SEC: Nashville Firm Schemed to Collect Extra Fees From Hedge Funds

The Securities and Exchange Commission today charged a Nashville, Tenn.-based investment advisory firm and its owner with scheming to collect extra monthly fees from a pair of hedge funds they managed.
 

Examiners in the SEC’s Atlanta office detected the misconduct during an examination of Hope Advisers Inc., which is owned by Karen Bruton.  The SEC alleges that in order to circumvent the funds’ fee structure under which the firm is entitled to fees only if the funds’ profits that month exceed past losses, Hope Advisers and Bruton have been orchestrating certain trades that enable the funds to realize a large gain near the end of the current month while basically guaranteeing a large loss to be realized early the following month.  Without the fraudulent trades, Hope Advisers would have received almost no incentive fees since October 2014. 

 

“We allege that Hope Advisers and Bruton disregarded investors by engaging in a pattern of deceptive trades so they could continue earning large incentive fees,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office.

 

Hope Advisers and Bruton have consented to an interim order that restricts them from accessing $7 million of their own investments in the funds, prohibits them from collecting any further fees unless they satisfy the high water mark in the funds’ fee structure, and restricts them from taking additional investments in the fund.  Without admitting or denying the allegations, Hope Advisers and Bruton also are preliminarily enjoined from violating the antifraud statutes of the federal securities laws.

 

According to the SEC’s complaint filed in federal court in Atlanta:

• The two private hedge funds managed by Hope Advisers and Bruton – named Hope Investments LLC and HDB Investments LLC – have more than $175 million in net asset value.
• Hope Advisers receives its only compensation for managing the funds in the form of an incentive fee, calculated as a share of the profits (10 or 20 percent) earned in the funds’ accounts each month.
• Hope Advisers and Bruton engaged in a continuous pattern of trading to inflate their compensation from the funds.  They not only delayed realization of trading losses but also intentionally sized certain trades so the funds realized a profit every month.
• The scheme has enabled Hope Advisers to avoid realization of more than $50 million in losses in the hedge funds while earning millions of dollars in fees to which they were not entitled.
• Without the fraudulent trades, Hope Advisers would have received almost no incentive fees from at least October 2014 through the present.

 

The SEC’s complaint charges Hope Advisers and Bruton with violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 as well as Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-8.  The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions. 

 

The complaint also names Bruton’s charity called Just Hope Foundation as a relief defendant for the purposes of returning money it received out of the fees to which the firm was not entitled.  The complaint does not allege that the Just Hope Foundation participated in the wrongdoing. 

 

The SEC examination that uncovered the misconduct was conducted by Jamila Abston, Elaina Labossiere, and Ed McConnell under the supervision of Bill Royer and with assistance from Terry Moran in the Chicago office and Jim Richardson in the Miami office.  The ensuing investigation was conducted by Peter Diskin, Graham Loomis, Joshua Mayes, Robert Gordon, and Grant Mogan in the Atlanta office with assistance from Mr. Moran and Mr. Richardson.  The investigation was supervised by William P. Hicks, the Associate Regional Director of Enforcement in the Atlanta office.   
 

SEC Press Release

Mortgage Company and Executives Settle Fraud Charges

The Securities and Exchange Commission today announced that a California-based mortgage company and six senior executives agreed to pay $12.7 million to settle charges that they orchestrated a scheme to defraud investors in the sale of residential mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae). 

 

First Mortgage Corporation (FMC) is a mortgage lender that issued Ginnie Mae RMBS backed by loans it originated.  The SEC alleges that from March 2011 to March 2015, FMC and its senior-most executives pulled current, performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly-issued RMBS.  FMC caused its Ginnie Mae RMBS prospectuses to be false and misleading by improperly and deceptively using a Ginnie Mae rule that gave issuers the option to repurchase loans that were delinquent by three or more months. 

 

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, FMC purposely delayed depositing checks from borrowers who had been behind on their loans, falsely claiming to both investors and Ginnie Mae that such loans remained delinquent when in reality they were current.  This was done with the knowledge and approval of the company’s senior-most management.  After repurchasing at prices applicable to delinquent loans, FMC was able to resell the loans into new Ginnie Mae RMBS pools at higher prices applicable to current loans for an immediate, nearly risk-free profit.  Investors, meanwhile, were wrongly deprived of the interest payments on the repurchased loans.

