FINANCIAL FIRM PRESIDENT SENT TO PRISON FOR 10 YEARS

FROM:  U.S. JUSTICE DEPARTMENT
Thursday, June 4, 2015
President of New Jersey-Based Financial Services Firm Sentenced to 10 Years in Prison for Multimillion-Dollar Securities Fraud

The president of an investment and financial services firm was sentenced today to 120 months in prison for evading taxes and defrauding dozens of investors in New Jersey, Pennsylvania, Texas and elsewhere of $5 million, announced by U.S. Attorney Paul J. Fishman for the District of New Jersey.

Everett C. Miller, 45, of Marlton, New Jersey, previously pleaded guilty before U.S. District Judge Renee Marie Bumb to information charging him with one count of securities fraud and one count of tax evasion.  Judge Bumb imposed the sentence today in Camden federal court.

According to documents filed in this case and statements made in court: Miller was the founder, chief executive officer, president, principal and sole owner of Carr Miller Capital LLC (CMC), an investment and financial services firm based in Marlton, New Jersey.  Miller and others solicited investments through the firm from individuals located in New Jersey, Pennsylvania, North Carolina, Arkansas, Texas and elsewhere.  CMC had more than 30 affiliates and related entities and more than 75 related bank accounts.  Miller controlled the firm’s finances and established himself as synonymous with CMC.  Prior to founding CMC in June 2006, Miller was a registered financial advisor at several financial institutions.

Miller admitted that from June 2006 through December 2010, he and others issued promissory notes to more than 190 investors across the United States and Miller and CMC received $41.2 million from these investors.  The notes were provided as “securities,” but Miller and CMC never registered the notes as securities with any federal or state agency, nor were the notes exempt from such registration requirements.  The notes had a term of nine months and promised the investors returns of seven to 20 percent per year and a return of the principal investment at the end of the nine-month period.

Miller and others falsely represented to the investors that their money would be invested in certain ways, but the investors were not provided with material information about their investments or were misled about the risks of their investments.  Miller commingled and pooled the investors’ monies into one of CMC’s 75 related bank accounts.  Unbeknown to the investors, Miller used some of the monies in the following ways: to repay prior investors, most in Ponzi scheme fashion, to pay CMC and its related entities’ payrolls and operating expenses and to support Miller’s lifestyle.  Miller’s purchases included luxury automobiles; home furnishings and electronic equipment; tickets to entertainment and sporting events; travel, lodging and vacations; meals, entertainment, retail shopping; and groceries.                

On Aug. 11, 2009, the Arkansas Securities Department (ASD) initiated an investigation of Miller, CMC and others for selling unregistered securities to investors in the form of the promissory notes.  Following the investigation, the ASD issued a cease-and-desist order against Miller, CMC and others from selling the notes.

From August 2009 through December 2010, despite knowing about the ASD’s investigation of the promissory notes and CMC’s inability to pay either the interest or the principal on them, Miller and others continued to sell the notes as unregistered securities to investors.  They issued notes to approximately 50 new investors, but never returned any of the principal to the new investors.

Miller admitted that for calendar years 2007, 2008 and 2009, he intentionally failed to provide the Internal Revenue Service (IRS) with any information regarding the proceeds that he personally received in connection with his fraudulent scheme.  Miller failed to disclose $218,770, $244,879 and $199,507 for 2007, 2008 and 2009, respectively.  In total, Miller admitted failing to report $663,156 in taxable income to the IRS, resulting in a tax loss to the government of $47,342.

At the plea proceeding, Judge Bumb entered a consent judgment and order of forfeiture in the amount of $4,999,400, which constitutes the proceeds Miller obtained as a result of the securities fraud.

In addition to the prison term, Judge Bumb sentenced Miller to three years of supervised release and ordered him to pay restitution of $22.34 million.

U.S. Attorney Fishman credited special agents with the FBI, under the direction of Special Agent in Charge Richard M. Frankel in Newark, New Jersey; IRS-Criminal Investigation, under the direction of Special Agent in Charge Jonathan D. Larson; and the U.S. Postal Inspection Service, under the direction of Inspector in Charge Maria L. Kelokates, for the investigation leading to today’s sentencing.  He also thanked the Financial Industry Regulatory Authority – Criminal Prosecution Assistance Group and the U.S. Securities and Exchange Commission’s Philadelphia Office for its assistance with this investigation.  In addition, he thanked the New Jersey Securities Fraud Prosecution Section, the Arkansas Securities Department and the Texas State Securities Board for their roles in the investigation.

