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January 28, 2011
Securities and Exchange Commission v. Francisco Illarramendi and Michael Kenwood Capital Management, LLC, as Defendants, and Michael Kenwood Asset Management, LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar, LP, as Relief Defendants, Civil Action No. 3:11cv00078 (D. Conn., January 14, 2011)SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets
The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of a Stamford, Connecticut-based investment adviser and its principal, Francisco Illarramendi, charging that they misappropriated at least $53 million in investor funds and used the money for self-dealing transactions.
The SEC alleges that Illarramendi defrauded investors in the several hedge funds he managed by improperly transferring their money into bank accounts that he personally controlled. He then invested the money for his own benefit or for the benefit of the entities that he controlled, rather than for the benefit of the hedge fund investors.
According to the SEC’s complaint filed in U.S. District Court for the District of Connecticut on January 14, 2011, Illarramendi is the majority owner of the Michael Kenwood Group LLC — a holding company for, among other entities, investment adviser Michael Kenwood Capital Management LLC. Through this adviser entity, Illarramendi manages several hedge funds, including one that contains up to $540 million in assets. The SEC’s complaint alleges that Illarramendi took at least $53 million in investor money out of this hedge fund without the knowledge or consent of the hedge fund’s investors.
The SEC sought an asset freeze and other emergency relief because it alleged that Illarramendi was imminently planning to make additional investments using investor funds without the knowledge or consent of the investors. Since the filing of the complaint, the Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, has held a series of hearings pertaining to the SEC’s request for an emergency relief against Illarramendi and Michael Kenwood Capital Management. Judge Arterton then entered an order freezing the assets of the defendants.
The SEC’s complaint charges Illarramendi and Michael Kenwood Capital Management, LLC, with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 there under. The complaint also names the following Illarramendi-controlled entities as relief defendants, alleging that they received investor funds to which they have no right: Michael Kenwood Asset Management LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar LP. In addition to preliminary emergency relief, the SEC’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties from the defendants, and disgorgement plus prejudgment interest from the relief defendants.
January 26, 2011SEC v. Adam Smith, Civil Action No. 11-CV-0535 (SDNY) SEC Charges Former Galleon Portfolio Manager in its Ongoing Investigation
On January 26, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York alleging that Adam Smith – a former portfolio manager of the Galleon Emerging Technology funds (f/k/a the Galleon Communications funds) engaged in insider trading in the securities of ATI Technologies, Inc. The SEC alleges that Smith caused the Galleon funds he advised to purchase shares of ATI based on material non-public information concerning Advanced Micro Devices Inc.’s $5.4 billion takeover of ATI in July, 2006. The trading generated over $1.3 million in illicit profits.
According to the SEC’s complaint, Smith obtained material non-public information concerning the AMD/ATI transaction from an investment banking source that Smith had known for years. This source, according to the SEC, provided Smith with the tip in order to win favors from Galleon such as securing investment banking work from, or obtaining future employment with, Galleon. The complaint filed today relates to a pending enforcement action, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR).
The SEC’s complaint charges Smith with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a final judgment permanently enjoining Smith from future violations of the above provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay civil penalties.
The SEC has now charged 28 defendants in its Galleon-related enforcement actions that have alleged widespread and repeated insider trading at numerous hedge funds including Galleon — a multibillion-dollar New York hedge fund complex founded and controlled by Raj Rajaratnam — and by other professional traders and corporate insiders in the securities of 14 companies generating illicit profits totaling over $70 million.
In addition, since the Galleon-related cases were filed, the SEC has:
January 19, 2011
Securities and Exchange Commission v. Provident Capital Indemnity, Ltd.,Minor Vargas Calvo, Jorge L. Castillo, and Relief Defendant Desarrollos Comerciales Ronim, S.A., Civil Action No. 3:11-cv-045 (E.D. Va. Jan. 19, 2011)SEC Charges Offshore Company With Massive Life Settlement Bonding Fraud U.S. Attorney and DOJ File Simultaneous Criminal Action
The Commission today filed an enforcement action against Provident Capital Indemnity, Ltd. (“PCI”), its president Minor Vargas Calvo (Vargas), and its purported outside auditor, Jorge L. Castillo (Castillo) seeking to halt a massive, ongoing fraud by PCI, an offshore company located in Costa Rica that provides financial guarantee bonds on life settlements and claims to protect investors’ interests in life insurance policies by promising to pay the death benefit if the insured lives beyond his or her estimated life expectancy. According to the complaint, from at least 2004 through March 2010, PCI issued approximately 197 bonds backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $670 million.
