SEC Names Alberto Arevalo as Associate Director in the Office of International Affairs

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SEC Names Alberto Arevalo as Associate Director in the Office of International Affairs

The Securities and Exchange Commission today announced that Alberto Arevalo has been named an associate director in the Office of International Affairs (OIA), where he will oversee international enforcement, supervisory cooperation, and technical assistance programs.

Mr. Arevalo has been chief of OIA’s international cooperation and technical assistance programs since 2012, and his work with regulators outside the U.S. has helped extend the reach of the SEC’s cross-border enforcement efforts and strengthened its ability to oversee globally active organizations.  He also was responsible for expanding the SEC’s training programs for foreign regulators, including training in anti-money laundering compliance.    

“Under Alberto’s leadership, the SEC’s international cooperation and technical assistance programs have made important advances in addressing the needs of investors in today’s global markets.  Alberto is an accomplished strategist, advocate, and manager and I look forward to working with him in his new role,” said Paul Leder, director of the SEC’s Office of International Affairs.

Mr. Arevalo said, “I am honored to have this opportunity to work in this new capacity with my talented colleagues in the Office of International Affairs and across the Commission, as well as our foreign counterparts.”  

Before joining the SEC in 2004, Mr. Arevalo spent 14 years as an Assistant U.S. Attorney in the Southern District of California.  During his tenure there, he served as deputy chief of the General Crimes Section, deputy chief of the Border Crimes Section, and worked on special assignment training prosecutors and police in South America and the Caribbean.  He began his legal career practicing corporate and securities law in Silicon Valley and San Diego for six years.

Mr. Arevalo received a J.D. from Stanford Law School, a master’s degree in Latin American Studies from Stanford University, and an undergraduate degree from the University of California, Santa Barbara.

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SEC Charges Smith & Wesson With FCPA Violations

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SEC Charges Smith & Wesson With FCPA Violations

The Securities and Exchange Commission today charged Smith & Wesson Holding Corporation with violating the Foreign Corrupt Practices Act (FCPA) when employees and representatives of the U.S.-based parent company authorized and made improper payments to foreign officials while trying to win contracts to supply firearm products to military and law enforcement overseas.

Smith & Wesson, which profited by more than $100,000 from the one contract that was completed before the unlawful activity was identified, has agreed to pay $2 million to settle the SEC’s charges.  The company must report to the SEC on its FCPA compliance efforts for a period of two years.

According to the SEC’s order instituting a settled administrative proceeding, the Springfield, Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010.  During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries.

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit.  “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”  

According to the SEC’s order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department.  Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments.  Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852.

The SEC’s order finds that Smith & Wesson employees made or authorized improper payments related to multiple other pending or contemplated international sales contracts.  For example, in 2009, Smith & Wesson attempted to win a contract to sell firearms to an Indonesian police department by making improper payments to its third-party agent in Indonesia.  The agent indicated he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs.  He said Indonesian police officials expected to be paid additional amounts above the actual cost of testing the guns.  Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated.

The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided to foreign officials in Turkey, Nepal, and Bangladesh.  The attempts to secure sales contracts in those countries were ultimately unsuccessful. 

The SEC’s order finds that Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934.  The company agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty. Smith & Wesson consented to the order without admitting or denying the findings.  The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light.  Smith & Wesson halted the impending international sales transactions before they went through, and implemented a series of significant measures to improve its internal controls and compliance process.  The company also terminated its entire international sales staff.

The SEC’s investigation was conducted by FCPA Unit members Mayeti Gametchu and Paul G. Block, who work in the Boston Regional Office.  The SEC appreciates the assistance of the Justice Department’s Fraud Section and the Federal Bureau of Investigation.

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SEC Announces Charges in “Solar Farm” Penny Stock Scheme

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SEC Announces Charges in “Solar Farm” Penny Stock Scheme

The Securities and Exchange Commission today announced fraud charges against a penny stock company and its CEO linked to a scam artist whom the agency separately charged earlier this month.

The SEC alleges that MSGI Technology Solutions and its CEO J. Jeremy Barbera defrauded investors by touting a joint venture to develop and manage solar energy farms across the country on land purportedly owned by an electricity provider operated by Christopher Plummer.  Barbera and Plummer co-authored press releases falsely portraying MSGI as a successful renewable energy company on the brink of profitable solar energy projects.  However, MSGI had no operations, customers, or revenue at the time, and Plummer’s company did not actually possess any of the assets or financing needed to develop the purported solar energy farms. 

The SEC previously charged Plummer and a different penny stock company and CEO that similarly issued false press releases depicting a thriving business that in reality was struggling financially.

Barbera and MSGI agreed to settle the SEC’s charges.

“It is vital that information disseminated by a company into the marketplace be corroborated and truthful,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “Barbera caused MSGI to issue press releases baselessly touting nonexistent assets and phony business opportunities, which had the harmful effect of misleading investors.”

According to the SEC’s complaint filed in federal court in Manhattan, in addition to co-authoring misleading press releases with Plummer, Barbera himself made other material misstatements about MSGI’s operations.  For example, he described MSGI in press releases and on its website as an operational security company with customers all over the world, despite the fact that MSGI had long lacked the financial means to manufacture any security products on a commercial scale.  Barbera also falsely claimed in press releases that another sham entity operated by Plummer had purchased MSGI’s sizable outstanding debt, and he falsely touted nonexistent solar energy projects with an entity unrelated to Plummer.

The SEC’s complaint charges Barbera and MSGI with violating antifraud provisions of the federal securities laws.  The defendants have consented to the entry of final judgments permanently enjoining them from future violations of the antifraud provisions.  Barbera has agreed to pay a $100,000 penalty and be permanently barred from acting as an officer or director of a public company or from participating in a penny stock offering.  Barbera and MSGI neither admitted nor denied the charges.  The settlement is subject to court approval.

The SEC’s investigation has been conducted by Justin P. Smith and George N. Stepaniuk of the New York office and supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Federal Bureau of Investigation.

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Harbinger’s Former Chief Operating Officer Agrees to Settle Charges for Assisting Hedge Fund Scheme

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Harbinger’s Former Chief Operating Officer Agrees to Settle Charges for Assisting Hedge Fund Scheme

The Securities and Exchange Commission today announced that the former chief operating officer at Harbinger Capital Partners LLC has agreed to settle charges that he assisted a scheme by the firm and its owner Philip A. Falcone to misappropriate millions of dollars from a hedge fund they managed to pay Falcone’s personal taxes. 

Peter A. Jenson, who was charged along with Falcone and Harbinger in a 2012 enforcement action by the SEC, has agreed to admit wrongdoing and pay a $200,000 penalty.  He also agreed to be prohibited from working in the securities industry for at least two years, and agreed to be 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 settlement papers were filed in U.S. District Court for the Southern District of New York and must be approved by the court.

Falcone and Harbinger consented to a settlement last year in which they agreed to pay more than $18 million and admit wrongdoing.

“Jenson assisted a fraudulent scheme that allowed Falcone to put his own interests ahead of investors by engaging in a related party loan on favorable terms,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “This settlement shows that we hold accountable not only those who perpetrate a scheme, but also those who enable them.”

In his settlement, Jenson admits that with knowledge of Falcone’s and Harbinger’s violations, he provided substantial assistance in connection with the loan by failing to:

• 
  Ensure that the lender (Harbinger Capital Partners Special Situations Fund) had separate counsel.


• 
  Ensure that the loan was consistent with Falcone’s fiduciary obligations to the Special Situations Fund.


• 
  Ensure that Falcone paid an “above market” interest rate on the loan.


• 
  Timely disclose the loan to investors.


• 
  Take actions to cause the lender to accelerate Falcone’s payment on the loan once investors in the Special Situations Fund were permitted to begin redeeming their investments.

