FRAUD VERDICT IN PONZI SCHEME CASE LEADS TO $80 MILLION IN SANCTIONS AGAINST MAN AND HIS COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Court Imposes Injunctions and Monetary Sanctions of Over $80 Million Against Marlon Quan and His Companies Based On Fraud Verdict

The United States Securities and Exchange Commission announced today that, on September 19, 2014, Judge Ann D. Montgomery, of the U.S. District Court in Minneapolis, Minnesota, issued an Opinion and Order imposing sanctions against defendants Marlon Quan, Acorn Capital Group, LLC ("Acorn"), Stewardship Investment Advisors, LLC ("SIA") and ACG II, LLC ("ACG II"). In the Opinion and Order, Judge Montgomery imposed permanent injunctions against the defendants, and imposed financial sanctions of over $80 million against Marlon Quan and the three other defendants that he controlled.

The Commission's complaint, which was filed in March 2011, alleged that Marlon Quan helped to facilitate the massive fraud of Tom Petters by funneling several hundred million dollars of investor money into the Petters Ponzi scheme. According to the SEC's 2009 complaint against Tom Petters, he sold promissory notes to feeder funds like those controlled by Quan and his firms. Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes. Petters had promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such retailers as Wal-Mart and Costco. In reality, this "purchase order inventory financing" business was merely a Ponzi scheme -- there were no inventory transactions.

The SEC alleged that Quan and his firms (SIA and Acorn) invested hundreds of millions of hedge fund assets with Petters while pocketing tens of millions of dollars in fees. Marlon Quan and his companies falsely assured investors that their money would be protected by various safeguards such as "lock box accounts." The complaint also alleged that when Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms concealed Petters's defaults from investors.

The Commission had previously charged Petters and Illinois-based fund manager Gregory M. Bell with fraud, and filed additional charges against Florida-based hedge fund managers Bruce F. Prévost and David W. Harrold for similarly defrauding their investors in connection with investments in the Petters Ponzi scheme. Subsequent to filing the complaint against Marlon Quan and his companies, the SEC also charged James Fry, a Minnesota-based hedge fund manager, with similar misconduct.

After a nine-day trial, on February 11, 2014, the jury returned a verdict for the Commission and against the defendants, finding Marlon Quan and his three companies liable for securities fraud. In her September 19th Opinion and Order, Judge Montgomery permanently enjoined the Marlon Quan, Acorn, SIA and ACG II from violating, or aiding and abetting violations of, Section 17(a)(2) and (3) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Judge Montgomery further ordered that Marlon Quan and the other defendants were liable, jointly and severally, for disgorgement of $80,6213,589 together with prejudgment interest.

The trial team from the Commission's Chicago Regional Office consisted of attorneys John E. Birkenheier, C.J. Kerstetter, Timothy Leiman, Michael Mueller, Senior Accountant Don Ryba, and paralegal Sarah Renardo.

SEC CHARGES INVESTMENT ADVISORY FIRM WITH FAVORING CERTAIN CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a San Diego-based investment advisory firm and its president for allegedly steering winning trades to favored clients and lying about how certain money was being spent.

The SEC’s Enforcement Division alleges that J.S. Oliver Capital Management and Ian O. Mausner engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested.  Meanwhile they doled out less profitable trades to other clients, including a widow and a charitable foundation.  The disfavored clients suffered approximately $10.7 million in harm.

The SEC’s Enforcement Division further alleges that Mausner and J.S. Oliver misused soft dollars, which are credits or rebates from a brokerage firm on commissions paid by clients for trades executed in the investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for expenses, including a limited category of brokerage and research services that benefit clients.  However, Mausner and J.S. Oliver misappropriated more than $1.1 million in soft dollars for undisclosed purposes that in no way benefited clients, such as a payment to Mausner’s ex-wife related to their divorce.

“Mausner’s fraudulent schemes were a one-two punch that betrayed his clients and cost them millions of dollars,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Investment advisers must allocate trades and use soft dollars consistent with their fiduciary duty to put client interests first.”

The SEC also charged Douglas F. Drennan, a portfolio manager at J.S. Oliver, for his role in the soft dollar scheme.

According to the SEC’s order instituting administrative proceedings, Mausner engaged in the cherry-picking scheme from June 2008 to November 2009 by generally waiting to allocate trades until after the close of trading or the next day.  This allowed Mausner to see which securities had appreciated or declined in value, and he gave the more favorably priced securities to the accounts of four J.S. Oliver hedge funds that contained investments from Mausner and his family.  Mausner profited by more than $200,000 in fees earned from one of the hedge funds based on the boost in its performance from the winning trades he allocated.  Mausner also marketed that same hedge fund to investors by touting the fund’s positive returns when in reality those returns merely resulted from the cherry-picking scheme.

