FTC TAKES ON FIRST CROWDFUNDING CASE INVOLVING ALLEGED FRAUD

FROM:  U.S. FEDERAL TRADE COMMISSION
Crowdfunding Project Creator Settles FTC Charges of Deception
Defendant Spent Backers’ Money on Personal Expenses

In its first case involving crowdfunding, the Federal Trade Commission has taken legal action against the deceptive tactics of a project creator who raised money from consumers to produce a board game through a Kickstarter campaign, but instead used most of the funds on himself. The defendant has agreed to a settlement that prohibits him from deceptive representations related to any crowdfunding campaigns in the future and requires him to honor any stated refund policy.

Crowdfunding involves individuals and businesses funding a project or venture by raising funds from numerous people, often via dedicated online platforms. According to the FTC’s complaint, Erik Chevalier, also doing business as The Forking Path Co., sought money from consumers to produce a board game called The Doom That Came to Atlantic City that had been created by two prominent board game artists.

“Many consumers enjoy the opportunity to take part in the development of a product or service through crowdfunding, and they generally know there’s some uncertainty involved in helping start something new,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “But consumers should able to trust their money will actually be spent on the project they funded.”

According to the FTC’s complaint, Chevalier represented in his Doom campaign on Kickstarter.com that if he raised $35,000, backers would get certain rewards, such as a copy of the game or specially designed pewter game figurines.  He raised more than $122,000 from 1,246 backers, most of whom pledged $75 or more in the hopes of getting the highly prized figurines. He represented in a number of updates that he was making progress on the game. But after 14 months, Chevalier announced that he was cancelling the project and refunding his backers’ money.

Despite Chevalier’s promises he did not provide the rewards, nor did he provide refunds to his backers. In fact, according to the FTC’s complaint, Chevalier spent most of the money on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment, and licenses for a different project.

Under the settlement order, Chevalier is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. He is also barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly. The order imposes a $111,793.71 judgment that will be suspended due to Chevalier’s inability to pay. The full amount will become due immediately if he is found to have misrepresented his financial condition.

This case is part of the FTC’s ongoing work to protect consumers taking advantage of new and emerging financial technology, also known as FinTech. As technological advances expand the ways consumers can store, share, and spend money, the FTC is working to keep consumers protected while encouraging innovation for consumers’ benefit.

The Commission vote authorizing the staff to file the complaint and proposed stipulated order in federal court was 5-0. The case was filed in the U.S. District Court for the District of Oregon, Portland Division.

SEC CHARGES INVESTMENT ADVISER WITH DEFRAUDING TEACHERS AND LAW ENFORCEMENT OFFICERS

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION  
06/01/2015 05:55 PM EDT

The Securities and Exchange Commission charged an investment adviser in Miami with siphoning money from his investment fund and defrauding investors, including several local teachers and law enforcement officers.

The SEC alleges that Phil Donnahue Williamson conducted a Ponzi scheme with money he raised for the Sterling Investment Fund, which purportedly invested in mortgages and properties in Florida and Georgia.  Many of Williamson’s investors were public sector retirees such as teachers and law enforcement officers who sought safe investments for their retirement savings.  Williamson assured investors there was no risk involved and they would receive annual returns of 8 to 12 percent.  But rather than invest their money as promised, he used the majority of fund assets to pay his personal expenses and make supposed returns to investors.  Williamson created fictitious valuations that were sent to investors.



“We allege that Williamson lured retired teachers, law enforcement officers, and others into believing that the Sterling Investment Fund was a safe investment generating significant returns,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Investors entrusted him with their retirement savings, and he spent it as his own money.”



According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, one retired Miami-Dade County school teacher and church pastor invested $125,000 in the fund.  That same day, Williamson transferred himself $10,000 to pay his credit card bill and make a car payment to BMW among other personal expenditures.  Williamson later paid $24,400 to other investors in the fund as purported distributions, and transferred himself another $24,000 to pay additional personal expenses.



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



Williamson has agreed to settle the SEC’s charges and is liable for $748,050.01 in disgorgement.  He also agreed to be permanently prevented from violating the antifraud provisions of the Investment Advisers Act of 1940, including misleading clients or prospective clients about investment strategies, the use of client funds, or his qualifications to advise clients.  The settlement is subject to court approval.



The SEC’s investigation was conducted by Casey Cohen and Margaret Vizzi in the Miami office, and the case was supervised by Assistant Regional Director Jason R. Berkowitz and Associate Regional Director Glenn S. Gordon.  The litigation will be handled by Andrew O. Schiff.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida, the Federal Bureau of Investigation, and the Florida Office of Financial Regulation.

SEC ANNOUNCES FRAUD CHARGES AGAINST ITT EDUCATIONAL SERVICES INC.

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

05/12/2015 10:20 AM EDT

The Securities and Exchange Commission today announced fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick.

The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT’s investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed.  ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance sheet loans for ITT’s students following the collapse of the private student loan market.  To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon.  Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT’s exposure to these programs was much more limited.  Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments that ITT would need to make on the guarantees, ITT’s stock price declined dramatically, falling by approximately two-thirds.

“Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations.”

The SEC’s complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT’s guarantee obligations for the PEAKS and CUSO programs.  For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.  ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact.  ITT further failed to consolidate the PEAKS program in ITT’s financial statements despite ITT’s control over the economic performance of the program.  ITT and the executives also misled and withheld significant information from ITT’s auditor.

The SEC’s investigation has been conducted by Zachary Carlyle, Jason Casey, and Anne Romero with assistance from Judy Bizu.  The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato of the Complex Financial Instruments Unit.  The litigation will be led by Nicholas Heinke, Polly Atkinson, and Mr. Carlyle.

10 CHARGED IN PENNY STOCK FRAUD SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23243 / April 16, 2015
Securities and Exchange Commission v. Daniel P. McKelvey, et al., Civil Action No. 9:15-cv-80496 (S.D. Fla., filed April 16, 2015)

The Securities and Exchange Commission announced fraud charges against 10 individuals involved in a scheme to offer and sell penny stock in undisclosed "blank check" companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans.

Blank check companies generally have no operations and no value other than their status as a registered entity, which makes them attractive targets for unscrupulous individuals seeking reverse mergers with clean shells ripe for pump-and-dump schemes. The federal securities laws impose various requirements on blank check companies to prevent such illicit use. The SEC alleges that Daniel P. McKelvey of Foster City, Calif., Alvin S. Mirman of Sarasota, Fla., and Steven Sanders of Lake Worth, Fla., routinely evaded these requirements by creating undisclosed blank check companies and installing figurehead company officers while falsely depicting in registration statements and other SEC filings that the companies were pursuing real business ventures under these officers. Allegedly concealed from the public was the fact that the companies were controlled at all times by McKelvey, Mirman, or Sanders for the sole purpose of entering into reverse mergers with unidentified companies so they could profit from the sales.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, McKelvey, Mirman, and Sanders collectively developed nearly two dozen undisclosed blank check companies and sold most of them for a total of approximately $6 million in ill-gotten gains. They were thwarted from further sales when the SEC instituted stop order proceedings last year that led to the suspension of the registration statements of four issuers before they could be further packaged for sale. The scheme allegedly involved forging or falsifying hundreds of certifications filed with the companies' SEC filings as well as communications from impersonating e-mail accounts, management representation letters to accountants, notarizations on applications to the Financial Industry Regulatory Authority, and securities purchase agreements used in the sales of the undisclosed blank check companies.

The SEC's complaint alleges that Steven Sanders's brother Edward G. Sanders of Coral Springs, Fla., Scott F. Hughes of Duluth, Ga., and Jeffrey L. Lamson of El Dorado Hills, Calif. assisted the scheme by acting as corporate nominees with knowledge of the false business plans, drafting or providing false business plans, or recruiting other nominee officers.

