SEC SAYS MAN CHARGED WITH FRAUD AGAINST SMALL BUSINESS FOR POSING AS A HEDGE FUND MANAGER,

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
06/10/2015 11:40 AM EDT

The Securities and Exchange Commission today announced fraud charges against a New Jersey man accused of posing as a hedge fund manager and defrauding small companies out of more than $4 million.

The SEC alleges that Nicholas Lattanzio falsely promised small businesses that he would arrange project financing for them and generate substantial returns on money they invested in his Black Diamond Capital Appreciation Fund.  He told them they could withdraw their money if the promised project financing didn’t materialize, and he claimed his fund had as much as $800 million under management and a proven track record of producing double-digit returns.

According to the SEC’s complaint filed in federal court in New Jersey, the fund never had more than approximately $5 million in assets as Lattanzio simply took investor money and spent it on himself and his family.  He allegedly used fund assets to purchase a million-dollar home in Montclair, N.J., a $124,000 luxury car, and $100,000 worth of merchandise from Tiffany & Co.  He also paid off more than $760,000 in credit card debt, withdrew approximately $570,000 in cash or checks written to himself and his girlfriend, paid more than $30,000 to a yacht broker, and funded his children’s private school tuition and his membership at an exclusive golf club.

“As alleged in our complaint, Lattanzio masqueraded as a sophisticated hedge fund manager to capitalize on small businesses’ legitimate need for financing.  He falsely reassured his investors they were earning profits while he was swiping their money to bankroll his affluent lifestyle that he otherwise could not afford,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Lattanzio, and the New Jersey Bureau of Securities within the State Attorney General’s Division of Consumer Affairs also announced sanctions against him.

The SEC’s complaint charges Lattanzio, Black Diamond Capital Appreciation Fund, and three other Lattanzio-controlled entities with securities fraud in violation of the Securities Act of 1933 and Securities Exchange Act of 1934.  The complaint also charges Lattanzio and some of the entities with investment adviser fraud in violation of the Investment Advisers Act of 1940.

The SEC’s continuing investigation is being conducted by David Austin, Roseann Daniello, and George Stepaniuk, and the litigation will be led by Todd Brody and David Austin.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the New Jersey Bureau of Securities within the State Attorney General’s Division of Consumer Affairs.

SEC CHARGES HEDGE FUND MANAGER AND FIRM WITH CHARGING EXCESS RESEARCH EXPENSES AND FEES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Minneapolis-Based Hedge Fund Manager with Bilking Investors and Portfolio Pumping

The Securities and Exchange Commission charged a Minneapolis-based hedge fund manager, his investment advisory firm, and an accomplice with bilking investors in two hedge funds out of more than $1 million under the guise of research expenses and fees.

The SEC alleges that as the management fees earned by Archer Advisors LLC were shrinking due to the funds' worsening performance, the firm's owner Steven R. Markusen and an employee Jay C. Cope implemented a scheme to enrich themselves at the expense of investors in the funds. Markusen routinely caused the funds to reimburse Archer for fake research expenses, and he eventually routed much of that money to his personal checking account and spent it on country club dues, boarding school tuition, and a Lexus among other luxury items. Furthermore, Markusen devised a way to essentially charge fund investors twice for the same fake research expenses. First, he billed the funds directly by falsely claiming that Archer had paid Cope to conduct "research" for the funds. Second, he and Cope improperly diverted soft dollars from the funds to Cope for the same purported "research" and under the additional pretense that Cope was an independent consultant. Soft dollars were supposed to be used to buy third-party investment research that benefited the funds. Cope conducted no third-party research as an Archer officer whose main duties were placing trades and helping Markusen find new investors.

The SEC's complaint filed in federal court in Minneapolis also charges Markusen and Cope with conducting a separate scheme to manipulate the stock price of the funds' largest holding in order to inflate the monthly returns reported to investors and conceal the true extent of the funds' mounting investment losses.

According to the SEC's complaint, the scheme enabled Markusen to secretly pay Cope's salary with fund soft dollars rather than out of Archer's coffers. Markusen and Cope disguised Cope's $10,000 monthly salary payments as research fees because under the governing documents of the hedge funds they managed and SEC rules, Archer employees could not draw a salary from fund assets or receive fund soft dollars for non-research assistance. The SEC alleges that Markusen and Cope traded excessively in the funds' brokerage accounts in order to generate enough soft dollars to pay Cope's monthly salary at Archer. They misrepresented Cope's relationship with Archer to the brokerage firms that administered the funds' soft dollars, and created false and misleading monthly "research" invoices for the amount of Cope's salary. Markusen and Cope sent the invoices each month to the funds' brokerage firms, who in turn paid fund soft dollars directly to Cope for the purported research expenses. Markusen would then receive a $1,000 monthly kickback from Cope.

According to the SEC's complaint, Markusen and Cope carried out their portfolio pumping scheme by manipulating the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75 percent of the funds' portfolios and was by far the largest holding. Knowing that Archer's trading as CYBE's largest shareholder could materially impact the market price, Markusen and Cope "marked the close" in CYBE on the last trading day of the month at least 28 times. In doing so, they sought to improperly drive up CYBE's closing price by placing multiple buy orders often seconds before the market closed to artificially pump up the value of the funds' portfolios, which were valued as of the close of trading on the month's last trading day. Those valuations were used to calculate the funds' monthly returns that Archer reported to investors as well as Archer's monthly management fee, which was a fixed percentage of each portfolio's value. The higher CYBE closing price at the end of each month enabled Markusen to inflate the funds' performance and extract more lucrative management fees.

