SEC Charges Three California Residents Behind Movie Investment Scam

The Securities and Exchange Commission recently charged three California residents with defrauding investors in a purported multi-million dollar movie project that would supposedly star well-known actors and generate exorbitant investment returns.

The SEC alleges that Los Angeles-based attorney Samuel Braslau was the architect of the fraudulent scheme that raised money through a boiler room operation spearheaded by Rand Chortkoff of Encino, Calif. High-pressure salespeople including Stuart Rawitt persuaded more than 60 investors nationwide to invest a total of $1.8 million in the movie first titled Marcel and later changed to The Smuggler. Investors were falsely told that actors ranging from Donald Sutherland to Jean-Claude Van Damme would appear in the movie when in fact they were never even approached. Instead of using investor funds for movie production expenses as promised, Braslau, Chortkoff, and Rawitt have spent most of the money among themselves. The investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Braslau, Chortkoff, and Rawitt.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Braslau set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds from investors for the movie project. In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II. Shortly thereafter, Mutual Entertainment began raising money from investors through a boiler room operation that Chortkoff operated out of Van Nuys, Calif.

The SEC alleges that Braslau, Chortkoff, and Rawitt claimed that 63.5 percent of the funds raised from investors would be used for “production expenses.” However, very little if any money was actually spent on movie expenses as they instead used the vast majority of investor funds to pay sales commissions and phony “consulting” fees to themselves and other salespeople. Rawitt made numerous false claims to investors about the movie project. For instance, he flaunted a baseless projected return on investment of about 300 percent. He falsely depicted that they were just shy of reaching a $7.5 million fundraising goal and the movie was set to begin shooting in summer 2013. He instilled the belief that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz. And he falsely stated that investors would realize revenues from action figures and other products tied to the movie when in fact no such licensing rights had been sold.

According to the SEC’s complaint, Rawitt was the subject of a prior SEC enforcement action in 2009, when he was charged for his involvement in an oil-and-gas scheme.

The SEC’s complaint alleges that Braslau, Chortkoff, and Rawitt violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint further alleges that Chortkoff and Rawitt violated Section 15(a) of the Exchange Act, and Rawitt violated Section 15(b)(6)(B) of the Exchange Act. The SEC seeks financial penalties and permanent injunctions against Braslau, Chortkoff, and Rawitt.

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At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Charges New Jersey Resident in Prime Bank Investment Scheme and Files Settled Charges Against California Attorney Escrow Agent

Recently, the Securities and Exchange Commission filed an enforcement action in the U.S. District Court for the District of New Jersey against New Jersey resident Brett A. Cooper and his companies Global Funding Systems LLC, Dream Holdings, LLC, Fortitude Investing, LLC, Peninsula Waterfront Development, LP and REOP Group Inc., who from at least November 2008 through about April 2012 perpetrated three fraudulent schemes and engaged in various fraudulent and deceitful acts, practices and courses of business in furtherance of those schemes.

The SEC’s complaint alleges that, in the first scheme, commonly referred to as a “Prime Bank Fraud”, Cooper raised approximately $1.4 million from investors by claiming to have special access to programs that through pooling of funds allowed individual investors to participate in this investment opportunity generally available only to Wall Street insiders. Cooper misrepresented to investors that the financial instruments are issued by the world’s largest and most financially sound banks; used vague, complex, and meaningless legal and financial terms designed to deceive the investors into believing that he offered legitimate investments; misrepresented that extraordinary returns of up to 1,000 percent within as little as 60 days were possible with little risk to principal; lied to investors that their principal would be collateralized with cash or semi-precious gemstones; and lied that their money would remain safe in escrow with attorneys pending the completion of certain steps in the transaction.

In the second scheme, also purportedly involving investment in prime bank paper, Cooper offered to participate as an investor in the purchase and trade of a $100 million bank guarantee on the condition that all investor funds were pooled in an attorney client trust account. Cooper sent a forged escrow agreement, purportedly from an attorney, containing wiring instructions for the attorney client trust account. The wire instructions, however, were for an account controlled by Cooper, not an attorney acting as escrow agent. The four investors unwittingly deposited a total of $925,000 in the phony escrow account which was, in fact, for Cooper’s company Dream Holdings, after which Cooper misappropriated the funds.

In March 2012 Cooper and his company REOP participated in a third scheme involving the sale of a purported Brazilian sovereign bond. Cooper claimed that, in exchange for a $50,000 “fee”, he would locate a buyer for the bond and open an account at a registered broker-dealer, which Cooper claimed was necessary to sell the bond. Cooper forged a letter that purported to be from the broker-dealer indicating that the bond had been “accepted” by the broker-dealer. Based upon this letter, the deceived investor paid Cooper’s $50,000 “fee”.

According to the SEC’s complaint, Cooper used the investor money to pay personal expenses, buy cars, pay associates in the scheme, and fund frequent gambling junkets to casinos in Las Vegas and Atlantic City.

The SEC’s complaint alleges that, despite his offering and selling of securities, Cooper has never been registered with the SEC to sell securities.

The SEC’s complaint alleges that Cooper and his companies violated the antifraud and broker-dealer registration provisions of the federal securities laws. Specifically, the complaint alleges that they each violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; that Cooper aided and abetted violations of Securities Act, Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5; and that Cooper also violated Exchange Act Section 15(a). The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil penalties against each defendant.

Also on September 27, 2013, the SEC charged California attorney David H. Frederickson, a sole practitioner, and his law firm The Law Offices of David H. Frederickson, with aiding and abetting Cooper’s prime bank scheme in two transactions in 2010 and 2011.