The government is represented by Assistant U.S. Attorney Shirley U. Emehelu of the Economic Crimes Unit in Newark, New Jersey.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force.

SEC CHARGES FIRM, IT'S PRESIDENT & 2 SALES ASSOCIATES IN FRAUDULENT IPO OFFERINGS SCHEME TARGETING SENIORS

FROM:  U.S. JUSTICE DEPARTMENT 

The Securities and Exchange Commission charged a Staten Island, N.Y.-based firm, its former president, and two sales representatives involved in a fraudulent boiler room scheme targeting seniors to invest in speculative start-up companies.

The SEC alleges that Dwayne Malloy, Chris Damon, and Theirry Ruffin treated vulnerable older investors as their personal ATM machines.  They cold-called names from a list they maintained at Premier Links Inc. and used high-pressure sales tactics to convince seniors to invest in companies purportedly on the brink of conducting initial public offerings (IPOs).  They never disclosed to the investors that only a small fraction of the money would be transmitted to the promoted companies, and Premier Links diverted investor funds to other entities controlled by the sales representatives or other associates.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Premier Links has never been registered with the SEC as a broker-dealer as required under the federal securities laws to conduct this type of business with investors.  Premier Links, Malloy, Damon, and Ruffin fraudulently obtained at least $9 million from more than 300 investors across the country by building a relationship of purported trust and confidence with them.  In one particularly egregious example, Damon and Malloy spent months earning the trust of an elderly veteran in order to defraud him of $300,000.  In many instances, investors were provided with misleading account statements showing the shares they purportedly purchased as being held for safekeeping in their Premier Links accounts while awaiting the promised IPOs.  Yet transfer agent records for the relevant companies indicate that shares were never purchased for these investors.  Investor money was simply stolen instead.

“Premier Links was a boiler room operated by unscrupulous schemers who made their living by cold-calling seniors and inducing them to buy worthless stock as they stole their money outright,” 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 Eastern District of New York today filed criminal charges.

The SEC’s complaint charges Premier Links, Malloy (who was company president from 2007 to 2012), Damon, and Ruffin with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as the broker-dealer registration provisions of the Exchange Act.  They also are charged with selling securities without a registration statement filed with the SEC.  The complaint seeks disgorgement of ill-gotten gains and financial penalties among other remedies.  The complaint also names several relief defendants for the purposes of recovering money from the scheme in their possession.

The SEC’s investigation was conducted by Joshua Newville, Peter Pizzani, Thomas P. Smith Jr., and Michael Osnato of the SEC’s New York Regional Office.  The case was supervised by Amelia A. Cottrell, and the litigation will be led by Todd Brody.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.

SEC ANNOUNCES INDICTMENT OF ATTORNEY FOR ROLE IN SHEME TO MANIPULATE STOCK

FROM:  U.S. U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23154 / December 9, 2014
USA v. Richard Weed, Case No. 1:14-cr-10348-DPW
Securities and Exchange Commission v. Richard Weed, et al. , Civil Action No. 1:14-cv-14099
California Attorney Indicted for Securities Fraud in Scheme to Manipulate Stock of Sports Ticket Broker

The Securities and Exchange Commission announced today that on December 4, 2014, Richard Weed ("Weed"), a partner in a Newport Beach, California law practice, was indicted on eleven criminal charges by a grand jury in the U.S. District Court for the District of Massachusetts in connection with an alleged pump-and-dump scheme that defrauded investors in a Boston-based ticket brokering business. The indictment charges Weed with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, and nine counts of wire fraud.

The allegations in the criminal indictment stem from the same misconduct underlying the Commission's pending action filed against Weed and two other defendants on November 6, 2014. In that case, the SEC alleges that Weed facilitated a scheme to pump and dump the stock of CitySide Tickets Inc., which he helped structure into a publicly traded company through reverse mergers. Weed created backdated promissory notes and authored false legal opinion letters that enabled Thomas Brazil and Coleman Flaherty to obtain millions of purportedly unrestricted shares of stock in the company. Investors were then blitzed with a false and misleading promotional campaign touting CitySide Tickets as a budding national leader on the verge of acquiring smaller ticket firms across the country and positioning itself as an attractive takeover target for Ticketmaster. As the company's stock price increased on the false hype, Brazil and Flaherty sold their shares to unsuspecting investors for illicit proceeds of approximately $3 million, and Weed was well-compensated for his role in the scheme. Shortly thereafter, the market for CitySide Tickets stock collapsed and the company eventually went out of business.