The SEC’s investigation was conducted by Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting.  The SEC’s litigation was handled by Mr. Stoelting, Mr. Salzberg, and Kevin McGrath.

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Citigroup Business Unit Charged With Failing to Protect Confidential Subscriber Data While Operating Alternative Trading System

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Citigroup Business Unit Charged With Failing to Protect Confidential Subscriber Data While Operating Alternative Trading System

The Securities and Exchange Commission today charged a Citigroup business unit operating an alternative trading system (ATS) with failing to protect the confidential trading data of its subscribers.

New York-based LavaFlow Inc. has agreed to pay $5 million to settle the SEC’s charges, including a $2.85 million penalty that is the agency’s largest to date against an ATS.

An ATS is a venue that executes stock trades on behalf of broker-dealers and other traders.  LavaFlow operates a type of ATS known as an electronic communications network (ECN), which unlike a dark pool displays some information about pending orders in its system, such as best bid or best offer.  Under federal rules, an ATS must have safeguards to protect the confidential trading information of its subscribers.

According to the SEC’s order instituting a settled administrative proceeding, LavaFlow allowed an affiliate operating a technology application known as a smart order router to access and use confidential information related to the non-displayed orders of LavaFlow’s ECN’s subscribers.  The order router was located outside of the ECN’s operations and LavaFlow did not have adequate safeguards and procedures to protect the confidential information that the order router accessed.  While LavaFlow only allowed the affiliate to use the confidential trading data for order router customers who also were ECN subscribers, the firm did not obtain consent from its subscribers to use their confidential information in this way, nor did LavaFlow disclose the use in its regulatory filings with the SEC.  

According to the SEC’s order, LavaFlow eventually discontinued this practice, but not before the smart order router executed more than 400 million shares in a three-year period based in part on the subscriber information contained in the ECN’s unexecuted hidden orders.

“Operators of alternative trading systems must protect confidential subscriber data and take steps to ensure that affiliates do not improperly use order information,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division. “We will continue to hold accountable firms that fail to follow the rules applicable to off-exchange venues.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “LavaFlow’s subscribers trusted and expected that knowledge of their hidden orders would not escape the ATS.  Because much of today’s equity trading is automated, firms must protect sensitive information within computer networks just as aggressively as they police against the misuse of information by people.”

Alternative trading systems currently execute approximately 12 percent of the U.S. equity trading volume.  According to Financial Industry Regulatory Authority data, LavaFlow is estimated to be a top 10 ATS when measured by share or trade volume.  LavaFlow is owned by Citigroup Financial Products.

In addition to the Regulation ATS violations, the SEC’s order finds that LavaFlow aided and abetted a violation by the same affiliate that operated the smart order router, Lava Trading Inc., which continued to provide broker-dealer services for several months after it deregistered in August 2008.  Lava Trading, which also was owned by Citigroup Financial Products, earned approximately $1.8 million in broker-dealer business during this time period, and LavaFlow provided operational and administrative support while also responsible for a website that claimed Lava Trading was a registered broker-dealer.

The SEC’s order finds that LavaFlow violated Rule 301(b)(10) of Regulation ATS, which requires an ATS to establish safeguards and procedures for protecting confidential trading information of its subscribers.  LavaFlow also violated Rule 301(b)(2) of Regulation ATS, which requires that an ATS file certain amendments on Form ATS with the SEC.  LavaFlow aided and abetted and caused Lava Trading’s violation of Section 15(a) of the Securities Exchange Act of 1934, which requires broker-dealer registration.  The SEC’s order, to which LavaFlow consented without admitting or denying the findings, requires the firm to pay $1.8 million in disgorgement of money earned by Lava Trading while unregistered plus $350,000 in prejudgment interest and a $2.85 million penalty.  The order also censures LavaFlow and requires the firm to cease and desist from committing or causing these violations.

The SEC’s investigation was conducted by Market Abuse Unit staff including Jason Breeding and Mandy Sturmfelz.  The investigation was supervised by Mr. Hawke, Robert Cohen, and Diana Tani.  The SEC’s National Exam Program and Division of Trading and Markets provided substantial assistance with the case.

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SEC Charges Florida-Based Transfer Agent and Owner with Defrauding Investors

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SEC Charges Florida-Based Transfer Agent and Owner with Defrauding Investors

The Securities and Exchange Commission today announced it has charged a Florida-based transfer agent and its owner with defrauding investors by using aggressive boiler room tactics to peddle worthless securities with promises of high returns or discounted prices. 

Transfer agents are typically used by publicly-traded companies to keep track of the individuals and entities that own their stocks and bonds.  The SEC alleges that Cecil Franklin Speight, whose firm International Stock Transfer Inc. (IST) was a registered transfer agent, abused the transfer agent function by creating and issuing fake securities certificates to both U.S. and international investors.  While investors collectively sent in millions of dollars thinking they were purchasing high-yield investments and discounted stock, they ended up receiving counterfeit certificates that Speight and IST fooled them into thinking were legitimate. 

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

“Speight brazenly misused his transfer agent authority to commit fraud by creating fake certificates and acting as if he was authorized by issuers to do so,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “His promise of high-yield investment returns and his use of attorneys to receive investor money were simply lures to take advantage of unsuspecting investors.”

Speight and IST agreed to settle the SEC’s charges.  Speight will be barred from serving as an officer or director of a public company and from participating in any penny stock offering.  The court will determine monetary sanctions at a later date.

According to the SEC’s complaint filed Wednesday in U.S. District Court for the Eastern District of New York, Speight’s scheme included multiple securities, including the issuance of fake foreign bond certificates and stock certificates for a publicly-traded microcap company with no connection to IST.  To bolster the appearance of the safety of the investments and conceal from investors how their money was really being spent, Speight enlisted two attorneys to receive investment funds into their own bank accounts.  From there, the money was transferred to IST.  Instead of making its way to any issuers, however, IST and Speight spent investors’ money almost as quickly as it came in.  They used it to pay Speight’s personal expenses, and in Ponzi scheme fashion new investor money was used to fund interest payments to prior foreign bond investors.  In all, Speight and IST stole more than $3.3 million from at least 70 investors. 

The SEC’s complaint charges Speight and IST with violating the antifraud provisions of the securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.  The complaint charges IST with violating the transfer agent books and records requirements of Section 17(a)(3) of the Exchange Act, and Speight with aiding and abetting such violations.  Speight and IST have consented to the entry of judgments permanently enjoining them from future securities law violations and requiring them to pay disgorgement of all ill-gotten gains plus prejudgment interest and penalties as determined by the court, which must approve the settlement.

The SEC’s investigation was conducted by Sharon Binger, Adam Grace, Justin Alfano, John Lehmann, Elzbieta Wraga, and Jordan Baker in the New York office.  An examination of IST was conducted by Debra Williamson, Ileana Rodriguez, and Brian Dyer and supervised by John Mattimore and Nicholas Monaco in the Miami office.  The SEC’s litigation will be handled by Alexander Vasilescu, Justin Alfano, and John Lehmann.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.

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Morgan Stanley to Pay $275 Million for Misleading Investors in Subprime RMBS Offerings

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Morgan Stanley to Pay $275 Million for Misleading Investors in Subprime RMBS Offerings

The Securities and Exchange Commission today charged three Morgan Stanley entities with misleading investors in a pair of residential mortgage-backed securities (RMBS) securitizations that the firms underwrote, sponsored, and issued.

Morgan Stanley agreed to settle the charges by paying $275 million to be returned to harmed investors.

In an asset-backed securities offering, federal regulations under the securities laws require the disclosure of delinquency information for the mortgage loans serving as collateral.  An SEC investigation found that Morgan Stanley misrepresented the current or historical delinquency status of mortgage loans underlying two subprime RMBS securitizations that came against a backdrop of rising borrower delinquencies and unprecedented distress in the subprime market.

