GRAND JURY INDICTS CEO IN STOCK SCAM CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Federal Grand Jury Indicts CEO of Chicago-Area Company Accused of Defrauding Investors in Multi-Million Dollar Stock Scam

On February 28, 2014, the United States Attorney’s Office for the Northern District of Illinois announced that a federal grand jury returned an 11-count indictment against Gregory Webb, the CEO and President of InfrAegis, Inc., a Chicago-area company that claimed to make products for the homeland security market.  According to the indictment, between 2007 and October 2013, Webb and InfrAegis obtained more than $9 million from investors through the offer and sale of InfrAegis stock by making false representations about the solvency and financial condition of InfrAegis, about contracts that the company allegedly expected to be awarded or had been awarded, and about the expected and actual return on investment investors would get from the company.  For example, Webb falsely represented that the City of Chicago had agreed to install InfrAegis’ iaMedium ― a kiosk that purportedly could detect the presence of nuclear or biological weapons ― throughout the city and that the agreement would result in profits of more than $80 million a year. While InfrAegis engaged in some discussions with the city about the installation of the iaMedium kiosks, there was never any agreement or contract to install the system in Chicago.  In another example, Webb falsely represented that the company had a contract with the Washington Metropolitan Area Transit Authority (WMATA) to install iaMedium kiosks throughout the Washington, D.C., Metro train system. Again, there was never any agreement or contract beyond initial negotiations.

In October 2011, the SEC filed a civil enforcement action in U.S. District Court in Chicago against Webb and InfrAegis based, in part, on the conduct alleged in the criminal indictment.  The SEC alleged that, from January 2005 through June 2010, Webb and InfrAegis orchestrated a fraudulent, unregistered offering of stock that raised more than $20 million from hundreds of investors across the country.  The SEC claimed that, among other things, Webb and InfrAegis made false and misleading claims about the company’s commercial success and the existence of contracts for the installation of InfrAegis’ products, including the City of Chicago and WMATA contracts described in the criminal indictment.  Based on their conduct, the SEC charged Webb and InfrAegis 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 and Rule 10b-5 thereunder. [SEC v. Gregory E. Webb and InfrAegis, Inc., 1:11-cv-07152 (N.D. Ill.)] (LR-22122)

Webb, who currently lives in Dallas, Texas, will be arraigned in U.S. District Court in Chicago on a date to be determined.  Webb faces eight counts of mail fraud and three counts of wire fraud, each of which carries a maximum penalty of 20 years in prison and a $250,000 fine. Restitution is mandatory.

FATHER-SON HEDGE FUND MANAGERS CHARGED WITH MISLEADING INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 20, 2012 – The Securities and Exchange Commission today charged a Boston-based father-son duo of hedge fund managers and their firms with securities fraud for misleading investors about their investment strategy and past performance.

The SEC’s investigation found that Gabriel and Marco Bitran raised millions of dollars for their hedge funds through GMB Capital Management LLC and GMB Capital Partners LLC by falsely telling investors they had a lengthy track record of success based on actual trades using real money. In truth, the Bitrans knew the track record was based on back-tested hypothetical simulations. The Bitrans also misled investors in certain hedge funds to believe they used quantitative optimal pricing models devised by Gabriel Bitran to invest in exchange-traded funds (ETFs) and other liquid securities. Instead, they merely invested the money almost entirely in other hedge funds. GMB Capital Management later provided false documents to SEC staff examining the firm’s claims in marketing materials of a successful track record.

The Bitrans agreed to be barred from the securities industry and pay a total of $4.8 million to settle the SEC’s charges.

“The Bitrans solicited investors by touting an impressive track record and a unique investment strategy, and they lied about both,” said David P. Bergers, Director of the SEC’s Boston Regional Office.

According to the SEC’s order instituting settled administrative proceedings, Gabriel Bitran founded GMB Capital Management in 2005 for the stated purpose of managing hedge funds using quantitative models he developed based on his academic optimal pricing research to trade primarily ETFs. He and his son Marco Bitran solicited potential investors with three primary selling points:
Very successful performance track records based on actual trades using real money from 1998 to the inception of the hedge funds.

The firm’s use of Gabriel Bitran’s proprietary optimal pricing model to trade ETFs.
Gabriel Bitran’s involvement as founder and portfolio manager of the funds.
The SEC’s order states that over a period of three years, the Bitrans raised more than $500 million for eight hedge funds and various managed accounts while making these misrepresentations to investors. In order to market the hedge funds, GMB Management and the Bitrans created performance track records beginning in January 1998 showing double-digit annualized return without any down years. They distributed these track records to potential investors in marketing materials, and told investors that they were based on actual trading with real money using Gabriel Bitran’s optimal pricing models. In reality, the Bitrans knew their representations were false and the track records were based on hypothetical historical investments. For two of their hedge funds, they created track records showing annualized returns of 16.2 percent and 11.7 percent with no down years, and told investors the returns were based on actual trading when in fact they were based on hypothetical historical allocations to hedge fund managers.

According to the SEC’s order, investors were misled to believe their money was being invested according to Gabriel Bitran’s unique quant strategy when in reality certain GMB hedge funds were merely investing predominantly in other hedge funds without his involvement. For example, investors in two GMB hedge funds were told that Gabriel Bitran spent 80 percent of his time managing the funds and was involved in reviewing trades in the funds on a daily basis. However, he actually had no role in the management of either fund. Both funds experienced a series of losses at the end of 2008, and GMB eventually dissolved them. When a possible financial fraud at the Petters Group Worldwide was reported in late September 2008, the two hedge funds’ investments in a fund that was entirely invested in the Petters Group became illiquid. However, GMB did not disclose to investors that it had been impacted by the Petters fraud, instead sending investors a letter stating that “a swap instrument that the Fund entered into seeking to realize a higher return on a portion of its uninvested cash” had become illiquid because “one of the parties underlying the swap instrument is currently experiencing a credit and liquidity crisis, in conjunction with other alleged factors.” Furthermore, the two GMB funds suffered significant losses in hedge funds that had invested with Bernard Madoff. These investments in funds that ultimately invested with the Petters Group and Madoff were made contrary to what GMB investors were told.

According to the SEC’s order, during an SEC examination of GMB Capital Management, the firm produced a document that the Bitrans claimed was a real-time record of Gabriel Bitran’s trades since 1998. In fact, the document was false and created solely for the purpose of responding to the SEC staff’s request for the books and records that supported GMB’s performance claims.

The GMB entities and the Bitrans neither admitted nor denied the SEC’s findings in settling the charges. They agreed to pay disgorgement of $4.3 million. Gabriel and Marco Bitran also agreed to pay $250,000 each in penalties and be barred from the securities industry, and the GMB entities will be censured. The SEC’s order requires the Bitrans and the GMB entities to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-8 thereunder.

The SEC’s investigation was conducted by Kerry Dakin, Kevin Kelcourse, and Kathleen Shields of the Boston Regional Office. Paul Prata, Elizabeth Ward, and Milton Pepin of the Boston Regional Office worked on the SEC’s examination. Stuart Jackson of the SEC’s Division of Risk, Strategy, and Financial Innovation assisted in the investigation.