SEC CHARGES MAN WITH FRAUD INVOLVING MILITARY PERSONNEL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
04/14/2015 10:15 AM EDT

The Securities and Exchange Commission today announced fraud charges and an asset freeze against a man living in central Texas accused of telling false tales about his stockbroking experience to lure current and former U.S. military personnel into investing with him.

The SEC alleges that Leroy Brown Jr. touted his own military connection as an Army veteran while soliciting members of the military and other investors through his firm LB Stocks and Trades Advice LLC.  Brown falsely assured investors, including some stationed at nearby Fort Hood, that he had many years of experience in the securities markets.  He specifically claimed to have all the necessary licenses and registrations to conduct securities business.  In reality, Brown is not a licensed securities professional and his firm is not registered with the SEC, Financial Industry Regulatory Authority, or any state regulator.  Brown and his firm have no evident experience with investments.

The SEC further alleges that Brown falsely guaranteed investors that he would double or triple their money within 120 days.

“Trust is a bedrock principle to our military, and we allege that Brown exploited his own military experience and abused that trust for his own personal gain,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office.  “Investment fraud is always wrong, but it’s especially pernicious when perpetrated against those who have sacrificed so much for our freedom.”

The SEC’s complaint, filed yesterday in U.S. District Court for the Western District of Texas, charges Brown and LB Stocks and Trades Advice with securities fraud and conducting an unregistered securities offering.  The SEC is seeking financial penalties and disgorgement of ill-gotten gains as well as permanent injunctive relief.  The court has issued an order temporarily freezing all assets of Brown and LB Stocks and Trades Advice.

The SEC’s investigation was conducted by Chris Ahart and Melvin Warren of the Fort Worth Regional Office, and the case was supervised by Jim Etri.  The SEC’s litigation is being led by B. David Fraser.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Texas, the U.S. Secret Service, and the Texas Department of Public Safety - Criminal Investigations Division.

SEC ANNOUNCES AN INVESTMENT MANAGEMENT FIRM TO PAY $35 MILLION TO SETTLE FRAUD CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that investment management firm F-Squared Investments has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product.

The SEC separately charged the firm’s co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared.

According to the SEC’s order instituting a settled administrative proceeding against Massachusetts-based F-Squared, which is the largest marketer of index products using exchange-traded funds (ETFs), the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment.  The signals were based on an algorithm, and F-Squared and Present used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed.  They named the new product “AlphaSector” and launched the first index a month later.  AlphaSector’s indexes quickly became the firm’s largest revenue source, and F-Squared went from losing money to becoming a highly profitable investment manager.

The SEC alleges that while marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients.  In reality, the algorithm was not even in existence during the seven years of purported performance success.  The data used in F-Squared’s advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period.  F-Squared and Present specifically advertised the investment strategy as “not backtested.”  Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

“Investors must be able to trust that performance advertisements are accurate,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”

According to the SEC’s complaint against Present filed in federal court in Boston, he was responsible for F-Squared’s advertising materials that were often posted on the company website and sent to clients and prospective clients.  Present also was responsible for the descriptions of AlphaSector in its filings with the SEC, and he certified the accuracy of those filings.  F-Squared and Present made the false and misleading statements about AlphaSector from September 2008 to September 2013.  The SEC alleges that they claimed AlphaSector was based on an investment strategy that had been used to invest client assets since April 2001.  Yet Present knew that the algorithm was not finalized until late summer 2008 when he devised rules for turning the signals into a model ETF portfolio and directed an assistant to calculate hypothetical returns for the portfolio going back to April 2001.

The SEC further alleges that the F-Squared analyst who calculated the backtested AlphaSector performance inadvertently applied the buy/sell signals to the week preceding any ETF price change that the signals were based on.  The mistake carried the model portfolio’s backtested buy and sell decisions back in time one week, enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell.  The SEC alleges that the analyst tried to explain this possible calculation error to Present in late September 2008, yet F-Squared went on to advertise the inflated data for the next five years and overstated that AlphaSector significantly outperformed the S&P 500 from April 2001 to September 2008.