The SEC's complaint charges McKelvey, Mirman, Steven Sanders, Hughes, Lamson, and Edward Sanders with violating or aiding and abetting violations of the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions as well as officer-and-director bars and penny stock bars.

The SEC's complaint also names four relief defendants for the purpose of recovering illicit proceeds of the scheme in their possession: Mirman's wife Ilene P. Mirman, a company managed by McKelvey called Forte Capital Partners LLC, and two companies managed by Steven Sanders named AU Consulting LLC and MBN Consulting LLC.

The SEC additionally charged four other figurehead officers and directors who agreed to settle their cases in separate administrative proceedings: Edward T. Farmer of Sarasota, Fla., William J. Gaffney of Cumming, Ga., Kevin D. Miller of Alpharetta, Ga., and Ronald A. Warren of Peachtree Corners, Ga. They consented to SEC orders without admitting or denying the findings that they violated the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws. They are barred from serving as an officer or director of a public company and from participating in penny stock offerings, and they must disgorge ill-gotten gains plus prejudgment interest.

The SEC's investigation, which is continuing, is being conducted by Jeffrey T. Cook in the Miami Regional Office as part of the Microcap Fraud Task Force. The case is being supervised by Eric R. Busto, and the SEC's litigation will be led by Patrick R. Costello.

FTC BARS COMPANY FROM MAKING FALSE CLAIMS ABOUT APP THAT CAN DIAGNOSE MELONOMA RISK

FROM:  U.S. FEDERAL TRADE COMMISSION
FTC Approves Final Order Barring Misleading Claims about App’s Ability to Diagnose or Assess the Risk of Melanoma

Following a public comment period, the Federal Trade Commission has approved a final consent order barring Health Discovery Corporation from making deceptive or unsupported claims that its app, MelApp, could help diagnose or assess consumers’ melanoma risk.

According to the FTC’s February 2015 complaint, MelApp instructed users to photograph a mole with a smartphone camera and input other information. It would then supposedly calculate the mole’s melanoma risk as low, medium, or high. The FTC charged that Health Discovery Corporation deceptively claimed the app accurately analyzed melanoma risk and could assess such risk in early stages, and that its accuracy was scientifically proven.

The final order settling the action bars the company from claiming that any device detects or diagnoses melanoma or its risk factors, or increases users’ chances of early detection, unless the representation is not misleading and is supported by competent and reliable scientific evidence. It also prohibits Health Discovery Corporation from making any other deceptive claims about a device’s health benefits or efficacy, or about the scientific support for any product or service, and requires the company to pay $17,963.

The Commission vote approving the final consent order and was 4-1, with Commissioner Maureen Ohlhausen voting no

SEC CHARGES 12 COMPANIES, 6 INDIVIDUALS FOR ROLES IN ALLEGED FRAUD SCHEME INVOLVING CELLULAR SPECTRUM LICENSES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
04/06/2015 02:40 PM EDT

The Securities and Exchange Commission charged 12 companies and six individuals with defrauding investors in a scheme involving applications to the Federal Communications Commission (FCC) for cellular spectrum licenses.

According to the SEC’s complaint filed in federal district court in Arizona, David Alcorn and Kent Maerki orchestrated the offering fraud through Janus Spectrum LLC, a Glendale, Ariz.-based company they founded and managed.  Janus Spectrum held itself out as a service provider that prepares cellular spectrum license applications on behalf of third parties.  The complaint alleges that although Alcorn and Maerki had third parties offer and sell securities based on the licenses to investors, they were personally involved in presentations to investors and Maerki appeared in misleading videos, including one called “Money from Thin Air.”

The SEC alleges that investors in the scheme were promised potentially lucrative returns based on Janus Spectrum obtaining FCC licenses in the Expansion Band and Guard Band portions of the 800 megahertz (MHz) band.  Janus Spectrum and the fundraising entities claimed that investors could profit because Sprint and other major wireless carriers needed licenses in this spectrum.  In fact, the value of the licenses was small because this spectrum cannot support cellular systems and is generally used for “push-to-talk” services for local law enforcement or businesses like pizza delivery companies that require less bandwidth.

“Janus Spectrum and its fundraising entities allegedly engaged in the unregistered offer and sale of securities in violation of the federal securities laws and repeatedly lied to investors regarding the value and use of the FCC licenses,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint alleges that the scheme raised more than $12.4 million from investors from May 2012 to October 2014.  The fundraising entities funneled a significant percentage of the investors’ funds to Janus Spectrum, which used only a small portion to prepare applications for FCC licenses.  The complaint alleges that instead, all of the individuals in the scheme kept a significant portion of investor funds for personal use.

Four individuals and 11 companies were named as fundraising entities:

Daryl G. Bank of Port St. Lucie, Fla., and his companies Dominion Private Client Group LLC, Janus Spectrum Group LLC, Spectrum Management LLC, Spectrum 100 LLC, Spectrum 100 Management LLC, Prime Spectrum LLC and Prime Spectrum Management LLC all based in Virginia Beach, Va.
Bobby D. Jones of Phoenix and his company Premier Spectrum Group PMA, a Texas private membership association based in Phoenix.
Terry W. Johnson of Heath, Texas and Raymon G. Chadwick Jr. of Grand Prairie, Texas and their companies Innovative Group PMA, Premier Group PMA and Prosperity Group PMA, Texas private membership associations based in Grand Prairie, Texas or Heath, Texas.
As alleged in the SEC’s complaint, in conducting this fraudulent scheme and lying to investors, Janus Spectrum, Alcorn, Maerki, Bank, Jones, Johnson, Chadwick, and the fundraising entities violated the antifraud provisions and the securities registration provisions of the federal securities laws, and Janus Spectrum and all six individuals violated the broker-dealer registration provisions.

The SEC’s investigation was conducted by Sana Muttalib and Lorraine Pearson and supervised by Victoria A. Levin of the Los Angeles office.  The litigation will be handled by Sam Puathasnanon.  The SEC appreciates the assistance of the Texas State Securities Board and the Federal Communications Commission.

SEC ACCUSES EXECUTIVE WITH USING FALSE ACCOUNTING ENTRIES TO INFLATE QUARTERLY REVENUES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
04/01/2015 02:45 PM EDT

The Securities and Exchange Commission today charged the owner and chief executive of a North Carolina business with defrauding a publicly-traded telecommunications company and its shareholders during and after its acquisition of his business.

The executive, Timothy Scronce, agreed to settle the charges against him without admitting or denying the SEC’s findings.  Scronce consented to the SEC’s order requiring him to return his allegedly ill-gotten gains with interest, pay a civil penalty, and be barred for 10 years from serving as a public company officer or director.

Bloomingdale, Ill.-based PCTEL Inc. acquired assets of TelWorx Communications LLC and three related telecommunications companies owned or controlled by Scronce for cash and a stock-based earn-out. According to the SEC’s order, Scronce used false accounting entries to inflate TelWorx’s quarterly revenues and earnings in the months leading up to the purchase to inflate the price PCTEL paid for the companies.  Scronce indirectly defrauded PCTEL’s shareholders because TelWorx’s false financial statements were incorporated into an SEC filing made by PCTEL.  After the asset purchase was completed, while employed by PCTEL, Scronce continued to conceal his fraudulent activities.  He falsified PCTEL’s books and records and circumvented the company’s internal controls by recording bogus transactions

In separate settled administrative proceedings instituted today, the SEC charged two former TelWorx employees who worked with Scronce at PCTEL after the asset purchase: senior vice president Marc Mize and controller Michael Hedrick.  The SEC’s orders find that Mize played a role in recording the bogus transactions after the asset purchase and that Hedrick participated in the fraud and recorded bogus transactions.  Mize and Hedrick settled the SEC’s charges without admitting or denying the SEC’s findings.  Mize agreed to pay a $25,000 penalty and Hedrick agreed to disgorge $25,000 plus prejudgment interest.  Hedrick entered into a cooperation agreement with the SEC.

