December, 2011:

Securities and Exchange Commission v. Evolution Capital Advisors, et al., Civ. Action No. 4:11-cv-02945 (United States District Court for the Southern District of Texas, Houston Division) (Miller, J.).

Following Contested Evidentiary Hearing, SEC Obtains Preliminary and Permanent Injunctions and Related Relief Against New York Businessman and Two Houston-area Firms Who Conducted a Fraudulent $10 Million Note Offering

On August 10, 2011, the Securities and Exchange Commission filed suit in the United States District Court for the Southern District of Texas against Damian Omar Valdez of New York and two Houston-area firms he controlled, Evolution Capital Advisors (“Evolution Capital”) and Evolution Investment Group I (“EIGI”). Evolution Capital was an investment adviser registered with the Commission until June 2010. The firms and Valdez raised at least $10 million from more than 80 investors through two fraudulent note offerings.

After a contested evidentiary hearing on October 19 and 20, 2011, the Court found that: (1) Valdez, Evolution Capital, and EIGI misled investors to believe that the notes were safe and secured by assets guaranteed by the United States government; (2) the defendants falsely promised to use leverage to purchase the assets securing the notes; (3) the assets securing the notes were subject to significant undisclosed default and prepayment risk; (4) the defendants paid themselves more than $2.4 million in fees and expenses and used approximately $2.7 million from the second note offering to make Ponzi payments to investors in the first note offering; (5) because of defaults and prepayments on the underlying assets, failure to obtain leverage, and excessive Ponzi payments and fees, the defendants lacked sufficient assets to repay investors in accordance with the notes; and (6) the defendants would have continued taking all monies from the account each month as “profit” had the Commission not brought its enforcement action. The Court specifically found that Defendant Valdez acted with fraudulent intent.

Based on these findings, the Court granted the Commission’s motion for preliminary and permanent injunction, asset freeze, and appointment of a receiver. The Court also permanently froze the defendants’ assets. In addition, the Court specifically enjoined the defendants against further violations of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission’s requests for disgorgement of ill-gotten gains plus prejudgment interest, as well as civil penalties, remain pending.

December, 2011:

The Securities and Exchange Commission recently charged a former securities trader at a San Diego-based brokerage firm with orchestrating an illegal trading scheme.

The SEC alleges that Aurelio Rodriguez acted in concert with a Mexican investment adviser, InvesTrust, and unnecessarily inserted a separate broker-dealer as a middleman into securities transactions in order to generate millions of dollars in additional fees. Rodriguez, who resided in Coronado, Calif., at the time and currently lives in Mexico, agreed to pay $1 million to settle the SEC’s charges. The SEC also charged his former firm Investment Placement Group (IPG) and its CEO with failing to properly supervise Rodriguez. IPG agreed to pay more than $4 million to settle the charges.

In an interpositioning scheme, an extra broker-dealer is illegally added as a principal on trades even though no real services are being provided. The SEC alleges that Rodriguez colluded with InvesTrust and needlessly inserted a broker-dealer based in Mexico into securities transactions between IPG and InvesTrust’s pension fund clients, causing the pension funds to pay approximately $65 million more than they would have without the middleman.

“Rodriguez repeatedly abused his position as a securities industry professional to commit this cross-border fraudulent scheme to the detriment of the pension funds,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office. “The scheme’s participants reaped millions of dollars from these illicit activities.”

According to the SEC’s order instituting administrative proceedings against Rodriguez, the scheme occurred from January to November 2008. Rodriguez in coordination with InvesTrust acquired 10 different credit-linked notes in an IPG proprietary account. Rodriguez knew that the notes were slated for InvesTrust’s pension fund clients.

The SEC alleges that IPG, through Rodriguez, added a markup of roughly 1.5 to 4.5 percent to the purchase price and then sold the notes to the middleman Mexican brokerage firm. IPG, through Rodriguez, repurchased the notes from the Mexican brokerage firm within a day or so at a slightly higher price. IPG added another markup and then sold the securities to InvesTrust’s pension fund clients.

According to the SEC’s order, in some instances Rodriguez repeated the buy-sell pattern with the middleman Mexican brokerage firm multiple times, driving up the price with each successive trade before finally selling the notes to the pension funds at artificially inflated prices. Rodriguez received millions of dollars in additional markups generated from the interpositioned transactions.

The SEC’s order finds that Rodriguez violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. Without admitting or denying the SEC’s findings, Rodriguez consented to the order and agreed to pay $1 million in ill-gotten gains and to be barred from the securities industry as well as from participating in any penny stock offering, for five years. The order also requires him to cease and desist from committing or causing any violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.

The SEC instituted separate but related administrative proceedings against IPG and its CEO Adolfo Gonzalez-Rubio, who was Rodriguez’s direct supervisor. IPG and Gonzalez-Rubio each agreed to settle their cases without admitting or denying the SEC’s findings. IPG agreed to be censured, pay approximately $3.8 million in disgorgement and prejudgment interest, pay a $260,000 penalty, and comply with certain undertakings. Gonzalez-Rubio agreed to a three-month suspension as a supervisor with any broker, dealer, investment adviser, or certain other registered entities.

December, 2011:

The Securities and Exchange Commission recently charged GE Funding Capital Market Services with securities fraud for participating in a wide-ranging scheme involving the reinvestment of proceeds from the sale of municipal securities.

GE Funding CMS agreed to settle the SEC’s charges by paying approximately $25 million that will be returned to affected municipalities or conduit borrowers. The firm also entered into agreements with the Department of Justice, Internal Revenue Service, and a coalition of 25 state attorneys general and will pay an additional $45.35 million.

The settlements arise from extensive law enforcement investigations into widespread corruption in the municipal reinvestment industry. In the past year, federal and state authorities have reached settlements with four other financial firms, and 18 individuals have been indicted or pled guilty, including three former GE Funding CMS traders.

“Our in-depth investigations have uncovered pervasive corrupt practices in the municipal securities reinvestment market, and we are requiring financial firms one by one to step up and pay the price for their misconduct,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “More than $743 million has been recovered from financial institutions in these settlements, much of which has been returned to municipalities that have been harmed.”

Elaine C. Greenberg, Chief of the SEC’s Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “GE Funding CMS’s fraudulent practices and misrepresentations undermined the competitive bidding process and negatively impacted the prices that municipalities paid for reinvestment products. The firm’s misconduct deprived municipalities of a conclusive presumption that reinvestment instruments were purchased at fair market value.”

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, in addition to fraudulently manipulating bids, GE Funding CMS made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were in exchange for the assistance of bidding agents in controlling and manipulating the competitive bidding process.