“We allege that not only did F-Squared and Present attract clients to this investment strategy by touting a track record they presented as real when it was merely hypothetical, but the hypothetical calculations also were substantially inflated,” said Julie M. Riewe, co-chief of the Enforcement Division’s Asset Management Unit.

F-Squared consented to the entry of the order finding that it violated Sections 204, 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8.  The order also finds that F-Squared aided and abetted and caused certain mutual funds sub-advised by F-Squared to violation Section 34(b) of the Investment Company Act of 1940.  F-Squared acknowledged that its conduct violated federal securities laws, and agreed to cease and desist from committing or causing violations of these provisions.  F-Squared agreed to retain an independent compliance consultant and pay disgorgement of $30 million and a penalty of $5 million.

The SEC’s complaint against Present alleges that he violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The SEC’s investigation, which is continuing, is being conducted by Bill Donahue, Robert Baker, Jose Santillan, and John Farinacci of the Asset Management Unit as well as Rachel Hershfang, Frank Huntington, Mayeti Gametchu, Jennifer Cardello, and Rory Alex of the Boston Regional Office.  The case has been supervised by Kevin Kelcourse.  The SEC’s litigation against Present will be led by Mr. Huntington and Ms. Hershfang.

SEC SUSPENDS TRADING IN EBOLA RELATED COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
11/20/2014 10:30 AM EST

The Securities and Exchange Commission today suspended trading in four companies that claim to be developing products or services in response to the Ebola outbreak, citing a lack of publicly available information about the companies’ operations.

The SEC simultaneously issued an investor alert warning about the potential for fraud in microcap companies purportedly involved in Ebola prevention, testing, or treatment, noting that scam artists often exploit the latest crisis in the news cycle to lure investors into supposedly promising investment opportunities.

The SEC Enforcement Division and its Microcap Fraud Task Force work to proactively identify microcap companies that are publicly disseminating information that appears inadequate or potentially inaccurate.  The SEC has authority to issue trading suspensions against such companies.  The companies whose trading was suspended today are Patchogue, N.Y.-based Bravo Enterprises Ltd., Monrovia, Calif.-based Immunotech Laboratories Inc., Toronto-based Myriad Interactive Media Inc., and Anaheim, Calif.-based Wholehealth Products Inc.

“We move quickly to protect investors when we see thinly-traded stocks being promoted with questionable information that make them ripe for pump-and-dump schemes,” said Elisha Frank, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Fraudsters are constantly exploiting issues of public concern to tout a penny stock company supposedly in the business of addressing the latest crisis.”

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.  More information about the trading suspension process is available in an SEC investor bulletin on the topic.

According to the SEC’s investor alert, similar to how natural disasters such as Hurricane Katrina and Hurricane Sandy have given rise to investment schemes for companies purportedly involved in cleanup efforts, con artists may perpetrate investment scams related to Ebola prevention or treatment efforts.  The alert suggests that investors be wary about promises or guarantees of high investment returns with little or no risk, avoid solicitations with pressure to “buy RIGHT NOW,” and beware of unsolicited investment offers through social media.

SEC INVESTOR ALERT: FALSE CLAIMS OF BEING REGISTERED WITH THE SEC

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Investor Alert: Beware of False Claims of SEC Registration
03/20/2014

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors about potentially fraudulent investment schemes that involve individuals or firms misrepresenting that they are registered with the SEC. Investors should be careful to check the background, including license and registration status, of any person who tries to sell them an investment product or service, and should avoid investing with anyone who falsely represents that they are registered with the SEC.

Fraudsters may try to lure you into investing with them by falsely claiming to be registered with the SEC. In a recent fraud case brought by the SEC, SEC v Fleet Mutual Wealth, the defendants allegedly promised investors guaranteed returns of 2-3% per week through the use of a high frequency trading strategy, but instead used investors’ money to operate a pyramid scheme. The defendants allegedly recruited investors by misrepresenting that their firm was “registered” or “duly registered” with the SEC and pointing to the firm’s Form D filings to support this misrepresentation.

A Form D filing has nothing to do with whether an individual or firm is registered with the SEC.