“Scronce used accounting gimmicks to make TelWorx appear more valuable to PCTEL than it actually was,” said Robert Burson, Associate Regional Director of the SEC’s Chicago office. “Scronce compounded his deception by recording fake transactions even after the acquisition was complete.”

The SEC’s order instituting a settled administrative proceeding against Scronce finds that he violated the anti-fraud, books and records, and internal controls provisions of the Securities Exchange Act of 1934.  The SEC’s order also finds that he caused PCTEL’s violations of the books and records and reporting provisions of the Exchange Act.

The SEC’s order against Hedrick finds that he caused Scronce’s violations of the anti-fraud provisions of the Exchange Act and violated the books and records and internal controls provisions.  The order also finds that Hedrick caused PCTEL’s violations of the books and records and reporting provisions.

The SEC’s order against Mize finds that he violated the books and records and internal controls provisions and caused PCTEL’s violations of the books and records provisions of the Exchange Act.

The SEC’s investigation, which is ongoing, has been conducted by Jen Peltz, Nicholas Eichenseer, Luz Aguilar and Robert M. Moye and supervised by Paul Montoya of the Chicago Regional Office.

ALLEGED FTC IMPERSONATORS ORDERED BY COURT TO TEMPORARILY SHUTDOWN

FROM:  FEDERAL TRADE COMMISSION FTC

Scammers Make Impossible Promises, Target Spanish-Speaking Consumers

At the request of the Federal Trade Commission, a federal court has halted the operations of a company that calls itself “FTC Credit Solutions.” The company allegedly used false affiliation with the Commission to market bogus credit repair services to Spanish-speaking consumers.

In a complaint filed with the court, the FTC alleges that defendants deceived consumers by claiming to be affiliated with or licensed by the Federal Trade Commission, falsely promising that they could remove negative information from consumers’ credit reports, and guaranteeing consumers a credit score of 700 or above within six months or less.

“Peddling lies under the name of the Federal Trade Commission to target consumers who are in difficult financial situations is appalling,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “This scam used the promise of a fresh start to hurt consumers when they most needed help, so we are pleased the court has taken a first step to ending it for good.”

The FTC’s complaint quotes a radio advertisement hosted by defendant Guillermo Leyes, in which he falsely stated that FTC Credit Solutions had a license from the FTC. Defendant Leyes misrepresented that the purported license allowed FTC Credit Solutions to guarantee any consumer a credit score of 700 or higher within 120 days or less.

According to the FTC’s filings, in undercover calls placed to the company by FTC investigators posing as consumers seeking debt repair services, defendant Maria Bernal, an employee of the company, said that the company “works under the Federal Trade Commission, which is a law that was signed by the President in 2010.” She also falsely promised that the company could “delete” and “get [the investigator] a pardon” for $19,000 in debt.

The FTC further alleges that the company unlawfully charged consumers fees in advance of providing the promised credit repair services.  The company also sent the major credit bureaus letters with false information on behalf of numerous consumers.

The FTC alleges that the company, along with employees Leyes, Bernal, Jimena Perez and Fermin Campos, violated the FTC Act and the Credit Repair Organizations Act (CROA). Specifically, defendants violated the FTC Act by misrepresenting that they were affiliated with the FTC, by falsely promising to remove negative information from consumers’ credit reports, and by making false promises about improving consumers’ credit scores. In addition, the FTC alleges that by charging consumers upfront for credit repair services and misrepresenting their services, the defendants violated the CROA.

Under the terms of the temporary restraining order granted by the court, the company has temporarily ceased operations and the defendants’ assets are frozen.

The County of Los Angeles Department of Consumer and Business Affairs provided significant assistance in this case.

The Commission vote authorizing the staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Central District of California.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. The case will be decided by the court.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them.

SEC SHUTS DOWN ALLEGED PYRAMID AND PONZI SCHEME THAT USED 'TRIPLE ALGORITHM' AND '3-D MATRIX'

FROM:  U.S. SECURITIES  AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against two operators of a Colorado-based pyramid and Ponzi scheme that promises investors extraordinary returns of 700 percent through a purported “triple algorithm” and “3-D matrix.”

In a complaint unsealed yesterday afternoon in federal court in Denver, the SEC alleges that Kristine L. Johnson of Aurora, Colo., and Troy A. Barnes of Riverview, Mich., have raised more than $3.8 million since April 2014 from investors they enticed into buying positions in their company Work With Troy Barnes Inc., which is doing business as “The Achieve Community.”  In Internet videos and other web promotions, investors were pitched “you and anyone you know can make as much money as you want” by purchasing positions that cost $50 each, and as they progress through the matrix they would receive a $400 payout on each position within three to six months.  Barnes claimed to have hired a seasoned programmer to perfect the triple algorithm investment formula supposedly generating the extraordinary returns.

The SEC alleges that while Johnson and Barnes explicitly claimed their program was not a pyramid scheme, their company has no legitimate business operations and they are merely paying purported investment returns to earlier investors as they receive funds from new investors.  Meanwhile, Johnson and Barnes have been making cash withdrawals of investor funds for such personal uses as buying a new car and paying credit card bills.

“Johnson and Barnes allegedly claim to be operating a successful investment program when in fact they are taking funds from new investors to pay phony profits to earlier investors,” said Julie Lutz, Director of the SEC’s Denver Regional Office.

The SEC’s complaint alleges that Work With Troy Barnes, Johnson, and Barnes 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.  The SEC’s complaint names Achieve International LLC as a relief defendant for the purpose of recovering ill-gotten gains from the scheme in its accounts.  The Honorable Robert E. Blackburn, U.S. District Judge for the District of Colorado, granted a temporary restraining order that in part freezes the assets of Johnson, Barnes, and their company.  

The SEC’s investigation, which is continuing, is being conducted by Jeffrey Felder, Kerry Matticks, and Jay A. Scoggins in the Denver office.  The SEC’s litigation is being led by Nicholas Heinke of the Denver office.  The SEC appreciates the assistance of the Colorado Division of Securities.

DOJ, STATES AND D.C. ENTER INTO $1.375 BILLION SETTLEMENT WITH S&P RELATED TO STRUCTURED FINANCIAL PRODUCTS

FROM:  U.S. JUSTICE DEPARTMENT 
Tuesday, February 3, 2015
Justice Department and State Partners Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis

Attorney General Eric Holder announced today that the Department of Justice and 19 states and the District of Columbia have entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).  The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia.  Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks.  Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.

The settlement announced today is comprised of several elements.  In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts.  It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States.  Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.

“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Holder.  “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business.  While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

Attorney General Holder was joined in announcing the settlement with Acting Associate Attorney General Stuart F. Delery, Acting Assistant Attorney General for the Civil Division Joyce R. Branda and Acting U.S. Attorney for the Central District of California Stephanie Yonekura.  Also joining the Department of Justice in making this announcement are the attorneys general from Arizona, Arkansas, California, Connecticut, Colorado, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington and the District of Columbia.

“This resolution provides further proof that the Department of Justice will vigorously pursue investigations and litigation, no matter how challenging, to protect the best interests of the American people,” said Acting Associate Attorney General Delery.  “As part of the resolution, S&P admitted facts demonstrating that it misrepresented itself to investors and the public, allowing the pursuit of profits to bias its ratings.  S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government.  Today's announcement is the latest result of our dedicated effort to address misconduct of every kind that contributed to the financial crisis.”