Weed was originally charged by a criminal complaint and arrested on November 6, 2014. The SEC's action, which is pending, seeks disgorgement of ill-gotten gains plus pre-judgment interest and penalties as well as penny stock bars and permanent injunctions against further violations of the securities laws. The SEC also seeks to bar Weed from serving as an officer or director of any public company.

SEC CHARGES 3 STOCK PROMOTERS IN ALLEGED PUMP-AND-DUMP SCHEME

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged three penny stock promoters with conducting pump-and-dump schemes involving stocks they were touting in their supposedly independent newsletters.

The SEC alleges that Anthony Thompson, Jay Fung, and Eric Van Nguyen worked in coordinated fashion to gain control of a large portion of shares in the stock of microcap companies and then hyped those stocks in newsletters they distributed to prospective investors.  After creating demand for the stock and increasing the value, they sold their holdings at the higher prices and earned significant profits.  Once they stopped their promotional efforts, the demand for the stocks subsided and the prices dropped, leaving investors who had purchased the promoters’ shares with significant losses.

According to the SEC’s complaint filed in federal court in Manhattan, the newsletters published by Thompson, Fung, and Van Nguyen misleadingly stated that they “may” or “might” sell shares they owned when in reality their intentions always were to sell the stocks they were promoting.  In fact, in some instances they already were selling the stocks to which they were saying “may” or “might” sell.  They also failed to fully disclose in their newsletters the amounts of compensation they were receiving for promoting the stocks, cloaking the fact that they were coordinating their promotion of the penny stocks to deliberately increase the prices and dump their own shares.

“Investors should be very wary of penny stock promotions like these, which promise quick and vast riches to those who are purportedly lucky enough to invest,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “In this case, the promoters violated a specific legal requirement that they accurately disclose all compensation they were receiving for promoting the stock and the fact that they were simultaneously selling the stock while urging the investing public to buy it.”

According to the SEC’s complaint, the three promoters conducted five separate schemes that resulted in more than $10 million in ill-gotten gains.  The penny stocks they manipulated were Blast Applications Inc., Smart Holdings Inc., Blue Gem Enterprise Inc., Lyric Jeans Inc., and Mass Hysteria Entertainment Company Inc.  Thompson, who lives in Bethesda, Md., distributed several electronic penny stock promotion newsletters with such names as FreeInvestmentReport.com and OxofWallStreet.com.  Fung, who resides in Delray Beach, Fla., distributed his newsletters at such websites as PennyPic.com, and Van Nguyen was typically based in Canada and distributed electronic penny stock promotion newsletters on such websites as UnrealStocks.com and InsanePicks.com.

“Thompson, Fung, and Van Nguyen repeatedly staged coordinated promotional campaigns to manipulate stock prices and score their own paydays while defrauding investors,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.

The SEC’s complaint names two relief defendants for the purposes of recovering money in their possession that resulted from the schemes.  Thompson’s wife Kendall Thompson received $200,000 in proceeds from one of the stock manipulation schemes.  John Babikian, who operated a penny stock promotion business primarily from a website named AwesomePennyStocks.com, received $1 million as a result of one of the schemes. In a separate SEC case involving a different scheme, a court ordered $3.73 million in sanctions against Babikian.

The SEC’s complaint charges Thompson, Fung, and Van Nguyen with violating the antifraud and anti-touting provisions of the federal securities laws and related rules.  The SEC is seeking disgorgement of ill-gotten gains from the schemes plus prejudgment interest and penalties as well as permanent injunctions against further violations of the securities laws.

Thompson and Fung also were named in a separate SEC case for their roles in a Florida-based scheme in which they promoted a penny stock in their newsletters without adequately disclosing they were selling their shares in the same stock and receiving compensation for their promotional efforts.  A court issued a final judgment requiring them to pay more than $1 million combined.

The SEC’s investigation was conducted by Peter Pizzani, Timothy Nealon, Michael Osnato, and Thomas P. Smith Jr. of the SEC’s New York Regional Office, and the case was supervised by Mr. Wadhwa.  The SEC’s litigation will be led by Howard A. Fischer.  The SEC appreciates the assistance of the Manhattan District Attorney’s Office and the Financial Industry Regulatory Authority.