The SEC alleges that from August 1999 to October 2004, GE Funding CMS illegally generated millions of dollars by fraudulently manipulating at least 328 municipal bond reinvestment transactions in 44 states and Puerto Rico. GE Funding CMS won numerous bids through a practice of “last looks” in which it obtained information regarding competitor bids and either raised a losing bid to a winning bid or reduced its winning bid to a lower amount so that it could make more profit on the transaction. In connection with other bids, GE Funding CMS deliberately submitted non-winning bids to facilitate bids set up in advance by certain bidding agents for other providers to win. GE Funding CMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

In settling the SEC’s charges without admitting or denying the allegations, GE Funding CMS agreed to pay a $10.5 million penalty along with disgorgement of $10,625,775 with prejudgment interest of $3,775,987. GE Funding CMS consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933. The settlement is subject to court approval.

December, 2011:

SEC v. Heart Tronics, Inc., et al., Case No. SACV-11-1962-JVS (ANx) (C.D. Cal.)

SEC Charges Heart Tronics, Inc. and Six Individuals in Connection with a Series of Fraudulent Schemes Pumping Company Stock

The Securities and Exchange Commission filed a lawsuit today in federal court in Los Angeles charging seven defendants, including California lawyer Mitchell J. Stein, in a series of brazen fraudulent schemes designed to artificially inflate the securities of Heart Tronics, Inc., f/k/a Signalife, Inc. (Heart Tronics), while Stein secretly made millions of dollars from selling the stock. The seven defendants charged are:

• Heart Tronics (known during the relevant period as Signalife), a company headquartered in California that purports to sell a heart monitoring device. Heart Tronics common stock was formerly listed on the American Stock Exchange but is now quoted on the OTC Link under the symbol “HRTT.PK”;
• Mitchell J. Stein of Hidden Hills, CA, a California attorney who was the architect and principal beneficiary of the fraud schemes. Stein controlled many of Heart Tronics’ business activities and public disclosures;
• Willie J. Gault of Encino, CA, a former professional football player and one of Heart Tronics’ co-CEOs from October 2008 through June 2011;
• J. Rowland Perkins of Beverly Hills, CA, a former Hollywood executive and the other of Heart Tronics’ co-CEOs since June 2008;
• Martin B. Carter of Boca Raton, FL, an unlicensed electrician who worked as Stein’s chauffer and handyman while carrying out the fraud with Stein;
• Mark C. Nevdahl of Spokane, WA, the trustee and stock broker for a number of nominee accounts Stein used to unlawfully sell Heart Tronics stock; and
• Ryan A. Rauch of San Clemente, CA, a stock promoter paid to tout Heart Tronics stock to investors.

In a parallel criminal investigation, the U.S. Department of Justice and U.S. Postal Inspection Service announced today the arrest of Stein.

The SEC’s complaint alleges that Heart Tronics fraudulently and repeatedly announced millions of dollars in sales orders for its product between 2006 and 2008. In fact, according to the complaint, Heart Tronics never had viable sales orders from actual customers, but Stein and Carter fabricated numerous documents to support the false disclosures to the public. As alleged in the complaint, Stein profited by causing Heart Tronics to unlawfully pay Carter approximately $2 million in cash and Heart Tronics stock pursuant to a sham consulting agreement. Carter kicked-back substantially all the proceeds to Stein.

The complaint also alleges that in 2008 Heart Tronics installed Gault, a celebrity athlete, and Perkins, a founder of a well-known talent agency, as figurehead CEOs to generate publicity for Heart Tronics and foster investor confidence. However, the SEC alleges that Gault and Perkins rarely questioned Stein’s fraudulent agenda and abdicated their fiduciary responsibilities to shareholders by signing, or authorizing to be signed, false SEC filings and false certifications under the Sarbanes-Oxley Act of 2002. In addition, the complaint alleges that Stein and Gault together defrauded an individual investor into making a substantial investment in Heart Tronics based on false representations that his capital would fund the company’s operations. Instead, Stein and Gault diverted the investor’s proceeds for their personal use, including purchasing Heart Tronics stock in Gault’s personal brokerage account to create the appearance of volume and demand for the stock.

Stein also hired promoters to tout Heart Tronics stock on the Internet. According to the complaint, one such promoter, Rauch, solicited numerous investment advisers, retail and institutional brokers, and other investors to buy Heart Tronics stock, but failed to disclose he was being paid by Heart Tronics in exchange for his promotion.

While Stein was orchestrating his campaign of misinformation and other schemes designed to inflate Heart Tronics’ stock price, the complaint alleges that he and his wife, Tracey Hampton-Stein (Hampton-Stein), the company’s majority shareholder, directed the sale of more than $5.8 million worth of Heart Tronics stock, while failing to disclose the sales as required under the federal securities laws. Stein enlisted Nevdahl, a stock broker, to act as trustee for a number of purportedly blind trusts to create the façade that the shares were under the control of an independent trustee. The trusts were blind in name only; according to the complaint, Nevdahl met the Steins’ regular demands for cash by continually selling Heart Tronics stock though the trusts.

The SEC’s complaint charges the following defendants committed the following violations of the federal securities laws:

• Heart Tronics violated Sections 5(a) and (c), and Section 17(a) of the Securities Act of 1933 (“Securities Act”); Securities Act Regulation S-T, Rule 302(b); Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”); and Exchange Act Rules 10b-5(b), 12b-11, 12b-20, 13a-1, 13a-11, and 13a-13.

• Stein violated Sections 5(a) and (c), and Section 17(a) of the Securities Act; Sections 10(b), 13(b)(5), 13(d), and 16(a) of the Exchange Act; and Exchange Act Rules 10b-5, 13b2-1, 13d-1, and 16a-3; and he aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13.

• Gault violated Section 17(a) of the Securities Act; Sections 10(b) and 13(b)(5) of the Exchange Act; and Exchange Act Rules 10b-5 and 13a-14; and he aided and abetted violations of Sections 10(b) of the Exchange Act and Exchange Act Rules 10b-5(a) and (c).

• Perkins violated Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5(b) and 13a-14; and he aided and abetted violations of Section 13(b)(2)(B) of the Exchange Act.