Registration of Individuals and Firms

Many sellers of investment products or services are either brokers, investment advisers, or both. Most brokers must register with the SEC and join the Financial Industry Regulatory Authority (FINRA). Investment advisers that provide investment advice to retail investors generally must register with the SEC or the state securities regulator where they have their principal place of business.
The fact that an individual or firm has made a filing with the SEC does not mean that the individual or firm is registered with the SEC. If an individual or firm offering you an investment product or service claims to be registered with the SEC, verify that this is true:

Determine whether a firm is registered with the SEC as a broker and whether key individuals are duly licensed, and check whether there is a history of investor complaints or problems with regulators, by using FINRA’s BrokerCheck or by calling the FINRA BrokerCheck Hotline at (800) 289-9999.

Determine whether a firm’s registration with the SEC as an investment adviser is active and whether any required licenses of individuals are current, and review disciplinary history by searching the SEC’s Investment Adviser Public Disclosure (IAPD) database:

To check a firm, select the SEC Registration Status hyperlink.
To check an individual, review the Qualifications section of an Investment Adviser Representative Report Summary.

In addition, always contact your state securities regulator to determine whether an individual or firm is licensed or registered with your state securities regulator to do business with you, and ask about any complaints. Find contact information for your state securities regulator by visiting the North American Securities Administrators Association (NASAA)’s website or by calling NASAA at (202) 737-0900.

Registration of Securities Offerings and Form D

Under the federal securities laws, a company or private fund may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration applies. Companies and private funds that offer and sell securities in reliance on certain exemptions from registration are required to file a brief notice known as Form D. Form D filings are publicly available in the EDGAR database.

Form D requires basic information about the issuer of the securities and the unregistered securities offering, such as information about the issuer’s executive officers, the size of the offering, and the date of first sale. The SEC does not verify the accuracy of the information in a Form D filing, and a Form D filing cannot be used to accomplish registration of individuals or firms with the SEC, or registration of securities offerings with the SEC.

MAN SENTENCED TO 144 MONTHS IN PRISON FOR ROLE IN $270 MILLION INVESTMENT FRAUD SCHEME

FROM:  U.S. JUSTICE DEPARTMENT
Friday, December 6, 2013
Virginia Man Sentenced for Conducting $270 Million Investment Fraud Scheme

The owner of a Virginia-based investment firm was sentenced today to serve 144 months in prison for orchestrating a $270 million stock loan scheme that defrauded his clients of more than $35 million.

Acting Assistant Attorney General Mythili Raman of the Department of Justice’s Criminal Division, Acting United States Attorney Dana J. Boente of the Eastern District of Virginia and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office made the announcement after sentencing by U.S. District Judge Gerald Bruce Lee of the Eastern District of Virginia.

William Dean Chapman, 44, of Sterling, Va., pleaded guilty to one count of wire fraud on May 23, 2013.   Chapman was the founder and owner of Alexander Capital Markets (ACM), whose primary business was to offer a financial product that provided customers with a purportedly fully hedged loan at an above-market rate of interest against a customer’s securities.   This served as collateral for the transaction for a percentage – typically between 85 percent and 90 percent – of the securities’ value.   For example, in exchange for a customer’s Apple stock, ACM would provide a cash loan to that customer worth 85 percent or 90 percent of the stock’s value.   After a period of time – between two and seven years, and typically three years – the customer could receive back their securities, or the equivalent cash value, if they repaid the balance of the loan plus accrued interest.   Alternatively, because the loans were non-recourse, the customer could walk away at the end of the redemption period having already received up to 90 percent of the value of their securities.

ACM’s customers were assured that ACM was engaged in hedging transactions such that ACM would be able to return the full value of the securities, or the cash equivalent, at the end of the contract period.   In reality, ACM simply sold the securities upon receipt, remitted up to 90 percent of the sales proceeds to its customers as the loan, and retained the remaining sales proceeds for itself and the parties who sold, marketed or facilitated the product.