“Today’s historic settlement demonstrates that we will use all of our resources and every legal tool available to hold accountable those who commit financial fraud,” said Acting Assistant Attorney General Branda.  “Thanks to the tireless efforts of our team in Washington and California, S&P has not only paid a record-setting penalty, but has now admitted to the American people facts that make clear its own unlawful role in the financial crisis.”

Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency.  The remaining $687.5 million will be divided among the 19 states and the District of Columbia.  The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.

In its agreed statement of facts, S&P admits that its decisions on its rating models were affected by business concerns, and that, with an eye to business concerns, S&P maintained and continued to issue positive ratings on securities despite a growing awareness of quality problems with those securities. S&P acknowledges that:

S&P promised investors at all relevant times that its ratings must be independent and objective and must not be affected by any existing or potential business relationship;

S&P executives have admitted, despite its representations, that decisions about the testing and rollout of updates to S&P’s model for rating CDOs were made, at least in part, based on the effect that any update would have on S&P’s business relationship with issuers;

Relevant people within S&P knew in 2007 many loans in RMBS transactions S&P were rating were delinquent and that losses were probable;

S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the negative rating actions that it expected would come.
In addition, S&P acknowledges that the voluminous discovery provided to S&P by the United States in the litigation does not support their allegation that the United States’ complaint was filed in retaliation for S&P’s 2011 decisions on the credit rating of the United States.  S&P will formally retract that claim in the litigation.

“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Yonekura.  “Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off.  This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone.  This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”

Today’s settlement was announced in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. Attorneys’ Offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes, enhancing coordination and cooperation among federal, state and local authorities, addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants.

SEC ANNOUNCES FRAUD CHARGES AGAINST FORT LAUDERDALE, FLORIDA-BASED INVESTMENT ADVISORY FIRM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
01/21/2015 01:15 PM EST

The Securities and Exchange Commission announced fraud charges and an asset freeze against a Fort Lauderdale, Florida-based investment advisory firm, its manager, and three related funds in a scheme that raised more than $17 million since November 2013.

The SEC’s complaint filed in federal court in the Southern District of Florida last week charged Elm Tree Investment Advisors LLC, its founder and manager, Frederic Elm, and Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP.  According to the complaint, Elm, formerly known as Frederic Elmaleh, his unregistered investment advisory firm, and the three funds misled investors and used most of the money raised to make Ponzi-like payments to the investors.  The complaint alleges that Elm treated the funds as his personal piggy bank, tapping them to buy a $1.75 million home, luxury automobiles, and jewelry, and to cover daily living expenses.  Elm’s wife, Amanda Elm, formerly Elmaleh, is named as a relief defendant based on her receipt of investor monies.

"Elm misled investors about how he and his funds would use their money and about how much he charged them in fees," said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  "As a result, Elm was able to wrongfully take millions of dollars from investors without their knowledge."

The SEC's complaint charges Elm, his advisory firm and the Elm Tree funds with violating anti-fraud provisions of federal securities laws and SEC anti-fraud rules.  The SEC is seeking relief for investors, including return of allegedly ill-gotten gains, with interest, and financial penalties.

The Honorable William Dimitrouleas on Friday granted the SEC’s request for a temporary restraining order and temporary asset freeze against Elm, his firm, and the three Elm Tree funds.  The judge ordered a temporary asset freeze against Amanda Elm and required her and the other defendants to provide accountings.  Judge Dimitrouleas also entered an order appointing Grisel Alonso as receiver for Elm Tree Investment Advisors and the Elm Tree funds.  A court hearing has been scheduled for January 29.

The SEC's investigation, which is continuing, has been conducted by Katharine E. Zoladz and Mark Dee and supervised by Elisha L. Frank in the Miami Regional Office.  Patrick Costello is leading the SEC’s litigation.

ENERGY COMPANY TO PAY $2.5 MILLION FOR ALLEGED INVOLVEMENT IN FRAUD CONSPIRACY AGAINST UNITED STATES

WEDNESDAY, NOVEMBER 19, 2014
WASHINGTON GAS ENERGY SYSTEMS AGREES TO PAY $2.5 MILLION IN FINES AND PENALTIES FOR CONSPIRING TO OBTAIN FEDERAL CONTRACTS

Scheme Involved Energy-Related Services at Government Buildings

WASHINGTON — Washington Gas Energy Systems (WGESystems) has agreed to pay more than $2.5 million in fines and monetary penalties for conspiring to commit fraud on the United States by illegally obtaining contracts that were meant for small, disadvantaged businesses.

The court agreement was announced today by William J. Baer, Assistant Attorney General of the Antitrust Division; Principal Assistant U.S. Attorney Vincent H. Cohen Jr. of the U.S. Attorney’s Office for the District of Columbia; Robert C. Erickson, Acting Inspector General of the U.S. General Services Administration (GSA); Peggy E. Gustafson, Inspector General for the Small Business Administration (SBA), and Andrew G. McCabe, Assistant Director in Charge of the FBI’s Washington Field Office.

WGESystems, based in Virginia, is a wholly owned subsidiary of WGL Holdings Inc. (WGL).  WGL is the parent company for all of the corporations within the Washington Gas family.  WGESystems plays no direct role in the delivery of natural gas, and it is not a utility.  It is a design-build firm that specializes in providing energy efficiency and sustainability solutions to clients.

A criminal information was filed today in the U.S. District Court for the District of Columbia charging WGESystems with one count of knowingly and willfully conspiring to commit major fraud on the United States.  WGESystems waived the requirement of being charged by way of federal indictment, agreed to the filing of the information, and has accepted responsibility for its criminal conduct and that of its employees.

In addition, as part of a deferred prosecution agreement reached with the U.S. Attorney’s Office for the District of Columbia and the Antitrust Division, WGESystems agreed to pay a fine of $1,560,000 and a monetary penalty of $1,027,261 within five days of the approval of the agreement by the court.

According to court documents filed today, WGESystems conspired with a company that was eligible to receive federal government contracts set aside for small, disadvantaged businesses with the understanding that the business would illegally subcontract all of the work on the projects to WGESystems.  In this way, WGESystems was able to capture a total of eight contracts worth $17,711,405 that should have gone to an eligible company. These contracts, awarded in 2010, were focused on making federal buildings in the Washington, D.C., area more energy efficient.

Under the illegal agreement, the company that was awarded these government contracts was allowed to keep 5.8 percent of the value of the contracts for allowing WGESystems to use the company’s small business status to win these contracts.

“Conspiracies to violate federal procurement laws will not be tolerated,” said Assistant Attorney General Bill Baer for the Antitrust Division.  “Taxpayers deserve to have contracting processes that are fair and competitive, and fully comply with applicable laws and regulations.”

“Time and time again, we have seen government contractors abuse and exploit programs designed to help minority and socially disadvantaged small businesses,” said Principal Assistant U.S. Attorney Cohen.  “This Washington Gas subsidiary obtained millions of dollars in federal contracts by using a small business that had no ability to actually complete the contract as a front company.  Even though the subsidiary lost money on these contracts, it is required to pay $2.5 million in fines and penalties under this agreement.  This resolution should cause other contractors to think twice about playing fast and loose with federal contracting rules.”

“Cases like this are important for us to maintain the integrity of the federal contracting process,” said GSA Acting Inspector General Erickson.  “Companies cannot cheat to win federal contracts and expect to get away with their ill-gotten gains.”

“SBA’s 8(a) Business Development Program assists eligible socially and economically disadvantaged individuals in developing and growing their businesses,” said SBA Inspector General Gustafson.  “Large businesses that fraudulently seek to gain access to contracts set aside for small businesses erode the public’s trust in this important program.  I want to thank the U.S. Attorney’s Office and our law enforcement partners for their professionalism and commitment to justice in this investigation.”