• Carter violated Sections 5(a) and (c), and Sections 17(a)(1) and (3) of the Securities Act; Sections 10(b) and 13(b)(5) of the Exchange Act; and Exchange Act Rules 10b-5(a) and (c), and 13b2-1; and he aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5(a) and (c), 12b-20, 13a-1, 13a-11, and 13a-13.Nevdahl violated Sections 17(a)(1) and (3) of the Securities Act; Section 10(b) of the Exchange Act; and Exchange Act Rules 10b-5(a) and (c); and he aided and abetted violations of Sections 10(b) of the Exchange Act and Exchange Act Rules 10b-5(a) and (c).

• Rauch violated Section 17(b) of the Securities Act.

The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil monetary penalties from all defendants. With respect to Stein, Gault and Perkins, the complaint seeks the imposition of permanent officer-and-director bars; with respect to Stein, Gault, Perkins, Carter and Rauch, the complaint seeks the impositions of permanent penny stock bars. The complaint also seeks the return of ill-gotten gains from nine relief defendants, including Hampton-Stein and her company, ARC Finance Group LLC, Heart Tronics’ majority shareholder.

December, 2011:

SEC v. Myron Weiner, Civil Action No. 11-CV-5731 (E.D.N.Y.) (DLI)(RER)

SEC Obtains Injunction Against Myron Weiner for Unregistered Sales of Spongetech Delivery Systems, Inc. Stock; Weiner Ordered to Pay Over $1.3 Million

The United States Securities and Exchange Commission recently announced that the Honorable Dora L. Irizarry, United States District Court Judge for the Eastern District of New York, entered a judgment against Myron Weiner. The judgment permanently enjoins Weiner from violating the registration provisions of Section 5 of the Securities Act of 1933 (“Securities Act”) and imposes a one-year penny stock bar against Weiner. The judgment also ordered Weiner to pay $1,215,057 in disgorgement, $80,135 in prejudgment interest, and a $50,000 civil penalty. Weiner consented to the entry of the judgment, without admitting or denying the allegations of the Commission’s complaint. Weiner also settled a related forfeiture action brought by the Civil Division of the U.S. Attorney’s Office for the Eastern District of New York.

The Commission’s civil action against Myron Weiner, filed on November 22, 2011, relates to his unregistered sales of shares of Spongetech Delivery Systems, Inc. (“Spongetech”) in 2009. In its complaint, the Commission alleges that Weiner purchased the shares from a Spongetech affiliate at a discounted price of 5 cents, and then sold the shares into the public market less than three months later for 20 cents, for a profit of $1,215,057. The Commission alleges that Weiner’s conduct violated the registration provisions of Section 5 of the Securities Act, since his sales were not registered with the Commission, and no exemption from the registration requirements of the federal securities laws applied.

December, 2011:

SEC v. Marcin Malarz et al., Case No. 11-cv-8803 (N.D. Ill., filed December 12, 2011).

SEC Charges Three Individuals in Chicago-Area Offering Fraud

The Securities and Exchange Commission recently announced that it filed a civil injunctive action alleging fraud in the unregistered offer and sale of securities by Defendants Marcin Malarz (“Malarz”), Jacek Sienkiewicz (“Sienkiewicz”), and Arthur Lin (“Lin”) (collectively, “Defendants”). The SEC’s complaint, filed in the U.S. District Court for the Northern District of Illinois, alleges that from at least September 2006 through at least January 2009, Malarz, Sienkiewicz, and Lin raised at least $14,380,000 from at least 43 investors through the fraudulent unregistered offer and sale of promissory notes issued by entities owned and controlled by Malarz and/or Sienkiewicz. Malarz Equity Investments, LLC (“Malarz Equity”) was the primary entity through which the scheme was perpetrated. Malarz and Lin’s wife, Relief Defendant Gloria Lin, were the members of Malarz Equity, and Lin was an officer of Malarz Equity. Malarz, with Sienkiewicz, also used four other entities, Invision Investment, LLC, Burton Grove Condominiums, LLC, Buffalo Creek Condominiums, LLC, and Willow Lake Condominiums, LLC, to carry out the scheme.

The complaint alleges that investors were told that their funds would be used to purchase apartment complexes and rehabilitate and convert the individual apartment units for sale as condominiums, and that their investments were safe because they were personally guaranteed by Malarz and, in some cases, Sienkiewicz. The complaint alleges that contrary to these representations, Malarz used substantial sums of the Malarz Equity investors’ funds for his personal benefit and to make ponzi-type “interest” and principal payments to previous investors. Further, Lin received at least $436,000 in undisclosed commission payments, which were transmitted to Relief Defendant Gloria Lin. The complaint further alleges that Malarz and Sienkiewicz provided several investors with personal financial statements that materially overstated their respective net worths. It also alleges that Malarz and Sienkiewicz granted some investors mortgages on properties that they either owned or were about to acquire, to purportedly secure the investments. Most of these investors were falsely told that their particular mortgage would have priority over all other debts, except for the mortgages that had previously been granted to banks in conjunction with the property’s purchase. At least two investors were told that their funds would be used as part of a down payment on a new apartment complex in Lombard, Illinois, but Malarz and Sienkiewicz never purchased that property.

The SEC’s complaint charges Malarz, Sienkiewicz, and Lin with violating Sections 5(a), 5(c), and 17(a)(2) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5(b) thereunder, and charges Lin only with violating Section 15(a) of the Exchange Act. The complaint seeks permanent injunctive relief, disgorgement, and civil penalties from all of the Defendants. The complaint also seeks disgorgement from Relief Defendant Gloria Lin.

December, 2011:

SEC Charges “Shell Packagers” and Several Others in Penny Stock Scheme

Recently, the Securities and Exchange Commission charged a shell packaging firm and several others involved in a penny stock scheme to issue purportedly unrestricted shares in the public markets.

The SEC alleges that Joseph Meuse and his firm Belmont Partners LLC – which is in the business of identifying and selling public shell companies for use in reverse mergers – fabricated and backdated documents used to convince a transfer agent and an attorney writing an opinion letter to issue free-trading shares of Alternative Green Technologies Inc. (AGTI). The SEC also charged AGTI and its CEO Mitchell Segal as well as Segal’s business partner Howard Borg and stock promoters David Ryan, Vikram Khanna, and Panascope Capital Inc. for their roles in the scheme that resulted in unknowing investors purchasing fraudulently issued AGTI shares without the protections afforded by the securities laws.