According to the SEC’s complaint filed separately in the U.S. District Court for the District of New Jersey, Frederickson served as escrow agent for two of Cooper’s prime bank transactions, and provided letters to investors stating that their investments were secured by collateral owned by Cooper’s company Global Funding Systems LLC. Frederickson did nothing to verify the value, authenticity, or ownership of the collateral, which Cooper claimed to be seven sapphires valued at $376 million. The SEC’s complaint also alleges that by the time Frederickson served as escrow agent for the second of these investors, Frederickson had learned facts indicating that Cooper had affixed Frederickson’s electronic signature to a forged escrow agreement that caused investor funds to be diverted to another Cooper company instead of being sent to Frederickson’s escrow account. Moreover, Frederickson told this second investor that he had served as escrow agent for Cooper in numerous other successful bank instrument trading transactions. In fact, none of the bank instrument trading transactions had been successful.

Frederickson earned a total of $6,790 in escrow fees for these transactions and for a transaction involving an escrow agreement Cooper forged, for which Frederickson provided no escrow services. These fees were paid from the funds of the defrauded investors.

Without admitting or denying the SEC’s allegations, Frederickson and his firm agreed to settle the case against them. The settlement is pending final approval by the court. Specifically, Frederickson and his firm consented to the entry of a final judgment that (1) permanently enjoins each of them from violating or aiding and abetting violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5; (2) permanently enjoins each of them from providing professional legal or escrow services in connection with, or from participating directly or indirectly in, the issuance, offer, or sale of securities involving bank guarantees, medium term notes, standby letters of credit, structured notes, and similar instruments, provided, however, that such injunction shall not prevent Frederickson from purchasing or selling securities listed on a national securities exchange; and (3) orders them to pay, jointly and severally, disgorgement and prejudgment interest totaling $7,257, and a civil penalty in the amount of $25,000, for a total of $32,257.

As part of the settlement, and following the entry of the proposed final judgment, Frederickson, without admitting or denying the Commission’s findings, has consented to the entry of a Commission order pursuant to Rule 102(e)(3) of the Commission’s rules of practice permanently suspending him from appearing or practicing before the Commission as an attorney.

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At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Charges Charlotte Investment Advisors with Excessive Fee Scheme

Recently, the Securities and Exchange Commission filed an action in federal court in the Western District of North Carolina, charging Frank Dappah of Charlotte, NC, and his firm, Yatalie Capital Management (a/k/a Yatalie Capital Management Co, Creato Funds L.P., a/k/a Yatalie Capital, Inc., a/k/a Creato Funds, L.P., a/k/a Yatalie Capital Management Co.), a sole proprietorship, with violations of the federal securities laws for charging grossly excessive fees to their advisory clients without authorization or notice and other violations. The Commission’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and an asset freeze against the defendants.

The Commission’s complaint alleges that Dappah and his firm took from the clients fees far in excess of what they were entitled to under the client advisory agreements. The complaint alleges that between March 2012 and July 2013, Dappah took advisory fees of nearly $75,000 on assets under management averaging around $205,000. One client, according to the complaint, lost $9,200 in unauthorized fees to Dappah in less than a year on investments of around $23,000.

The complaint also alleges that the defendants improperly registered Yatalie Capital Management with the Commission as an investment adviser, that they made multiple materially false statements in Yatalie Capital Management’s Forms ADV, on the firm’s website and elsewhere, and that the defendants failed to maintain client advisory agreements.

The complaint alleges that Dappah and Yatalie Capital Management violated the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It further alleges that while acting as investment advisors, the defendants violated Sections 206(1) and Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”), the antifraud provisions of the Advisers Act, and Sections 203A, 204, and 207 the Advisers Act and Rules 204-2 and 206(4)-1 thereunder.

The defendants have entered into a consent with the Commission agreeing to the entry by the Court of the relief requested in the complaint.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission recently charged a father and son in Lexington, S.C., with operating a fraudulent investment program designed to illegally profit from the deaths of terminally ill individuals.

The SEC alleges that Benjamin S. Staples and his son Benjamin O. Staples deceived brokerage firms and bond issuers and made at least $6.5 million in profits by lying about the ownership interest in bonds they purchased in joint brokerage accounts opened with people facing imminent death who were concerned about affording the high costs of a funeral. The Stapleses recruited the terminally ill individuals into their program by offering to pay their funeral expenses if they agreed to open the joint accounts and sign documents that relinquished their ownership rights to the accounts or any assets in them.

According to the SEC’s complaint filed in federal court in Columbia, S.C., once a joint account was opened and they had sole control, the Stapleses purchased discounted corporate bonds containing a “survivor’s option” that allowed them to redeem the bonds for the full principal amount prior to maturity if a joint owner of the bond dies. Following the death of one of their terminally ill participants, the Stapleses redeemed the bonds early by citing the survivor’s option to the brokerage firm and misrepresenting that the deceased individual had ownership rights to the bond. Their illicit profit was the difference between the discounted price of the bonds they purchased and the full principal amount they obtained when redeeming the bonds early.

According to the SEC’s complaint, the Stapleses operated what they called the Estate Assistance Program from early 2008 to mid-2012. They recruited at least 44 individuals into the program and purchased approximately $26.5 million in bonds from at least 35 issuers. The Stapleses required the terminally ill individuals to sign three documents: an application to open a joint brokerage account with them, an estate assistance agreement, and a participant letter. The latter two documents required the terminally ill participant to relinquish any ownership interest in the assets in the joint account, including the bonds that the Stapleses later purchased.

The SEC alleges that after a terminally ill participant died, the Stapleses wrote a letter to the brokerage firm where the joint account was held and asked that the bonds be redeemed under the survivor’s option. In their redemption request letters, the Stapleses falsely represented that the deceased participant was an “owner” of the bonds. The Stapleses did not inform the brokerage firms or bond issuers that the deceased program participants had signed the estate assistance agreements and participant letters relinquishing all ownership interest in the bonds.