“Federal government contracting laws are in place to create a level playing field for small disadvantaged businesses whose work supports our country's diverse financial infrastructure,” said Assistant Director in Charge McCabe.  “The FBI with our law enforcement partners will investigate those companies who fraudulently abuse federal contracting laws with the purpose of increasing their company's bottom line.”

According to the court documents, until 2010, GSA had an area-wide contract with WGESystems.  This contract enabled GSA, without competition, to enter into contracts with WGESystems so that WGESystems could provide energy management services for federal buildings.

However, starting in 2010, the federal government changed its practices.  The American Reinvestment and Recovery Act appropriated funds to make buildings in the District of Columbia and the surrounding area more energy efficient.  These funds were to be awarded through the 8(a) program, which is administered by the SBA and which was created to help small, disadvantaged businesses access the federal procurement market.

To qualify for the 8(a) program, a business must be at least 51 percent-owned and controlled by a U.S. citizen (or citizens) of good character who meet the SBA’s definition of socially and economically disadvantaged.  The firm also must be a small business (as defined by the SBA) and show a reasonable potential for success.  Participants in the 8(a) program are subject to regulatory and contractual limits on subcontracting work from 8(a) set-aside contracts.  The SBA regulations require, among other things, the 8(a) concern to agree that on construction contracts it “will perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials).”

As a result of this change, WGESystems – which was not certified to participate in the 8(a) program – faced the prospect of losing millions of dollars in revenue.

WGESystems, along with an 8(a) company it used to obtain these contracts, and others, engaged in and executed a scheme to defraud the SBA and GSA by, among other things: concealing that WGESystems, which was not eligible for the aforementioned SBA contracting preferences, exercised impermissible control over the 8(a) company’s bidding for and performance on GSA contracts; and misrepresenting that the 8(a) company was in compliance with SBA regulations pertaining to work on these contracts, including that the company’s employees had performed the required percentage of work on these contracts.  Through these unlawful efforts, WGESystems and the 8(a) company with which it conspired obtained, at least, approximately $17,711,405 in U.S. government contracts related to work at eight different federal buildings.  When these contracts were awarded, the 8(a) company’s registered place of business was the president of the company’s home, and the company had no employees who could provide design-build or contracting services.

WGESystems assisted the 8(a) company with identifying a project manager for the work at the eight buildings who was nominally an employee of the 8(a) company, but who, in actuality, took direction from WGESystems employees.  For much of the relevant period, this project manager was the only employee of the 8(a) company performing work for any of the eight projects.

Under the agreement with WGESystems, the 8(a) company was entitled to 5.8 percent of the $17,711,405 total value of the contracts, which equals $1,027,261.  To date, with all but one of the eight contracts completed or suspended, WGESystems has lost approximately $1,122,581 on the projects.  WGESystems initially anticipated a profit margin that would have equaled about $1,560,000.

Since being informed of this investigation by the Justice Department, WGESystems has taken steps to enhance and optimize its internal controls, policies and procedures.

In light of the company’s remedial actions to date and its willingness to acknowledge responsibility for its actions, the U.S. Attorney’s Office for the District of Columbia and the Antitrust Division will recommend the dismissal of the Information in two years, provided WGESystems fully cooperates with, and abides by, the terms of the deferred prosecution agreement.

This investigation was conducted by the Inspector General’s Offices of the U.S. General Services Administration and the Small Business Administration and the FBI’s Washington Field Office.  The prosecution is being handled by Assistant U.S. Attorney Matt Graves of the Fraud and Public Corruption Section of the U.S. Attorney’s Office for the District of Columbia, and Assistant Chief Craig Y. Lee and Trial Attorney Diana Kane, both of the Antitrust Division’s Washington Criminal I Section.

ALLEGED HEALTHCARE FRAUD BUSINESS BANNED FROM SELLING PRODUCTS

FROM:  U.S. FEDERAL TRADE COMMISSION 

FTC Settlement Bans Bogus Trade Association from Selling Healthcare-Related Products

Alleged Fraudsters Stole Millions of Dollars from Consumers Seeking Health Insurance

A group of marketers who allegedly tricked consumers into buying phony health insurance are permanently banned from selling healthcare-related products under a settlement with the Federal Trade Commission.

The settlement resolves claims that the defendants, who operated as the bogus trade association Independent Association of Businesses (IAB), preyed on consumers who sought health insurance. Consumers submitted their contact information to websites purportedly offering quotes from health insurance companies. They paid an initial fee ranging from $50 to several hundred dollars, and a monthly fee ranging from $40 to $1,000 purportedly for comprehensive health insurance coverage, but instead they were enrolled in an IAB membership. The program included purported discounts on services such as identify-theft protection, travel, and roadside assistance, as well as certain purported healthcare related benefits, including limited discounts and reimbursements on visits to certain doctors or hospitals, subject to broad exclusions and limitations.

In 2012, the FTC charged the IAB defendants and those who ran IAB’s largest telemarketing operation with violating the FTC Act and the FTC’s Telemarketing Sales Rule (TSR). A federal court halted the operation until the case was resolved. A settlement order announced in 2013 bans the telemarketing defendants from selling healthcare-related products.

The settlement order announced today permanently bans the remaining defendants from selling healthcare-related products. They are IAB Marketing Associates LP, Independent Association of Businesses, HealthCorp International Inc., JW Marketing Designs LLC, International Marketing Agencies LP, International Marketing Management LLC, Wood LLC, James C. Wood, his sons, James J. Wood and Michael J. Wood, and his brother, Gary D. Wood. It also resolves the FTC’s claims against relief defendant Tressa K. Wood, James C. Wood’s wife, who benefitted from but did not participate in the alleged scheme.

The order also prohibits the defendants from violating the TSR, misrepresenting material facts about any goods or services, and selling or otherwise benefitting from consumers’ personal information.

The order imposes a $125 million judgment that will be partially suspended once the defendants surrender assets valued at almost $2 million, including $502,000 in IRA funds and personal property that includes five luxury cars (a Lamborghini, two Mercedes, a Porsche, and an MG Roadster). A separate settlement order requires relief defendant Avis. K. Wood to pay $60,000 from an IRA account that was funded by the defendants’ allegedly unlawful activities.

The Commission vote approving the proposed stipulated final order was 5-0. The order was entered by the U.S. District Court for the Northern District of Texas, Dallas Division on October 10, 2014. The Commission vote approving the proposed stipulated final order against Avis S. Wood was 5-0, and it was entered by the U.S. District Court for the Northern District of Texas on August 8, 2014.

SEC CHARGES FORMER EXEC WITH FRAUD FOR FAILING TO REPORT HIS INSIDER STOCK SALES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Announces Fraud Charges Against Biotech Company and Former Executive Who Failed to Report Insider Stock Sales

09/10/2014 12:05 PM EDT

The Securities and Exchange Commission today charged a Massachusetts-based biotech company and its former CEO with defrauding investors by failing to report his sales of company stock.

The federal securities laws require certain corporate executives to report their transactions in the company’s stock in order to give investors the opportunity to evaluate whether the purchases and sales by an insider could be indicative of the prospects of the company.  An SEC investigation found that after Gary H. Rabin became CEO, CFO, and chairman of Advanced Cell Technology (ACT) in 2010, he repeatedly failed to report his sales of company stock for the next few years.  Subsequently, ACT’s annual reports and proxy statements during that period were inaccurate because they failed to report that Rabin was not complying with his obligation to disclose his substantial sales of ACT stock.

ACT and Rabin agreed to settle the SEC’s charges.

“It’s not merely a technical lapse when executives fail to report their transactions in company stock, because investors are consequently denied important and timely information about how an insider is potentially viewing the company’s future prospects,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “Instead of reporting his numerous company stock sales within two days as typically required, Rabin waited more than two years and compromised Advanced Cell Technology’s financial reporting obligations.”

