of the New York Regional Office.  The SEC appreciates the assistance of the Federal Bureau of Investigation.

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SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities

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SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities

The Securities and Exchange Commission today charged the co-owner of two Bitcoin-related websites for publicly offering shares in the two ventures without registering them. 

An SEC investigation found that Erik T. Voorhees published prospectuses on the Internet and actively solicited investors to buy shares in SatoshiDICE and FeedZeBirds.  But he failed to register the offerings with the SEC as required under the federal securities laws.  Investors paid for their shares using Bitcoin, a virtual currency that can be used to purchase real-world goods and services and exchanged for fiat currencies on certain online exchanges.  The profits ultimately earned by Voorhees through the unregistered offerings totaled more than $15,000.

Voorhees agreed to settle the SEC’s charges by paying full disgorgement of the $15,843.98 in profits plus a $35,000 penalty for a total of more than $50,000.

“All issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using Bitcoin,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to focus on enforcing our rules and regulations as they apply to digital currencies.”

According to the SEC’s order instituting a settled administrative proceeding, the first unregistered offering occurred in May 2012 as 2,600 bitcoins were raised through the sale of 30,000 shares in FeedZeBirds, which promises to pay bitcoins to Twitter users who forward its sponsored text messages.  Then in two separate offerings from August 2012 to February 2013, SatoshiDICE sold 13 million shares and raised 50,600 bitcoins that were worth approximately $722,659 at the time.  SatoshiDICE, which calls itself the biggest Bitcoin-betting game in the world and pays out casino-like winnings in bitcoins, ultimately returned these offering proceeds to investors in a buy-back transaction in July 2013.  A significant rise in the exchange rate of U.S. dollars to bitcoins actually increased the amount paid back to investors to approximately $3.8 million for 45,500 bitcoins.

The SEC’s order finds that Voorhees actively solicited investors to buy FeedZeBirds and SatoshiDICE shares on a website dedicated to Bitcoin known as the Bitcoin Forum.  Voorhees also publicly promoted the unregistered offerings on other Bitcoin-related websites as well as Facebook.  The first unregistered offering was explicitly referred to as the “FeedZeBirds IPO.”  Despite these general solicitations, no registration statement was filed for the FeedZeBirds or SatoshiDICE offerings, and no exemption from registration was applicable to these transactions.

The SEC’s order finds that Voorhees violated Sections 5(a) and 5(c) of the Securities Act of 1933.  Voorhees consented to cease and desist from committing or causing any future violations of the registration provisions without admitting or denying the SEC’s findings.  In addition to the monetary sanctions, Voorhees agreed that he will not participate in any issuance of any security in an unregistered transaction in exchange for any virtual currency including Bitcoin for a period of five years.  The entry of the SEC’s order disqualifies Voorhees from relying on Rule 506(b) and 506(c) of Regulation D under the Securities Act, as defined in the bad actor disqualification provisions of Rule 506.

The SEC’s investigation was conducted by Daphna A. Waxman, Daphne P. Downes, and Philip R. Moustakis of the New York Regional Office.  The case was supervised by Valerie A. Szczepanik and Amelia A. Cottrell.

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Investor Alert: Bitcoin and Other Virtual Currency-Related Investments

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SEC Charges Charter School Operator in Chicago With Defrauding Bond Investors

Press Releases

SEC Charges Charter School Operator in Chicago With Defrauding Bond Investors

The Securities and Exchange Commission today charged a charter school operator in Chicago with defrauding investors in a $37.5 million bond offering for school construction by making materially misleading statements about transactions that presented a conflict of interest.

The SEC alleges that UNO Charter School Network Inc. and United Neighborhood Organization of Chicago not only failed to disclose a multi-million-dollar contract with a windows company owned by the brother of one of its senior officers, but investors also weren’t informed about the potential financial impact the conflicted transaction had on its ability to repay the bonds.

UNO is settling the SEC’s charges by agreeing to undertakings to improve its internal procedures and training, including the appointment of an independent monitor.

“UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors had a right to know that UNO’s transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.”

According to the SEC’s complaint filed in federal court in Chicago, UNO entered into two grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) in 2010 and 2011 to build three schools.  Each grant agreement contained a provision requiring UNO to certify that no conflict of interest existed when it signed the agreements.  UNO was required to immediately notify IDCEO in writing if any actual or potential conflicts subsequently arose.  If UNO breached this conflict of interest provision, IDCEO could suspend the payment of grants and recover grant funds already paid to UNO.

According to the SEC’s complaint, UNO breached the conflict of interest provision as it entered the construction phases of the project in 2011 and 2012.  UNO contracted two companies owned by brothers of its chief operating officer.  UNO agreed to pay one company approximately $11 million to supply and install windows and the other company approximately $1.9 million to serve as an owner’s representative during construction.  UNO did not advise IDCEO in writing about either of those conflicted transactions.

The SEC alleges that when UNO conducted its $37.5 million bond offering in October 2011, it issued an official statement to investors in bond offering documents that devoted an entire subsection to the subject of conflicts of interest.  UNO affirmatively assured investors that its conflicts policy was more robust than required for non-profit organizations.  UNO did disclose the contract with the company serving as owner’s representative, which was owned by the chief operating officer’s brother – who was a former UNO board member himself.

The SEC alleges that UNO nonetheless failed to disclose its much larger transactions with the windows company owned by another brother of the chief operating officer.  Moreover, nothing in the official statement disclosed that UNO already was in breach of the conflict of interest provision in its June 2010 grant agreement with the IDCEO because it already had transacted with both companies without advising the agency in writing about those engagements.  UNO also failed to disclose in the official statement that IDCEO could recoup all of the grant money as a result of this breach of the conflicts of interest provision.  Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools – the very revenue-producing assets essential for repayment of the bonds.

“Conflicted transactions and self-dealing by issuer officials can be material information for municipal bond investors and should be given appropriate focus by issuers and underwriters in disclosure documents,” said LeeAnn Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “Failing to disclose material information undermines investor confidence in the municipal securities market and places at risk an important source of funding for local government projects.”

The SEC complaint charges UNO with violations of Section 17(a)(2) of the Securities Act of 1933.  UNO neither admitted nor denied the charges in the settlement.

The SEC’s investigation is continuing.  It has been conducted jointly by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Michael Mueller, Eric Celauro, and Michael Foster.  The case is being supervised by Peter K.M. Chan.

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