The SEC’s complaint charges Ben S. Staples and Ben O. Staples 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 thereunder. The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions. The SEC’s complaint names a different son of Ben S. Staples – Brian Staples also of Lexington, S.C. – as a relief defendant for the purposes of recovering $400,000 in illicit profits that were transferred into his possession. Brian Staples had no active role in the scheme.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission (“Commission”) recently charged the operator of the largest hospital in Miami-Dade County with misleading investors about the extent of its deteriorating financial condition prior to an $83 million bond offering.

An SEC investigation found that the Public Health Trust, which is the governing authority for Jackson Health System, misstated present and future revenues due to breakdowns in a new billing system that inaccurately recorded revenue and patient accounts receivable. The Public Health Trust projected a non-operating loss in the official statement accompanying the bond offering in August 2009, but reported a figure that was more than four times lower than what was ultimately reported at the end of the 2009 fiscal year. The Public Health Trust also failed to properly account for an adverse arbitration award, and misrepresented that its financial statements were prepared according to U.S. Generally Accepted Accounting Principles (GAAP).

The Public Health Trust has agreed to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings, the official statement accompanying the bond offering represented that the Public Health Trust (PHT) projected a $56 million non-operating loss for its fiscal year ending Sept. 30, 2009. Several months after the bonds were sold, external auditors discovered problems with the PHT’s patient accounts receivable valuation. This discovery required a large accounting adjustment to the reported net income, and the PHT ultimately reported a non-operating loss of $244 million for fiscal year 2009 – more than four times the projection made to bond investors.

The SEC’s order found that the PHT was aware of the rising level of patient accounts receivable and declining cash-on-hand prior to the bond offering, which caused concern among trustees and executive management. They raised questions about the accounts receivable amounts and collection rates that were used to calculate the PHT’s revenue figures. The $56 million non-operating loss amount included in the bond offering’s official statement was generated by the budget department using stale cash collection numbers amid the known problems with the new billing system. The budget department was not updating its collection rates in a timely fashion due to a lack of adequate communication among departments. Therefore, the PHT lacked a reasonable basis for its loss projection, and the official statement was materially misleading.

The SEC’s order also found that the PHT failed to properly account for a December 2008 arbitration award that negatively impacted patient accounts receivable in its 2008 audited financial statements that were attached to the bond offering’s official statement. The arbitration award required the PHT to pay a third-party receivables company $3.9 million in cash, and transfer to the company $360 million face amount of existing accounts receivable and $250 million face amount of future accounts receivable. The PHT failed to perform an analysis to determine the value of the replacement accounts receivable awarded to the third-party company. The analysis is required under the relevant accounting standards in order to evaluate whether to accrue an expense related to the arbitration award or disclose the arbitration award in the notes to its financial statements. Without the proper analysis, the PHT failed to accurately account for the arbitration award in the audited financial statements.

The SEC’s order directs the PHT to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The PHT neither admitted nor denied the SEC’s findings. The Commission determined not to impose a monetary penalty due to the PHT’s current financial condition. The Commission also considered the PHT’s cooperation with the investigation and the remedial measures undertaken.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

Securities and Exchange Commission v. City of Miami, Florida, and Michael Boudreaux, Civil Action No. 1:13-cv-22600 (U.S. District Court for the Southern District of Florida, filed July 19, 2013)

The Securities and Exchange Commission announced that it recently charged the City of Miami and its former Budget Director with securities fraud in connection with several municipal bond offerings and other disclosures made to the bond investing public. The SEC’s action also charges the City with violating a 2003 SEC Cease-and-Desist Order which was entered against the City based on similar misconduct. This case is the SEC’s first ever injunctive action against a municipality already under an existing SEC cease-and-desist order.

The SEC alleges in its complaint that beginning in 2008, the City and Michael Boudreaux made materially false and misleading statements and omissions concerning certain interfund transfers in three 2009 bond offerings totaling $153.5 million, as well as in the City’s fiscal year 2007 and 2008 Comprehensive Annual Financial Reports (“CAFRs”) distributed to broad segments of the investing public, including investors in previously issued City debt. The interfund transfers moved monies from the City’s Capital Improvement Fund to its General Fund. Boudreaux orchestrated the transfers in order to mask the increasing deficits in the City’s General Fund, its primary operating fund, viewed by investors and bond rating agencies as a key indicator of financial health, at a time when the City was actively marketing bonds to the investing public.

The SEC’s complaint, which was filed in the United States District Court for the Southern District of Florida, alleges that the City, through Boudreaux, transferred a total of approximately $37.5 million from its Capital Improvement Fund and a Special Revenue Fund to the General Fund in 2007 and 2008 in order to mask increasing deficits in the General Fund. The SEC also alleges that the City and Boudreaux omitted to disclose to bondholders that the transferred funds included legally restricted dollars which, under City Code, may not be commingled with any other funds or revenues of the City. They also failed to disclose that the funds transferred were allocated to specific capital projects which still needed those funds as of the fiscal year end or, in some instances, already spent that money. The transfers enabled the City to meet or come close to meeting its own requirements relating to General Fund reserve levels. In the wake of the transfers, the City’s bond offerings were all rated favorably by credit rating agencies.

After reversing most of the transfers following a report by its Office of Independent Auditor General (OIAG), the City had to declare a state of fiscal urgency once it failed to meet statutorily mandated fund levels in its General Fund, and bond rating agencies downgraded their ratings on the City’s debt.

