SEC Charges Litigation Marketing Company With Bilking Retirees

The Securities and Exchange Commission today charged a Los Angeles-based litigation marketing company and its co-founders with defrauding retirees and other investors who were told their money would be used to help gather plaintiffs for class-action and other lawsuits and they would earn hefty investment returns from settlement proceeds.

The SEC alleges that James Catipay and David Aldrich raised $11.7 million from approximately 250 investors during the past three years for their company PLCMGMT LLC, also referred to as PLC or Prometheus Law.  But only $4.3 million was actually used to locate prospective plaintiffs for lawsuits, and the company has generated scant revenue from any settlements.  Catipay and Aldrich have instead diverted millions of dollars for their personal use while failing to deliver the promised 100 to 300 percent returns to investors.  In fact, PLC is obligated to pay investors at least $31.5 million.

“We allege that Catipay and Aldrich have defrauded investors, many of them retirees, by repeatedly downplaying the risks associated with their investments and the fact that their entire business model was unrealistic to afford the exorbitant returns promised,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office

According to the SEC’s complaint filed in U.S. District Court for the Central District of California:

·         Investors were told their funds would be used for marketing and advertising to locate plaintiffs for cases involving failed prescription drugs or medical devices.  Each investor’s money would be associated with a specific potential plaintiff.  PLC would refer the potential plaintiffs to a contingency-fee attorney and use proceeds of lawsuit settlements to pay investor returns. 

·         The arrangements purportedly enabled investors, who were mostly non-attorneys, to split legal fees with the lawyer who actually litigated a particular lawsuit, which is generally prohibited.

·         PLC, Catipay, and Aldrich enticed investors by claiming the investments were safe and “guaranteed” when in fact they were highly speculative and risky because only certain potential plaintiffs would typically qualify as actual plaintiffs, and even if a case was filed there was no guarantee they would win the lawsuit.

·         In addition to the false and misleading statements, PLC, Catipay, and Aldrich misused $5.6 million in investor funds for personal purposes, including more than $1 million for Aldrich’s personal income taxes and another million dollars to purchase a residential condominium in the name of Aldrich’s privately-held company. 

·         Aldrich and Catipay also took large salaries and admitted to SEC investigators that they have made Ponzi payments to several Prometheus investors. 

The SEC’s complaint charges PLC, Catipay, and Aldrich with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5.  Catipay also allegedly violated Section 15(a) of the Exchange Act.  The SEC seeks preliminary and permanent injunctions, the appointment of a receiver over the company, an asset freeze, financial penalties and disgorgement plus interest, and other relief.

The SEC’s investigation was conducted by David Rosen and Carol Shau and supervised by Marc Blau.  The SEC’s litigation will be led by Amy Longo and Mr. Rosen and supervised by John Berry.

SEC Press Release

SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.  The SEC’s case was unsealed today in federal court in Miami, and the court has appointed a receiver over the companies to prevent any further spending of investor assets.

The SEC alleges that Ariel Quiros of Miami, William Stenger of Newport, Vt., and their companies made false statements and omitted key information while raising more than $350 million from investors to construct ski resort facilities and a biomedical research facility in Vermont.  Investors were told they were investing in one of several projects connected to Jay Peak Inc., a ski resort operated by Quiros and Stenger, and their money would only be used to finance that specific project.  Instead, in Ponzi-like fashion, money from investors in later projects was misappropriated to fund deficits in earlier projects.  More than $200 million was allegedly used for other-than-stated purposes, including $50 million spent on Quiros’s personal expenses and in other ways never disclosed to investors.

According to the SEC’s complaint, Quiros improperly tapped investor funds for such things as the purchase of a luxury condominium, payment of his income taxes and other taxes unrelated to the investments, and acquisition of an unrelated ski resort.

“The alleged fraud ran the gamut from false statements to deceptive financial transactions to outright theft,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “As alleged in our complaint, the defendants diverted millions of EB-5 investor dollars to their own pockets, leaving little money for construction of the research facility investors were told would be built and thereby putting the investors’ funds and their immigration petitions in jeopardy.”