According to the SEC’s order, the soft dollar scheme occurred from January 2009 to November 2011.  Mausner and J.S. Oliver failed to disclose the following uses of soft dollars:

More than $300,000 that Mausner owed his ex-wife under their divorce agreement.
More than $300,000 in “rent” for J.S. Oliver to conduct business at Mausner’s home.  Most of this amount was funneled to Mausner’s personal bank account.
Approximately $480,000 to Drennan’s company for outside research and analysis when in reality Drennan was an employee at J.S. Oliver.
Nearly $40,000 in maintenance and other fees on Mausner’s personal timeshare in New York City.
According to the SEC’s order, Drennan participated in the soft dollar scheme by submitting false information to support the misuse of soft dollar credits and approving some of the soft dollar payments to his own company.

The SEC’s order alleges that J.S. Oliver and Mausner willfully violated the antifraud provisions of the federal securities laws and asserts disclosure, compliance, and recordkeeping violations against them.  The SEC’s order alleges that Drennan willfully aided, abetted, and caused J.S. Oliver’s fraud violations in the soft dollar scheme.

The SEC’s investigation, which is continuing, has been conducted by Ronnie Lasky and C. Dabney O’Riordan of the Enforcement Division’s Asset Management Unit in the Los Angeles Regional Office.  The SEC’s litigation will be led by David Van Havermaat, John Bulgozdy, and Ms. Lasky.  The examination of J.S. Oliver was conducted by Ashish Ward, Eric Lee, and Pristine Chan of the Los Angeles office’s investment adviser/investment company examination program.

MANAGER AND HEDGE FUNDS TO PAY $44 MILLION TO SETTLE STOCK PRICE MANIPULATION CHARGES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 12, 2012 — The Securities and Exchange Commission today charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.

The SEC alleges that Sung Kook "Bill" Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tiger Asia Management.

"Hwang today learned the painful lesson that illegal offshore trading is not off-limits from U.S. law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning," said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit, added, "Hwang betrayed his duty of confidentiality by trading ahead of the private placements, and betrayed his fiduciary obligations when he defrauded his investors by collecting fees earned from his attempted manipulation scheme."

The SEC also charged Raymond Y.H. Park for his roles in both schemes as the head trader of the two hedge funds involved – Tiger Asia Fund and Tiger Asia Overseas Fund. Park, who lives in Riverdale, N.Y., also agreed to settle the SEC’s charges. Hwang lives in Tenafly, N.J.

According to the SEC’s complaint filed in federal court in Newark, N.J., from December 2008 to January 2009, Hwang and his advisory firms participated in two private placements for Bank of China stock and one private placement for China Construction Bank stock. Before disclosing material nonpublic information about the offerings, the placement agents required wall-crossing agreements from Park and the firms to keep the information confidential and refrain from trading until the transaction took place. Despite agreeing to those terms, Hwang ordered Park to make short sales in each stock in the days prior to the private placement. Hwang and his firms illegally profited by $16.2 million by using the discounted private placement shares they received to cover the short sales they had entered into based on inside information about the placements.

The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange. These stocks were among the largest short position holdings in the hedge funds’ portfolios. The more assets the hedge funds had under management, the greater the management fee that Tiger Asia Management was entitled to collect. So Hwang directed Park to place losing trades in order to depress the stock prices, which would inflate the calculation of the management fees. Hwang and Tiger Asia Management made approximately $496,000 in fraudulent management fees through this scheme.

The SEC’s complaint charges Hwang, his firms, and Park with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. Hwang and his firms also are charged with violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Park is charged with aiding and abetting those violations.

The settlements, which are subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest. Each of them has agreed to pay a penalty of $8,294,348 for a total of 24,883,044. Park agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.

The SEC’s investigation was conducted by Thomas P. Smith, Jr., Sandeep Satwalekar, and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York, and Frank Milewski of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, the Japanese Securities and Exchange Surveillance Commission, and the Hong Kong Securities and Futures Commission.

FORMER SILICON VALLEY EXECUTIVE SETTLES SEC CHARGES STEMMING FROM HEDGE FUND INSIDER TRADING CASE

Photo Credit:  Wikimedia Commons

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Former Silicon Valley Executive to Pay $1.75 Million to Settle Insider Trading Charges
On October 24, 2012, the Securities and Exchange Commission charged a former senior executive at a Silicon Valley technology company for illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge funds to make nearly $1 million in illicit profits.

The SEC alleges that Kris Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds. Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007.

Chellam, who lives in Saratoga, Calif., has agreed to pay more than $1.75 million to settle the SEC's charges. The settlement is subject to court approval.