The SEC’s complaint charges the City with 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 thereunder. It also charges the City with violating the SEC’s 2003 Cease-and-Desist Order. The complaint charges Boudreaux with violations of Section 17(a) of the Securities Act and violations and aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks injunctive relief and financial penalties against the City and Boudreaux, and an order commanding the City to comply with the SEC’s 2003 Order.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Charges Top Officials At Investment Adviser in Scheme to Hide Theft from Pension Fund of Detroit Police and Firefighters

The Securities and Exchange Commission (“SEC”) recently charged the leader of a Detroit-based investment adviser for stealing nearly $3.1 million from the pension fund that the firm manages for the city’s police officers and firefighters so he could buy two strip malls in California. The SEC charged four other top officials at the firm for helping him try to cover up the theft.

The SEC alleges that Chauncey C. Mayfield, who is the founder, president, and CEO of MayfieldGentry Realty Advisors, took the money from the Police and Fire Retirement System of the City of Detroit without obtaining permission. He used it to purchase the shopping properties and title them in the name of a MayfieldGentry affiliate. Other executives at MayfieldGentry gradually became aware that Mayfield had siphoned money away from their biggest client. Rather than come clean about the theft and risk losing the sizeable business the firm received from the pension fund, MayfieldGentry officials instead devised a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. Their plan ultimately failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund.

Mayfield and his firm agreed to settle the charges by paying back the stolen amount.

The other MayfieldGentry executives charged in the SEC’s complaint are chief financial officer Blair D. Ackman, chief operating officer Marsha Bass, chief investment officer W. Emery Matthew, and chief compliance officer and general counsel Alicia M. Diaz.

According to the SEC’s complaint filed in federal court in Detroit, Mayfield took the money from a trust account for the pension fund in 2008. The stolen money could have provided a year of benefits for more than 100 retired police officers, firefighters, and surviving spouses and children. Shortly thereafter, Mayfield told Ackman about the misappropriation, and by May 2011 the other principals at MayfieldGentry were aware of the misdeed. They proceeded to hide the theft by affirmatively misleading the pension fund

The SEC alleges that during a critical budget meeting with fund trustees in 2011, Diaz stressed MayfieldGentry’s success in generating a cash return for the pension fund. He stated that “the cash we deliver at the end of the day is the ultimate testimony in terms of what we do.” Diaz touted a projection that MayfieldGentry would remit $4.96 million to the pension fund in 2012. Diaz never told the pension fund trustees that the cash remittance would be reduced by more than 60 percent once the stolen money was taken into account. At the same meeting, Matthews claimed that MayfieldGentry had achieved a benchmark-beating 6.8 percent return for the pension fund. He didn’t explain that the 6.8 percent return would be materially impacted by the $3.1 million theft.

According to the SEC’s complaint, MayfieldGentry and its executives continued to cover up the theft until they finally informed the pension fund on the evening before the SEC filed a complaint against Mayfield and his firm in May 2012 for their participation in a “pay-to-play” scheme involving the former mayor and treasurer of Detroit. Upon learning of the theft, the pension fund promptly terminated its relationship with MayfieldGentry.

The SEC’s complaint alleges that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Ackman, Bass, Matthews, and Diaz aided and abetted those violations. Mayfield and his firm agreed to pay disgorgement in the amount of $3,076,365.88 and be permanently enjoined from violating Sections 206(1) and 206(2) of the Advisers Act. They neither admit nor deny the allegations in the settlement, which is subject to court approval. In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Charges Cincinnati Resident and Delaware Firm with Offering Fraud

Recently, the Securities and Exchange Commission filed a civil injunctive action in the Northern District of Georgia against Detroit Memorial Partners, LLC (“DMP”) and its managing member, Mark Morrow, a resident of Cincinnati, Ohio. The Commission alleges that Morrow caused DMP to issue approximately $19 million in fraudulent promissory notes and to sell $4.5 million in equity interests. DMP, which purported to be in the business of operating cemeteries, made material misrepresentations and omissions to investors who purchased the promissory notes and equity interests. Most significantly, DMP and Morrow misrepresented that it owned various cemetery properties and that the notes would be secured by those properties in Michigan. In fact, DMP did not own any cemetery properties and none of the notes were secured. Defendants also misrepresented that the proceeds from the notes would be used to acquire and manage cemeteries. In fact, significant amounts of the proceeds were used to fund Morrow’s personal equity interest in DMP, for high risk trading in securities and to pay interest owed to other DMP note holders. Morrow also falsely told the equity investors that DMP was debt free, while knowing that DMP had incurred substantial obligations to the note holders.

The complaint further alleges that DMP failed to register the note offering with the commission in violation of the registration provisions of the securities laws.

The notes were sold by Morrow’s long-time business associate Angelo Alleca through his investment advisory firm, Summit Capital. Alleca and Summit are the subjects of another lawsuit brought by the Commission charging them with operating a massive Ponzi scheme. See, SEC v. Alleca, et al., Lit. Rel. No. 22485 (Sept. 19, 2012)

According to the Commission’s complaint, a total of approximately $19 million in DMP notes have been sold to at least 190 investors in multiple states. Substantial investor funds are missing and unaccounted for.

The Commission seeks an injunction against the Defendants to prevent further violations of the securities laws, disgorgement of their ill-gotten gains, civil penalties and interest.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.

According to the SEC’s order, several members of NASDAQ’s senior leadership team convened a “Code Blue” conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.

The matching of buy and sell orders in an IPO is referred to as “the cross.” According to the SEC’s order, the systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by NASDAQ, whose IPO cross application calculated the price and volume of the cross based on the orders and cancellations received up until 11:11 a.m. This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11 a.m. and 11:30:09 a.m. to not be included in the cross. Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were “stuck” orders. Immediately prior to the cross, NASDAQ officials noticed a discrepancy between the final indicative pricing and volume totals and the actual totals on NASDAQ’s internal systems. This discrepancy indicated that there was still a problem with the cross and that some cross-eligible orders may not have been handled properly. But NASDAQ failed to address this issue during the minutes and hours following the cross. NASDAQ’s Facebook issues also caused problems in the trading of Zynga shares, and NASDAQ failed to execute 365 orders for Zynga shares in accordance with the price/time priority requirements.