“Shell packagers who buy and sell public companies for use by fraudsters have no rightful place in our markets,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office. “These shell packagers not only sold the shell company, but created the false documents necessary to cause the transfer agent to issue shares that should never have been sold to the public.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Long Island, N.Y.-based AGTI and Segal, an attorney licensed to practice in New York, knowingly submitted false documents to a transfer agent and an attorney, who relied on them to conclude that free-trading shares of AGTI could legitimately be issued. Virginia-based Belmont Partners and Meuse aided and abetted AGTI’s fraud by knowingly creating and sometimes backdating the false documentation, including a sham assignment of debt and a fabricated and backdated corporate resolution and convertible note. Segal then used the stock certificates illegally issued to fund promotional campaigns promoting AGTI’s stock. The stock promoters – Ryan, Panascope Capital and its president Khanna – were charged with selling the unregistered securities.

The SEC’s complaint charges all defendants with violating Section 5 of the Securities Act of 1933, and AGTI and Segal with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. Segal, Meuse and Belmont Partners are charged with aiding and abetting the fraud by AGTI. The SEC’s complaint seeks permanent injunctions and disgorgement against all defendants; a financial penalty against AGTI, Segal, Belmont Partners, Meuse, and Ryan; and officer and director and penny stock bars against Segal and Meuse. The SEC’s complaint also names several relief defendants for the purposes of recovering proceeds they received from the illicit stock sales.

Borg, Khanna and Panascope Capital have consented to the entry of a final judgment enjoining them from further violations of Section 5 of the Securities Act without admitting or denying the allegations in the SEC’s complaint. Khanna and Panascope Capital agreed to pay $81,477.10 to settle the charges, and Borg agreed to pay $35,264.05 and surrender to the transfer agent for cancellation more than four million shares of AGTI stock that were illegally issued. The settlements are subject to court approval.

If you would like to read more, please follow the highlighted link.

December, 2011:

Securities and Exchange Commission v. Geoffrey J. Eiten and National Financial Communications Corp., 1:11-CV-12185 (District of Massachusetts, Complaint filed December 12, 2011).

SEC CHARGES MASSACHUSETTS-BASED PENNY STOCK PROMOTER WITH MAKING FRAUDULENT STATEMENTS

The Securities and Exchange Commission, recently filed an action in federal court in Boston, charging Massachusetts resident Geoffrey J. Eiten and his company National Financial Communications Corp. (“NFC”) for making material misrepresentations and omissions in a penny stock publication they issued.

The Commission’s complaint alleges that Eiten and NFC publish a penny stock promotion piece called the “OTC Special Situations Reports.” According to the complaint, Eiten, self-proclaimed “America’s Leading Micro-Cap Stock Picker,” promotes penny stocks in this publication on behalf of clients in order to increase the price per share and/or volume of trading in the market for the securities of penny stock companies. The complaint alleges that Eiten and NFC have made misrepresentations in these reports about the penny stock companies they are promoting. For example, the Commission’s complaint alleges that during 2010, Eiten and NFC issued reports promoting four penny stock companies: (1) Clean Power Concepts, Inc., based in Regina, Saskatchewan, Canada, a purported manufacturer and distributor of various fuel additives and lubrication products made from crushed seed oil; (2) Endeavor Power Corp., based in Robesonia, Pennsylvania, a purported recycler of value metals from electronic waste; (3) Gold Standard Mining, based in Agoura Hills, California, a purported owner of Russia gold mining operations; and (4) Nexaira Wireless Corp., based in Vancouver, British Columbia, Canada, a purported developer and seller of wireless routers. The Commission’s complaint alleges that in these four reports, Eiten and NFC made material misrepresentations and omissions, concerning, among other things, the companies’ financial condition, future revenue projections, intellectual property rights, and Eiten’s interaction with company management as a basis for his statements.

According to the complaint, Eiten and NFC were hired to issue the above reports. Eiten and NFC used false information provided by their clients, without checking the accuracy of the information with the companies in question or otherwise ensuring that the statements they were making in the OTC Special Situations Report were true.

The Commission’s complaint charges Eiten and NFC with violating 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). In its complaint, the Commission seeks permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and penny stock bars pursuant to Section 21(d)(6) of the Exchange Act against the defendants.

If the reader would like to review the SEC complaint in more detail, please follow the highlighted link.

December, 2011:

SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds

Wachovia Agrees to $148 Million Settlement With SEC and Other Authorities

The Securities and Exchange Commission (SEC) recently charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The complaint alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.”

Wachovia Bank is now Wells Fargo Bank following a merger in March 2010.

When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval.

In order to obtain a complete understanding of the allegations made by the SEC, please follow the highllighted link, which will direct you to a copy of the complaint.

December, 2011:

Securities and Exchange Commission v. Michael R. Balboa and Gilles T. De Charsonville, Civil Action No. 8731 (S.D.N.Y. filed December 1, 2011)

SEC CHARGES HEDGE FUND MANAGER AND BROKER WITH MULTI-MILLION DOLLAR OVERVALUATION SCHEME

The Securities and Exchange Commission recently announced that it filed a civil injunctive action in the United States District Court for the Southern District of New York charging two individuals with engaging in a fraudulent scheme to overvalue illiquid asset holdings of the now insolvent hedge fund, Millennium Global Emerging Credit Fund (the “Fund”), and thereby inflate the Fund’s reported returns and net asset value. The defendants named in the Commission’s complaint are Michael Balboa, the Fund’s former portfolio manager, and Gilles De Charsonville, a broker with BCP Securities, LLC.

The SEC’s complaint alleges that from January through October 2008, Balboa surreptitiously provided De Charsonville and another broker with fictional prices for them to pass on to the Fund’s outside valuation agent and its auditor. Specifically, Balboa had De Charsonville and the other broker portray the valuations for two of the Fund’s illiquid securities holdings, Nigerian and Uruguayan warrants, as ostensibly independent month-end “marks” that were provided by third-party sources. In fact, Balboa completely fabricated the prices which De Charsonville and the other broker were complicit in passing onto the valuation agent and auditor for these two securities. This scheme caused the Fund to drastically overvalue these two securities holdings by as much as $163 million in August 2008, which, in turn, allowed the Fund to report inflated and false-positive monthly returns. By overstating the Fund’s returns and overall net asset value, Balboa was able to attract at least $410 million in new investments, deter about $230 million in eligible redemptions and generate millions of dollars in inflated management and performance fees.

The SEC’s complaint charges the defendants with committing and/or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 206 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder and, as to Balboa, Section 17(a) of the Securities Act of 1933. De Charsonville is also charged with violating Financial Industry Regulatory Authority Rule 5210. As to both defendants, the SEC’s complaint seeks a permanent injunction against future violations, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.

The United States Attorney’s Office for the Southern District of New York (“USAO”), which conducted a parallel investigation of this matter, has also announced the arrest of Balboa and the simultaneous filing of a criminal complaint against him.