FORMER EXEC SENTENCED TO PRISON FOR INVOLVEMENT IN $750 MILLION SECURITIES FRAUD SCHEME

FROM:  U.S. JUSTICE DEPARTMENT 

Friday, August 29, 2014

Former Arthrocare Executives Sentenced for Orchestrating $750 Million Securities Fraud Scheme

Former CEO and CFO Sentenced to 20 Years in Prison and 10 Years in Prison, Respectively

The former chief executive officer (CEO) of ArthroCare Corporation was sentenced to serve 20 years in prison, and the former chief financial officer (CFO) was sentenced to serve 10 years in prison today for their leading roles in a $750 million securities fraud scheme.   Two other former senior vice presidents of ArthroCare were also sentenced to prison terms for their roles in the scheme.  

Principal Deputy Assistant Attorney General Marshall L. Miller of the Department of Justice’s Criminal Division and Special Agent in Charge Christopher H. Combs of the FBI’s San Antonio Field Office made the announcement.   U.S. District Judge Sam Sparks in the Western District of Texas imposed the sentences.

“Earlier today, in federal court in Austin, Texas, we witnessed the culmination of an epic tale of greed,” said Principal Deputy Assistant Attorney General Miller.  “The CEO, CFO and two vice presidents of ArthroCare sentenced today ran a successful business, but they wanted more.  Their greed led to fraud, and their fraud caused investors to lose hundreds of millions of dollars.   At the Criminal Division of the Department of Justice, we are committed to prosecuting individuals who commit crimes to make money, whether they do so on street corners or in corner offices.  The aggressive pursuit of corporate executives  who commit fraud is at the core of our mission to  pursue justice and protect the American public.”

“This scheme of betrayal and deceit was carried out by the defendants without regard to the deep-reaching and irreparable harm their actions caused to thousands of victims, here in Texas, and throughout the United States,” said FBI Special Agent in Charge Combs.   “While it is important to recognize the financial losses sustained by all victims, which includes individual investors and institutional investment firms, many of the victims will never recover from the financial ruin caused by the defendants’ greed.  Many of the victims worked hard their entire lives, saving money for retirement or their children’s’ college funds.  Some were already living on fixed incomes and are now struggling to make ends meet.  The FBI will continue to aggressively work to uncover these fraud schemes in an effort to prevent future victimization and to protect the integrity of the securities and commodities market.”

On June 2, 2014, former ArthroCare’s CEO Michael Baker, 55, and former CFO Michael Gluk, 56, were convicted by a jury of wire fraud, securities fraud, and conspiracy to commit wire and securities fraud; Baker was also convicted of making false statements.   On June 24, 2013, John Raffle, 46, the former Vice President of Strategic Business Units, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and two false statements charges.  On May 9, 2013, David Applegate, 55, the former Senior Vice President of the Spine Division, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and a false statements charge.   At sentencing, the court found that investors lost approximately $756 million as a result of the defendants’ scheme to artificially inflate the share price of ArthroCare stock through sham transactions.

According to court documents, between 2005 and 2009, Baker, Gluk, Raffle and Applegate executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors.  Products were shipped to distributors at quarter end based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.  ArthroCare then fraudulently reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to appear to meet or exceed internal and external earnings forecasts.  ArthroCare’s distributors agreed to accept these shipments of millions of dollars of excess inventory in exchange for lucrative concessions from ArthroCare, such as upfront cash commissions, extended payment terms, and the ability to return products.  In some cases, like that of ArthroCare’s largest distributor, DiscoCare, the defendants agreed ArthroCare would acquire the distributor and the inventory so that the distributor would not have to pay ArthroCare for the products at all.  

Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results to reflect the results of an internal investigation and account for the defendants’ fraud, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.   On Dec.19, 2008, ArthroCare again announced publicly that it had identified more accounting errors and possible irregularities related to the defendants’ fraud.   That day, the price of ArthroCare shares dropped from approximately $16.23 to approximately $5.92 per share.

In addition to the underlying conduct, Baker was convicted of lying to the U.S. Securities and Exchange Commission during its investigation of the conduct.   The court further found, as part of sentencing, that Baker and Gluk each lied under oath during their trial testimony, in which they attempted to escape responsibility for their actions.

In addition to their prison terms, Baker and Gluk were sentenced to serve five years of supervised release.   In addition, the court ordered Gluk and Baker to forfeit $22,165,030, the amount of their profits from the scheme.

John Raffle was sentenced to serve 80 months in prison followed by three years of supervised release.   David Applegate was sentenced to serve 60 months in prison followed by three years of supervised release.