Because ACM simply sold the securities upon receipt and no legitimate hedge existed, ACM could not return securities, or the cash equivalent, to the customers at the end of the redemption period unless it had sufficient funds to buy back the securities.   By in or about April 2008, ACM was functionally insolvent.   ACM did not have – and could not have expected to have – sufficient funds to cover its outstanding liabilities.   Nevertheless, Chapman continued to solicit new customers despite knowing that ACM would never be able to fulfill its financial obligations.

Over seven years, Chapman took in more than $270 million in stock, and 122 victims lost more than $35 million as a result of this scheme.   At the same time that ACM was amassing massive liabilities and failing to repay its existing clients, Chapman used his clients’ money to support a lavish lifestyle by purchasing a custom-built $3 million home in Great Falls, Va.; condominiums in the Turks & Caicos and Pompano Beach, Fla.; and a Lamborghini and Ferrari.

This case was investigated by the FBI’s Washington Field Office.  The Criminal Division and the U.S. Attorney’s Office for the Eastern District of Virginia recognize the substantial assistance of the U.S. Securities and Exchange Commission on this case.   Assistant United States Attorney Chad Golder and Trial Attorney Henry Van Dyck of the Criminal Division’s Fraud Section prosecuted the case on behalf of the United States.

SEC CHARGES 10 BROKERS IN $125 MILLION INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against 10 former brokers at an Albany, N.Y.-based firm at the center of a $125 million investment scheme for which the co-owners have received jail sentences.

The SEC filed an emergency action in 2010 to halt the scheme at McGinn Smith & Co. and freeze the assets of the firm and its owners Timothy M. McGinn and David L. Smith, who were later charged criminally by the U.S. Attorney’s Office for the Northern District of New York and found guilty.

The SEC’s Enforcement Division alleges that 10 brokers who recommended the unregistered investment products involved in the scheme made material misrepresentations and omissions to their customers.  The registered representatives ignored red flags that should have led them to conduct more due diligence into the securities they were recommending to their customers.

“As securities professionals, these brokers had an important duty to determine whether the securities they recommended to customers were suitable, especially when red flags were apparent.  These registered representatives performed inadequate due diligence and failed to fulfill their duties,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order names 10 former McGinn Smith brokers in the administrative proceeding:

Donald J. Anthony, Jr. of Loudonville, N.Y.
Frank H. Chiappone of Clifton Park, NY.
Richard D. Feldmann of Delmar, N.Y.
William P. Gamello of Rexford, N.Y.
Andrew G. Guzzetti of Saratoga Springs, N.Y.
William F. Lex of Phoenixville, Pa.
Thomas E. Livingston of Slingerlands, N.Y.
Brian T. Mayer of Princeton, N.J.
Philip S. Rabinovich of Roslyn, N.Y.
Ryan C. Rogers of East Northport, N.Y.
According to the SEC’s order, the scheme victimized approximately 750 investors and led to $80 million in investor losses.  Guzzetti was the managing director of McGinn Smith’s private client group from 2004 to 2009, and he supervised brokers who recommended the firm’s offerings.  The SEC’s Enforcement Division alleges that despite his knowledge of serious red flags, Guzzetti failed to take any action to investigate the offerings and instead encouraged the brokers to sell the notes to McGinn Smith customers.

The SEC’s Enforcement Division alleges that the other nine brokers charged in the administrative proceeding should have conducted a searching inquiry prior to recommending the products to their customers.  The brokers continued to sell McGinn Smith notes even after being told that customers placed in some of the firm’s offerings could only be redeemed if a replacement customer was found.  This was contrary to the offering documents.  In January 2008, the brokers learned that four earlier offerings that raised almost $90 million had defaulted, yet they failed to conduct any inquiry into subsequent offerings and continued to recommend McGinn Smith notes.

The SEC’s order alleges that the misconduct of Anthony, Chiappone, Feldmann, Gamello, Lex, Livingston, Mayer, Rabinovich, and Rogers resulted in violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The order alleges that Guzzetti failed to reasonably supervise the nine brokers, giving rise to liability under Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4).