According to the complaint, the PCI bonds were a material component of numerous third-party life settlement offerings in the United States and abroad. Without a bond, a life settlement investment is illiquid and open-ended because the investment’s pay-out date and return are dependent upon the date of the insured’s death. PCI’s bonds offered a fixed maturity date for the investments because PCI’s bond obligated PCI to pay investors (directly or indirectly through the life settlement issuer) the face value of the underlying insurance policy by a date certain if the insured lived past his life expectancy date.
The complaint alleges that the defendants misrepresented PCI’s ability to satisfy its obligations under its bonds by making material misrepresentations about:
Specifically, since at least 2003, PCI, Vargas and Castillo represented to life settlement issuers, and in turn, the investing public, that Castillo had audited PCI’s financial statements in accordance with generally accepted accounting standards. Contrary to their representations, however, the complaint alleges that Castillo never conducted an audit of PCI and instead issued clean audit reports at Vargas’s bidding, thereby supporting the illusion that PCI had materially larger assets and greater financial wherewithal to support its obligations under the life settlement bonds. According to the complaint, PCI’s “audited” financial statements reflect what appears to be a fictitious “Long Term Asset” that has comprised some 70 percent to 80 percent of PCI’s total reported assets from at least 2003 to the present.
The complaint alleges that PCI’s “audited” financial statements were provided to Dun & Bradstreet (D&B), which issued PCI a favorable rating of “5 A/S,” based exclusively on PCI’s reported net worth. PCI then misleadingly represented in its marketing materials that D&B’s rating is a reflection of “successful customer satisfaction” and “the ability to maintain one of the insurance industry’s lowest loss ratios.” According to the complaint, PCI and Vargas also have represented that PCI was backed by a “bouquet” of reputable reinsurers that would backstop PCI’s obligations under its life settlement bonds when, in fact, PCI had no reinsurance coverage.
The Commission charged the defendants with violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5] and alternatively charged Castillo with aiding and abetting PCI’s and Vargas’s violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. The Commission also named Desarrollos Comerciales Ronim S.A., PCI’s managing general agent, as a relief defendant.
January 13, 2011
Securities and Exchange Commission v. Warren D, Nadel, Warren D. Nadel & Co. and Registered Investment Advisers, LLC, Civil Action No. 11-CV-0215 (DRH) (E.D.N.Y. January 13, 2011)
On January 13, 2011, the Securities and Exchange Commission filed a civil action in the United States District Court for the Eastern District of New York against Warren D. Nadel, his broker-dealer, Warren D. Nadel & Co. (“WDNC”), and his investment advisory firm, Registered Investment Advisers, LLC (“RIA”). The Commission alleges that these Defendants fraudulently induced clients to invest tens of millions of dollars in a purported investment program in order to receive over $8 million in commissions and fees from 2007 through 2009. Defendants deliberately overstated the value and liquidity of client holdings in the Strategy, by misrepresenting and concealing critical information about the way they were supposedly executing it. Although Defendants informed clients repeatedly that they were executing open-market transactions on the clients’ behalf, the vast majority of transactions, however, were not executed on the open market. Most simply consisted of trades between advisory client accounts controlled by Defendants at inflated prices made up by Nadel himself. Defendants thus created the false impression that there was a liquid market for these securities and that the market prices for the securities were consistent with the inflated values that Defendants reported to their clients.