The SEC’s complaint charges Quiros, Stenger, Jay Peak, and a company owned by Quiros called Q Resorts Inc. as well as seven limited partnerships and their general partner companies with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Four other companies are named as relief defendants in the SEC’s complaint for the purpose of recovering investor funds transferred into their accounts.  The SEC seeks preliminary and permanent injunctions, financial penalties, and disgorgement of ill-gotten gains plus interest.  The agency also seeks conduct-based injunctive relief against Quiros and Stenger along with an officer-and-director bar against Quiros.

The SEC’s investigation was conducted by Brian Theophilus James, Trisha D. Sindler, Michelle Lama, and Mark Dee, and the case was supervised by Chedly C. Dumornay of the Miami Regional Office.  The SEC’s litigation will be led by Christopher Martin and Robert K. Levenson of the Miami office.  The SEC appreciates the assistance of the Office of the Vermont Attorney General and other authorities in Vermont.

SEC Press Release

SEC: Town Officials in New York Hid Financial Troubles From Bond Investors

The Securities and Exchange Commission today announced fraud charges against Ramapo, N.Y., its local development corporation, and four town officials who allegedly hid a deteriorating financial situation from their municipal bond investors.

The SEC alleges that Ramapo officials resorted to fraud to hide the strain in the town’s finances caused by the approximately $60 million cost to build a baseball stadium as well as the town’s declining sales and property tax revenues.  They cooked the books of the town’s primary operating fund to falsely depict positive balances between $1.4 million and $4.2 million during a six-year period when the town had actually accumulated balance deficits as high as nearly $14 million.  And because the stadium bonds issued by the Ramapo Local Development Corp. (RLDC) were guaranteed by the town, certain officials also masked an operating revenue shortfall at the RLDC and investors were unaware the town would likely need to subsidize those bond payments and further deplete its general fund.

According to the SEC’s complaint, inflated general fund balances were used in offering materials for 16 municipal bond offerings by Ramapo or the RLDC to investors, who consider the condition of a municipality’s general fund when making investment decisions.  After town supervisor Christopher P. St. Lawrence purposely misled a credit rating agency about the town’s general fund balance before certain bonds were rated, he told other town officials to refinance the short-term debt as fast as possible because “we’re going to all have to be magicians” to realize the purported financial results.

“Retail investors account for more than 75 percent of the $3.7 trillion municipal bond market, which is critical for our nation’s infrastructure and development,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “We won’t stand for public officials and employees who resort to alleged accounting trickery to mislead investors who are investing in their financial futures as well as the future betterment of our communities.”

According to the SEC’s complaint:

• Christopher P. St. Lawrence, who served as RLDC’s president in addition to being town supervisor, masterminded the scheme to artificially inflate the balance of the general fund in financial statements for fiscal years 2009 to 2014. 
• St. Lawrence and Aaron Troodler, a former RLDC executive director and assistant town attorney, concealed from investors that RLDC’s operating revenues were insufficient to cover debt service on bonds to finance the stadium.
• Town attorney Michael Klein helped conceal outstanding liabilities related to the baseball stadium and repeatedly misled the town’s auditors about the collection of a $3.08 million receivable recorded in the town’s general fund for the sale of a 13.7-acre parcel of land to the RLDC.  But because the title of the property was never transferred from the town to the RLDC, Klein also made misleading statements about the receivable’s source.
• Troodler helped conceal the fictitious sale and boost the account balance of the town’s general fund by approving RLDC financial statements reflecting a purchase of property that never actually occurred.  Troodler also signed offering documents that contained an additional fabricated receivable totaling $3.66 million for another transfer of land from the town to the RLDC.  The only land transferred from the town to the RLDC during the time of the purported transaction was property donated for the baseball stadium, which St. Lawrence and Troodler knew did not impose any payment obligation on the RLDC.
• The town’s deputy finance director Nathan Oberman participated in activities to inflate the town’s general fund by arranging $12.4 million in improper transfers from an ambulance fund to bolster the troubled general fund during a six-year period.

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

“We allege that Ramapo’s senior-most officials concealed the true condition of the town’s declining finances to avoid further political fallout from the construction of the baseball stadium,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, which was previously known as the Municipal Securities and Public Pensions Unit.

The SEC’s complaint charges Ramapo, RLDC, St. Lawrence, Troodler, Klein, and Oberman with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  St. Lawrence and Troodler also are charged with liability under Section 20(a) of the Exchange Act as controlling persons for the violations by the town and RLDC, and all four town officials are charged with aiding and abetting violations by the town and RLDC.  In addition to financial penalties, the SEC seeks a court order appointing an independent consultant for Ramapo and RLDC to recommend improvements for financial reporting and municipal securities disclosure policies and monitor the mandated implementation of those recommendations for a period of five years.  The SEC also seeks an order prohibiting the town officials from participating in future municipal bond offerings.