The SEC’s civil case continues against the firm as well as McGinn and Smith, who were sentenced to 15 and 10 years imprisonment respectively in the criminal case.
The SEC’s investigation was conducted by David Stoelting, Kevin P. McGrath, Lara Shalov Mehraban, Haimavathi V. Marlier, Joshua Newville, Kerri Palen, Michael Paley, and Roseann Daniello of the New York office.  Mr. Stoelting, Ms. Marlier and Michael Birnbaum will lead the Enforcement Division’s litigation.

JUSTICE DEPARTMENT OFFICAL TESTIFIES BEFORE HOUSE SUBCOMMITTEE

FROM: U.S. DEPARTMENT OF JUSTICE

Acting Assistant Attorney General Mythili Raman Testifies Before the U.S. House Financial Services Subcommittee on Oversight and Investigations

~ Wednesday, May 22, 2013

Chairman McHenry, Ranking Member Green, and distinguished Members of the Subcommittee: Thank you for inviting the Department of Justice to appear before you today to discuss our efforts to combat financial crime. I am pleased to be here and am privileged to oversee the important work of the Criminal Division.

The Justice Department is committed to vigorously investigating allegations of wrongdoing at financial institutions and, along with our many law enforcement partners, holding individuals and corporations to account for their conduct.

Our track record in recent years shows our commitment to pursuing the most challenging and complex financial crime investigations in the country. Over the last three fiscal years alone, the Department has filed nearly 10,000 financial fraud cases against nearly 14,500 defendants. These prosecutions have led to stiff prison sentences for many defendants. Last year, for example, the Criminal Division and the U.S. Attorney’s Office in Houston secured a 110-year sentence for Robert Allen Stanford for orchestrating a 20-year, $7 billion investment fraud scheme – just one of numerous investment fraud schemes the Department has prosecuted in recent years.

We have been just as aggressive in bringing prosecutions involving the manipulation of the markets, as seen by the extraordinary success of the U.S. Attorney’s Office in Manhattan in an unprecedented string of insider trading cases over the last several years.

Our prosecutors and agents also continue to doggedly pursue health care fraudsters. Our Medicare Fraud Strike Force has convicted over 1,000 defendants of felony health care fraud offenses since the Strike Force’s inception, and the average sentence in Strike Force cases is approximately 45 months in prison.

Our fight against foreign bribery, too, is as robust as it has ever been. In just the past two months, we have announced charges against 11 individuals – including corporate executives and employees, and one foreign official – in active Foreign Corrupt Practices Act investigations.

Similarly, our investigation of the manipulation at various banks of interbank lending rates, including LIBOR, has had reverberations across the globe. As detailed in my written statement, the consequences thus far for several multinational banks have been far reaching, ranging from replacement of senior leaders at Barclays, to criminal charges against traders at UBS, to detailed admissions of criminal wrongdoing and the payment of substantial penalties by three global banks, to felony guilty plea agreements by Japanese subsidiaries of UBS and RBS.

As is evident from this track record, we are deeply committed to holding wrongdoers – whether individuals or business entities – to account for their crimes. In our investigations of business entities, in particular, we are guided by firmly rooted Department policy, set out in the U.S. Attorneys’ Manual, which requires our prosecutors to consider a number of factors in determining how and whether to bring charges – including the seriousness of the entity’s conduct, the pervasiveness of the wrongdoing, the extent of the entity’s cooperation with our investigation, and the remedial actions taken by the company.

There has been some discussion in recent months about one of those factors – the potential collateral consequences of charging a corporate entity – and we appreciate your interest in better understanding the extent to which the Department may consider possible collateral consequences of criminal prosecutions against large, complex financial institutions.

The consideration of collateral consequences on innocent third parties, like the other factors we must consider when determining whether and how to proceed against a corporation, has been required by the U.S. Attorneys’ Manual since 2008. But the basic principles underlying that policy have a much longer history at the Department. The first Department-wide guidance on this subject was issued in 1999, and those basic principles have been reaffirmed multiple times since then, including in 2003, 2006, and 2008.