According to the SEC’s order instituting a settled administrative proceeding, Section 16(a) of the Securities Exchange Act and underlying SEC rules require officers and directors of a company with a registered class of equity securities to file reports of their securities holdings and transactions.  The Sarbanes-Oxley Act of 2002 and additional SEC regulations accelerated the reporting deadline for most insider transactions to two business days and mandated that all reports be filed electronically with the SEC to facilitate rapid dissemination to the public.

The SEC’s order finds that Rabin’s sales would have been viewed by a reasonable investor as significantly altering the total mix of available information about ACT given his executive position as well as the size and frequency of his sales of the company’s stock.  However, it wasn’t until May 2013 that Rabin eventually reported his 27 sales of $1.5 million worth of ACT stock from 2010 to 2012.  ACT and Rabin violated the anti-fraud provisions of the securities laws by failing to file reports of these transactions and holdings in a timely and accurate manner.  Rabin signed and ACT filed annual reports and proxy statements during this period that were false and misleading due to Rabin’s missing Section 16(a) reports.

Rabin, who lives in Santa Monica, Calif., and left the company earlier this year, agreed to settle the SEC’s charges by paying a $175,000 penalty.  ACT agreed to pay a $375,000 penalty and retain an independent consultant to conduct a review of its Section 16(a) reporting and compliance procedures.  They neither admitted nor denied the SEC’s findings while consenting to orders that charge ACT with violations of Sections 17(a)(2) of the Securities Act of 1933 and Sections 13(a) and 14(a) of the Exchange Act as well as Rules 12b-20, 13a-1, and 14a-9, and charge Rabin with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 14(a) and 16(a) of the Exchange Act as well as Rules 14a 9 and 16a-3.  Rabin also is charged with causing ACT’s violations of Exchange Act Section 13(a) as well as Rules 12b-20 and 13a-1.

The SEC’s investigation was conducted by Leslie A. Hakala and C. Dabney O’Riordan in the Los Angeles office.

SEC SETTLES HEART TRONICS, INC., FRAUD CHARGES AGAINS FORMER CEO

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23081 / September 10, 2014

Securities and Exchange Commission v. Heart Tronics, Inc., et al., Civil Action No. SACV11-1962-JVS (C.D. Cal. filed Dec. 15, 2011)

SEC Settles Fraud Charges Against Former Heart Tronics CEO and Former Registered Representative.

The Securities and Exchange Commission announced that J. Rowland Perkins, II and Mark C. Nevdahl have settled charges arising out of their involvement with Heart Tronics, Inc., a microcap company formerly known as Signalife, Inc. that the SEC has alleged engaged in a series of frauds between 2006 and 2009.  As part of the settlement, Perkins will pay a penalty of $42,500 and is now barred for three years from serving as an officer or director of a public company or engaging in an offering of penny stock.   He also consented to the full injunctive relief sought by the SEC.  Nevdahl, in his settlement, will pay a civil penalty of $13,000 and was ordered to cease and desist from aiding or abetting or committing any future violations.  Nevdahl also was suspended for six months from associating with certain regulated entities and from participating in any offering of penny stock.  The SEC’s litigation against Heart Tronics, its co-CEO, Willie Gault, and a former attorney, Mitchell Stein, is continuing.  Stein is currently incarcerated while awaiting sentencing, after a jury returned a verdict in May 2013 convicting him of fourteen felonies for his role.

According to the SEC’s complaint, Perkins, acting as CEO in 2008, signed and certified pursuant to the Sarbanes-Oxley Act of 2002 three quarterly reports Heart Tronics filed with the SEC that contained material misstatements about the company’s sales orders, potential customers, and internal accounting and disclosure controls.  The SEC alleged, among other things, that Perkins knew of significant red flags indicating that Heart Tronics’ purported sales orders in 2007 and 2008 were fictional yet allowed the orders to be publicly disclosed without taking adequate steps to determine their validity.  Neither admitting nor denying the SEC’s allegations, Perkins consented to a final judgment ordering him to pay a civil penalty of $42,500 and enjoining him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13a-14 thereunder, or aiding and abetting violations of Exchange Act Section 13(b)2)(B).  He also consented to court-imposed, three-year officer and director and penny stock bars. The court entered a final judgment against Perkins on September 4, 2014.

The SEC’s complaint also alleged that Nevdahl, who, at the time, was a registered representative of an SEC-registered broker-dealer, served as the trustee for a number of nominee accounts and blind trusts that Mitchell Stein and his wife used to secretly and unlawfully sell millions of dollars’ worth of Heart Tronics stock.  According to the complaint, the trusts were designed to create the façade that the shares were under the control of Nevdahl as an independent trustee, but Nevdahl met the Steins’ regular demands for cash by continually selling Heart Tronics stock on the public market and in transactions negotiated by Stein.  Without either admitting or denying the SEC’s allegations, Nevdahl consented to pay a penalty of $13,000 to resolve the SEC’s action.  Nevdahl also consented to the institution and settlement of administrative cease-and-desist proceedings in which the SEC issued an order finding that he willfully violated Section 17(a)(3) of the Securities Act, ordering him to cease and desist from aiding or abetting or committing any future violations, and suspending him from participation in any penny stock offering for a period of six months.  The order also suspended Nevdahl for six months from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical organization, and from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company.  The court entered a final judgment against Nevdahl on August 29, 2014, and the Commission issued its Order on September 5, 2014.

For further  information, see Litigation Release No. 22204 (Dec. 20, 2011).

CFTC CHARGES COMPANY AND OWNERS WITH FRAUD AND MISAPPROPRIATION IN COMMODITY INVESTMENT POOL CASE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Colorado Company R2 Capital Group, LLC, and its owners, Ryan Tomazin, Ryan Madigan, Randell A.Vest, RAST Investor Group, LLC, Madigan Enterprises, Inc., and Bulletproof Vest, Inc. with Fraud and Misappropriation

Defendants allegedly solicited more than $2.4 million from at least four participants in commodity investment pool

Federal court issues restraining orders freezing Defendants’ assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on August 15, 2014, Chief Judge Marcia S. Krieger, of the U.S. District Court for the District of Colorado, issued a restraining Order freezing the assets of Defendants Ryan Tomazin of Stamford, Connecticut, Ryan Madigan of Raleigh, North Carolina, and Randell A. Vest of Fort Myers, Florida. The restraining Order was an expansion of the court’s August 7, 2014 restraining Order, which froze the assets of Tomazin’s, Madigan’s and Vest’s holding companies — Defendants RAST Investor Group, LLC, Madigan Enterprises, Inc., and Bulletproof Vest, Inc., respectively — and their Colorado company, Defendant R2 Capital Group LLC (R2 Capital). The restraining Orders also prohibit the Defendants from destroying or altering books and records.

Both restraining Orders arise from a CFTC federal court enforcement action filed on August 6, 2014, charging the Defendants with futures and foreign currency (forex) fraud, and misappropriation. The CFTC Complaint also charges the Defendants with illegally commingling funds received from pool participants with others’ funds by, among other things, transferring pool participant funds directly into the personal bank accounts of Tomazin, Madigan, Vest, their respective holding companies, and R2 Capital.

The Complaint alleges that since at least December 2009 through the present, R2 Capital — owned and operated by Tomazin, Madigan, and Vest, and their respective holding companies — solicited more than $2.4 million from at least four pool participants who invested in an investment pool operated by R2 Capital: R2 Commercial Capital Partners I L.P. (the Commercial Pool). The Commercial Pool traded forex and, later, futures contracts, including E-mini S&P 500 futures contracts and E-mini Dow futures contracts, according to the Complaint.