“The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions.”

According to the SEC’s order instituting a settled administrative proceeding against Morgan Stanley & Co. LLC, Morgan Stanley ABS Capital I Inc., and Morgan Stanley Mortgage Capital Holdings LLC, these securitizations were collateralized by mortgage loans with an aggregate principal value balance of more than $2.5 billion.  They were the last subprime RMBS that Morgan Stanley sponsored, issued, and underwrote.  The offerings themselves were called Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 and Morgan Capital I Inc. Trust 2007-HE7.

The SEC’s order finds that offering documents for the securitizations stated that less than 1 percent of each pool’s aggregate principal balance was more than 30 days but less than 60 days delinquent as of each securitization’s cut-off date.  With the exception of these loans, Morgan Stanley represented as of each securitization’s closing date that no payment under any mortgage loan was more than 30 days delinquent at any time since origination.  On the contrary, approximately 17 percent of the loans in the HE7 securitization had been delinquent at some point since origination, and in the NC4 securitization approximately 4.5 percent of the loans were currently delinquent rather than the disclosed 1 percent.

According to the SEC’s order, for the HE7 securitization, Morgan Stanley had a chart showing that approximately 17 percent of the loans had been delinquent at some point since origination, and Morgan Stanley also used information about payments made after the cut-off date to determine the loans disclosed as delinquent as of the cut-off date.  By using the later payment data, Morgan Stanley misreported 46 fewer loans as currently delinquent, leading the firm to disclose that less than 1 percent of the loans were delinquent.  The NC4 securitization did not close until the month after the cut-off date, so Morgan Stanley received updated payment information at that time. This information showed that approximately 4.5 percent of the loans had become delinquent.  Yet despite the delayed closing and a representation that extended the delinquency representation to the closing, Morgan Stanley did not disclose or remove the additional delinquent loans and instead continued with the 1 percent figure.

The SEC charged Morgan Stanley with violations of Sections 17(a)(2) and (3) of the Securities Act of 1933.  Without admitting or denying the allegations, the firm agreed to the entry of an order that requires a payment of $160,627,852 in disgorgement, $17,995,437 in prejudgment interest, and a $96,376,711 penalty.  The order notes that a Fair Fund is being created for the disgorgement, interest, and penalties paid in this case for the purpose of returning money to investors who were harmed in these securitizations.

The SEC’s investigation was conducted by Andrew Sporkin, Jeffrey Weiss, Creola Kelly, Melissa Lessenberry, and Delmer Raibourn in the Complex Financial Instruments Unit with assistance from Kyle DeYoung of the trial unit and Eugene Canjels in the Division of Economic and Risk Analysis.  The SEC appreciates the assistance of the federal-state Residential Mortgage-Backed Securities Working Group.

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SEC Announces Additional Charges in Football-Related Boiler Room Scheme

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SEC Announces Additional Charges in Football-Related Boiler Room Scheme

The Securities and Exchange Commission today announced a second round of charges against individuals behind a boiler room scheme that hyped a company whose new technology was purportedly Super Bowl-bound.

The SEC previously charged the operators of the scheme based in the South Florida and Los Angeles areas.  Seniors and other investors were pressured into purchasing stock in Thought Development Inc. (TDI), an unaffiliated Miami Beach-based company that stated its signature invention is a laser-line system that generates a green line on a football field for a first-down marker visible not only on television but also to players, officials, and fans in the stadium. 

The SEC today is additionally charging four executives who helped make the scheme possible and three companies they operate – DDBO Consulting, DBBG Consulting, and CalPacific Equity Group.  Approximately $1.7 million was raised through these companies from more than 110 investors who were told that an initial public offering (IPO) in TDI was imminent and that their money would be used to develop the groundbreaking technology.  Instead, the SEC alleges that the IPO was not forthcoming as promised, and at least 50 percent of the offering proceeds were merely retained by these companies or paid to sales agents through undisclosed commissions and fees.  Certain executives, their sales agents and their companies lured investors by misrepresenting that TDI’s technology was about to be used by the National Football League (NFL).  One investor even made an additional $75,000 investment on top of an initial $2,500 investment after being told that NFL Commissioner Roger Goodell purchased TDI’s technology for use in the 2013 Super Bowl.  In fact, there was no such arrangement.   

“These sales agents misled investors to believe that TDI was on the brink of having its technology used in football stadiums across the country,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “In reality, TDI had not reached any agreements with the NFL or any team to feature its technology during any games, and certainly not at the Super Bowl.”

The SEC’s complaints charge brothers Dean R. Baker of Coral Springs, Fla., and Daniel R. Baker of Valley Village, Calif., along with Bret A. Grove of Delray Beach, Fla., and Demosthenes Dritsas of Newhall, Calif. 

In parallel actions, the U.S. Attorney’s Office for the Central District of California announced criminal charges against Daniel Baker and Dritsas, and the U.S. Attorney’s Office for the Southern District of Florida announced criminal charges against Dean Baker and Grove as well as Peter Kirschner and Stuart Rubens.  The latter two were charged by the SEC in its initial complaint filed last year.  Dean Baker was previously barred from association with any FINRA member firm in 2006.   

According to the SEC’s complaint filed in federal court in Miami against Dean Baker, Grove, DDBO Consulting, and DBBG Consulting, they entered into an agreement with Kirschner to solicit investors and sell TDI stock.  Baker is president of DDBO Consulting and DBBG Consulting, and Grove is vice president of DBBG.  They recruited, hired, and supervised sales agents who were paid transaction-based compensation in connection with the offer and sale of TDI stock.  Grove misled investors about the use of proceeds by not disclosing fees of more than 50 percent, while Baker and sales agents falsely promised investors guaranteed returns from a purportedly pending IPO.  The sales agents further claimed that TDI’s laser-line technology would be used by the NFL, and Baker himself falsely told an investor in January 2012 that TDI’s technology would be used during the NFL’s upcoming preseason.

According to the SEC’s complaint filed in federal court in Los Angeles against Daniel Baker, Dritsas, and their firm CalPacific Equity Group, they similarly entered into agreements with Kirschner to act as sales agents to offer and sell TDI stock.  Daniel Baker told an investor that the proceeds would go “directly to the business” and no more than “ten cents on every dollar of investor money” would be used as a commission or other fee.  Dritsas told the same investor that he would not charge any commission for a trade – “not even a dime” – when in fact CalPacific received 50 percent of the investor’s proceeds as commissions or other fees. 

“The Bakers and others falsely claimed that an IPO was just around the corner for TDI, and they further enticed investors by saying there were extracting just minimal fees or commissions while more than half the money actually wound up in sales agents’ wallets,” said Glenn S. Gordon, associate director of the SEC’s Miami Regional Office.  “We will continue to bring actions against those who target seniors and other groups vulnerable to investment fraud.” 

The SEC’s complaints allege violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. 

The defendants have all agreed to settle the SEC’s charges, while Daniel Baker and Dritsas have also entered into plea agreements in criminal cases relating to matters alleged in the complaint in this action.

The SEC’s investigation has been conducted by Kevin B. Hart, Fernando Torres and Mark Dee in the Miami office, and supervised by Jason R. Berkowitz.  The investigation followed an SEC examination conducted by Anson Kwong, Michael Nakis and George Franceschini under the supervision of Nicholas A. Monaco and the oversight of John C. Mattimore.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida, the U.S. Attorney’s Office for the Central District of California and the Federal Bureau of Investigation.

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SEC Adopts Money Market Fund Reform Rules

The Securities and Exchange Commission today adopted amendments to the rules that govern money market mutual funds. The amendments make structural and operational reforms to address risks of investor runs in money market funds, while preserving the benefits of the funds.