 

“FMC and its senior executives abused their privileged access to Ginnie Mae’s securitization program by allowing greed to corrupt their business practices,” said Andrew Ceresney, Director of the SEC's Division of Enforcement.  “It is critical that we hold senior management fully accountable for this kind of misconduct, which we were able to accomplish here quickly due to the cooperation of company insiders.”

 

The executives charged with fraud in the SEC’s complaint agreed to the following settlements:

• Chairman and CEO Clement Ziroli Sr. agreed to a $100,000 penalty.
• Company president Clement Ziroli Jr. agreed to pay 411,421.98 plus $27,203.92 in interest and a $200,000 penalty.
• Chief financial officer Pac W. Dong agreed to pay a $100,000 penalty.
• Senior vice president Ronald T. Vargas, who headed FMC’s capital markets department, agreed to pay a $60,000 penalty.
• Senior vice president Scott Lehrer agreed to pay a $50,000 penalty.
• Managing director of the servicing department Edward Joseph Sanders agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest.  Sanders cooperated in the SEC’s investigation.

 

In settling the charges without admitting or denying the allegations, each of the six executives agreed to be barred from serving as an officer or director of a public company for five years.

 

The SEC’s complaint alleges that FMC, Ziroli Sr., Ziroli Jr., Dong, Vargas, Lehrer, and Sanders violated Sections 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5(a) and (c).  The complaint also alleges that FMC violated Rule 10b-5(b).  The settlements are subject to court approval.

 

The SEC’s investigation was conducted by Allison Herren Lee and John B. Smith from the Complex Financial Instruments Unit in the Denver Regional Office.  They were assisted by Dugan Bliss and Judy Bizu, and the case was supervised by Laura M. Metcalfe and Michael J. Osnato.  The SEC appreciates the assistance of Ginnie Mae.
 

SEC Press Release

Investment Banker and Plumber Charged With Insider Trading

The Securities and Exchange Commission today announced insider trading charges against an investment banker and his close friend, a plumber who allegedly helped remodel his bathroom and put cash in his gym bag in return for illicit tips about upcoming mergers and acquisitions.

 

The SEC alleges that Steven McClatchey had regular access to highly confidential nonpublic information about impending transactions being pursued for investment bank clients.  The Analysis and Detection Center within the SEC Enforcement Division’s Market Abuse Unit detected an illicit pattern of trading by Gary Pusey, who McClatchey allegedly tipped with nonpublic information on 10 different occasions ahead of public merger announcements.

 

“We will continue enhancing our market surveillance techniques to detect patterns of insider trading and expose schemes, even when alleged perpetrators like McClatchey and Pusey attempt to avoid detection by providing in-person tips and cash payments,” said Joseph Sansone, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.

 

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

 

According to the SEC’s complaint filed in federal court in Manhattan:

• The scheme began in early 2014 after McClatchey and Pusey became close friends upon meeting at a marina where they kept their fishing boats. 
• One of McClatchey’s job responsibilities was to collect timely information about potential mergers and acquisitions involving clients of the investment bank where he worked in New York City.  McClatchey misused his ready access to confidential information and regularly tipped Pusey.
• Pusey used the misappropriated nonpublic information as he purchased securities in 10 companies before their acquisitions were announced publicly, enabling him to generate $76,000 in illicit trading profits. 
• In return for the tips, Pusey provided McClatchey with free services during his bathroom remodel and paid him thousands of dollars in cash that he typically placed in McClatchey’s gym bag while at the marina or handed to him directly in his garage. 

 

The SEC’s complaint charges McClatchey and Pusey with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 14(e) of the Exchange Act and Rule 14e-3.  The complaint seeks a final judgment ordering McClatchey and Pusey to pay disgorgement of their ill-gotten gains plus interest and penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

 

The SEC's investigation was conducted by Mark S. Germann and Charles D. Riely of the Market Abuse Unit with assistance from John Rymas in the Analysis and Detection Center.  Also assisting in the investigation were Sandeep Satwalekar, James D’Avino, and Matthew Lambert of the New York Regional Office.  The case has been supervised by Mr. Sansone.  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 Financial Industry Regulatory Authority.
 