December, 2011:

United States Securities Exchange Commission v. Richard Dalton and Universal Consulting Resources LLC, Defendants, and Marie Dalton, Relief Defendant, Civil Action No. 10-CV-02794-REB-KLM (D. Colo.)

SEC RESOLVES FRAUD-BASED LAWSUIT AGAINST DENVER-AREA COMPANY AND ITS OWNER

The Securities and Exchange Commission recently announced that on December 1, 2011, the United States District Court for the District of Colorado entered judgments against Richard Dalton and Universal Consulting Resources LLC (UCR) and ordered them to pay $15,842,948, which includes a civil penalty of $7,549,458. The Court found that Dalton routinely provided investors with false and materially misleading information about investments contracts known as the Trading Program and the Diamond Program. The Court stated that Dalton told investors they would receive annual profits ranging from 48% to 120% when, in fact, he was operating a Ponzi scheme, with new investors providing the funds for UCR’s profit payments to existing investors. The Court held that Dalton misappropriated investors’ funds and used at least $2.5 million for his personal benefit or for the benefit of family members.

According to the Commission’s complaint, Dalton raised approximately $17 million from 130 investors in 13 states. Dalton told investors in the Trading Program that their money would be held in an escrow account in a U.S. bank, and that a European trader would use the value of that account to obtain leveraged funds to purchase and sell bank notes. The Diamond Program supposedly generated profits from the trading of cut and uncut diamonds.

The Court permanently enjoined Dalton and UCR from violating Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Dalton from violating Exchange Act Section 15(a).

The Court also entered a judgment on December 1, 2011 against Marie Dalton, who was named as a relief defendant in the Commission’s complaint. According to the Commission’s complaint, Marie Dalton purchased a residence in Golden, Colorado with over $900,000 in investors’ funds. The Court stated that a receiver would be appointed to sell the residence. The Court also ordered Marie Dalton to disgorge $115,000 in investors’ funds that were deposited in her bank account.

On October 19, 2011, a federal grand jury in the District of Colorado handed up an indictment charging Dalton and Marie Dalton with violations of federal criminal laws in connection with a scheme involving investments in UCR’s Trading Program and the Diamond Program.

December, 2011:

Securities and Exchange Commission v. Integrity Financial AZ, LLC, Steven R. Long, Stanley M. Paulic, Walter W. Knitter, and Robert C. Koeller Civil Action No. 10-CV-782 (SO) (N.D. Ohio filed Apr. 15, 2010)

COURT ORDERS INTEGRITY FINANCIAL FOUNDERS TO PAY $4.2 MILLION FOR OFFERING FRAUD CONNECTED TO ARIZONA REAL ESTATE

The U.S. Securities and Exchange Commission (Commission) recently announced that, on November 23, 2011, the U.S. District Court for the Northern District of Ohio entered final judgments against Steven R. Long and Stanley M. Paulic in a Commission injunctive action, United States Securities and Exchange Commission v. Integrity Financial AZ, LLC, Steven R. Long, Stanley M. Paulic, Walter W. Knitter, and Robert C. Koeller, Civil Action No. 10-CV-782 (SO) (N.D. Ohio filed Apr. 15, 2010). The Commission’s complaint alleges that Long and Paulic founded Integrity Financial AZ, LLC (IFAZ) and, with assistance from Walter W. Knitter and Robert C. Koeller, used the company to raise more than $8 million in a fraudulent unregistered offering of promissory notes purportedly secured by real estate in Arizona.

The final judgments were entered after the district court granted the Commission’s motion for summary judgment against Long and Paulic. The order granting summary judgment found that Long “knowingly made misrepresentations or omissions of material fact regarding the offer and sale of securities, while utilizing investors’ money for his own gain” and that “Paulic misrepresented material facts in connection with the offer and sale of securities” and “acted recklessly in conjunction with his activities and responsibilities as CEO and co-owner of IFAZ.”

The final judgments against Long and Paulic permanently enjoin each of them from further violations of Sections 5 and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b‑5. The final judgment against Long also finds him liable for disgorgement in the amount of $1,481,736, plus prejudgment interest thereon in the amount of $97,723.32, and a civil penalty in the amount of $1,465,306. The final judgment against Paulic also finds him liable for disgorgement in the amount of $586,225, plus prejudgment interest thereon in the amount of $38,662.65, and a civil penalty in the amount of $586,225.

The Commission also announced today, that on October 7, 2011, the district court entered a default judgment against IFAZ permanently enjoining it from violations of Sections 5 and 17(a) of the Securities Act, Sections 10(b) and 15(a) of the Exchange Act, and Exchange Act Rule 10b‑5, and finding it liable for disgorgement in the amount of $5,598,717, plus prejudgment interest thereon in the amount of $429,403.44, and a civil penalty in the amount of $650,000.

Knitter settled with the Commission previously. The remaining defendant, Koeller, reached a partial settlement with the Commission on September 28, 2011.

December, 2011:

Securities and Exchange Commission v. David Ronald Allen, et al. Civil Action No. 3:11-CV-882-O (N.D. Tex.)

COURT ENTERS FINAL JUDGMENTS AGAINST CHINA VOICE HOLDING CORP. AND ITS FORMER CFO, DAVID RONALD ALLEN

Recently, the Securities and Exchange Commission announced that the Honorable Reed O’Connor, United States District Judge for the Northern District of Texas, entered a final judgment against David Ronald Allen, the co-founder and former Chief Financial Officer and President of China Voice Holding Corp., to settle charges that he made false and misleading statements and material omissions regarding China Voice, selectively disclosed material, non-public information regarding the company, aided and abetted an unregistered broker, and operated a Ponzi scheme. The court also entered final judgments against China Voice and a number of Allen’s related companies.

Allen agreed to entry of a final judgment permanently enjoining him from violating Sections 5 and 17(a) of the Securities Act of 1933, 10(b) and 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act and Regulation FD thereunder. The final judgment, entered on December 2, also orders Allen and his company, Winterstone Financial Ltd., to pay $225,468 in disgorgement and prejudgment interest and orders Allen to pay a civil penalty of $212,821. In addition, Allen is barred permanently from serving as an officer or director of a public company and from participating in an offering of a penny stock. Allen’s wife agreed to pay disgorgement and prejudgment interest of $146,162. The Allens and Winterstone Financial Ltd. agreed to the entry of these judgments without admitting or denying the allegations in the Commission’s complaint.