The SEC’s continuing investigation is being conducted by Daniel M. Loss and Celeste A. Chase of the New York office and Creighton L. Papier of the Public Finance Abuse Unit with assistance from Jonathan Wilcox, Louis Randazzo and Mark R. Zehner from the Public Finance Abuse Unit.  The SEC’s litigation will be led by Alexander M. Vasilescu and Mr. Loss.  The case is being supervised by Sanjay Wadhwa and Ms. Gaunt.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Rockland County District Attorney’s Office in New York. 

SEC Press Release

SEC: Research Analyst Is Insider Trading in Mother’s Brokerage Account

The Securities and Exchange Commission today announced insider trading charges against a research analyst who allegedly reaped more than $1.5 million in February through trades he made in his mother’s brokerage account based on nonpublic information he learned at work.

The SEC alleges that John Afriyie found out about an impending acquisition of home security company The ADT Corporation when prospective acquirer Apollo Global Management approached the Manhattan-based investment firm where he was employed and discussed potential debt financing for a public-to-private deal.  Afriyie subsequently accessed several highly confidential, deal-related documents on the firm’s computer network and purchased thousands of high-risk, out-of-the-money ADT call options in his mother’s account in anticipation that ADT’s stock price would rise when the transaction was publicly announced.  The ADT deal was announced on February 16, and afterwards Afriyie sold all of the ADT options in his mother’s account to obtain his illicit profits.

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

“Insider traders should have learned by now that trying to hide their illegal activity in a relative’s account ultimately won’t work,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “On behalf of the millions of traders in our markets who play by the rules, we will continue to detect and expose those who don’t.”

Today’s charges are the latest example of SEC staff thwarting the efforts of insider traders to avoid detection by trading in a relative's brokerage account.  Other cases include:

·         A group of Northern California men allegedly conducted an insider trading scheme in which the primary trader used his brother-in-law’s account to trade on nonpublic tips about Ross Stores leaked by his friend who worked there.

·         A then-employee at Goldman Sachs was charged with insider trading after SEC enforcement staff utilized data analysis tools to detect his unusual trading activity in two different accounts, including one belonging to his father.

·         A New York City investment banker was charged with insider trading in his father’s account as well as an account belonging to the mother of his young child to generate illegal proceeds in lieu of formal child support payments.

·         A Chicago-based accountant was charged with secretly using his wife’s account to illegally trade in advance of financial reporting announcements by the company where he worked.

·         A systems administrator at Green Mountain Coffee allegedly used his mother’s account for insider trading based on confidential data he obtained shortly before the company made its quarterly earnings announcement.

The SEC’s complaint against Afriyie, which was filed in U.S. District Court for the Southern District of New York, charges him with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint also names his mother as a relief defendant for purposes of recovering ill-gotten gains that Afriyie generated by trading in his mother’s name.

The SEC’s continuing investigation is being conducted by Walker Newell and supervised by Jennifer J. Lee of the San Francisco office with assistance from John Rymas of the Market Abuse Unit.  The SEC’s litigation will be led by Mr. Newell and Marc Katz.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

SEC Press Release

SEC: Company Misled Investors About Energy-Efficient Technology

The Securities and Exchange Commission today announced fraud charges against a Texas-based technology company and its founder accused of boosting stock sales with false claims about a supposedly revolutionary computer server and big-name customers purportedly placing orders to buy it.

Also charged in the SEC’s complaint is Texas Attorney General Ken Paxton and a former member of the company’s board of directors for allegedly recruiting investors while hiding they were being compensated to promote the company’s stock.

The SEC alleges that Servergy Inc. and William E. Mapp III sold $26 million worth of company stock in private offerings while misleading investors to believe that the Cleantech CTS-1000 server (the company’s sole product) was especially energy-efficient.  They said it could replace “power-hungry” servers found in top data centers and compete directly with top server makers like IBM, Dell, and Hewlett Packard.  However, neither Mapp nor Servergy informed investors that those companies were manufacturing high-performance servers with 64-bit processors while the CTS-1000 had a less powerful 32-bit processor that was being phased out of the industry and could not in reality compete against those companies.