SEC Press Release

Mayor in Illinois Settles Muni Bond Fraud Charges

The Securities and Exchange Commission today announced that the mayor of Harvey, Ill., has agreed to pay $10,000 and never participate in a municipal bond offering again in order to settle fraud charges.

The SEC alleges that Eric J. Kellogg was connected to a series of fraudulent bond offerings by the city.  Investors were told that their money would be used to develop and construct a Holiday Inn hotel in Harvey, but instead city officials diverted at least $1.7 million in bond proceeds to fund the city’s payroll and other operational costs unrelated to the hotel project.

According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Illinois, Mayor Kellogg exercised control over Harvey’s operations and signed important offering documents the city used to offer and sell the bonds.  Based on his control of the city, Kellogg is liable for fraud as a control person under Section 20(a) of the Securities Exchange Act.

“Investors were told one thing while the city did another, and Kellogg was in a position to control the bond issuances and prevent any fraudulent use of investor money.  His days of participating in muni bond offerings are over,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. 

Kellogg agreed to settle the charges without admitting or denying the SEC’s allegations.  The settlement is subject to court approval.

The SEC’s investigation was conducted by Sally J. Hewitt, Eric A. Celauro, and Brian D. Fagel of the Public Finance Abuse Unit, with assistance from Scott J. Hlavacek and Eric M. Phillips of the Chicago Regional Office.

SEC Press Release

SEC Announces Insider Trading Charges in Case Involving Sports Gambler and Board Member

The Securities and Exchange Commission today announced insider trading charges against a professional sports gambler who allegedly made $40 million based on illegal stock tips from a corporate insider who owed him money.

The SEC alleges that the sports gambler, William “Billy” Walters of Las Vegas, was owed money by then-Dean Foods Company board member Thomas C. Davis.  According to the SEC complaint, Davis regularly shared inside information about Dean Foods with Walters in advance of market-moving events, using prepaid cell phones and other methods in an effort to avoid detection.  The SEC further alleges that while Walters made millions of dollars insider trading using the confidential information, he provided Davis with almost $1 million and other benefits to help Davis address his financial debts. 

The SEC complaint also alleges that professional golfer Phil Mickelson traded Dean Foods’s securities at Walters’s urging and then used his almost $1 million of trading profits to help repay his own gambling debt to Walters.  Walters and Davis are charged with insider trading, and Mickelson is named as a relief defendant.  Relief defendants are not accused of wrongdoing but are named in SEC complaints for the purposes of recovering alleged ill-gotten gains in their possession from schemes perpetrated by others.

“As we charge in our complaint, Walters illegally reaped tens of millions of dollars with the benefit of the ultimate ace in the hole – confidential information leaked by a sitting board member of a public company,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “Additionally, Mickelson will repay the money he made from his trading in Dean Foods because he should not be allowed to profit from Walters’s illegal conduct.” 

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

After certain suspicious trades had been identified, the SEC’s investigation analyzed years of trading data and other information and followed the leads back to Walters and Davis, including their use of a variety of prepaid cell phone numbers.

According to the SEC’s complaint, Walters provided Davis with a prepaid cellular phone to use when he shared inside information about Dean Foods.  Walters further instructed Davis to refer to Dean Foods as the “Dallas Cowboys” during conversations.

According to the SEC’s complaint filed in federal court in Manhattan:

• The unlawful trading occurred during a five-year period.  Among the inside information passed from Davis to Walters in advance of Dean Foods public announcements was earnings information for the second and fourth quarters in 2008, the first and third quarters in 2010, and the first and second quarters of 2012.
• Davis also tipped Walters as Dean Foods prepared to convert its profitable subsidiary WhiteWave Foods Company into a separate business with its own stock.  Walters traded in Dean Foods stock in advance of public announcements about the spin-off and initial public offering (IPO) of WhiteWave shares.
• The SEC also identified suspicious trades in the stock of Darden Restaurants and linked them to Davis, who was recruited in 2013 by a group of shareholders buying up Darden stock with the goal of influencing management to make corporate changes.
• Davis was lacking market-moving information about Dean Foods to share with Walters at that time, so he began sharing nonpublic information about strategic plans for Darden despite signing a non-disclosure agreement to keep the group’s details secret.
• Walters in turn bought almost $30 million worth of Darden stock based on illegal tips from Davis and profited when the stock price increased 7 percent in October 2013 upon reported news about the investor group’s plans.
• In July 2012, Walters called Mickelson, who had placed bets with Walters and owed him money at the time.  While Walters was in possession of material nonpublic information about Dean Foods, he urged Mickelson to trade in Dean Foods stock.
• Mickelson bought Dean Foods stock the next trading day in three brokerage accounts he controlled.  About one week later, Dean Foods’s stock price jumped 40 percent following public announcements about the WhiteWave spin-off and strong second-quarter earnings.
• Mickelson then sold his shares for more than $931,000 in profits.  He repaid his debt to Walters in September 2012 in part with the trading proceeds.

The SEC’s complaint charges Walters and Davis with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks a final judgment ordering the return of ill-gotten gains plus interest and penalties as well as permanent injunctions from future violations of Section 10(b) and Rule 10b-5 and an officer-and-director bar against Davis. 

Mickelson neither admitted nor denied the allegations in the SEC’s complaint and agreed to pay full disgorgement of his trading profits totaling $931,738.12 plus interest of $105,291.69.

The SEC’s investigation was conducted in its San Francisco Regional Office by Karen Kreuzkamp, Market Abuse Unit members Victor W. Hong, William J. Martin, and Steven D. Buchholz, and Alexander M. Vasilescu of the New York office, who will also lead the SEC’s litigation.  The case was supervised by San Francisco office director Jina L. Choi and Market Abuse Unit co-chief Joseph Sansone. 

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, U.S. Postal Inspection Service, and Financial Industry Regulatory Authority.

SEC Press Release

SEC Charges Two Attorneys With Defrauding Escrow Clients

The Securities and Exchange Commission today announced fraud charges against two attorneys accused of making undisclosed risky investments and in some instances outright stealing money they obtained in escrow accounts from small business owners seeking commercial loans.

The SEC alleges that Jay Mac Rust and Christopher K. Brenner collected $13.8 million acting as escrow agents between their clients and a purported loan company called Atlantic Rim Funding.

Rust and Brenner assured clients that their deposits of 10 percent of the desired loan amount would be held safe and only used to purchase liquid, government-backed securities that Atlantic would then leverage to obtain their loans.

According to the SEC’s complaint, Atlantic had no ability or intention to obtain these loans.  Yet when that became obvious to Rust and Brenner they each continued to make misrepresentations to clients and collected more money anyway.  Rust siphoned $662,000 and Brenner took $595,000 in client funds to pay themselves and others, and they gambled on risky securities derivatives with the remainder of the money.  Rust and Brenner each opened numerous securities accounts at broker-dealers to make these trades, and avoided scrutiny by lying that the money being used was their own cash rather than client assets.

SEC examiners detected the scheme when examining one of the brokerage firms where trades were being placed.

“We allege that these attorneys betrayed the trust of their clients by luring them with promises of small business loans that never materialized.  They continued to recruit new escrow clients to repay earlier clients and did everything but keep client money safe as they represented they would,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, filed in federal court in Manhattan, charges Rust and Brenner with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks permanent injunctions and disgorgement of ill-gotten gains plus interest and penalties.

The examination that uncovered the misconduct was conducted by broker-dealer examiners in the New York office.  The ensuing investigation was conducted by Daphna A. Waxman, Tuongvy T. Le, and Valerie A. Szczepanik.  The litigation will be led by Richard G. Primoff, and the case is being supervised by Lara S. Mehraban.

SEC Press Release

SEC Charges Shell Factory Operators With Fraud

The Securities and Exchange Commission today announced fraud charges against a California stock promoter and a New Jersey lawyer who allegedly were creating sham companies and selling them until the SEC stopped them in their tracks.