The Commission had filed an emergency action on April 28, 2011, alleging that Allen, with the assistance of Alex Dowlatshahi and Christopher Mills, and numerous related entities, launched what became a Ponzi scheme that sought to raise at least $8.6 million from investors across the country. The Commission alleged that, contrary to what investors were told, proceeds were used to pay back earlier investors; to make payments to Allen, Dowlatshahi, and Mills; and to make payments to Allen-affiliated businesses, including China Voice. The Commission’s complaint further charged Allen, China Voice, and China Voice’s former CEO and President, William Burbank, for a series of fraudulent statements about China Voice’s financial condition and business prospects and with selectively disclosing material, non-public information regarding the company to certain shareholders. In addition, the SEC charged China Voice shareholders Ilya Drapkin and Gerald Patera with financing stock promotion campaigns regarding China Voice, including a blast fax campaign conducted by Robert Wilson, and charged Patera with acting as an unregistered broker.

Five companies associated with Allen, Associates Funding Group, Inc., Associates Capital Leasing Joint Venture, D-Cap Associates Joint Venture, Development Capital Associates Joint Venture, and Townhome Communities Corp., also agreed to entry of a final judgment to settle the charges against them. Without admitting or denying the allegations in the Commission’s complaint, the five companies agreed to entry of a final judgment that permanently enjoins all of them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and further enjoins D-Cap Associates Joint Venture, Development Capital Associates Joint Venture, and Townhome Communities Corp. from violating Sections 5 and 17(a) of the Securities Act. In addition, the Final Judgment orders the five companies to pay a civil penalty of $500,000.

Finally, China Voice agreed to entry of a final judgment permanently enjoining it from violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rule 10b-5 and Regulation FD thereunder. The judgment, which China Voice consented to without admitting or denying the allegations in the Commission’s complaint, also requires China Voice to hire an independent consultant to evaluate the company’s internal controls.

November, 2011:

FEDERAL COURT ENTERS JUDGMENTS OF PERMANENT INJUNCTION AND OTHER RELIEF AGAINST DEFENDANTS CHRISTOPHER M. DUBEAU AND ATLANTIS TECHNOLOGY GROUP

Securities and Exchange Commission v. Atlantis Technology Group and Christopher M. Dubeau, Civil Action No. 10-61824-CIV-ZLOCH (S.D. Fla.)

The United States District Court for the Southern District of Florida has entered final judgments against defendants Christopher M. Dubeau and Atlantis Technology Group, enjoining them from violating the antifraud provisions of the federal securities laws. The Court’s final judgments, issued on October 31, 2011, enjoin Dubeau and Atlantis from violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and also enjoin Dubeau from violations of Section 17(a) of the Securities Act of 1933. In addition to granting injunctive relief, the Court permanently barred Dubeau from participating in an offering of a penny stock and from acting as an officer or director of any public company. The Court also ordered Dubeau to disgorge his ill-gotten gains of $312,000.00, plus prejudgment interest in the amount of $12,947.93, and pay a civil penalty of $100,000.00. Dubeau and Atlantis consented to entry of the final judgments.

The Commission’s Complaint against Dubeau and Atlantis, filed September 30, 2010, alleges that from at least August 7, 2009 through April 5, 2010, they issued numerous false press releases claiming, among other things, that Atlantis’ subsidiary, Global Online Television Corporation (GOTV), offered internet protocol television and video phone services to consumers, and claiming that GOTV had relationships with television networks to offer their content to Atlantis subscribers. The Complaint further alleges these claims were not true because, at the time Atlantis issued its press releases, GOTV was not able to offer internet protocol television services to consumers or video phone service, and it did not have relationships with television networks to offer content to its subscribers.

If you would like to review the former release, please follow the highlighted link.

November, 2011:

SEC v. Myron Weiner, Civil Action No. 11-CV-5731 (E.D.N.Y.) (DLI)(RER)

SEC Charges Myron Weiner with Unregistered Sales of Spongetech Delivery Systems, Inc. Stock

The Securities and Exchange Commission (SEC) filed a civil injunctive action against Myron Weiner, relating to his unregistered sale of shares of Spongetech Delivery Systems, Inc. (“Spongetech”) in 2009. In its complaint, the Commission alleges that Weiner purchased the shares from a Spongetech affiliate at a discounted price of 5 cents, and then sold the shares into the public market less than three months later for 20 cents, for a profit of $1,215,057. The Commission’s complaint alleges that Weiner’s sales were not registered with the Commission, and no exemption from the registration requirements of the federal securities laws applied.

The Commission’s complaint seeks a final judgment: (1) enjoining Weiner from violating Section 5 of the Securities Act of 1933 (registration provisions); (2) requiring the payment of disgorgement of $1,215,057, plus prejudgment interest of $80,135; (3) requiring payment of a civil penalty of $50,000; and (5) barring Weiner for one year from participating in the offering of any penny stock.

The U.S. Attorney’s Office for the Eastern District of New York filed a related forfeiture action.

November, 2011:

Securities and Exchange Commission v. Garfield Taylor, Inc., et al., Case No. 1:11CV02054 (D.D.C.)

SEC CHARGES PERPETRATOR OF WASHINGTON-AREA PONZI SCHEME

Recently, the Securities and Exchange Commission (SEC) charged a Bethesda, Md. man and several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area.

The SEC alleges that Garfield M. Taylor lured primarily middle-class residents in his community with little to no investing experience to invest in promissory notes issued by his two companies that engaged in purportedly low-risk options trading. Taylor urged investors to refinance their homes and use any available means to invest, including their personal savings and retirement funds. The SEC alleges that he promised returns as high as 20 percent per year and falsely assured investors that their investments would be protected by a “reserve account” or that he would employ a “covered call” trading strategy that would not touch the principal amount of their investment.

According to the SEC’s complaint filed in federal court in Washington D.C., Taylor and his companies instead engaged in very high-risk, speculative options trading and suffered massive losses. Taylor relied upon money from new investors to pay returns to earlier investors in typical Ponzi scheme fashion. The SEC’s complaint also alleges that he siphoned off $5 million in investor funds to pay family and friends and for other personal uses, including $73,000 to the private school his children attended.

The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors from 2005 to 2010. The scheme ultimately collapsed in the fall of 2010 when the companies’ accounts were depleted by the trading losses and interest payments to investors.