Today’s rules build upon the reforms adopted by the Commission in March 2010 that were designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. When the Commission adopted the 2010 amendments, it recognized that the 2008 financial crisis raised questions of whether more fundamental changes to money market funds might be warranted.

The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.

“Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” said SEC Chair Mary Jo White. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”

With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.

The SEC today also issued a related notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds. Additionally, the SEC re-proposed amendments to the Commission’s money market fund rules and Form N-MFP to address provisions that reference credit ratings. The re-proposed amendments would implement section 939A of the Dodd-Frank Wall Street and Consumer Protection Act of 2010, which requires the Commission to review its rules that use credit ratings as an assessment of credit-worthiness, and replace those credit-rating references with other appropriate standards.

The rules adopted today will be effective 60 days after their publication in the Federal Register, and the re-proposal will have a 60-day public comment period following its publication in the Federal Register.

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SEC Charges Investor Relations Executive With Insider Trading While Preparing Clients’ Press Releases

The Securities and Exchange Commission today charged a partner at a New York-based investor relations firm with insider trading on confidential information he learned about two clients while he helped prepare their press releases. 

The SEC alleges that Kevin McGrath sold his shares in Misonix Inc. upon learning that the company was set to announce disappointing financial results. The SEC further alleges that McGrath bought stock in Clean Diesel Technologies Inc. when he learned about the company’s impending announcement of positive news, and he profited when its stock price nearly doubled. McGrath’s illicit profits and avoided losses from insider trading in both companies totaled $11,776.

McGrath, who lives in Brooklyn, N.Y., and works at Cameron Associates, agreed to settle the charges by paying disgorgement of $11,776, prejudgment interest of $1,492, and a penalty of $11,776, for a total of $25,044.

“Investor relations firms owe their clients a duty to maintain in strict confidence the important and sensitive information that clients impart for the sole purpose of obtaining help and advice on how best to communicate forthcoming news to investors,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “McGrath’s self-centered misconduct betrayed both his own firm and his firm’s clients whose confidential information he exploited for personal gain.”

The settlement also includes a “conduct-based injunction” that permanently requires McGrath to abstain from trading in the stock of any issuer for which he or his firm has performed any investor relations services within a one-year period. His present or any future firm is required to provide written notice to a client upon any intent to sell shares received as compensation for services performed, and must receive written authorization for the sale from the management of that company.

“McGrath used one hand to help clients draft their press releases while using the other to trade illegally in their stock,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “This settlement imposes additional trading limitations on McGrath in the form of a conduct-based injunction to ensure that he doesn’t commit the same transgression again.”

According to the SEC’s complaint filed in federal court in Manhattan, McGrath purchased Misonix shares in April 2009. He later performed work on a press release in which Misonix was set to announce disappointing quarterly results. McGrath ascertained the company’s target date to release the negative news, and sold all of his Misonix shares shortly before the press release was issued on May 11, 2009. By doing so, McGrath avoided losses of $5,400 when Misonix’s share price subsequently dropped 22 percent.

The SEC alleges that McGrath also performed work on a press release in which Clean Diesel was announcing approximately $2 million in orders it received for certain products. Merely minutes after finding out on May 24, 2011, that the press release was bound for issuance the following day, McGrath purchased 1,000 shares of Clean Diesel stock. The stock price rose 95 percent upon the positive news, and McGrath sold all of his Clean Diesel shares on May 27 for illicit profits of $6,376.

The SEC’s complaint charges McGrath with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Without admitting or denying the allegations, McGrath agreed to be permanently enjoined from future violations of these provisions of the federal securities laws. The settlement is subject to court approval.

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SEC Charges Seattle Firm and Owner With Misusing Client Assets for Vacation Home and Vintage Automobile

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SEC Charges Seattle Firm and Owner With Misusing Client Assets for Vacation Home and Vintage Automobile

The Securities and Exchange Commission today charged the owner of a Seattle-based investment advisory firm with fraudulently misusing client assets to make loans to himself to buy a luxury vacation home and refinance a rare vintage automobile.  

An SEC investigation found that Dennis H. Daugs Jr. and Lakeside Capital Management LLC used assets from the portfolio of a senior citizen client to fund $3.1 million in personal loans without telling her or obtaining her consent.  The loans were not in the best interest of the client and significantly favored Daugs, who provided no collateral, had no set pay-off dates, and paid most of the interest at the prime rate (which banks typically provide their most credit-worthy customers).  Daugs also improperly directed an investment fund managed by his firm to make more than $4.5 million in loans and investment purchases to facilitate personal real estate deals and fend off claims from disgruntled Lakeside Capital clients.  He diverted more than $500,000 from the fund to pay settlements to disgruntled clients.

Lakeside Capital and Daugs, who eventually paid back the diverted funds and personal loans, agreed to settle the SEC’s charges and pay more than $340,000 in disgorgement and prejudgment interest to the individual client and the investment fund, representing ill-gotten gains that Daugs retained even after he paid back the loans.  Daugs and his firm also agreed to pay a $250,000 penalty, and Daugs will be barred from the securities industry for at least five years.  Lakeside Capital will wind down its operations with oversight from an independent monitor.

“Investment advisers have a fiduciary duty to act in the best interest of advisory clients and disclose all material conflicts of interests,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “Daugs instead took advantage of his clients and misused more than $8 million of their assets for his own personal gain.” 

According to the SEC’s order instituting a settled administrative proceeding, the misconduct occurred from 2008 to 2012.  Daugs managed a large investment portfolio for the senior citizen client and members of her family, owing her a fiduciary duty to disclose any material conflicts of interest and act in her best interest.  Daugs violated that duty in January 2008 when he fraudulently caused Lakeside Capital to liquidate $2.15 million in securities in her portfolio to generate the cash to transfer that amount from her IRA account at a custodian broker-dealer directly to an escrow account he used to purchase his ski vacation home.  Daugs similarly misused $950,000 in assets from her portfolio in May 2009 to refinance his purchase of a rare 1955 Mercedes “Gullwing” automobile.  Even as he made his regular interest payments into her IRA account, Daugs withheld from the client as well as Lakeside Capital’s chief compliance officer at the time that he was using her investments to loan money to himself for his ski home and auto.

The SEC’s order also finds that Lakeside Capital failed to take required compliance and custody measures to safeguard client assets. 

The SEC’s order charges Daugs and Lakeside Capital with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-2 and 206(4)-7.  Daugs and Lakeside Capital agreed to the settlement without admitting or denying the findings. 

The SEC’s investigation was conducted by Thomas Eme and supervised by Tracy Davis in the San Francisco office.  The preceding examination of Lakeside Capital was conducted by Cindy Tom, Steven Wolz, John Chee, Matthew O’Toole, and Kenneth Schneider in the San Francisco office.

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SEC Charges Penny Stock Company CEO and Purported Business Partner for Defrauding Investors With False Press Releases

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SEC Charges Penny Stock Company CEO and Purported Business Partner for Defrauding Investors With False Press Releases

The Securities and Exchange Commission today charged a serial con artist and a penny stock company CEO with misleading investors in a supposed vaccine development company by issuing false press releases portraying it as a successful venture when it was in fact a failing enterprise.

The SEC alleges that Christopher Plummer teamed up with the CEO of CytoGenix, Lex M. Cowsert, to defraud investors with extravagant claims about the microcap company’s revenue and other benefits flowing from a “shared revenue agreement” with Franklin Power & Light, an electricity provider supposedly operated by Plummer.  However, Plummer’s entity was a complete sham, CytoGenix had actually lost all of its vaccine patents and other intellectual property in a lawsuit, and Plummer and Cowsert stole proceeds of CytoGenix stock offerings that they told investors would be used for energy production projects and other corporate purposes.

“Plummer and Cowsert misled investors by widely mischaracterizing a worthless thinly-traded microcap issuer as a growing success with lucrative new business opportunities,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “Crooked penny stock promoters like Plummer and their unscrupulous sidekicks, often company CEOs like Cowsert, must be held accountable to the investing public for the misinformation they so freely disseminated into the marketplace.”