As more fully explained in my written statement, although the factors set forth in the U.S. Attorneys’ Manual, for good reason, inform our prosecutorial decisions, none of those factors, including potential collateral consequences, acts as a bar to prosecution, or has prevented the Justice Department from pursuing investigations and seeking criminal penalties in cases involving large, complex financial institutions. No individual or institution is immune from prosecution, and we intend to continue our aggressive pursuit of financial fraud with the same strong commitment with which we pursue other criminal matters of national and international significance.

Thank you for the opportunity to provide the Subcommittee with this overview of our financial fraud enforcement efforts. I look forward to answering any questions you may have.

FORMER CEO OF FAIR FINANICAL SENTENCED FOR DEFRAUDING INVESTORS OUT OF OVER $200 MILLION

Photo:  New York Stock Exchange 1929.  Credit:  Wikimedia. 

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON – The former chief executive officer of Fair Financial Company, an Ohio financial services business, was sentenced today to serve 50 years in prison for his role in a scheme to defraud approximately 5,000 investors of more than $200 million, announced Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division and U.S. Attorney for the Southern District of Indiana Joseph H. Hogsett.

Timothy S. Durham, 50, of Fortville, Ind., was sentenced today by U.S. District Judge Jane Magnus-Stinson. In addition to his prison term, Durham was sentenced to serve two years supervised release.

James F. Cochran, the former chairman of the board of Fair, was sentenced today by Judge Magnus-Stinson to serve 25 years in prison and three years of supervised release.

Rick D. Snow, the former chief financial officer of Fair, was sentenced today by Judge Magnus-Stinson to ten years in prison and two years of supervised release.

Judge Snow also ordered Durham, Cochran and Snow to pay restitution in the amount of $208 million.

"The lengthy prison sentences handed down today are just punishment for a group of executives who built a business on smoke and mirrors," said Assistant Attorney General Breuer. "By deliberately misleading their investors and state regulators, Mr. Durham and his co-conspirators were able defraud thousands of innocent investors. The Justice Department will continue to devote considerable time and resources to ensure that fraudsters like Mr. Durham, Mr. Cochran and Mr . Snow are brought to justice for their crimes."

"This ordeal is truly a tragedy for all families involved," said U.S. Attorney Hogsett. "All we can do is ask that today's decision send a warning to others in Indiana that if you sacrifice truth in the name of greed, if you steal from another's American dream to enhance your own, you will be caught and you will pay a significant price."

"The FBI will continue to aggressively pursue financial crimes investigations," said Special Agent in Charge Robert A. Jones of the FBI Indianapolis Division. "Today’s sentencing represents a significant step toward justice. We must remain mindful that the victims of this crime still suffer."

On June 20, 2012, following an eight-day trial, a federal jury in the Southern District of Indiana convicted Durham and two co-conspirators for their roles in this scheme. Durham was convicted of one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud. James F. Cochran, 57, of McCordsville, Ind., was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and six counts of wire fraud. Rick D. Snow, 49, Fishers, Ind., was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and three counts of wire fraud.

Durham and Cochran purchased Fair, whose headquarters was in Akron, Ohio, in 2002. According to evidence presented at trial, between approximately February 2005 through November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money. The evidence also established that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.

When Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million. By November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled.

Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral. After firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009. With independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.

Evidence introduced at trial showed that the defendants engaged in a variety of other fraudulent activities to conceal from the State of Ohio Division of Securities and from investors Fair’s true financial health and cash flow problems. Evidence showed that the defendants made false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health. The defendants also directed employees of Fair not to pay investors who were owed interest or principal payments on their certificates.

Even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.

This case is being prosecuted by Trial Attorney Henry P. Van Dyck and Senior Deputy Chief for Litigation Kathleen McGovern of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Winfield D. Ong and Nicholas E. Surmacz of the Southern District of Indiana. The investigation was led by the FBI in Indianapolis.

FORMER FAIR FINANCE COMPANY CEO SENTENCED TO 50 YEARS IN PRISON FOR CONDUCTING $200 MILLION FRAUD SCHEME

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced that on November 30, 2012, Timothy S. Durham, former CEO of Ohio-based Fair Finance Company ("Fair Finance"), was sentenced to 50 years in prison for orchestrating a $200 million scheme that defrauded more than 5,000 investors over almost five years. Judge Jane Magnus-Stinson of the United States District Court for the Southern District of Indiana also sentenced James F. Cochran, Fair Finance’s board chairman, to 25 years in prison, and Rick D. Snow, the firm’s chief financial officer, to a 10-year prison term. According to U.S. Attorney Joseph Hogsett in Indianapolis, Durham’s sentence is the longest white-collar fraud sentence in Indiana history.