The SEC further alleges that when Servergy was low on operating funds, Mapp enticed prospective investors by falsely claiming well-known companies were ordering the CTS-1000, and he specifically mentioned an order purportedly received from Amazon.  In reality, an Amazon employee had merely contacted Servergy because he wanted to test the product in his free time for personal use.

Servergy has since cut ties with Mapp, who served as CEO.  The company agreed to pay a $200,000 penalty to settle the SEC’s charges.  The litigation continues against Mapp in U.S. District Court for the Eastern District of Texas. 

“We allege that Mapp deceived investors into believing that Servergy’s groundbreaking technology was generating lucrative sales to major customers when it was technologically behind its competitors and made no actual sales,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. 

While serving in the Texas House of Representatives, Paxton allegedly reached an agreement with Mapp to promote Servergy to prospective investors in return for shares of Servergy stock.  According to the SEC’s complaint, Paxton raised $840,000 in investor funds for Servergy and received 100,000 shares of stock in return, but never disclosed his commissions to prospective investors while recruiting them.  Similarly, former Servergy director Caleb White allegedly raised more than $1.4 million for Servergy and received $66,000 and 20,000 shares of Servergy stock while never disclosing these commissions to investors.  White has agreed to settle the SEC’s charges by paying $66,000 in disgorgement and returning his shares of Servergy stock to the company.  The SEC’s litigation continues against Paxton.

“People recruiting investors have a legal obligation to disclose any compensation they are receiving to promote a stock, and we allege that Paxton and White concealed the compensation they were receiving for touting Servergy’s product,” Mr. Shipchandler said.

The SEC’s complaint charges Servergy, Mapp, Paxton, and White with violating Sections 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.  Servergy, Mapp, and White also allegedly violated Sections 5(a) and (c) of the Securities Act, and Paxton and White allegedly violated Section 17(b) of the Securities Act and Section 15(a) of the Exchange Act. 

Servergy and White neither admitted nor denied the SEC’s charges in their settlements.

The SEC’s investigation was conducted by Samantha S. Martin and Carol J. Hahn and supervised by Jessica B. Magee and David L. Peavler in the Fort Worth office.  The SEC’s litigation will be led by Matthew J. Gulde and Ms. Magee.

SEC Press Release

SEC Charges Four in Fraudulent “Free Dinner” Scheme

The Securities and Exchange Commission today announced that it has charged four individuals in a fraud whose victims included seniors who were solicited at “free dinner” investment seminars in Florida.

The SEC alleges that Philadelphia residents Joseph Andrew Paul and John D. Ellis, Jr. lied about the track record of their investment advisory firm and recruited James S. Quay of Atlanta and Donald H. Ellison of Palm Bay, Florida, to lure potential victims with promises of lofty returns.

According to the SEC’s complaint, Paul and Ellis created fraudulent marketing materials including some with performance numbers that were “cut and pasted” from another firm’s website.  The complaint further alleges that Quay and Ellison used these materials to mislead seniors who responded to their mass-mailing offer of a free dinner at a Tampa restaurant.

“As we allege in our complaint, a large portion of the money was never invested but instead was split among these self-described investment experts whose only real expertise was stealing other people’s money,” said Sharon Binger, Director of the SEC’s Philadelphia Regional Office.

According to the SEC’s complaint filed in the U.S District Court for the Eastern District of Pennsylvania, Quay used an alias, “Stephen Jameson,” to conceal his true identity from potential victims.  Quay was previously convicted of tax fraud in 2005 and found liable for securities fraud in a 2012 SEC enforcement action.   

“Jameson” was not registered as an investment professional during the relevant period of fraudulent conduct, and Ellison also was not registered for the majority of that period.  Investors can easily and quickly check the registration status and disciplinary history of investment professionals by using the searchable database on the SEC’s Investor.gov website. 

The SEC’s investigation was conducted by Lisa M. Candera and Brendan P. McGlynn and supervised by G. Jeffrey Boujoukos.   David L. Axelrod and Mark R. Sylvester will lead the SEC’s litigation.  The examination that led to the investigation was conducted by Michael K. Nally, William M. Lavin, and John Cajulis, under the supervision of Steven R. Dittert.  

SEC Press Release