According to the SEC’s complaint filed against CytoGenix, Cowsert, and Plummer in federal district court in Manhattan, Plummer also spearheaded a separate scheme around the same time in 2010 involving another microcap company that similarly issued a rapid-fire series of press releases with bogus information.  Those press releases touted a purported partnership with Plummer’s phony power company to own and operate solar energy farms across the country.  In reality, the microcap issuer was in dire financial straits and lacked the financial or logistical capability to commercially produce a product of any kind let alone break ground on energy farms.  The company continues to have no operations, customers, or revenues. 

Trading in CytoGenix and the other microcap stock was suspended by the SEC as part of a mass trading suspension in 2011.  The two companies are now either dormant or defunct.  Plummer is currently serving a multi-year federal prison term for an unrelated fraud, and he also has two prior convictions for fraud offenses.

“Plummer created a sham retail electricity provider and then exploited it to hype purported partnerships and ignite the stocks of two microcap companies that were themselves little more than debt-ridden shells with no operating business, revenue, or meaningful assets,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His fraudulent conduct has earned him a spotlight in an SEC enforcement action.”

According to the SEC’s complaint, CytoGenix was in dire financial straits when Plummer approached Cowsert and proposed a partnership with the sham company he created, Franklin Power & Light.  Cowsert agreed and began issuing a series of false press releases, including one touting the formation of a new CytoGenix subsidiary to operate as a joint venture with Plummer’s company to develop “biologically-based” technologies for energy production in untapped retail electrical markets.  Cowsert had no basis for believing that Plummer’s company had the means to generate the revenue needed to fund such energy production technologies, yet he nonetheless prepared and authorized the CytoGenix press releases with the materially false and misleading information about Franklin Power & Light that Plummer supplied. 

The SEC’s complaint further alleges that other CytoGenix press releases unrelated to the partnership with Plummer touted outdated test results and a non-existent new laboratory for testing the vaccine products that CytoGenix claimed to be developing.  These materially false and misleading statements were made despite CytoGenix having lost its assets in litigation with two former employees, including the rights to various vaccine patents and other intellectual property featured in press releases.  These CytoGenix press releases failed to disclose the loss of those critical assets.

According to the SEC’s complaint, Cowsert and Plummer further defrauded CytoGenix shareholders by misappropriating the proceeds of purported private offerings.  Cowsert obtained approximately $91,000 in funds directly from CytoGenix investors by falsely telling them that they were investing in a private placement of CytoGenix stock, but no shares were ever issued to the investors.  Cowsert asked the investors to make their checks payable to him personally, deposited the checks into his personal bank account, and used the funds to pay personal expenses.  Meanwhile, Plummer defrauded a shareholder out of more than 6.5 million free trading shares of CytoGenix stock. 

The SEC’s complaint charges Plummer, Cowsert, and CytoGenix with violating antifraud provisions of the federal securities laws.  Plummer is additionally charged with violating Section 20(b) of the Securities Exchange Act of 1934.  The SEC seeks permanent injunctions along with disgorgement, prejudgment interest, financial penalties, and orders barring Plummer and Cowsert from acting as officers or directors of a public company and from participating in a penny stock offering.

The SEC’s investigation, which is continuing, has been conducted by Justin P. Smith and George N. Stepaniuk of the New York office, and supervised by Sanjay Wadhwa.  The SEC’s litigation will be led by Paul G. Gizzi.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Federal Bureau of Investigation.

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SEC Charges Self-Described Bankers, Dishonest Brokers, and Microcap Company Executive in Pump-And-Dump Scheme

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SEC Charges Self-Described Bankers, Dishonest Brokers, and Microcap Company Executive in Pump-And-Dump Scheme

The Securities and Exchange Commission today charged individuals who pocketed millions of dollars running an elaborate pump-and-dump scheme involving shares of a medical education company in Pennsylvania and two other microcap stocks. 

The SEC alleges that the stock market manipulation ring included two self-described bankers, a pair of dishonest brokers, and a corrupt company executive who issued misleading press releases.  The SEC today suspended trading in one of the microcap companies before they could illegally profit further.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, the CEO and president of a purported merchant banking firm – Abraxas “A.J.” Discala and Marc E. Wexler – teamed up with brokers Matthew A. Bell and Craig L. Josephberg as well as Ira Shapiro, CEO of the medical education company CodeSmart, to inflate the price of the company’s stock and profit at the expense of the brokers’ customers.  They acquired 3 million restricted shares of CodeSmart stock following its reverse merger into a public shell company in May 2013, and improperly flooded the market with the shares as though they were unrestricted.  They then engaged in a promotional campaign to hype the stock with Shapiro issuing materially misleading CodeSmart press releases that were sometimes edited by Discala.  Meanwhile Bell and Josephberg invested their brokerage clients in CodeSmart, often using their retirement funds to purchase the purportedly unrestricted shares.  Once Discala and Wexler reduced their trading and Bell and Josephberg dumped their own shares on the market, CodeSmart’s stock price crashed to earth from a peak of nearly $7 per share.  It is currently trading below 10 cents.

“This was a brazen manipulation scheme calculated to enrich Discala and his accomplices using, in many cases, the retirement savings of innocent and unwitting retail investors,” said Andrew Ceresney, director of the SEC Enforcement Division.  “We act aggressively against unscrupulous brokers and investment advisers who take advantage of individual investors.”

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced criminal charges against Discala, Wexler, Bell, Josephberg, and Shapiro.

“Here we have yet another case of individuals who thought they could manipulate our markets with impunity, but who will now pay a serious price for their abusive conduct,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.

According to the SEC’s complaint, Discala and Wexler reaped millions of dollars in illicit gains from the CodeSmart scheme, and Bell and Josephberg each made in excess of $500,000.  More recently, they engaged in manipulative trading of two other penny stock companies: Cubed Inc. and The Staffing Group Ltd.  They exchanged text messages in which they openly discussed coordinating their trading in these securities in order to create a false impression of market activity.  Their text messages also contemplated that Cubed had the potential to be an even more profitable scheme than CodeSmart.  Cubed’s stock began trading in earnest on April 22, 2014, at a price of $5.25 and has moved incrementally upward with low volume in a pattern that suggests controlled manipulative trading.  The SEC has suspended trading in Cubed stock before Discala and the others could dump their shares on the market.

According to the SEC’s complaint, Discala lives in Norwalk, Conn., Wexler resides in Colts Neck, N.J., Bell lives in San Antonio, Josephberg lives in New York City, and Shapiro resides in Congers, N.Y.  The SEC’s complaint against them alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 9, 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks a permanent injunction and disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and penny stock bars.  The SEC also seeks officer-and-director bars against Discala, Wexler, and Shapiro.

The SEC’s investigation, which is continuing, has been conducted by Market Abuse Unit members Sheldon L. Pollock, Matthew J. Watkins, and Charles D. Riely along with Diego D. Brucculeri and Jordan W. Baker in the New York Regional Office.  John Marino, a specialist in the Market Abuse Unit, assisted the investigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, Federal Bureau of Investigation, Texas State Securities Board, and Financial Industry Regulatory Authority.

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SEC Announces Charges in Scheme to Secretly Enable Lawbreakers to Run Microcap Company

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SEC Announces Charges in Scheme to Secretly Enable Lawbreakers to Run Microcap Company

The Securities and Exchange Commission today announced fraud charges against four individuals and a microcap company for concealing from investors that two lawbreakers ran the company.