The complaint alleges that the Defendants violated the anti-fraud provisions of the federal securities laws, specifically Defendants Nadel, WDNC and RIA violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder; Defendant WDNC violated and Defendant Nadel aided and abetted violations of 17(a) of the Exchange Act and Rules 10b-10 and 17a-4 thereunder; Defendants Nadel and RIA violated Sections 206(1), (2) and (3) and 207 of the Investment Advisers Act of 1940 (“Advisers Act”); Defendant RIA violated and Defendant Nadel aided and abetted violations of Sections 204 of the Advisers Act and Rule 204(2)-(a)(3) thereunder.
January 11, 2011
SEC v. Charles Schwab Investment Management, Charles Schwab & CO., Inc., and Schwab Investments, Civil Action No. CV-11-0136 EMC (N.D. Cal. Jan. 11, 2011)SEC Charges Schwab Entities With Making Misleading Statements
The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund’s concentration policy without obtaining the required shareholder approval.
CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC’s charges.
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets fall from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to the complaint filed in federal court in San Francisco and a related order issued by the Commission, CSIM and CS&Co. failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities did not adequately inform investors about the differences between YieldPlus and money market funds. In particular, the maturity and credit quality of the YieldPlus Fund’s securities were significantly different than those of a money market fund.
The SEC also found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab’s bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund’s assets in private-issuer MBS without obtaining shareholder approval.
January 11, 2011
Securities and Exchange Commission v. ConnectAJet.com, Inc., et al., Case No. 3-09 CV-01742-B (N.D. Tex.)
SEC OBTAINS JUDGMENT AGAINST FLORIDA STOCKBROKER STEPHEN FAYETTE The Securities and Exchange Commission announced today that on December 30, 2010, the United States District Court for the Northern District of Texas entered a Final Judgment against Stephen Fayette (Fayette), of Sarasota, Florida. The Commission’s complaint alleged that Fayette was part of a scheme to pump and dump the stock of ConnectAJet.com, Inc. According to the complaint, ConnectAJet.com, Inc., of Austin, Texas, issued 30 million shares of stock in an illegal, unregistered offering to certain penny stock promoters. To pump up demand for the stock, ConnectAJet.com, Inc. and its chief executive, attorney Martin T. Cantu, launched a nationwide advertising campaign including false press releases. The complaint alleged that Fayette, a registered representative at Fagenson & Co., Inc. facilitated the scheme by liquidating ConnectAJet.com, Inc. shares on behalf of multiple customers, including the penny stock promoters. According to the complaint, Fayette ignored numerous red flags and failed to make a reasonable inquiry under the circumstances to ensure that his customers were not acting as underwriters.
The Final Judgment permanently enjoins Fayette from violating Sections 5(a) and (c) of the Securities Act of 1933 and requires him to pay disgorgement, prejudgment interest and civil penalties totaling $313,257. Fayette consented to the entry of the judgment, which also bars him from participating in any penny stock offerings. Fayette, who previously worked for registered broker dealers GLB Trading, Inc. and Franklin Ross, Inc., also consented to an order barring him from association with any broker or dealer.
Previously, the Court entered Final Judgments against Martin T. Cantu, his father Martin M. Cantu, one of the promoters, Verona Funds LLC, and relief defendant Edward Spahiu. Cantu and Martin M. Cantu were held jointly and severally liable for $632,327 in disgorgement. In addition, they were ordered to pay $260,000 and $130,000 respectively in civil penalties. The Commission’s case against the remaining defendants is pending. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.
SEC v. Robert Feinblatt, Jeffrey Yokuty, Trivium Capital Management LLC, Sunil Bhalla, and Shammara Hussain, Civil Action No. 11-CV-0170 (SDNY)SEC Charges New York Hedge Fund Manager, Wall Street Professionals and Corporate Insiders in an Action Related to the Galleon Investigation
On January 10, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York alleging that Robert Feinblatt — a co-founder and principal of New York-based hedge fund investment adviser Trivium Capital Management LLC — and Trivium analyst Jeffrey Yokuty engaged in insider trading in the securities of Polycom, Hilton, Google and Kronos. The complaint charges Trivium with insider trading as well. The SEC further alleges that Polycom senior executive Sunil Bhalla and Shammara Hussain, an employee at investor relations consulting firm Market Street Partners that did work for Google, tipped the inside information that enabled the insider trading by Feinblatt and Yokuty on behalf of Trivium’s hedge funds for illicit profits of more than $15 million. The complaint filed today relates to pending enforcement actions, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR) and SEC v. Hardin, 10-CV-8600 (S.D.N.Y.) (JSR).