The case was investigated by the FBI’s San Antonio Field Office.  The case was prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section.   The Department recognizes the substantial assistance of the Criminal Division’s Asset Forfeiture and Money Laundering Section and the U.S. Securities and Exchange Commission, as well as the critical role of the U.S. Attorney’s Office for the Western District of Texas, which provided invaluable support to the prosecution team during all phases of the litigation.

STATE OF KANSAS CHARGED WITH SECURITIES FRAUD BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors.  According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.

Shortly after its nationwide review of municipal bond disclosures began, the SEC brought its first-ever enforcement action against a state when it sanctioned New Jersey for failing to disclose to investors that it was underfunding the state’s two largest pension plans.  Around the same time, the SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.  As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities.  Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures.

The SEC also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.

“We’re pleased that our actions have resulted in improved disclosure of pension liabilities in states that were not making investors aware of a significant repayment risk,” said Andrew Ceresney, director of the SEC Enforcement Division.  “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.”

According to the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies.  According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation.  In the offering documents for the bonds, however, Kansas did not disclose the existence of the significant unfunded liability in KPERS.  Nor did the documents describe the effect of such an unfunded liability on the risk of non-appropriation of debt service payments by the Kansas state legislature.  The SEC’s investigation found that the failure to disclose this material information resulted from insufficient procedures and poor communications between the KDFA and the Kansas Department of Administration, which provided the KDFA with the information to include in the offering materials.

“Kansas failed to adequately disclose its multi-billion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “In determining the settlement, the Commission considered Kansas’s significant remedial actions to mitigate these issues as well as the cooperation of state officials with SEC staff during the investigation.”

According to the SEC’s order, Kansas has since adopted new policies and procedures to help ensure that appropriate disclosures about pension liabilities are being made in its offering documents.  Kansas designated responsible parties in state agencies critical to the disclosure process, mandated closer communication and cooperation among those agencies, established a disclosure committee, and now requires annual training of key personnel.  Without admitting or denying the findings, Kansas consented to the SEC’s order to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Robert Hannan and Eric Werner in the Fort Worth Regional Office with assistance from members of the Municipal Securities and Public Pensions Unit including Joseph Chimienti, Creighton Papier, Jonathan Wilcox, and Mark Zehner (deputy chief).

COMPANY TO PAY $30 MILLION PENALTY TO RESOLVE CHARGES OF FRAUD AGAINST EXECUTIVES

FROM: JUSTICE DEPARTMENT 
Tuesday, January 7, 2014
Medical Device Manufacturer Charged With Major Securities Fraud Scheme

ArthroCare Corporation, a medical device manufacturer based in Austin, Texas, and that trades on the NASDAQ stock exchange, has agreed to pay a $30 million monetary penalty to resolve charges that senior executives at the company engaged in a securities fraud scheme that resulted in more than $400 million in shareholder losses, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas.

John Raffle and David Applegate, both former senior vice presidents of ArthroCare, previously pleaded guilty to conspiracy to commit securities and wire fraud in connection with the fraud scheme.   ArthroCare’s former chief executive officer, Michael Baker, and chief financial officer, Michael Gluk, are scheduled to stand trial on related charges on May 5, 2014.   Defendants are presumed innocent unless and until proven guilty at trial.

As part of the agreed-upon resolution, the department today filed a criminal information in the Western District of Texas charging ArthroCare with one count of conspiracy to commit securities fraud and wire fraud.   In addition to the monetary penalty, ArthroCare also agreed to cooperate with the department in its continuing investigation and prosecution of individuals responsible for the scheme and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect violations of the federal securities laws and federal laws relating to the company’s relationships and transactions with health care providers.   ArthroCare had previously entered into a multi-million dollar settlement agreement with shareholder victims.

In the deferred prosecution agreement, ArthroCare admitted that senior executives of the company inflated ArthroCare’s revenue by tens of millions of dollars; concealed the nature and financial significance of ArthroCare’s relationship with its largest distributor, DiscoCare Inc., and other distributors; and used a series of sham transactions to manipulate ArthroCare’s revenue and earnings as reported to investors.   ArthroCare admitted that its executives determined the type and amount of product to be shipped to distributors, notably DiscoCare, based on ArthroCare’s need to meet sales forecasts, rather than the distributors’ actual orders.

ArthroCare further admitted that these executives and others then caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter so the company could report these shipments as sales in its quarterly and annual filings and so the company would appear to have met or exceeded internal and external earnings forecasts.