According to the SEC’s orders instituting administrative proceedings, the mission of Natural Blue Resources Inc. was to create, acquire, or otherwise invest in environmentally-friendly companies, including an initiative to locate, purify, and sell water recovered from underground aquifers in New Mexico and other areas with depleting water resources.  What investors didn’t know was that two individuals with prior law violations – James E. Cohen and Joseph Corazzi – secretly controlled the operational and management decisions of Natural Blue while calling themselves outside “consultants.”  This arrangement enabled them to be de facto officers of Natural Blue and personally profit from the company without disclosing their past brushes with the law to investors.  Cohen, who lives in Windermere, Fla., was previously incarcerated for financial fraud.  Corazzi, who resides in Albuquerque, N.M., was previously charged with violating federal securities laws and permanently barred from acting as an officer or director of a public company. 

“Cohen and Corazzi concealed their involvement through a so-called ‘consulting’ agreement, but their influence over the issuer spread much further,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division.  “Investors in Natural Blue had a right to know who was running the company behind the scenes.”

The SEC has suspended trading in Natural Blue stock.  The other two individuals charged in the case are Toney Anaya and Erik Perry, who were former chief executive officers at Natural Blue.  The SEC’s orders find that they misled investors by failing to disclose that Cohen and Corazzi were running the company in spite of their criminal or disciplinary histories.

Anaya, who is a former New Mexico governor and attorney general, and Perry each agreed to settle the charges.  Anaya has cooperated extensively with the SEC’s investigation.

“Preventing past law violators from raising money in our markets is critical to preserving investor confidence,” said Paul Levenson, director of the SEC’s Boston Regional Office.  “Natural Blue and its officers attempted an end-run around the rules designed to prevent recidivists from getting their hands on the controls of public companies.”

According to the SEC’s orders, Cohen and Corazzi created Natural Blue so they and other entities they controlled could receive money and stock from the company and profit by hundreds of thousands of dollars.  While Natural Blue was ostensibly led by Anaya and subsequently Perry, management decisions made by Cohen and Corazzi resulted in no revenues or viable business operations for the company.  Anaya and Perry each deferred to Cohen and Corazzi in derogation of their responsibilities.  Natural Blue and Perry also made various material misrepresentations about the company, its contracts, and its anticipated revenue in a February 2011 press release as well as on a website and verbally to investors.

Anaya, who served as Natural Blue’s CEO from August 2009 to January 2011, has signed a cooperation agreement with the SEC in which he has consented to the entry of a cease-and-desist order without admitting or denying the charges.  He will be barred from participating in any offering of a penny stock for at least five years.  Any financial penalties will be determined at a later date.

Perry, who replaced Anaya and served as CEO until June 2011, agreed to settle the case by consenting to the entry of a cease-and-desist order without admitting or denying the charges.  Perry, who previously resided in Massachusetts and currently lives in Bulgaria, agreed to pay a $150,000 penalty and be permanently barred from serving as an officer or director of a public company and from participating in any offerings of penny stock.   

The SEC’s orders charge Natural Blue, Cohen, and Corazzi with violations of Section 17(a)(1) and (a)(3) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c).  The orders also charge Natural Blue with violations of Section 17(a)(2) for misrepresentations made to investors in press releases and public filings, and violations of Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 by failing to make required SEC filings.

The SEC’s investigation was conducted by Thomas Rappaport, Amy Gwiazda, Sofia Hussain, and Rua Kelly in the Boston Regional Office.  Rua Kelly and Mayeti Gametchu will handle the litigation.  The SEC appreciates the assistance of the Federal Bureau of Investigation.

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SEC Charges Ernst & Young With Violating Auditor Independence Rules in Lobbying Activities

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SEC Charges Ernst & Young With Violating Auditor Independence Rules in Lobbying Activities

The Securities and Exchange Commission today charged Ernst & Young LLP with violations of auditor independence rules that require firms to maintain their objectivity and impartiality with clients.

Ernst & Young agreed to pay more than $4 million to settle the charges.

The SEC’s order instituting a settled administrative proceeding finds that an Ernst & Young subsidiary lobbied congressional staff on behalf of two audit clients.  Such lobbying activities were impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those audit clients.  Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements.

“Auditor independence is critical to the integrity of the financial reporting process.  When an auditor acts as an advocate for its audit client, that independence is compromised,” said Scott W. Friestad, associate director in the SEC’s Division of Enforcement.  “Ernst & Young engaged in lobbying activities that constituted improper advocacy and clearly violated the rules.”

According to the SEC’s order, Ernst & Young’s subsidiary Washington Council EY (WCEY) impaired the firm’s independence in several lobbying actions:

• 
  WCEY sent letters signed by a senior executive of an Ernst & Young audit client to congressional staff, urging passage of certain legislation. 


• 
  WCEY asked congressional staff to insert language into a bill that was favorable to the business interests of an Ernst & Young audit client. 


• 
  WCEY met with congressional staff in order to defeat legislation detrimental to the business interests of an Ernst & Young audit client.


• 
  WCEY asked third parties to approach a U.S. senator in order to seek support for a legislative amendment sought by an Ernst & Young audit client.


• 
  WCEY marked up a draft of a bill by inserting an Ernst & Young audit client’s language and sending it to congressional staff. 

According to the SEC’s order, Ernst & Young had issued a written independence policy intended to provide guidance on the provision of legislative advisory services to audit clients.  However, Ernst & Young did not provide WCEY with formal, in-person training specifically tailored to the policy.

The SEC’s order finds that Ernst & Young committed violations of Rule 2-02(b)(1) of Regulation S-X; caused violations of Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-1; and engaged in improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.  The SEC’s order requires Ernst & Young to cease and desist from violating the auditor independence rules and from causing violations of the corporate periodic reporting provisions of the federal securities laws.  The SEC also censured Ernst & Young and ordered payment of $4.07 million in monetary sanctions, including disgorgement of $1.24 million, prejudgment interest of $351,925.98, and a penalty of $2.48 million.  The SEC took into consideration the remedial acts undertaken by Ernst & Young and its cooperation with SEC staff during the investigation.  For example, Ernst & Young voluntarily issued new guidance in June 2012 restricting such legislative advisory services.  The firm issued similar final guidance in May 2013.

The SEC’s investigation was conducted by Jeremiah Williams, Kam H. Lee, and Robert Peak.  The case was supervised by David Frohlich.

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SEC Charges Group of Amateur Golfers in Insider Trading Ring

The Securities and Exchange Commission today charged a group of friends, most of them golfing buddies, who made more than $554,000 of illegal profits from trading on inside information about Massachusetts-based American Superconductor Corporation.

In a complaint filed in federal court in Boston, the SEC alleges that Eric McPhail repeatedly provided non-public information about American Superconductor to six others, most fellow competitive amateur golfers. McPhail’s source was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. According to the complaint, from July 2009 through April 2011, the executive told McPhail about American Superconducter’s expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential.

Instead, McPhail, of Waltham, Massachusetts, misappropriated the inside information about the energy technology company and fed it to his friends, often via email. The insider-trading ring included a handful of golfing buddies, four of whom live in Massachusetts: Douglas A. Parigian of Lowell, John J. Gilmartin of Andover, Douglas Clapp of Walpole, and James A. “Andy” Drohen of Granville. The fifth, Drohen’s brother, John C. Drohen, is a resident of Cranston, Rhode Island. In addition to the group of golfers, McPhail tipped a sixth man, his longtime friend Jamie A. Meadows, of Springfield, Massachusetts. Each of the six traded and profited on the inside information McPhail supplied to them.

“Whether the tips are passed on the golf course, in a bar, or elsewhere, the SEC will continue to track down those who seek an unfair advantage trading stocks,” said Paul G. Levenson, director of the SEC’s Boston Regional Office. “Working with our partners in law enforcement, we are sending a message to all investors that insider trading does not pay.”