The Complaint alleges that Defendants falsely and fraudulently concealed from at least two pool participants that 1) Defendants had closed the forex account, 2) that Pool Participants’ funds had been transferred to a new account at a different Futures Commission Merchant, 3) that the Commercial Pool was no longer trading forex, and 4) that the Commercial Pool was now trading E-mini S&P 500 futures and securities products.

In addition, the Defendants allegedly misappropriated more than $1.2 million of pool funds by routinely illegally diverting substantial sums from the R2 Capital and Commercial Pool bank accounts to themselves and their Defendant holding companies until all but a few hundred dollars of the pool participant funds were dissipated. Defendants allegedly then spent these misappropriated funds on personal trips, private school tuition for their children, other investments, and miscellaneous personal expenses.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.

The CFTC appreciates the assistance of the National Futures Association.

CFTC Division of Enforcement staff responsible members for this case are Sophia Siddiqui, Ken Koh, Dmitriy Vilenskiy, Luke Marsh, and Paul Hayeck.

SEC CHARGES ATTORNEY, WIFE AND LAW PARTNER WITH FRAUD INVOLVING EB-5 IMMIGRANT INVESTOR PROGRAM

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a Los Angeles-based immigration attorney, his wife, and his law firm partner with conducting an investment scheme to defraud foreign investors trying to come to the U.S. through the EB-5 Immigrant Investor Program.
The SEC alleges that Justin Moongyu Lee along with Rebecca Taewon Lee and Thomas Edward Kent raised nearly $11.5 million from two dozen investors seeking to participate in the EB-5 program, which provides immigrants an opportunity to apply for U.S. residency by investing in a domestic project to create jobs for U.S. workers.  The Lees and Kent informed investors that they would be EB-5 eligible if they invested in an ethanol production plant they would build and operate in Ulysses, Kan.  However, investors’ money was misappropriated for other uses instead of the ethanol plant project.  The plant was never built and the promised jobs never created, yet the Lees and Kent continued to misrepresent to investors that the project was ongoing.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Justin Lee.

“These immigration lawyers exploited a desire by foreign investors to participate in a program that would not only generate them a positive investment return, but also provide them a path to legal residency in the United States,” said Michele Wein Layne, Regional Director of the SEC’s Los Angeles office.  “Long after all construction had ceased, they continued to falsely tell investors that they were building the plant.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, the investors defrauded by the Lees and Kent were primarily of Chinese and Korean descent.  Justin Lee and Kent applied to the U.S. Citizenship and Immigration Services (USCIS) in 2006 for designation as a “regional center” under the EB-5 program.  They claimed there would be “substantial economic benefit” and “thousands” of new jobs for this area in southwest Kansas.  However, by mid-2008, construction of an ethanol plant at the site was no longer economically feasible, and the Lees and Kent concealed their failure to generate the jobs required by the EB-5 program by submitting false documents to the USCIS.

Meantime, the SEC alleges, when Justin Lee was running low on cash and having difficulty obtaining financing, he took money out of investor escrow accounts without their knowledge prior to the approval of an investor’s application for residency.  Lee and his wife subsequently misused several million dollars raised from the ethanol plant investors for other undisclosed purposes such as financing an iron ore project in the Philippines and repaying investors in other unrelated offerings.

According to the SEC’s complaint, the Lees set up investor seminars in Los Angeles at which the purported ethanol plant project was the main part of the presentation despite the halt of construction in 2008.  Kent, who visited the site frequently in 2008 and 2009 and knew no construction was taking place, also participated in the seminars.  Investors continued to be misled that the proceeds from their investment were being used to construct an ethanol plant.  In particular, the business plan updated in June 2010 and distributed to investors falsely represented that construction was “ongoing” and the plant would be in operation before November 2011.

The SEC’s complaint charges the Lees, Kent, and five companies founded and controlled by Justin Lee (American Immigrant Investment Fund I, Biofuel Venture IV, Biofuel Venture V, Nexland Investment Group, and Nexsun Ethanol) with violations of Sections 17(a)(1), (2), and (3) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 as well as Rule 10b-5(a) and (c).  Justin Lee, Kent, and the entities also are charged with violating Rule 10b-5(b).  The SEC’s complaint seeks disgorgement, prejudgment interest, and penalties along with permanent injunctions.

The SEC’s investigation was conducted by Carol Lally, Roberto Tercero, Roger Boudreau, and Spencer Bendell of the Los Angeles Regional Office.  The SEC’s litigation will be led by Karen Matteson.  The SEC appreciates the assistance of the USCIS, U.S. Attorney’s Office for the Central District of California, Federal Bureau of Investigation, U.S. Department of Homeland Security’s Immigration and Customs Enforcement (ICE), Internal Revenue Service, and State Bar of California.

SEC CHARGES OWNER INVESTMENT ADVISORY FIRM WITH USING CLIENT MONEY TO BUY VACATION HOME

FROM:  SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission charged the owner of a Seattle-based investment advisory firm with fraudulently misusing client assets to make loans to himself to buy a luxury vacation home and refinance a rare vintage automobile.  

An SEC investigation found that Dennis H. Daugs Jr. and Lakeside Capital Management LLC used assets from the portfolio of a senior citizen client to fund $3.1 million in personal loans without telling her or obtaining her consent.  The loans were not in the best interest of the client and significantly favored Daugs, who provided no collateral, had no set pay-off dates, and paid most of the interest at the prime rate (which banks typically provide their most credit-worthy customers).  Daugs also improperly directed an investment fund managed by his firm to make more than $4.5 million in loans and investment purchases to facilitate personal real estate deals and fend off claims from disgruntled Lakeside Capital clients.  He diverted more than $500,000 from the fund to pay settlements to disgruntled clients.

Lakeside Capital and Daugs, who eventually paid back the diverted funds and personal loans, agreed to settle the SEC’s charges and pay more than $340,000 in disgorgement and prejudgment interest to the individual client and the investment fund, representing ill-gotten gains that Daugs retained even after he paid back the loans.  Daugs and his firm also agreed to pay a $250,000 penalty, and Daugs will be barred from the securities industry for at least five years.  Lakeside Capital will wind down its operations with oversight from an independent monitor.

“Investment advisers have a fiduciary duty to act in the best interest of advisory clients and disclose all material conflicts of interests,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “Daugs instead took advantage of his clients and misused more than $8 million of their assets for his own personal gain.” 

According to the SEC’s order instituting a settled administrative proceeding, the misconduct occurred from 2008 to 2012.  Daugs managed a large investment portfolio for the senior citizen client and members of her family, owing her a fiduciary duty to disclose any material conflicts of interest and act in her best interest.  Daugs violated that duty in January 2008 when he fraudulently caused Lakeside Capital to liquidate $2.15 million in securities in her portfolio to generate the cash to transfer that amount from her IRA account at a custodian broker-dealer directly to an escrow account he used to purchase his ski vacation home.  Daugs similarly misused $950,000 in assets from her portfolio in May 2009 to refinance his purchase of a rare 1955 Mercedes “Gullwing” automobile.  Even as he made his regular interest payments into her IRA account, Daugs withheld from the client as well as Lakeside Capital’s chief compliance officer at the time that he was using her investments to loan money to himself for his ski home and auto.

The SEC’s order also finds that Lakeside Capital failed to take required compliance and custody measures to safeguard client assets. 

The SEC’s order charges Daugs and Lakeside Capital with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-2 and 206(4)-7.  Daugs and Lakeside Capital agreed to the settlement without admitting or denying the findings. 

The SEC’s investigation was conducted by Thomas Eme and supervised by Tracy Davis in the San Francisco office.  The preceding examination of Lakeside Capital was conducted by Cindy Tom, Steven Wolz, John Chee, Matthew O’Toole, and Kenneth Schneider in the San Francisco office.