According to the SEC's complaint filed in federal court in Manhattan, Xilinx announced in October 2006 the financial results for the second quarter of its 2007 fiscal year. Xilinx also provided guidance for the third quarter by projecting revenues of approximately $476 million to $490 million. Xilinx said it would update this revenue guidance on Dec. 7, 2006.

The SEC alleges that in the weeks leading up to Xilinx's December 7 update, Chellam received multiple reports indicating that the company's third quarter business results were not going to be as positive as projected in October. Chellam learned on November 21 that the top end of the projected revenue range was being lowered from $490 million to $470 million. He attended a December 4 confidential executive staff meeting where the bottom end of the revenue projection was lowered from $476 million to $455 million. On December 5, Chellam telephoned Rajaratnam and tipped him about Xilinx's worse-than-expected performance. Just minutes after the call, Galleon hedge funds controlled by Rajaratnam sold short Xilinx stock, eventually selling short more than 650,000 shares over the course of that day and the following day.

According to the SEC's complaint, the Galleon hedge funds reaped approximately $978,684 in illegal profits after the December 7 announcement by covering the substantial short position that Rajaratnam had accumulated based on Chellam's tip. Chellam had more than $1 million invested in one of the Galleon hedge funds in which Rajaratnam placed these trades. In May 2007, Chellam became the co-managing partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on investments in late-stage technology companies. Chellam continued to work at Galleon until April 2009 and continued to obtain confidential information about Xilinx's financial performance and pass it along to Galleon colleagues. Chellam earned approximately $675,000 in total compensation during his employment at Galleon.

The SEC's complaint charges Chellam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The proposed final judgment orders Chellam to pay $675,000 in disgorgement, $106,383.05 in prejudgment interest, and a $978,684 penalty. Chellam also would be barred for a period of five years from serving as an officer or director of a public company, and permanently enjoined from future violations of these provisions of the federal securities laws. Chellam neither admits nor denies the charges.

The SEC has now charged 32 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders throughout the country. The alleged insider trading has occurred in the securities of more than 15 companies for illicit profits totaling approximately $93 million.

WALL STREET FIRM CHARGED WITH FOREX FRAUD

Photo:  Currency Sign.  Credit:  Wikimedia
FROM:  COMMODITIES FUTURES TRADING COMMISSION
CFTC Charges New York Firm Madison Dean, Inc., and its Principals, George Athanasatos and Laurence Dodge, with Forex Fraud

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement action in the U.S. District Court for the Eastern District of New York charging Madison Dean, Inc. (Madison Dean), of Wantagh, N.Y., and its principals, George Athanasatos, also of Wantagh, and Laurence Dodge of Fresh Meadows, N.Y., with fraudulently soliciting approximately 19 persons to invest approximately $415,000 in managed trading accounts to trade off-exchange foreign currency (forex) contracts on a leverage or margined basis. None of the defendants has ever been registered with the CFTC.

The CFTC complaint, filed on May 8, 2012, alleges that from approximately December 2008 through approximately July 2010, defendants Madison Dean, Athanasatos, and Dodge, through an Internet website, written solicitation materials, and other actions, misrepresented and omitted material facts about Madison Dean, including the background and qualifications of Madison Dean employees and the firm’s performance record, to create a false impression that it was a well-established and successful company.

Specifically, according to the complaint, the defendants allegedly fraudulently claimed that 1) Madison Dean had been in existence since 1998, 2) Madison Dean’s customers included high net worth individuals, financial institutions, and institutional clients, 3) Madison Dean provided “professional money managers” who would be in charge of the forex trading for the customers’ managed accounts, and 4) Madison Dean had been making money for its customers for years.

Contrary to these claims, Madison Dean had not been making money for its customers for years, as it did not exist prior to December 2008, and its customers were “neither high net worth individuals, financial institutional or other institutional clients, hedge funds, nor millionaires,” according to the complaint. Also, according to the complaint, Madison Dean did not have professional money managers in charge of customer trading. Rather, Athansatos allegedly managed the trading of customer accounts, and on various occasions, Dodge and Athanasatos’ mother – neither a professional money manager – also traded customer accounts.

The complaint further alleges that Madison Dean’s customers lost approximately $250,000, “as a result of its poor trading.” As further alleged, after being in operation for a little over a year, during which time the firm collected approximately $112,000 in commissions and fees, Madison Dean shut down its operation with no notice to its customers and no way for those customers to contact the company or anyone associated with it.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, disgorgement of ill-gotten gains, trading and registration bans, and preliminary and permanent injunctions against further violations of the Commodity Exchange Act, as charged.
The CFTC appreciates the assistance of the United Kingdom Financial Services Authority in this matter.

CFTC Division of Enforcement staff members responsible for this case are Alan I. Edelman, James H. Holl, III, Michelle Bougas, Gretchen L. Lowe, and Vincent McGonagle.