The SEC’s complaint charged Taylor’s companies Garfield Taylor Inc. and Gibraltar Asset Management Group LLC – which were not registered with the SEC – as well as five collaborators in Taylor’s scheme:

• Maurice G. Taylor of Bowie, Md., who is the brother of Garfield Taylor. He is the Chief Investment Officer at Gibraltar and worked as a trader for Garfield Taylor Inc.
• Randolph M. Taylor of Washington D.C., who is the nephew of Garfield Taylor. He was formerly the Vice President for Organizational Development at Gibraltar.
• Benjamin C. Dalley of Washington D.C., who is the childhood friend and business partner of Randolph Taylor. He was formerly Vice President of Operations at Gibraltar.
• Jeffrey A. King of Upper Marlboro, Md., whose sister is married to Maurice Taylor. He was a former independent contractor for Garfield Taylor Inc. and former President and Chief Operating Officer of Gibraltar.
• William B. Mitchell of Middle River, Md., who was formerly Vice President for Finance at Garfield Taylor Inc. and former Executive Vice President of Strategic Planning at Gibraltar.

According to the SEC’s complaint, Garfield Taylor and the others jointly prepared and finalized a Gibraltar PowerPoint presentation for prospective investors that was riddled with false and misleading statements. They misrepresented the nature of the company’s options trading strategy, the anticipated rate of return, the protections offered by its outside accountant, and the overall level of risk involved in an investment with Gibraltar. They pitched the PowerPoint presentation to potential institutional investors and charitable organizations, including a Washington D.C.-based children’s charity and a Baptist church in Maryland. Garfield Taylor went so far as to provide the Baptist church with a fake “letter of recommendation” from Charles Schwab as he pitched the investment opportunity.

The SEC alleges that in order to maintain a steady flow of new investor money, Garfield Taylor induced current investors and others including King and Mitchell to solicit and refer new investors to him in exchange for commission payments based on the amounts invested. Garfield Taylor, who was not a licensed securities broker, persuaded several individuals to give him online access to their personal brokerage accounts so he could place trades and share in any profits generated.

The SEC’s complaint charges Garfield Taylor, Inc., Gibraltar Asset Management Group LLC, Garfield Taylor, Dalley, King, and Randolph Taylor with violations of Sections 17(a) of the Securities Act of 1933 (“Securities Act”). The SEC’s complaint also charges those defendants and Maurice Taylor with violating or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It also alleges that Garfield Taylor violated Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC’s complaint also charges Garfield Taylor, Inc., Gibraltar Asset Management Group, LLC, and Garfield Taylor with violations of Sections 5(a) and 5(c) of the Securities Act. The SEC’s complaint also alleges that Garfield Taylor, King, and Mitchell violated Section 15(a) of the Exchange Act. The SEC seeks a judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay penalties and disgorgement with prejudgment interest. The SEC also named three companies belonging to Randolph Taylor, Dalley, King, and Mitchell as relief defendants for the purposes of seeking disgorgement with prejudgment interest of investor funds.

November, 2011:

SEC v. Brian Hollnagel and BCI Aircraft leasing, Inc., Civil Action No. 1:07-cv-4538 (N.D. Ill.) (Bucklo, J.)

FORMER BROKER PLEADS GUILTY TO OBSTRUCTION OF JUSTICE IN CONNECTION WITH TWO SEC EXAMINATIONS

The Securities and Exchange Commission (“Commission”) recently announced that Robert Carlsson (“Carlsson”), a former broker, pled guilty to obstruction of justice in connection with his false representations to the SEC during two separate examinations of Carlsson’s broker-dealer in 2006 and 2007 by examination staff of the Commission’s Chicago Regional Office.

The Commission previously announced that on September 8, 2010, the United States Attorney’s Office for the Northern District of Illinois obtained a 21-count indictment of Brian Hollnagel, BCI Aircraft Leasing Inc., and five others involved in BCI’s fraudulent scheme and obstruction of the Commission’s attempts to discover and investigate that very scheme. U.S. v. Brian Hollnagel et al., Criminal Action No. 1:10-cr-0195 (N.D. Ill.) (St. Eve., J.). In that indictment, among various other violations, Hollnagel, BCI, and Carlsson, who raised money from investors for BCI’s operations, were accused of obstruction of justice in connection with false representations to the SEC during the 2006 and 2007 examinations of Carlsson’s broker-dealer, 21 Capital Group. In particular, Hollnagel, BCI, and Carlsson were accused of concealing Carlsson’s fund raising activities for BCI from the Commission’s Chicago examination staff.

According to the plea agreement, Carlsson faces an advisory Sentencing Guidelines range of 10 to 16 months’ imprisonment. Carlsson has agreed to fully and truthfully cooperate with the United States Attorney’s Office for the Northern District of Illinois in connection with the September 8, 2010 indictment of Hollnagel, BCI, and others.

Previously, on August 13, 2007, the Commission filed a civil injunctive complaint alleging that Defendants Hollnagel and BCI, from approximately 1998 through 2007, raised at least $82 million from approximately 120 investors as part of a fraudulent scheme in which the Defendants commingled investor funds, used investor funds to pay other investors, and failed to use investor funds as represented. The Complaint alleged that, as a result of their conduct, Defendants Hollnagel and BCI violated 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 Commission’s action was stayed in 2010 pending the criminal proceedings referenced above.

November, 2011:

Securities and Exchange Commission v. Patrick G. Rooney and Solaris Management, LLC, Case No. 1:11-cv-08264 (N.D. IL)

SEC CHARGES ILLINOIS-BASED HEDGE FUND ADVISER AND ITS OWNER FOR FRAUDULENT CONDUCT

The Securities and Exchange Commission (SEC) recently announced that it filed a civil injunctive action against Patrick G. Rooney (“Rooney”), a resident of Oakbrook, Illinois, and his company, Solaris Management, LLC (“Solaris Management”), the investment adviser to the Solaris Opportunity Fund, LP (“Solaris Fund”) for the fraudulent misuse of the Solaris Fund’s assets and other illegal conduct.

According to the SEC’s complaint, the Solaris Fund is purportedly a non-directional hedge fund with approximately 30 investors and reported assets of $16,277,780 as of December 2008. Contrary to the Solaris Fund’s offering documents and marketing materials, Rooney and Solaris Management allegedly made a radical change in the Solaris Fund’s investment strategy by becoming wholly invested in Positron Corp. (“Positron”), a financially troubled microcap company of which Rooney has been Chairman since 2004. Rooney, who has received compensation from Positron since September 2005, allegedly misused the Solaris Fund’s money by investing over $3.6 million in Positron through both private transactions and market purchases. Many of the private transactions were undocumented while other investments were loans to Positron at 0% interest. The complaint alleges that Rooney and Solaris Management hid the Positron investments and Rooney’s relationship with the company from the Solaris Fund’s investors for over four years. Although Rooney finally told investors about the Positron investments in a March 2009 newsletter, he allegedly lied by telling them he became Chairman to safeguard the Solaris Funds’ investment. The complaint further alleges that these investments benefited Positron and Rooney while providing the Solaris Fund with a concentrated, undiversified, and illiquid position in a cash-poor company with a lengthy track record of losses.