According to the SEC’s complaint, in April 2011, McPhail tipped Parigian and Meadows a few days before American Superconductor announced that it expected fourth-quarter and fiscal year-end results to be weaker due to a deteriorating relationship with its primary customer, China-based Sinovel Wind Group Co., Ltd. Parigian and Meadows used the information to place bets, through option contracts, that the company’s stock price would decline. When American Superconductor made the announcement, its stock price fell 42 percent and as a result of this one tip alone, Parigian made profits and avoided losses of $278,289, while Meadows made profits of $191,521.

McPhail tipped the various defendants on other occasions, funneling them inside information about American Superconductor’s quarterly earnings announcements in July and September 2009, and again in January 2010. He also alerted them in the fall of 2009 to a contract worth $100 million, and in November 2010 to a likely drop in American Superconductor’s share’s price, which occurred a few days later when AMSC announced a secondary stock offering.

The complaint charges that McPhail, Parigian, Gilmartin, Clapp, the Drohens, and Meadows violated federal antifraud laws and the SEC’s antifraud rule, and seeks to have them be enjoined, return their allegedly ill-gotten gains with interest, and pay financial penalties of up to three times their gains. Gilmartin, Clapp, and the Drohens agreed to settle the SEC’s charges, without admitting or denying the allegations, by consenting to the entry of judgments permanently enjoining them from violating the relevant securities laws. The judgments also order:

Gilmartin to return $23,713 in trading profits plus prejudgment interest of $4,034 and a civil penalty of $23,713, for a total of $51,460

Clapp to return $11,848 in trading profits plus prejudgment interest of $1,767 and a civil penalty of $11,848, for a total of $25,463

Andy Drohen to return $22,543 in trading profits plus prejudgment interest of $3,845 and a civil penalty of $22,543, for a total of $48,931

John Drohen to return $8,972 in trading profits plus prejudgment interest of $1,511 and a civil penalty of $8,972, for a total of $19,455

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SEC Charges California School District with Misleading Investors

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SEC Charges California School District with Misleading Investors

The Securities and Exchange Commission today charged a school district in California with misleading bond investors about its failure to provide contractually required financial information and notices.  The case is the first to be resolved under a new SEC initiative to address materially inaccurate statements in municipal bond offering documents. 

The SEC found that in the course of a 2010 bond offering, Kings Canyon Joint Unified School District affirmed to investors that it had complied with its prior continuing disclosure obligations.  The statement was inaccurate because between at least 2008 and 2010, the school district had failed to submit some required disclosures.  The California school district agreed to settle the charges without admitting to or denying the findings.

Under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC’s Enforcement Division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations.  The 2014 initiative, launched on March 10, expires on September 10.

“The integrity of the municipal securities market requires that issuers carefully comply with all of their disclosure obligations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Our MCDC initiative is one piece of our efforts to ensure that issuers meet their obligations going forward.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit added, “An important component of the MCDC program is that it provides issuers who were already under investigation the opportunity to accept the standard terms and resolve their enforcement matters in a fair and efficient manner.  We are pleased that King’s Canyon has taken advantage of the program and we continue to encourage all eligible issuers and underwriters to do so while the MCDC terms are still available.”

The SEC’s order instituting settled administrative proceedings finds that in three bond offerings between 2006 and 2007, Kings Canyon contractually agreed to disclose annual financial information and notices of certain events pertaining to those bonds.  When it conducted a $6.8 million bond offering in November 2010, Kings Canyon was required to describe any instances where it had failed to materially comply with its prior disclosure obligations.  In the 2010 offering document, Kings Canyon inaccurately affirmed that there was “no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation.”  Because Kings Canyon failed to submit some of the contractually required disclosures relating to the 2006 and 2007 offerings, the November 2010 bond offering document contained an untrue statement of a material fact.

Without admitting or denying the SEC’s findings, Kings Canyon consented to an order to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act.  It also agreed to adopt written policies for its continuing disclosure obligations, comply with its existing continuing disclosure obligations, cooperate with any subsequent investigation by the Enforcement Division, and disclose the terms of its settlement with the SEC in future bond offering materials.   

The SEC’s investigation was conducted by Monique C. Winkler and was supervised by Cary Robnett.  Both are in the SEC’s San Francisco Regional Office and are members of the Enforcement Division’s Municipal Securities and Public Pensions Unit.

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SEC, Massachusetts U.S. Attorney, and FBI Charge Five with Attempted Manipulation of Microcap Company

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SEC, Massachusetts U.S. Attorney, and FBI Charge Five with Attempted Manipulation of Microcap Company

The Securities and Exchange Commission, the U.S. Attorney for the District of Massachusetts, and the Federal Bureau of Investigation today announced charges against five individuals whose attempt to manipulate shares of Boston-based Amogear Inc. was caught by an FBI undercover operation.

According to the SEC and criminal cases filed in federal court in Boston, the defendants knew that Amogear was a shell company without any real operations, but schemed to boost its price and profit by selling their own shares.  What the parties didn’t know was that the FBI controlled Amogear and used it to obtain evidence of attempted stock manipulation.  To protect investors, the SEC suspended trading in Amogear’s securities on February 10, as the attempted stock manipulation was underway.

The charges follow a series of cases since December 2011 in which the SEC suspended trading in seven companies and criminal authorities charged 22 individuals with using kickbacks and other schemes to trigger investments in microcap stocks, convicting 18 to date.  Small “microcap” companies often trade for pennies per share and many do not file financial reports with the SEC.  The fact that investors often cannot find accurate information about microcap companies can make the microcap stock market a fertile ground for fraud and abuse.

Andrew Ceresney, director of the SEC’s Enforcement Division, said: “This case is an outstanding example of law enforcement creativity and cooperation trumping microcap fraudsters.  By obtaining control of a shell company, using it to collect evidence of a manipulation scheme, and suspending trading before the scheme succeeded, we have protected investors from harm.”  

“These defendants brazenly attempted to manipulate Amogear’s stock,” said Paul G. Levenson, director of the SEC’s Boston Regional Office.  “It didn’t occur to them that the FBI and SEC were a step ahead of them.” 

“As is clear from the combined efforts of the U.S. Attorney’s Office, the FBI, and the SEC, market manipulation will not be tolerated,” said Carmen M. Ortiz, U.S. Attorney for the District of Massachusetts. “The prosecution of corporate and securities fraud is a top priority of the Department of Justice and a top priority for this Office.  As is demonstrated by the recent charges, we will continue to develop new techniques to detect and prosecute those engaged in market abuse.”

“Fund representatives, CEOs, traders, fund managers, equities analysts, lawyers and publicists should take note that Boston FBI agents purposefully designed multiple undercover operations aimed directly at rooting out market manipulation and insider trading.  As the scope and design of our undercover operations become well-known, no one should think that future undercover operations will be the same as prior ones because in this instance the FBI took control of a publicly traded company making it nearly impossible to discover,” said Vince Lisi, Special Agent in Charge of the FBI’s Boston Division. 

The following individuals were charged today by the SEC with securities fraud and were recently charged by the U.S. Attorney on the following criminal charges:

• 
  Andrew J. Affa, 30, of Huntington Station, New York, conspiracy to commit securities fraud and wire fraud


• 
  Michael A. Affa, 34, of Toms River, New Jersey, conspiracy to commit securities fraud and wire fraud


• 
  Mitchell H. Brown, 48, of Long Branch, New Jersey, conspiracy to commit securities fraud and wire fraud


• 
  Christopher R. Putnam, 37, of Charleston, South Carolina, conspiracy to commit securities fraud


• 
  Christopher G. Nix, 34, of Charleston, South Carolina, conspiracy to commit securities fraud

The SEC is seeking permanent injunctions against further violations of the securities laws, return of allegedly ill-gotten gains with interest, civil monetary penalties, and to bar the defendants from being involved in penny-stock offerings. If convicted of the criminal charges, the defendants face a maximum of five years in prison and a $250,000 fine.  