According to the SEC’s order, NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ’s rules do not permit it to use an error account for any purpose. NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules. NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga trading.

The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.

In separate incidents unrelated to the Facebook IPO, the SEC’s order additionally charges NASDAQ with violations of Regulation NMS and Regulation SHO based on its failure to appropriately monitor and enforce compliance with price-test restrictions in October 2011 and August 2012.

The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. Additionally, NASDAQ violated Rule 201(b) of Regulation SHO during two separate incidents in October 2011 and August 2012 and also violated Rule 611 of Regulation NMS during the October 2011 incident. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission recently charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.

An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami’s participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

According to the SEC’s order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer’s limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.

According to the SEC’s order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city’s lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city’s then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.

However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering’s proceeds and the altered terms of the parking garage lease.

According to the SEC’s order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds’ tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city’s settlement and payments, bondholders were not financially harmed and they’re not required to include any interest from the bonds in their gross incomes.

The SEC’s order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city’s policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant’s determinations and implement all recommendations. South Miami neither admitted nor denied the SEC’s findings. A full description of the undertakings can be found in the SEC’s order.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission (Commission) recently charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.

An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.

The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website such as its 2009 budget, 2009 State of the City address, and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings.

The SEC separately issued a report addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

According to the SEC’s order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to approximately $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, 2013, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.

According to the SEC’s order, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009. Beginning in July 2009, Harrisburg was obligated to submit financial information and notices such as principal and interest payment delinquencies and changes in bond ratings to a central repository known as the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board (MSRB). Harrisburg did not submit its 2008 CAFR to EMMA, instead erroneously submitting it to a former NRMSIR on March 2, 2010. Harrisburg did not submit its 2009 CAFR to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices about its failure to submit annual financial information or its credit rating downgrades until March 29, 2011, after the SEC had commenced its investigation.

Therefore, the SEC’s order finds that at a time of increased interest in the Harrisburg’s financial health due to the deteriorating financial condition of The Harrisburg Authority, the city created a risk that investors could purchase or sell securities in the secondary market on the basis of incomplete and outdated information. For current information, investors had to review other public statements from the city about its fiscal situation. For example, Harrisburg’s 2009 budget and its accompanying transmittal letter were accessible on Harrisburg’s website. By the time the 2009 budget was passed, Harrisburg was aware of the Authority’s projected budget deficits and that Dauphin County was challenging a rate increase. As a result, the Authority was unlikely to have sufficient revenues to pay its 2009 debt service obligations. However, Harrisburg’s 2009 budget as adopted did not include funds for debt guarantee payments. The 2009 budget also misstated Harrisburg’s credit as being rated “Aaa” by Moody’s when in fact Moody’s had downgraded Harrisburg’s general obligation credit rating to Baa1 by December 2008.

According to the SEC’s order, another public statement available to investors on the city’s website was the annual State of the City address delivered on April 9, 2009. The address only discussed the municipal resource recovery facility as a situation that was an “additional challenge” and an “issue that can be resolved.” The address was misleading because it failed to mention that by this time, Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt. It also omitted the total amount of the debt that the city would likely have to repay from its general fund. By this time, Harrisburg knew that the Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor.

According to the SEC’s order, Harrisburg’s 2009 mid-year fiscal report available on its website was designed to provide a snapshot of budget-to-actual figures at the middle of the year. However, the report did not reference any of the guarantee payments the city had made on the municipal resource recovery facility debt, which at this mid-year point totaled $2.3 million (7 percent of its general fund expenditures).

The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The city neither admits nor denies the findings in the order. In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Charges City of Victorville, Underwriter, and Others with Defrauding Municipal Bond Investors

The Securities and Exchange Commission recently charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & De Dios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to “manage” the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission recently charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.

The SEC’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

BRITISH TWIN BROTHERS AGREE TO PAY $175,000 TO SETTLE MICROCAP PUMP-AND-DUMP CHARGES

The Securities and Exchange Commission recently announced that brothers Alexander John Hunter and Thomas Edward Hunter, both of Great Britain, have agreed to settle the Commission’s pending civil action against them. The Commission’s complaint, filed April 20, 2012 in the United States District Court for the Southern District of New York, alleges that the Hunters were just 16 years old when they began disseminating subscription-based e-mail newsletters through a pair of websites they created to tout stocks selected by a “stock picking robot,” which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Some investors paid an additional fee for the “home version” of the robot software.

The Commission’s complaint also alleges that the brothers separately created a third website where they marketed their newsletter subscriber list to penny stock promoters and boasted, “One email to this list of people rockets a stock price.” The Hunters were in turn paid to send selected penny stock ticker symbols to their subscribers, who were misled to believe that the stock “picks” were the product of the robot. The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors in most cases with shares worth less than they had purchased them for earlier in the day.

According to the SEC’s complaint, the Hunters also offered subscribers a downloadable version of the stock picking robot for an additional fee of $97. Rather than performing the analysis advertised, the software was actually designed to deliver users a stock pick supplied by the brothers.

The Commission’s complaint alleges that by virtue of the conduct described above, the Defendants violated the antifraud provisions of the federal securities laws.