The SEC has now charged 27 defendants in its Galleon-related enforcement actions that have alleged widespread and repeated insider trading at numerous hedge funds including Galleon – a multi-billion dollar New York hedge fund complex founded and controlled by Raj Rajaratnam — and by other professional traders and corporate insiders in the securities of 14 companies generating illicit profits totaling approximately $69 million.
In the SEC’s complaint filed earlier today in federal court in Manhattan, the SEC alleges that Feinblatt and Yokuty traded on behalf of Trivium in connection with two corporate takeovers and two quarterly earnings announcements based on material nonpublic information that Feinblatt and Yokuty allegedly received from Roomy Khan, an individual investor who had, herself, received such information from various sources.
The SEC’s complaint alleges that Bhalla tipped Khan to inside information about Polycom’s 2005 fourth quarter earnings, and that Khan traded on that information and tipped others. The tippees included Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. Bhalla also tipped Khan with inside information about Polycom’s 2006 first quarter earnings. Khan traded on the information and tipped Rajaratnam, who traded on behalf of Galleon based on the information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that Khan received from a Moody’s rating agency analyst about an impending takeover of Hilton by The Blackstone Group. Feinblatt and Yokuty then traded on behalf of Trivium based on the information.
The SEC further alleges that Hussain tipped Khan among others with inside information about Google’s 2007 second quarter earnings. Khan traded on the information and also tipped Feinblatt and Yokuty, who traded on behalf of Trivium based on the information. The SEC also alleges that Khan traded on and tipped Feinblatt and Yokuty among others with inside information that she received about the impending acquisition of Kronos by Hellman & Friedman. Feinblatt and Yokuty then traded on behalf of Trivium based on the information.
The SEC’s complaint charges the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Bhalla, with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Bhalla from acting as an officer or director of any registered public company.
In addition, since the Galleon-related cases were filed, the SEC has:
On January 6, 2011, the Securities and Exchange Commission filed a civil injunctive action in U.S. District Court for the Northern District of Georgia, charging Stanley J. Kowalewski (“Kowalewski”) and SJK Investment Management, LLC (“SJK”), a registered investment adviser, with violations of the federal securities laws for defrauding investors in two hedge funds managed by SJK.
The Commission’s Complaint alleges that, beginning in the summer of 2009, SJK and Kowalewski, the firm’s CEO, raised a total of $65 million for two hedge funds, the SJK Absolute Return Fund, LLC, and the SJK Absolute Return Fund, Ltd. (collectively, the “Absolute Return Funds”) and represented to investors that: (1) “substantially all” of the monies invested in the Absolute Return Funds would be invested in “unaffiliated” underlying hedge funds pursuing complex investment strategies, (2) no single underlying fund would be allocated more than 15 percent of the Absolute Return Funds’ monies, and (3) as compensation for its services, SJK would receive no more than a 1 percent annual asset management fee and a 10 percent profits incentive fee. Contrary to these representations, Kowalewski and SJK formed a new, undisclosed fund, the Special Opportunities Fund, LP (the “Special Opportunities Fund”), which they used to divert to themselves millions of dollars through various self-dealing transactions, including having the Special Opportunities Fund: (1) buy Kowalewski’s personal home for $2.8 million, almost $1 million more than its 2006 purchase price, (2) purchase a vacation home for Kowalewski for $3.9 million, (3) pay approximately $1 million of Kowalewski and SJK’s personal and business expenses, and (4) pay SJK an unfounded $4 million “administration” fee, which Kowalewski then paid himself as a “salary draw.”
In its Complaint, the Commission alleges that Kowalewski and SJK violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act (“Advisers Act”) and Rule 206(4)-8 thereunder.