On June 20, 2012, a federal jury in Indiana convicted Durham, age 50, of securities fraud, conspiracy and 10 counts of wire fraud. Cochran, age 57, and Snow, age 49, were also found guilty on conspiracy and securities fraud charges for their roles in the Fair Finance scheme.

On March 16, 2011, the Commission filed a civil action against Durham, Cochran and Snow based on the same conduct alleged in the criminal case. The Commission’s action has been stayed pending the outcome of the criminal case.

The Commission’s complaint alleged that Fair Finance had for decades legitimately raised funds by selling interest-bearing certificates to investors and using the proceeds to purchase and service discounted consumer finance contracts. However, after purchasing Fair Finance in 2002, Durham, Cochran and Snow began to deceive investors. Under the guise of loans, Durham and Cochran schemed to divert investor proceeds to themselves and others, including to entities that they controlled.

The Commission alleged that Durham and Cochran knew that neither they nor their related companies had the earnings, collateral or other resources to ensure repayment on the purported loans. As CFO, Snow knew or was reckless in not knowing that neither Durham and Cochran nor their entities could repay the funds they took from Fair Finance.

The complaint further alleged that, by November 2009, Durham, Cochran and their related businesses owed Fair Finance more than $200 million, which accounted for approximately 90 percent of Fair Finance’s total loan portfolio. Durham and Cochran also gave large amounts of money to family members and friends, and misused investor funds to afford mortgages for multiple homes, a $3 million private jet, a $6 million yacht, and classic and exotic cars worth more than $7 million. They also diverted investor money to cover hundreds of thousands of dollars in gambling and travel expenses, credit card bills, and country club dues, and to pay for elaborate parties and other forms of entertainment.

STANFORD GETS 110 YEARS FOR INVESTMENT FRAUD

FROM:  U.S. DEPARMENT OF JUSTICE
 Thursday, June 14, 2012
Allen Stanford Sentenced to 110 Years in Prison for Orchestrating $7 Billion Investment Fraud Scheme
WASHINGTON – R. Allen Stanford, the former board of directors chairman of Stanford International Bank (SIB), was sentenced today in Houston to a total of 110 years in prison for orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion from SIB to finance his personal businesses.

The sentencing was announced by Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney Kenneth Magidson of the Southern District of Texas; FBI Assistant Director Kevin Perkins of the Criminal Investigative Division; Assistant Secretary of Labor for the Employee Benefits Security Administration Phyllis C. Borzi; Chief Postal Inspector Guy J. Cottrell; and Richard Weber, Chief of Internal Revenue Service Criminal Investigation (IRS-CI).

On March 6, 2012, Stanford, 62, was convicted on 13 of 14 counts by a federal jury following a six-week trial and approximately three days of deliberation.  The jury also found that 29 financial accounts located abroad and worth approximately $330 million were proceeds of Stanford’s fraud and should be forfeited.

Stanford was sentenced by U.S. District Judge David Hittner.  After considering all the evidence, including more than 350 victim impact letters that were sent to the court, Judge Hittner sentenced Stanford to 20 years for conspiracy to commit wire and mail fraud, 20 years on each of the four counts of wire fraud as well as five years for conspiring to obstruct a U.S. Securities and Exchange Commission (SEC) investigation and five years for obstruction of an SEC investigation.  Those sentences will all run consecutively.  He also received 20 years for each of the five counts of mail fraud and 20 years for conspiracy to commit money laundering which will run concurrent to the other sentences imposed today for a total sentence of 110 years.

As part of Stanford’s sentence, the court also imposed a personal money judgment of $5.9 billion, which is an ongoing obligation for Stanford to pay back the criminal proceeds.  The court found that it would be impracticable to issue a restitution order at this time.  However, all forfeited funds recovered by the United States will be returned to the fraud victims and credited against Stanford’s money judgment.