The SEC alleges that Imran Husain and Gregg Evan Jaclin essentially operated a shell factory enterprise by filing registration statements to form various startup companies and misleading potential investors to believe each company would be operating and profitable.  The agency further alleges that their secret objective all along was merely to make money for themselves by selling the companies as empty shells rather than actually implementing business plans and following through on their representations to investors.

Moving quickly to protect investors based on evidence collected even before its investigation was complete, the SEC issued stop orders and suspended the registration statements of the last two created companies – Counseling International and Comp Services – before investors could be harmed and the companies could be sold.

“Issuers of securities offerings must make truthful disclosures about the company and its business operations so investors know what they’re getting into when they buy the stock,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “We allege that Husain drummed up false business plans and created a mirage of initial shareholders while Jaclin developed false paperwork to depict emerging companies that later sold as just empty shells.”

According to the SEC’s complaint filed in federal court in Los Angeles:

• Husain and Jaclin created nine shell companies and sold seven using essentially the same pattern.
• Husain created a business plan for each company that would not be implemented beyond a few initial steps, and then convinced a friend, relative, or acquaintance to become a puppet CEO who approved and signed corporate documents at Husain’s direction.
• Jaclin supplied bogus legal documents that Husain used to conduct sham private sales of a company’s shares of stock to “straw shareholders” who were recruited and given cash to pay for the stock they purchased plus a commission.  Some of the recorded shareholders were not even real people.
• Husain and Jaclin filed registration statements for initial public offerings and falsely claimed that a particular business plan would be implemented.  Deliberately omitted from the registration statements were any mention of Husain starting and controlling the company.
• Husain and Jaclin filed misleading quarterly and annual reports once a company became registered publicly, providing much of the same false information depicted in the registration statements.
• Husain obtained about $2.25 million in total proceeds when the empty shell companies were sold, and Jaclin and his firm received nearly $225,000 for their legal services.

The SEC’s complaint charges Husain and Jaclin with violating or aiding and abetting violations of the antifraud, reporting, and securities registration provisions of the federal securities laws.  The SEC seeks disgorgement of ill-gotten gains plus interest and penalties, permanent injunctions, and penny stock bars.  The SEC also seeks an officer-and-director bar against Husain.

The SEC’s investigation was conducted by Roberto A. Tercero and Spencer E. Bendell as part of the Microcap Fraud Task Force.  The litigation will be led by Amy J. Longo and supervised by John Berry.  The SEC appreciates the assistance of the FBI and the U.S. Attorney’s Office for the Northern District of California.

SEC Press Release

SEC Charges Father, Son, Others in Tribal Bonds Scheme

The Securities and Exchange Commission today charged a father and son and five associates with defrauding investors in sham Native American tribal bonds in order to steal millions of dollars in proceeds for their own extravagant expenses and criminal defense costs.

The SEC alleges that Jason Galanis, whose checkered past dates from an accounting fraud case during his days as a major Penthouse shareholder to stock fraud charges last year, conducted the scheme in which the “primary objective is to get us a source of discretionary liquidity,” he wrote in an e-mail to other participants.  Galanis and his father John Galanis convinced a Native American tribal corporation affiliated with the Wakpamni District of the Oglala Sioux Nation to issue limited recourse bonds that the father-and-son duo had already structured.  Galanis then acquired two investment advisory firms and installed officers to arrange the purchase of $43 million in bonds using clients’ funds. 

The SEC further alleges that instead of investing bond proceeds as promised in annuities to benefit the tribal corporation and generate sufficient income to repay bondholders, the money wound up in a bank account in Florida belonging to a company controlled by Jason Galanis and his associates.  Among their alleged misuses of the misappropriated funds were luxury purchases at such retailers as Valentino, Yves Saint Laurent, Barneys, Prada, and Gucci.  Investor money also was diverted to pay attorneys representing Jason and John Galanis in a criminal case brought parallel to the SEC’s stock fraud charges last year.

“We allege that Jason Galanis and his associates embarked upon a brazen and complex scheme in cold and calculated fashion to steal millions of dollars from unwitting investors,” said Andrew M. Calamari, Regional Director of the SEC’s New York office.   “Galanis persisted in this alleged scheme even after he was arrested by criminal authorities and charged by the SEC in a different case.”