Under the announced settlement, the Hunter brothers, without admitting or denying the allegations in the Commission’s complaint, consented to the entry of a judgment requiring Alex Hunter to pay a $100,000 penalty, requiring Tom Hunter to pay a $75,000 penalty, and enjoining both brothers individually from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

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With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The SEC alleges that Celgene Corporation’s director of financial reporting John Lazorchak, Sanofi S.A.’s director of accounting and reporting Mark S. Cupo, and Stryker Corporation’s marketing employee Mark D. Foldy each illegally tipped confidential information about their companies for the purpose of insider trading. Typically the nonpublic information involved upcoming mergers or acquisitions, but Lazorchak also tipped confidential details about Celgene’s quarterly earnings and the status of a Celgene application to expand the use of its drug Revlimid. The trading was carefully orchestrated so there was usually someone acting solely as a non-trading middleman who received the nonpublic information from the insider and tipped others. They hoped to avoid detection with no direct connection between the insiders and the traders, and the insiders were later compensated for the inside information with cash payments made in installments to avoid any scrutiny of large cash withdrawals.

The SEC alleges that Cupo’s friend Michael Castelli along with Lawrence Grum, who attended high school with Castelli, were the primary traders in the scheme. Among the ways that Castelli and Grum tried to hide their illegal conduct was by compiling binders of research to serve as a false basis for their trading. They actively traded in Celgene securities to create a pattern of long-standing positions in the stock. Grum reassured Cupo that discovery of the scheme and consequent legal action was unlikely due to limited government resources to police insider trading activity. Grum said, “At the end of the day, the SEC’s got to pick their battle because they have a limited number of people and a huge number of investors to go after.”

The other two traders charged are Lazorchak’s high school friends Michael T. Pendolino and James N. Deprado, who now live in New Hampshire and Virginia respectively. The others live in New Jersey. In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Lazorchak, Cupo, Foldy, Castelli, Grum, and Pendolino.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the scheme began in late 2007 when Lazorchak and Cupo, who were friends and colleagues at Sanofi, discussed Lazorchak’s new position at Celgene where he’d have access to nonpublic information about mergers and acquisitions. Lazorchak told Cupo that he was initially working on Celgene’s possible acquisition of another pharmaceutical company, Pharmion. Cupo discussed Lazorchak’s position with Castelli, a friend with whom he attends winemaking club meetings. Castelli brought in Grum, who he considered a sophisticated trader with knowledge of the securities industry. Castelli and Grum devised the scheme in which Lazorchak tipped Cupo with nonpublic Celgene-related information. Cupo, as the middleman, tipped Castelli and Grum so they could illegally trade. Castelli and Grum paid Cupo for his tips, and gave Cupo money to pass along to Lazorchak for the initial tips. Lazorchak never knew the identities of Castelli or Grum, but was aware that Cupo was passing confidential Celgene information to other traders.

The SEC alleges that Lazorchak’s high school friend Foldy entered the scheme in 2007, when Lazorchak tipped him with confidential details about the impending merger between Celgene and Pharmion, and Foldy illegally traded on the information prior to the public announcement of the deal. Lazorchak and Foldy devised and used code phrases while conversing to identify instances when Lazorchak was passing inside information or Foldy was seeking more details. After the illegal trading occurred and Foldy obtained illicit profits of $14,500, Lazorchak repeatedly demanded that Foldy compensate him for the inside information. Foldy ultimately paid Lazorchak at least $500 and later returned the favor with illegal tips of confidential information about a tender offer involving his employer, Stryker Corp. Lazorchak acted as a middleman and did not trade, instead tipping Pendolino so he could trade on the nonpublic information. Pendolino in turn tipped Deprado, who also traded. Lazorchak additionally tipped Cupo, who did not trade but acted as a middleman and tipped Castelli and Grum, who both traded.

The SEC alleges that Cupo began tipping inside information about his employer in late 2009, when he learned that Sanofi was planning to announce a tender offer to acquire another pharmaceutical company, Chattem Inc. Cupo learned of the imminent tender offer a few days prior to the public announcement, he tipped Castelli and Grum with the confidential details, and they both traded on the nonpublic information.

The SEC alleges that each of the defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder and that Castelli and Grum violated Section 17(a) of the Securities Act of 1933. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and officer and director bars for Lazorchak, Cupo, and Foldy.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

NYSE Agrees to Settle Charges by Paying First-Ever SEC Financial Penalty Against An Exchange

September, 2012:

The Securities and Exchange Commission recently brought first-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.

SEC Regulation NMS (National Market System) prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in what are known as consolidated feeds, which broadly distribute trade and quote data to the public. This ensures the public has fair access to current market information about the best displayed prices for stocks and trades that have occurred.

According to the SEC’s order against NYSE, the exchange violated this rule over an extended period of time beginning in 2008 by sending data through two of its proprietary feeds before sending data to the consolidated feeds. NYSE’s inadequate compliance efforts failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds.

NYSE and its parent company NYSE Euronext agreed to a $5 million penalty and significant undertakings to settle the SEC’s charges. It marks the first-ever SEC financial penalty against an exchange.

“Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That is why SEC rules mandate that exchanges give the public fair access to basic market data. Compliance with these rules is especially important given exchanges’ for-profit business interests”

Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The violations at NYSE may have been technological, but they were not technical. Robust technology governance is just as important to preventing investor harm as any other compliance or supervisory function.”

Robert W. Cook, Director of the SEC’s Division of Trading and Markets, said, “Market data is the lifeblood of the national market system. Our rules require exchanges to distribute information on quotes and trades to the consolidated data processors on terms that are ‘fair and reasonable’ and ‘not unreasonably discriminatory.’”

According to the SEC’s order, NYSE violated Rule 603(a) of SEC Regulation NMS. The two NYSE proprietary data feeds at issue were Open Book Ultra – which sends real-time data about NYSE’s entire order book – and PDP Quotes, which contains NYSE’s quote for each security. The transmission disparities had several causes. An internal NYSE system architecture gave one of the data feeds a faster path to customers than the path used to send data to the consolidated feed. Also there was a software issue in the internal NYSE system that sent data to the consolidated feed. The disparities in data release times ranged from single-digit milliseconds to multiple seconds.