The SEC's complaint charges Archer, Markusen, and Cope with violating the antifraud provisions of the federal securities laws and certain reporting provisions.

The SEC's investigation was conducted by Nicholas Eichenseer, Luz Aguilar, and Paul Montoya of the Chicago Regional Office, with assistance from Kevin Vincent and Lorraine Ricci of the Office's examination program. The SEC's litigation will be led by John Birkenheier. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC OBTAINS $13.9 MILLION PENALTY AGAINST RAJAT K. GUPTA

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C., July 17, 2013 — The Securities and Exchange Commission today obtained a $13.9 million penalty against former Goldman Sachs board member Rajat K. Gupta for illegally tipping corporate secrets to former hedge fund manager Raj Rajaratnam. Gupta also is permanently barred from serving as an officer or director of a public company.

The SEC previously obtained a record $92.8 million penalty against Rajaratnam for prior insider trading charges.

“The sanctions imposed today send a clear message to board members who are entrusted with protecting the confidences of the companies they serve,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “If you abuse your position by sharing confidential company information with friends and business associates in exchange for private gain, you will be prosecuted to the fullest extent by the SEC.”

In its complaint filed in late 2011, the SEC alleged that Gupta disclosed confidential information to Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs as well as nonpublic details about Goldman Sachs’s financial results for the second and fourth quarters of 2008.

In addition to imposing the civil penalty, the order issued today by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York enjoins Gupta from future violations of the securities laws, and permanently bars him from acting as an officer or director of a public company, and from associating with any broker, dealer, or investment adviser.

In a parallel criminal case arising out of the same facts, the SEC provided significant assistance to the U.S. Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Gupta, who was found guilty on June 15, 2012 of one count of conspiracy to commit securities fraud and three counts of securities fraud. Following the jury verdict, Gupta was sentenced on Oct. 24, 2012, to a term of imprisonment of two years followed by one year of supervised release, and ordered to pay a $5 million criminal fine.

On Dec. 26, 2012, the SEC obtained a final judgment ordering Rajaratnam to disgorge his share of the profits gained and losses avoided as a result of the insider trading based on Gupta’s tips, plus prejudgment interest.

SEC CHARGES MAN WITH ILLEGALLY TIPPING A HEDGE FUND MANAGER REGARDING CORPORATE EARNINGS

FROM: U.S. SECURITITES AND EXCHANGE COMMISSION

Washington, D.C., September 4, 2012 - The Securities and Exchange Commission today charged a California man with illegally tipping a hedge fund manager with inside information about Nvidia Corporation’s quarterly earnings that he learned from his friend who worked at the company.

The SEC alleges that Hyung Lim of Los Altos, Calif., received $15,000 and stock tips about a pending corporate acquisition for regularly providing a fellow poker player, Danny Kuo, with nonpublic details ahead of Nvidia’s quarterly earnings announcements. Kuo, a hedge fund manager, illegally traded on the information and passed it on to multi-billion dollar hedge fund advisory firms Diamondback Capital Management LLC and Level Global Investors LP. The SEC charged Kuo and the firms among others earlier this year as part of its widespread investigation into the trading activities of hedge funds.

"These hedge fund traders were eager to find an edge in an otherwise competitive marketplace, and Lim provided them that edge for a price," said Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit. "Now one more participant in this sprawling scheme is being held accountable for his illegal transgressions."

In a parallel action, the U.S. Attorney for the Southern District of New York today announced criminal charges against Lim.

According to the SEC’s complaint filed in federal court in Manhattan, Kuo and the hedge funds made nearly $16 million trading in Nvidia securities based on Lim’s inside information. Lim lives in Los Altos, Calif., and is employed in the accounting department of a semiconductor firm. Lim and Kuo met at poker parties organized by a mutual friend.

The SEC alleges that during at least 2009 and 2010, Lim regularly obtained detailed information about the contents of Nvidia’s upcoming quarterly earnings announcements from his friend who worked at Nvidia. Lim’s source provided him with not just one but a series of tips, which grew more accurate and reliable as Nvidia finalized its financial results for a given quarter and prepared to report them publicly. Lim typically learned the nonpublic information in phone conversations with his Nvidia friend, and within one minute of ending a conversation Lim would immediately call Kuo to relay the latest inside information. Lim provided Kuo such nonpublic details as Nvidia’s calculation of its revenues, gross profit margins, and other important financial metrics before the company made those figures public in its quarterly earnings announcements.

The SEC alleges that Lim was compensated by Kuo for the confidential Nvidia information that he provided. Kuo wired $5,000 to a Las Vegas casino to pay a debt for Lim, and later Kuo made two $5,000 cash payments to Lim. Kuo also provided Lim with nonpublic information about a pending corporate acquisition, which Lim used to make more than $11,000 in trading profits.

The SEC’s complaint charges Lim with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him to disgorge his ill-gotten gains and those of his tippees plus interest, ordering him to pay a financial penalty, permanently enjoining him from future violations, and barring him from serving as an officer or director of a public company.

The SEC’s investigation, which is continuing, has been conducted by Stephen Larson, Daniel Marcus and Joseph Sansone, who are members of the SEC’s Market Abuse Unit in New York, along with Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.