In addition to Jason and John Galanis, the SEC’s complaint names Devon Archer of Brooklyn, N.Y., Bevan Cooney of Incline Village, Nev., Hugh Dunkerley of Huntington Beach, Calif. and Paris, France, Gary Hirst of Lake Mary, Fla., and Michelle Morton of Colonia, N.J.  They’re charged with violations of the antifraud provisions of the federal securities laws and related rules.  The SEC seeks disgorgement plus interest and penalties as well as permanent injunctions.  The SEC also seeks officer-and-director bars against Jason Galanis, Archer, Dunkerley, and Morton. 

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

The SEC’s continuing investigation is being conducted by Tejal D. Shah, Nancy A. Brown, H. Gregory Baker, Christopher Ferrante, and Adam S. Grace.  The litigation will be led by Ms. Brown, Ms. Shah, and Mr. Baker.  The case is being supervised by Sanjay Wadhwa.  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 U.S. Postal Inspection Service.

SEC Press Release

Sharon Osbourne Dumps Ozzy

Sharon and Ozzy Osbourne’s marriage is reportedly coming to an end after the former X Factor judge kicked her husband out of their marital home after he allegedly cheated on her with a hairdresser.





Sharon Osbourne Dumps Ozzy Amid Claims He Cheated With A Hairdresser:

SEC: Financial Adviser Defrauded Pro Athletes and Lied to SEC Examiners

The Securities and Exchange Commission today announced fraud charges against a Pittsburgh, Pa.-based financial adviser accused of taking money without permission from the accounts of several professional athletes in order to invest in movie projects and make Ponzi-like payments.

According to the SEC’s complaint filed today in federal court in Manhattan, when SEC examiners uncovered the unauthorized withdrawals that Louis Martin Blazer III made from his clients’ accounts and asked him to explain the transactions, he lied and produced false deal documents that he created after the fact in a failed attempt to hide his misconduct.

The SEC alleges that Blazer, who founded Blazer Capital Management as a “concierge” firm targeting professional athletes and other high-net worth individuals as clients, took approximately $2.35 million from five clients without their authorization so he could invest in two movie projects.  Blazer had a personal financial interest in the development of both films, one called “Mafia the Movie” and the other called “Sibling.”  In one instance, Blazer actually pitched the movie project to an athlete as an investment opportunity, but that client expressly refused to make the investment.  Blazer allegedly took $550,000 from the client’s account anyway and invested the money in the film projects. 

The SEC further alleges that the client later learned about Blazer making the unauthorized investment in the movies and demanded repayment, even threatening a lawsuit.  Blazer then took money out of a different athlete’s account to make the repayment in Ponzi-like fashion.

“We allege that Blazer grossly abused the trust placed in him by his clients and repeatedly took their money without authorization.  And when our examiners put him on the spot, he resorted to false statements and false documents,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Blazer has agreed to settle the charges without admitting or denying the allegations.  The settlement is subject to court approval with determination of disgorgement and financial penalties to be decided by the court at a later date.  The SEC’s complaint charges Blazer with violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 206(1) and 206(2) of the Investment Advisers Act of 1940. 

The SEC’s investigation has been conducted by Dominick D. Barbieri, Neil Hendelman, and Charles D. Riely in the New York office with assistance from examiners Dawn Blankenship, Joy Best, Luis Casais, and John Herrera. The case has been supervised by Sanjay Wadhwa.  

SEC Press Release

SEC Charges Unregistered Brokers with Pocketing Investor Money

The Securities and Exchange Commission today charged two men with pocketing investor money they raised for limited liability companies they owned and controlled that purportedly held warrants to purchase the common stock of a technology startup company.

 

The SEC alleges that James R. Trolice and Lee P. Vaccaro raised approximately $6 million from more than 100 investors by creating a false sense of urgency and exclusivity around the offering, claiming that only a limited amount of warrants were available and that they eventually could be exercised at a very profitable price. Trolice further lured investors by showcasing his apparent wealth and hosting elaborate investor parties at his multi-million-dollar home. He also touted his purported track record of bringing startup companies public and obtaining high returns for investors.  