The SEC’s order finds that NYSE’s compliance department was not involved in important technology decisions, including the design, implementation, and operation of NYSE’s market data systems. By not involving the compliance department at critical junctures, NYSE missed opportunities to avoid compliance failures. NYSE also failed to retain computer files that contained information about its transmission of market data, including the times that NYSE sent data to be included in the consolidated feed. These computer files related to NYSE’s compliance with Rule 603(a), and NYSE’s failure to retain them complicated its ability to determine when it experienced delays sending data and calculate the length of delays when they occurred.

The SEC’s order finds that NYSE violated Rule 603(a) of Regulation NMS and the record retention provisions of Section 17(a)(1) of the Securities Exchange Act and Rule 17a-1, and NYSE Euronext, which supplied the personnel responsible for these systems and compliance, caused the violations. NYSE and NYSE Euronext agreed to a settlement without admitting or denying the Commission’s findings. The order censures NYSE, imposes a $5 million penalty, and requires both NYSE and NYSE Euronext to cease and desist from committing or causing these violations. NYSE and NYSE Euronext are required to retain an independent consultant to conduct a comprehensive review of their market data delivery systems to ensure that they comply with Rule 603(a).

August, 2012:

The Securities and Exchange Commission recently charged an executive at Bristol-Myers Squibb with insider trading on confidential information about companies being targeted for potential acquisitions. His illegal trading took place as recently as just weeks ago.

The SEC alleges that Robert D. Ramnarine, who lives in East Brunswick, N.J., made more than $300,000 in illegal profits by misusing nonpublic information he obtained while helping Bristol-Myers Squibb evaluate whether to acquire three other pharmaceutical companies. He used multiple personal brokerage accounts to illegally trade in stock options of these potential target companies. Prior to some trading, Ramnarine conducted Internet research from his Bristol computer to determine whether he could be detected by regulators. He searched for such phrases as “can stock option be traced to purchaser” and “illegal insider trading options trace” and viewed such articles as “Ways to Avoid Insider Trading.” Ramnarine even viewed a press release on the SEC’s website announcing an enforcement action arising from illegal trading in call options in advance of an acquisition announcement.

“Ramnarine tried to educate himself about how the SEC investigates insider trading so he could avoid detection, but apparently he ignored countless successful SEC enforcement actions against similarly ill-motivated individuals who paid a heavy price for their illegal trading,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Executives at pharmaceutical companies or in any industry should know better than to abuse confidential, market-moving information, and our charges against Ramnarine should serve notice that when you violate insider trading laws, no matter how you scheme, you will be caught.”

The SEC is seeking a court order to freeze Ramnarine’s brokerage account assets. In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey announced the arrest of Ramnarine today.

According to the SEC’s complaint filed in federal court in New Jersey, Ramnarine is an executive in the treasury department at Bristol-Myers Squibb. He conducted his insider trading schemes from August 2010 to July 2012, illegally trading in stock options of Pharmasset Inc., Amylin Pharmaceuticals Inc., and ZymoGenetics Inc. in advance of announcements that those companies would be acquired.

The SEC alleges that just as Bristol was finalizing its agreement with ZymoGenetics in late August 2010, Ramnarine started to buy out-of-the-money call options. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Ramnarine made $30,551 in illegal profits by trading ZymoGenetics call options in advance of a Sept. 7, 2010 public announcement that Bristol-Myers Squibb was acquiring ZymoGenetics.

The SEC further alleges that in advance of a Nov. 21, 2011 announcement that Pharmasset would be acquired by Gilead Sciences Inc., Ramnarine bought Pharmasset call options based on material, nonpublic information that he obtained from participating in Bristol-Myers Squibb’s evaluation of a possible acquisition of Pharmasset. This was part of an auction process conducted by Pharmasset and its investment bankers during the weeks before the Gilead-Pharmasset announcement. Ramnarine made $225,026 in illegal profits when he sold the calls immediately after the public announcement of Pharmasset’s sale.

According to the SEC’s complaint, Ramnarine very recently sold or “wrote” put options and purchased call options in advance of a June 29, 2012 announcement by Bristol-Myers Squibb that it would acquire Amylin. A put option is a security that derives its value from the underlying common stock. When investors sell or “write” puts, they obligate themselves to sell the underlying security at a certain price before the expiration date. Investors usually write puts when they believe the price of the underlying stock price is moving up. Ramnarine’s trades were based on material nonpublic information that he obtained by working on financing and capital structure matters as part of Bristol’s due diligence process leading up to the acquisition announcement. Ramnarine made $55,784 in illegal profits by trading Amylin put and call options in advance of the public announcement.

The SEC alleges that Ramnarine violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and (14)(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, an officer-and-director bar, a permanent injunction, and an order freezing the assets in Ramnarine’s brokerage accounts.

SEC Charges Family-Run Business Promising Investors Stake in Purported $11 Billion Gold Mine

July, 2012:

All that glitters is not gold. The Securities and Exchange Commission recently charged a father, son, and daughter with running a nationwide investment scheme that falsely promised investors whopping returns from a gold mining operation while their money was actually spent on family cars, jewelry, vacations, and vitamin supplements.

The SEC alleges that Harry Dean Proudfoot III of Mt. Vernon, Ohio, and his children Matthew Dale Proudfoot of Colbert, Wash., and Laurie Anne Vrvilo of Tigard, Ore., raised at least $2.7 million from approximately 140 investors in 23 states through their Portland, Oregon-based company 3 Eagles Research & Development LLC (3 Eagles). They told investors their company would extract gold worth more than $11 billion from gravel pits in central Ohio, and promised investors they could earn 35 times their initial investment. However, 3 Eagles did not even have rights to much of the property it claimed to be mining for gold, and the Proudfoots instead diverted investor money for personal use rather than the mining activities outlined in presentations to investors.