SEC Boston Regional Office Director Paul G. Levenson, U.S. Attorney Carmen M. Ortiz, and FBI Special Agent in Charge Vincent B. Lisi  announced the charges.  The criminal case is being prosecuted by Assistant U.S. Attorney Vassili Thomadakis of the Economic Crimes Unit and SEC attorneys Eric Forni and Andrew Palid, who were appointed Special Assistant U.S. Attorneys.  The SEC’s investigation was led by Michele T. Perillo, and Martin F. Healey will handle the SEC’s litigation.

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SEC Names Thomas J. Krysa as Associate Regional Director in Denver Office

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SEC Names Thomas J. Krysa as Associate Regional Director in Denver Office

The Securities and Exchange Commission today announced that it has named Thomas J. Krysa as the associate regional director for enforcement in its Denver office, where he will oversee enforcement efforts in seven western states.

Mr. Krysa started in the Denver office in 2003 as a staff attorney, became a trial counsel the following year, and has supervised the office’s trial unit since 2010.  He has litigated matters involving insider trading, financial fraud, offering fraud, broker-dealer and investment adviser misconduct, market timing, market manipulation, and auditor negligence.  Among the cases he has prosecuted was a jury trial against two former CFOs of a database marketing company on fraud and other charges.  After a three-week trial, the jury returned a verdict of liability on all claims.

“In his prior roles at the Commission, Tom has exhibited stellar advocacy skills, a keen ability to analyze and distill complex cases into simple concepts, and a collegial approach to decision-making,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “I am pleased that he will continue his service to the Commission in this new role.”

Julie Lutz, director of the Denver Regional Office, added, “Tom’s judgment, critical thinking, and work ethic are widely respected throughout the Denver Regional Office.  He brings great strengths to the important job of leading Denver’s talented enforcement staff.”

Mr. Krysa said, “I look forward to working in this new role with the staff of the Denver Regional Office to build on our strong track record of protecting investors and enforcing the securities laws.”

Mr. Krysa is a graduate of the Pennsylvania State University and the University of Denver Sturm College of Law, and obtained an LL.M. in taxation with distinction from Georgetown University Law Center.  After a clerkship on the U.S. Tax Court, he spent five years as a prosecutor in the western criminal enforcement section of the Tax Division of the Department of Justice.  

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James McNamara Named as Deputy Chief Human Capital Officer in the Office of Human Resources

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James McNamara Named as Deputy Chief Human Capital Officer in the Office of Human Resources

The Securities and Exchange Commission today announced that James McNamara has been selected as the deputy chief human capital officer in its Office of Human Resources.

Mr. McNamara, currently the managing executive for the Division of Trading and Markets, will begin his new position on July 14.  In his new role, he will help to manage programs and policies in areas such as leadership and employee development, recruitment and retention, performance management, compensation and benefits, and labor relations. 

“The SEC promotes a results-oriented workforce committed to the highest standards of expertise and excellence,” said SEC Office of Human Resources’ Chief Human Capital Officer Lacey Dingman.  “Jamey brings a breadth of experience that will greatly assist in our continuous efforts to recruit, develop, and retain an effective and diversified workforce for the SEC.”

As the first managing executive in the Division of Trading and Markets, Mr. McNamara oversaw administrative and operational support and advised senior leadership on human capital strategy, information technology, risk management, and process improvement initiatives.  In the past two years, he played a key role in implementing organizational changes to enhance operations and assist the division’s efforts on Dodd-Frank Wall Street Reform and Consumer Protection Act rulemaking and other requirements.  He co-chaired the division’s labor-management forum and has served as a member of numerous agency level committees and governance bodies including the national Labor Management Forum, the Human Capital Advisory Council, and the Budget Governance Committee. 

Mr. McNamara’s prior roles at the SEC include assistant director for planning and budget, budget officer, and branch chief for budget formulation and performance management, all in the Office of Financial Management.  He worked in the Division of Trading and Markets from 2003 to 2005 as branch chief for administration.  In the private sector, he was a human resources consultant and later vice president at Willmott & Associates, a search firm specializing in recruitment of human resources professionals. 

Mr. McNamara began his federal service at the U.S. Department of Justice where he worked for 10 years in positions of increasing responsibility in human resources management and budget formulation.  He received his bachelor's degree from Brown University.

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SEC Charges Five Traders with Short Selling Violations

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SEC Charges Five Traders with Short Selling Violations

The Securities and Exchange Commission today charged five traders for committing short selling violations while trading for themselves and Worldwide Capital Inc., a Long Island, N.Y.-based proprietary firm that earlier this year paid the largest-ever monetary sanction for Rule 105 violations.

Worldwide Capital and its owner Jeffrey W. Lynn agreed to pay $7.2 million to settle SEC charges in March for violating Rule 105, which prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same security through the offering.

The SEC today instituted settled administrative proceedings against Derek W. Bakarich, Carmela Brocco, Tina Lizzio, Steven J. Niemis, and William W. Vowell for violating Rule 105 by selling shares short during the restricted period and purchasing offering shares of the same securities they had shorted.  They purchased the offering shares through accounts they opened in their names or names of alter ego corporate entities at large broker-dealers and then executed the short sales of the securities through an account in Worldwide’s name at different, smaller broker-dealers.

“These individuals shared in profits generated by transactions that violated important short selling regulations in place to protect the markets from manipulative trading activity,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

Each of the five traders agreed to settle the SEC’s charges and pay a collective total of nearly $750,000.

“When conducting these trades, these individuals did not comply with the law,” said Amelia A. Cottrell, associate director of the SEC’s New York Regional Office. “Now they must forfeit the profits they earned on their respective trades plus additional penalties.”

According to the SEC’s orders, Bakarich, Brocco, Lizzio, Niemis, and Vowell were selected by Lynn to conduct trades for Worldwide Capital, which he created for the purpose of investing and trading his own money.  The traders he chose to trade his capital pursued an investment strategy focused primarily on obtaining allocations of new shares of public issuers coming to market through secondary and follow-on public offerings at a discount to the market price of the company’s shares that were already trading publicly.  They sold short the shares in those issuers in advance of the offerings, hoping to profit by the difference between the price they paid to acquire the offered shares and the market price on the date of the offering.  From approximately August 2009 to March 2012, Bakarich, Brocco, Lizzio, Niemis, and Vowell each violated Rule 105 in connection with at least nine covered offerings.  They received ill-gotten gains ranging from approximately $16,000 to more than $200,000.

Each of the five traders agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order.  They agreed to disgorge all of their ill-gotten gains plus prejudgment interest and pay an additional penalty equal to 60 percent of the disgorgement amount:

• 
  Bakarich, who lives in Duluth, Ga., agreed to pay $16,231 in disgorgement, $757 in prejudgment interest, and a $9,739 penalty for a total of $26,727.


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  Brocco, who lives in East Meadow, N.Y., agreed to pay $215,233 in disgorgement, $27,056 in prejudgment interest, and a $129,140 penalty for a total of $371,429.


• 
  Lizzio, who lives in Boca Raton, Fla., agreed to pay $28,864 in disgorgement, $1,548 in prejudgment interest, and a $17,319 penalty for a total of $47,731.


• 
  Niemis, who lives in Jupiter, Fla., agreed to pay $130,842 in disgorgement, $5,893 in prejudgment interest, and a $78,505 penalty for a total of $215,240.


• 
  Vowell, who lives in Manasquan, N.J., agreed to pay $51,519 in disgorgement, $4,427 in prejudgment interest, and a $30,911 penalty for a total of $86,857.

The SEC’s investigation, which is continuing, has been conducted by Leslie Kazon, Joseph P. Ceglio, Karen M. Lee, Richard G. Primoff, Elzbieta Wraga, and Elizabeth Baier.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the New York Stock Exchange.

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