 

Meanwhile, Trolice allegedly used investor funds to pay his mortgage along with other bills for a credit card, car lease, college tuition, and landscaping. Vaccaro allegedly spent at least a quarter-million dollars in investor funds at Las Vegas casinos.

 

The SEC further alleges that neither Trolice nor Vaccaro was registered with the SEC or any state regulator.  Investors can quickly and easily check whether people selling investments are registered by using the SEC’s investor.gov website.

 

“We allege that Trolice and Vaccaro lied to investors about the nature of the investment, created a phony aura of success, and ultimately funded their own lifestyles rather than investing all the money as promised,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “The SEC continues to pursue and investors should continue to be aware of unregistered brokers selling investments.”

 

The SEC’s complaint, filed today in federal court in Newark, N.J., also charges former stockbroker Patrick G. Mackaronis, who received commissions for bringing prospective investors to Trolice and Vaccaro so they could close the sales. Mackaronis ignored fraud risks and blindly touted the opportunity to family members, friends, and brokerage clients while knowing very little about the investments themselves. Mackaronis has agreed to settle the SEC’s charges by disgorging the $85,000 in commissions he received plus paying $8,486.91 in interest and a $50,000 penalty. Mackaronis also agreed to a three-year bar from the securities industry. The settlement is subject to court approval. 

 

In parallel actions, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Vaccaro, and the New Jersey Bureau of Securities announced civil charges against Trolice, Vaccaro, and Mackaronis.

 

The SEC’s complaint charges Trolice and Vaccaro with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Vaccaro is additionally charged with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. 

 

The SEC’s continuing investigation has been conducted by Kristin M. Pauley, Ann Marie Preissler, James E. Burt IV, James Flynn, Jacqueline A. Fine, Leslie Kazon, and Sheldon L. Pollock in the New York office. The litigation will be led by Kevin McGrath and Ms. Pauley.  The case is being supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey and the New Jersey Bureau of Securities.

SEC Press Release

SEC and Law Enforcement Partners Crack Stock Promotion and Kickback Schemes

The Securities and Exchange Commission today announced fraud charges against 10 individuals involved in schemes to trick investors into buying shares of a particular company stock.  

The schemes were allegedly fraught with cash bribes and other kickbacks to registered representatives and unregistered brokers who solicited investors to buy stock in ForceField Energy Inc.  The SEC alleges that investors were unaware those soliciting them were being paid by a ringleader – ForceField’s then-chairman of the board Richard St. Julien – to steer them to the stock, and that some of the perpetrators attempted to evade law enforcement by going so far as to communicate with prepaid disposable “burner” phones and encrypted, content-expiring text messages.    

But the SEC and other law enforcement have followed leads, utilized technological tools, and tracked down the alleged culprits, filing a complaint against St. Julien and nine others in federal court in Brooklyn, including one who referred to himself as St. Julien’s “brown bag man” as he distributed cash bribes and another who touted the stock in a newsletter called “Wall Street Buy Sell Hold.”

“We allege that these men sold investors on the merits of buying ForceField Energy stock while leaving out the most important detail of all: they were being bribed with money and other benefits behind the scenes to tell them that,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “The SEC and its law enforcement partners have pieced together the schemes despite the best efforts of the alleged perpetrators to communicate and distribute cash in clandestine ways.”

The U.S. Attorney’s Office for the Eastern District of New York brought criminal charges against St. Julien last year.  In a parallel action today, the U.S. Attorney’s Office announced criminal charges against the other nine individuals.  