On January 6, 2011, the Honorable Timothy C. Batten, Sr., United States District Judge for the Northern District of Georgia, entered an order temporarily restraining the defendants from violations of the federal securities laws identified above, instituting an asset freeze, and ordering other relief.Securities and Exchange Commission v. Raymond P. Morris, E&R Holdings, LLC, Wise Financial Holdings, LLC, Momentum Leasing, LLC, James L. Haley, Cornerstone Capital Fund, LLC, Vantage Point Capital, LLC, Jay J. Linford, Freedom group, LLC, and Luc D. Nguyen, Civil No. 2:11-cv-00021-BSJ (USDC Utah, filed January 6, 2011)
The Securities and Exchange Commission announced the filing of a complaint in federal district court against Raymond P. Morris (Morris), James L. Haley (Haley), Jay J. Lindford (Lindford), attorney Luc D. Nguyen (Nguyen), E&R Holdings, LLC (E&R Holdings), Wise Financial Holdings, LLC (Wise Financial), Momentum Leasing, LLC (Momentum), Cornerstone Capital Fund, LLC (Cornerstone), Vantage Point Capital, LLC (Vantage Point) and Freedom Group, LLC (Freedom Group), alleging unregistered fraudulent offers, sales and purchases of securities that bilked at least 90 investors out of no less than $60 million.
The complaint alleges that from at least March 2007 through January 2009, Morris, through his entities E&R Holdings, Wise Financial and Momentum, offered and sold unregistered promissory notes to investors and in doing so made misrepresentations and omissions designed to convince investors that they were purchasing high yield notes that were risk free. Morris told investors that their funds would be deposited into a secure account and would be used only to verify deposits. Instead of using the funds as represented Morris used investor funds to support his extravagant lifestyle and to make Ponzi payments to certain investors.
The complaint further alleges that Haley, Linford and Nguyen assisted Morris in the fraud, soliciting funds from investors through misrepresentations, recklessly repeating Morris’ misrepresentations.
The Commission’s complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings, Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group 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 thereunder. The complaint also charges Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The complaint seeks an injunction, disgorgement and civil penalties.
The Commission acknowledges the assistance of the United States Attorney’s Office for the District of Utah, the Federal Bureau of Investigation and the Utah County Attorney’s Office in this matter.
Securities and Exchange Commission v. K&L International Enterprises, Inc., et al., Case No. 6:09-cv-1638-Orl-31KRS (M.D. Fla.)EC Obtains Judgments Against Enzyme Environmental Solutions, Inc. and Its Officer Jared E. Hochstedler
The Securities and Exchange Commission announced today that, on December 17, 2010, the Honorable Gregory A. Presnell of the United States District Court for the Middle District of Florida entered Final Judgments against Enzyme Environmental Solutions, Inc. (EESO) and its sole director and officer, Jared E. Hochstedler. The Commission’s complaint alleged that the defendants engaged in a scheme to evade the registration requirements of Section 5 of the Securities Act of 1933. The complaint further alleged that, under the guise of converting debt obligations into shares, EESO and Hochstedler distributed over two billion shares of EESO stock to the public through stock distributors in unregistered transactions. The defendants consented to entry of the Final Judgments without admitting or denying the allegations in the complaint.
The Final Judgments permanently enjoin EESO and Hochstedler from violating Sections 5(a) and (c) of the Securities Act and require them to pay disgorgement, prejudgment interest and, in the case of EESO, civil penalties. EESO consented to an entry of a judgment ordering it to disgorge $346,135 plus prejudgment interest and to pay a civil penalty of $25,000. Hochstedler consented to the entry of a judgment ordering him to disgorge $1,445,000 plus prejudgment interest and, based upon his financial condition, waiving all but $385,000, $65,000 of which will be paid within 30 days of the entry of judgment and the balance within 24 months of the entry of judgment. With this settlement, the action is fully resolved as to all defendants.
Securities and Exchange Commission v. Joseph M. Braas and Michael J. Schlager, Case No. 11-cv-0087-PD (E.D. Pa.)