According to court documents and evidence presented at trial, the vehicle for Stanford’s fraud was SIB, an offshore bank owned by Stanford and based in Antigua and Barbuda that sold certificates of deposit (CDs) to depositors.  Stanford began operating the bank in 1985 in Montserrat, the British West Indies, under the name Guardian International Bank.  He moved the bank to Antigua in 1990 and changed its name to Stanford International Bank in 1994.  SIB issued CDs that typically paid a premium over interest rates on CDs issued by U.S. banks.  By 2008, the bank owed its CD depositors more than $8 billion.
According to SIB’s annual reports and marketing brochures, the bank purportedly invested CD proceeds in highly conservative, marketable securities that were also highly liquid, meaning the bank could sell its assets and repay depositors very quickly.  The bank also represented that all of its assets were globally diversified and overseen by money managers at top-tier financial institutions, with an additional level of oversight by SIB analysts based in Memphis, Tenn.

As shown at trial, this purported investment strategy and management of the bank’s assets was followed for only about 10-15 percent of the bank’s assets.  Stanford diverted billions in depositor funds into various companies that he owned personally, in the form of undisclosed “loans.”  Stanford was thus able to continue the operations of his personal businesses, which ran at a net loss each year totaling hundreds of millions of dollars, at the expense of depositors.  These businesses were concentrated primarily in the Caribbean and included restaurants, a cricket tournament and various real estate projects.  Evidence at trial established Stanford also used the misappropriated CD money to finance a lavish lifestyle, which included a 112-foot yacht and support vessels, six private planes and gambling trips to Las Vegas.

According to evidence presented at trial, Stanford continued the scheme by using sales from new CDs to pay existing depositors who redeemed their CDs.  In 2008, when the financial crisis caused a slump in new CD sales and record redemptions, Stanford lied about personally investing $741 million in additional funds into the bank to strengthen its capital base.  To support that false announcement, Stanford’s internal accountants inflated on paper the value of a piece of real estate SIB had purchased for $63.5 million earlier in 2008 by 5,000 percent to $3.1 billion, despite the fact there were no independent appraisals or improvements to the property.
         
The trial evidence also showed that Stanford perpetuated his fraud by paying bribes from a Swiss slush fund at Societe Generale to C.A.S. Hewlett, SIB’s auditor (now deceased), and Leroy King, the then-head of the Antiguan Financial Services Regulatory Commission.
         
In addition to Stanford, a grand jury in the Southern District of Texas previously indicted several of his alleged co-conspirators, including: James Davis, the former chief financial officer; Laura Holt, the former chief investment officer; Gil Lopez, the former chief accounting officer; Mark Kuhrt, the former controller; and King.  Davis has pleaded guilty and faces up to 30 years in prison under the terms of his plea agreement.  The trial of Holt, Kuhrt and Lopez, which was severed from Stanford’s trial, is scheduled to begin before Judge Hittner on Sept. 10, 2012.  They are presumed innocent unless and until convicted through due process of law.

The investigation was conducted by the FBI’s Houston Field Office, the U.S. Postal Inspection Service, IRS-CI and the U.S. Department of Labor, Employee Benefits Security Administration.  The case was prosecuted by Deputy Chief William Stellmach and Trial Attorney Andrew Warren of the Criminal Division’s Fraud Section and former Assistant U.S. Attorney (AUSA) Gregg Costa of the Southern District of Texas.  AUSA Kristine Rollinson of the Southern District of Texas and Trial Attorney Kondi Kleinman of the Asset Forfeiture and Money Laundering Section in the Justice Department’s Criminal Division assisted with the forfeiture proceeding, and AUSA Jason Varnado and Fraud Section Deputy Chief Jeffrey Goldberg assisted with the sentencing proceeding.

The Justice Department also wishes to thank several countries for their ongoing cooperation during the investigation and prosecution of Stanford and his co-conspirators, including the Governments of Antigua and Barbuda, Switzerland, the Cook Islands, the United Kingdom and the Isle of Man.