The SEC’s complaint, filed in the United States District Court for the Northern District of Illinois, charges Rooney and Solaris Management with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8(a)(1) and (a)(2) thereunder. The complaint also charges Rooney with aiding and abetting Solaris Management’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8(a)(1) thereunder, and Rooney and Solaris Management with aiding and abetting the Solaris Fund’s violation of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder.

The SEC is seeking permanent injunctions, disgorgement of any ill-gotten gains plus prejudgment interest and civil monetary penalties against Rooney and Solaris Management, and an officer and director bar against Rooney.

November, 2011:

SEC v. Frank C. Calmes, Lynn D. Rowntree, James E. Pratt, and Manny J. Shulman, Case No. 09-80524-CIV0-ZLOCH (S.D. Fla. April 2, 2009)

The Securities and Exchange Commission (SEC) recently announced that the United States District Court for the Southern District of Florida entered final judgments, dated November 10, 2011, against Frank C. Calmes, Lynn D. Rowntree, and James E. Pratt. Calmes and Rowntree had been principals at First Equity Corporation, a Boca Raton company that took small companies public via reverse mergers. Pratt, a lawyer, provided legal opinions regarding the ability to sell stock in the newly public companies.

According to the SEC’s Complaint, Calmes, Rowntree, and Pratt, along with co-defendant Manny J. Shulman, illegally sold millions of shares of unregistered securities in violation of the registration provisions of the Securities Act of 1933 (“Securities Act”). In addition, Calmes, Rowntree, and Shulman were alleged to have committed fraud in selling securities, in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. Calmes, Rowntree, and Pratt entered into bifurcated settlements with the SEC in May of 2011, just before a jury trial was to begin. Under the bifurcated settlements, Calmes and Rowntree agreed to be permanently enjoined from violating Sections 5(a) and 5(c) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, while Pratt agreed to be permanently enjoined from violating Sections 5(a) and 5(c) of the Securities Act. All three agreed to be barred from participating in any penny stock offering, and to cancel any shares of the corporations at issue in their possession or control. In addition, Defendant Calmes consented to be permanently barred from acting as an officer or director of any public issuer.

The bifurcated settlements left open, and the final judgments entered last week addressed, defendants’ liability for disgorgement of ill-gotten gains, prejudgment interest thereon, and the imposition of penalties. The final judgments imposed the following relief: against Calmes, $1,886,918 in disgorgement, $468,441 in prejudgment interest, and a $5,000 penalty; against Rowntree, $693,948 in disgorgement, $157,411 in prejudgment interest, and a $5,000 penalty; and against Pratt, $258,796 in disgorgement, $64,247 in prejudgment interest, and a $5,000 penalty.

Shulman proceeded to trial and on May 9, 2011 the jury returned a verdict finding him liable for violating Sections 5(a) and 5(c) of the Securities Act by selling uregistered securities and for violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by issuing materially false and misleading press releases regarding a company whose shares he was selling. On July 12, 2011, the Court enjoined Shulman from further violations of the federal securities laws, permanently barred Shulman from participating in any penny stock offering or acting as an officer or director of any public issuer, ordered disgorgement of $273,152, ordered payment of prejudgment interest of $95,633.44, and imposed a $5,000 penalty. The Court further ordered Shulman’s wife, Krystal Becnel, who was named as a relief defendant in the SEC’s Complaint, to disgorge $131,914.

November, 2011:

SEC Charges Philadelphia-Based Business Owner For Defrauding Investors Through an Offering Scheme Involving U.S. Treasury Strips

The Securities and Exchange Commission recently filed a Complaint in United States District Court for the Southern District of New York charging Tyrone L. Gilliams and his company TL Gilliams, LLC with fraud for misappropriating approximately $5 million from investors through an offering scheme involving U.S. Treasury STRIPS. According to the SEC’s Complaint Gilliams and TLG, from at least June 2010 through April 2011, claimed, among other things, to have a U.S. Treasury STRIPS Trading Program. According to the Complaint, Gilliams claimed that he would pool and use investor money to engage in large purchases and sales of Treasury STRIPS and that the trading program would yield weekly returns of five percent and was virtually risk-free.

U.S. Treasury STRIPS are the individual interest payment components of a United States Treasury bond, payable semi-annually over the life of the bond. These STRIPS are then separately tradeable like other securities. The term STRIPS derives from the program implemented by the Treasury to facilitate this type of trading, entitled “Separate Trading of Interest and Principal of Securities.”

The Complaint further alleges that contrary to his representations about the Treasury STRIPS Trading Program, Gilliams did not invest any of the funds received from investors in any U.S. Treasury STRIPS, nor in any program that invested in U.S. Treasury STRIPS. Rather, Gilliams used the misappropriated money to support his lavish lifestyle, including expenditures on hotels, nightclubs, airfare, designer apparel, jewelry, luxury car rentals, car payments and private school tuition for his children. In addition, the Complaint alleges, Gilliams caused TLG to spend at least $765,000 to sponsor a so-called celebrity charitable event in Philadelphia that culminated in a star-studded, black-tie gala on December 18, 2010, at the Ritz Carlton in Philadelphia.

In February 2011, shortly after misappropriating the $5 million, the Complaint alleges that Gilliams filed paperwork with the Commission indicated TLG’s intent to raise an “indefinite” amount of funds from investors in connection with the “Black Fox Fund,” an unregistered entity created by Gilliams. The Complaint also alleges that Gilliams has made recent efforts to raise money from investors.

The Complaint further alleges that Gilliams, the architect of the fraudulent scheme, used a series of middlemen who had access to investors or who controlled investment funds themselves. Gilliams promised the middlemen varying finder fees, and Gilliams paid some of the middlemen from the $5 million he ultimately obtained. Gilliams provided the middlemen and potential investors detailed information about his own experience trading Treasury STRIPS and his purported Treasury STRIPS Trading Program, including information regarding investment minimums, the expected trading frequency, and the expected rate of returns. According to the Complaint, nearly all of this information was false.

The SEC’s Complaint charges Gilliams and TLG 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 seeks injunctive relief, disgorgement, prejudgment interest and civil monetary penalties.

The U.S. Attorney’s Office for the Southern District of New York today filed an indictment charging Gilliams with wire fraud and securities fraud.