According to the SEC’s complaint against St. Julien, purported investor relations professional Jared Mitchell, and investment newsletter publisher Christopher F. Castaldo along with registered representatives Richard L. Brown, Gerald J. Cocuzzo, Naveed A. (Nick) Khan, Maroof Miyana, and Pranav V. Patel and unregistered brokers Herschel C. (Tres) Knippa and Louis F. Petrossi:

• St. Julien sought to conceal his illegal conduct by using a company in Belize to pay the kickbacks, wiring money from a company bank account to Mitchell, who called himself the “brown bag man” and withdrew the payments and paid cash bribes in person to Brown, Cocuzzo, Khan, Miyana, and Patel.  
• Castaldo lured his victims to invest in ForceField through a nationwide cold calling campaign he conducted from his Long Island, N.Y. office.  Castaldo recorded the prices and amounts sold to investors and sent the information to St. Julien so he could receive the kickbacks, which were wired to him through the Belizean company. 
• Neither Petrossi nor Knippa was registered as a broker to solicit investments in ForceField’s private placement offerings, and they received undisclosed kickbacks from St. Julien.
• Petrossi falsely told one investor in an e-mail that “I can not [sic] be bought,” and Knippa went so far as to appear on the Fox Business Network’s “Varney & Co.” show and the Business News Network as a purported market commentator to tout ForceField as a great investment.  In neither appearance did Knippa tell the host or viewers that he was being paid to solicit investors for ForceField.  Meanwhile Knippa told St. Julien in text message exchanges, “I can pitch (ForceField) as good as anyone in the world.”

The SEC’s complaint charges all defendants 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 as well as other various violations of the federal securities laws.  The SEC seeks disgorgement plus prejudgment interest, penalties, and permanent injunctions against all defendants as well as penny stock bars against St. Julien, Castaldo, and Petrossi and an officer-and-director bar against St. Julien.  

The SEC’s continuing investigation is being conducted by John O. Enright, Ann Marie Preissler, James E. Burt IV, Joseph Darragh, Thomas Feretic, Leslie Kazon, Michael Paley, and Sheldon L. Pollock in the SEC’s New York office.  The litigation will be led by Mr. Enright and Ms. Preissler.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC Press Release

Silicon Valley Executive Settles Insider Trading Charges

The Securities and Exchange Commission today announced that a Silicon Valley executive has agreed to pay more than a half-million dollars to settle charges that he traded on inside information received from a board member at a Minnesota-based company that was trying to solicit a competing bid in advance of a merger.

The SEC alleges that Peter D. Nunan was contacted by the board member at FSI International and confidentially informed that a Japan-based semiconductor equipment company called Tokyo Electron Ltd. was negotiating to acquire FSI.  The board member knew that Nunan, a senior engineering executive at a subsidiary of a semiconductor equipment manufacturer named Screen Holdings Company, knew the executive responsible for evaluating potential corporate acquisitions at Screen Holdings.  Nunan thereafter acted as a conduit for communications between the two companies as FSI sought a competing bid.

According to the SEC’s complaint filed in federal district court in San Jose, Calif., Nunan misused the confidential information entrusted to him about FSI’s potential merger plans and bought 105,000 FSI shares during the next six months.  He also recommended the trade to his brother, who purchased 1,000 shares of FSI stock.  Once Tokyo Electron and FSI publicly announced a merger agreement on Aug. 13, 2012, Nunan sold most of his FSI stock the next day and the illicit profits from his unlawful trading and tipping totaled $254,858.

“Corporate insiders must act with the highest degree of ethics and integrity, and it is simply unacceptable when they abuse their access to sensitive information in an attempt to line their own pockets,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement.

The SEC’s complaint charges Nunan with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3.  Without admitting or denying the allegations, Nunan agreed to be permanently enjoined from future violations and ordered to pay $254,858 in disgorgement of ill-gotten gains plus interest of $24,587 and a penalty of $254,858 for a total of $534,303.

The SEC’s investigation was conducted by Darren E. Long and Daniel A. Weinstein, and supervised by Brian O. Quinn. 

Among other recent examples of SEC cases charging a corporate insider with insider trading:

• Another Silicon Valley corporate insider agreed to settle charges that he was part of a ring of four men trading on confidential information he obtained ahead of corporate news announcements while working in finance at two public companies.
• An electronics company executive allegedly traded on nonpublic information he learned on the job ahead of the company’s release of FY 2014 first quarter earnings.
• A biotechnology company’s senior director of information technology agreed to settle charges that he illegally tipped his brother-in-law with nonpublic information in advance of two pharmaceutical trials, a licensing agreement for a cancer drug, and eventually the acquisition of the company. 

SEC Press Release