SEC CHARGES ALLEGED CON ARTIST AND PENNY STOCK CEO WITH ISSUING FALSE PRESS RELEASES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Securities and Exchange Commission v. Christopher Plummer, Lex M. Cowsert, and CytoGenix, Inc., Civil Action No. 14-CV-5441 (LTS)

The Securities and Exchange Commission charged a serial con artist and a penny stock company CEO with misleading investors in a supposed vaccine development company by issuing false press releases portraying it as a successful venture when it was in fact a failing enterprise.

The SEC alleges that Christopher Plummer teamed up with the CEO of CytoGenix, Lex M. Cowsert, to defraud investors with extravagant claims about the microcap company's revenue and other benefits flowing from a "shared revenue agreement" with Franklin Power & Light, an electricity provider supposedly operated by Plummer. However, Plummer's entity was a complete sham, CytoGenix had actually lost all of its vaccine patents and other intellectual property in a lawsuit, and Plummer and Cowsert stole proceeds of CytoGenix stock offerings that they told investors would be used for energy production projects and other corporate purposes.

According to the SEC's complaint filed against CytoGenix, Cowsert, and Plummer in federal district court in Manhattan, Plummer also spearheaded a separate scheme around the same time in 2010 involving another microcap company that similarly issued a rapid-fire series of press releases with bogus information. Those press releases touted a purported partnership with Plummer's phony power company to own and operate solar energy farms across the country. In reality, the microcap issuer was in dire financial straits and lacked the financial or logistical capability to commercially produce a product of any kind let alone break ground on energy farms. The company continues to have no operations, customers, or revenues.

Trading in CytoGenix and the other microcap stock was suspended by the SEC as part of a mass trading suspension in 2011. The two companies are now either dormant or defunct. Plummer is currently serving a multi-year federal prison term for an unrelated fraud, and he also has two prior convictions for fraud offenses.

According to the SEC's complaint, CytoGenix was in dire financial straits when Plummer approached Cowsert and proposed a partnership with the sham company he created, Franklin Power & Light. Cowsert agreed and began issuing a series of false press releases, including one touting the formation of a new CytoGenix subsidiary to operate as a joint venture with Plummer's company to develop "biologically-based" technologies for energy production in untapped retail electrical markets. Cowsert had no basis for believing that Plummer's company had the means to generate the revenue needed to fund such energy production technologies, yet he nonetheless prepared and authorized the CytoGenix press releases with the materially false and misleading information about Franklin Power & Light that Plummer supplied.

The SEC's complaint further alleges that other CytoGenix press releases unrelated to the partnership with Plummer touted outdated test results and a non-existent new laboratory for testing the vaccine products that CytoGenix claimed to be developing. These materially false and misleading statements were made despite CytoGenix having lost its assets in litigation with two former employees, including the rights to various vaccine patents and other intellectual property featured in press releases. These CytoGenix press releases failed to disclose the loss of those critical assets.

According to the SEC's complaint, Cowsert and Plummer further defrauded CytoGenix shareholders by misappropriating the proceeds of purported private offerings. Cowsert obtained approximately $91,000 in funds directly from CytoGenix investors by falsely telling them that they were investing in a private placement of CytoGenix stock, but no shares were ever issued to the investors. Cowsert asked the investors to make their checks payable to him personally, deposited the checks into his personal bank account, and used the funds to pay personal expenses. Meanwhile, Plummer defrauded a shareholder out of more than 6.5 million free trading shares of CytoGenix stock.

The SEC's complaint charges Plummer, Cowsert, and CytoGenix with violating antifraud provisions of the federal securities laws. Plummer is additionally charged with violating Section 20(b) of the Securities Exchange Act of 1934. The SEC seeks permanent injunctions along with disgorgement, prejudgment interest, financial penalties, and orders barring Plummer and Cowsert from acting as officers or directors of a public company and from participating in a penny stock offering.

The SEC's investigation, which is continuing, has been conducted by Justin P. Smith and George N. Stepaniuk of the New York office, and supervised by Sanjay Wadhwa. The SEC's litigation will be led by Paul G. Gizzi. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of Connecticut and the Federal Bureau of Investigation.

SEC CHARGES CVS CAREMARK CORP. WITH MISLEADING INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged CVS Caremark Corp. with misleading investors about significant financial setbacks and using improper accounting that artificially boosted its financial performance.

CVS has agreed to pay $20 million to settle the charges.

According to the SEC’s complaint filed in federal court in Rhode Island, CVS has two business segments as a pharmacy benefits manager and a retail chain of drug stores.  In offering documents for a $1.5 billion bond offering in 2009, CVS fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in the pharmacy benefits segment.  Investors were therefore misled about the expected future financial results for that line of business.  When CVS eventually revealed the full extent of the setbacks on Nov. 5, 2009, its stock price fell 20 percent in one day.  CVS further misled investors on an earnings call that same day by maintaining there was a slight improvement in its “retention rate,” which is a key metric of retained business often used to compare pharmacy benefits management companies.  But CVS omitted the fact that it had manipulated how it calculated the rate and concealed the full extent of its lost business.

“CVS broke faith with investors in both its stock and its bonds by disguising significant setbacks for its pharmacy benefits management business,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.  “The intentional misconduct by CVS breached the core principle of fair and accurate reporting of financial performance.”

The SEC’s complaint further alleges that CVS made improper accounting adjustments that overstated the financial results for its retail pharmacy line of business.  During the same 2009 timeframe, CVS altered the accounting treatment for its acquisition of another drug store chain – Longs Drugs – and failed to disclose the adjustments in its quarterly report filed on November 5.  CVS improperly reduced the value of $189 million of personal property in the Longs stores down to $0, and then reversed $49 million of depreciation that had been taken on those assets since the acquisition.  The undisclosed depreciation reversal increased the third-quarter earnings and enabled CVS to exceed analysts’ expectations at a time when it was otherwise announcing significant bad news about earnings projections in its pharmacy benefits line of business.

The SEC alleges that the improper accounting adjustments were orchestrated by Laird Daniels, who was the retail controller at CVS and is charged with accounting violations in a related SEC administrative proceeding.  According to the SEC’s order against Daniels, proper accounting would have treated the asset write-down as a current period expense, and the third quarter earnings per share for CVS would have been reduced by as much as 17 percent.  As Daniels described in an e-mail, the dramatic change in accounting turned the acquisition of Longs Drugs from a “bad guy” to a “good guy” in terms of purported profitability for CVS.

“The accounting standards are designed to provide the public with a fair and consistent measure of public company performance.  Instead, CVS and Daniels used improper accounting tactics to give investors a misleading picture of the company’s retail pharmacy earnings,” said Paul Levenson, director of the SEC’s Boston Regional Office.

Daniels has agreed to settle the administrative case against him by paying a $75,000 penalty and being barred for at least one year from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.  Without admitting or denying the allegations, Daniels agreed to the entry of a cease-and-desist order finding that he willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Rule 13b2-1 under the Securities Exchange Act of 1934.  The order finds that Daniels willfully aided, abetted, and caused violations by CVS of the reporting, books and records, and internal control provisions of the federal securities laws.

The SEC’s complaint charges CVS with violations of Section 10(b) of the Exchange Act and Rule 10b-5, and Section 17(a) of the Securities Act.  CVS also is charged with violations of the reporting, books and records, and internal control provisions of the federal securities laws.  In addition to the $20 million penalty, CVS consented to the entry of a final judgment permanently enjoining the company from violating various anti-fraud, books and records, and internal control provisions of the securities laws.  CVS neither admitted nor denied the allegations.  The settlement is subject to court approval.

The SEC’s investigation was conducted by Marc Jones, Ruth Anne Heselbarth, Frank Huntington, Amy Gwiazda, and Kevin Currid of the Boston Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.