According to the SEC’s complaint filed in federal court in Portland, the scheme primarily occurred between September 2009 and October 2011. The Proudfoots sold investors “royalty units” in the purported gold mining project, claiming their money would be used to purchase mining equipment and conduct mining operations at two gravel pits. The Proudfoots falsely touted they had an expert geologist on the mining project. They solicited investors in a variety of ways, including through a Power Point presentation filled with misleading information. They also hired a securities broker named Dennis Ashley Bukantis of Denver, who is not registered with the SEC and assisted in the sale of royalty units in exchange for nearly $165,000 in commissions. Bukantis is charged along with the Proudfoots in the SEC’s complaint.

The SEC alleges that rather than using investor funds for gold mining equipment and operations, the Proudfoots siphoned off more than $1.1 million of investor money and misused 3 Eagles corporate accounts as their own personal piggy bank, leaving the company penniless and unable to pay the necessary expenses to get the Ohio mine into production. Among their illicit personal expenditures, the Proudfoots spent $80,000 on automobiles, $235,000 in personal travel, and upwards of $30,000 per year for vitamins and nutritional supplements.

According to the SEC’s complaint, after being served investigative subpoenas by the SEC and various state securities regulators in the fall of 2011, Harry Proudfoot was removed from the company and 3 Eagles represented it stopped selling royalty units. However, by December, Matthew Proudfoot was again selling investors a stake in 3 Eagles, this time calling them “membership interests” that would be used to move the Ohio mining project into production. Yet once again, much of the investor money was misused for personal expenses, including defense lawyers for each of the Proudfoots and 3 Eagles as well as Matthew Proudfoot’s bankruptcy payments and household bills.

The SEC’s complaint charges 3 Eagles, Harry Proudfoot, Matthew Proudfoot and Laurie Vrvilo with violations of Sections 5(a), 5(c) and 17 (a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5(a), (b) or (c) thereunder. The complaint also charges Bukantis with acting as an unregistered broker in violation of Section 15 (a) of the Exchange Act. The complaint seeks permanent injunctions, disgorgement with prejudgment interest and civil monetary penalties.

June, 2012:

SEC Charges Florida Broker in Astrology-Based Ponzi Scheme

The Securities and Exchange Commission recently charged that a former broker in Orlando, Fla., defrauded investors in an astrology-based Ponzi scheme.

The SEC alleges that Gurudeo “Buddy” Persaud lured family, friends, and others into investing in his firm, White Elephant Trading Company LLC, by falsely guaranteeing their money would be safe and yield lofty returns ranging from 6 to 18 percent. Persaud told investors he would invest in the debt, stock, futures, and real estate markets, but did not reveal that his trading strategy was based on his belief that markets are affected by gravitational forces.

According to the SEC’s complaint filed in U.S. District Court for the Middle District of Florida, Persaud used investors’ money to make payments to other investors, the hallmark of a Ponzi scheme. Persaud also lost $400,000 of investor funds through his trading and diverted at least $415,000 to pay for his personal expenses, the SEC alleged. The same month Persaud began receiving investor money, he started using some of that money for his personal expenses. The SEC said that Persaud created phony account statements to hide his trading losses and give investors a false sense of security.

“Persaud preyed on people who trusted him by promising high and steady returns while hiding his unconventional trading strategy,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “When Persaud blatantly lied to investors and hid their losses through a Ponzi scheme, he should have known that an SEC enforcement action was in the stars.”

Persaud was a registered representative at a Florida-based broker-dealer but separately operated the now-inactive White Elephant, starting in mid-2007. In all, Persaud raised more than $1 million from at least 14 investors between July 2007 and January 2010.

The SEC alleges that in making trading decisions, Persaud chiefly relied on an Internet service that provided directional market forecasts based on lunar cycles and gravitational pull. Persaud’s strategy was premised on the idea that gravitational forces affect mass human behavior, and in turn, the stock market. For example, Persaud believed that when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.

The SEC’s complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Persaud to enjoin him from future violations of the federal securities laws.

June, 2012:

SEC v. Steven H. Bethke, Civil Action No. 4:12-cv-01638 (S.D. Tex., Houston Division, filed June 1, 2012)

SEC Charges Controlling Person of Transfer Agent for Misappropriating Share Certificates and Illegally Selling Stock

Recently, the Securities and Exchange Commission filed a settled civil action in the United States District Court for the Southern District of Texas, Houston Division, against Steven H. Bethke. In its complaint, the Commission alleges that, from January 2009 through May 2010, Bethke misappropriated share certificates from Bederra Corporation (now known as Zicix Corporation) while he controlled Bederra’s stock transfer agent, First National Trust Company. Bethke used the stolen certificates, which had been pre-printed with the signatures of Bederra officers and directors, to secretly issue over a billion Bederra shares, which he then sold in exchange for payments into his personal bank account of over $350,000. Among other things, Bethke signed purchase agreements falsely warranting that he had good title to the shares and that they were “freely tradable” when, in fact, he had orchestrated the misappropriation of the shares, and the sales were not eligible for any exemption from registration under the securities laws. To carry out his scheme, Bethke forged the signature of Bederra’s chief executive officer on certifications claiming that Bederra was aware of the sales when the company knew nothing about the transactions. Bethke also prepared letters falsely stating that he had obtained the shares from the company more than a year before, and that the sales were therefore exempt from registration under the securities laws.

Without admitting or denying the allegations in the Commission’s complaint, Bethke consented to a final judgment enjoining him from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; barring him from serving as an officer or director of a public company; barring him from participating in the offering or sale of a penny stock; and ordering disgorgement plus prejudgment interest, but waiving payment and not imposing a civil penalty based on Bethke’s financial condition. The judgment is subject to court approval. Bethke also consented, with respect to a related SEC administrative proceeding, to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical organization.