According to the Information, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.  The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

This case was investigated by the FBI’s Austin Field Office.  The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division’s Fraud Section.   Significant assistance was provided by the SEC’s Fort Worth, Texas, Office.

SEC CHARGES TWO COMPANIES WITH FRAUDULENT OFFER AND SALE OF SECURITIES IN ENERGY VENTURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Texas Oil and Gas Promoters for Securities Fraud

On December 12, 2013, the Securities and Exchange Commission charged Leon Ali Parvizian and his two companies, Arcturus Corporation and Aschere Energy LLC, with the fraudulent offer and sale of securities in the form of interests in oil and gas joint ventures. The Commission also charged promoters Alfredo Gonzalez, AMG Energy, LLC , Robert Balunas, and R. Thomas & Co., LLC with violations of the securities offering and broker-dealer registration provisions of the federal securities laws.

Filed in the United States District Court for the Northern District of Texas, the Commission's complaint alleges that the Parvizian, through Arcturus and Aschere, raised nearly $22 million from at least 380 investors between 2007 and December 2011.The complaint alleges that Parvizian prepared and disseminated to prospective investors offering materials that included material misrepresentations and omissions regarding, among other things, material litigation involving Arcturus and Aschere. According to the complaint, Parvizian, Arcturus and Aschere systematically, and without disclosure to investors, used the offering proceeds to pay the costs of defending and settling the litigation. The complaint further alleges that, among other things, Parvizian prematurely called for completion funds on at least two projects before he had finished drilling and testing the wells because he had already spent the offering proceeds for non-JV related expenses, including legal fees. According to the complaint, Parvizian, Arcturus, and Aschere spent only $7.9 million, or 36 percent, of the money raised to drill oil and gas wells.

The complaint also alleges that the defendants offered and sold the joint venture interests in unregistered securities offerings that were not exempt from the registration requirements of the federal securities laws. In addition, the complaint alleges that Parvizian, Gonzalez, AMG, Balunas, and R. Thomas & Co. acted as unregistered broker-dealers. According to the complaint, Parvizian, Gonzalez, Balunas, AMG Energy, and R. Thomas received transaction-based compensation in the form of sales commissions based upon a percentage of the amount of investor funds raised.

The complaint alleges that Parvizian, Arcturus, and Aschere violated Sections 5(a) and 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act")and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder and that Parvizian also violated Section 15(a) of the Exchange Act. Gonzalez, AMG, Balunas, and R. Thomas are charged with violating Section 5(a) and 5(c) of the Securities Act and with Section 15(a) of the Exchange Act. The Commission is seeking permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against each of the defendants.

The SEC's investigation was conducted by Ronda Blair, Ty Martinez, and Barbara Gunn of SEC's Fort Worth Regional Office. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority and the Texas State Securities Board.

SEC CHARGES HARRISBURG, PA WITH SECURITIES FRAUD

FROM: U.S. SECRUITIES AND EXCHANGE COMMISSION

Washington, D.C., May 6, 2013 — The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated

An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.

The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website such as its 2009 budget, 2009 State of the City address, and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings.

The SEC separately issued a report today addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

"In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. "Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading."

Elaine C. Greenberg, Chief of the SEC’s Enforcement Division’s Municipal Securities and Public Pensions Unit, said, "A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one. Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information."

According to the SEC’s order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to approximately $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, 2013, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.

According to the SEC’s order, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009. Beginning in July 2009, Harrisburg was obligated to submit financial information and notices such as principal and interest payment delinquencies and changes in bond ratings to a central repository known as the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board (MSRB). Harrisburg did not submit its 2008 CAFR to EMMA, instead erroneously submitting it to a former NRMSIR on March 2, 2010. Harrisburg did not submit its 2009 CAFR to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices about its failure to submit annual financial information or its credit rating downgrades until March 29, 2011, after the SEC had commenced its investigation.

Therefore, the SEC’s order finds that at a time of increased interest in the Harrisburg’s financial health due to the deteriorating financial condition of The Harrisburg Authority, the city created a risk that investors could purchase or sell securities in the secondary market on the basis of incomplete and outdated information. For current information, investors had to review other public statements from the city about its fiscal situation. For example, Harrisburg’s 2009 budget and its accompanying transmittal letter were accessible on Harrisburg’s website. By the time the 2009 budget was passed, Harrisburg was aware of the Authority’s projected budget deficits and that Dauphin County was challenging a rate increase. As a result, the Authority was unlikely to have sufficient revenues to pay its 2009 debt service obligations. However, Harrisburg’s 2009 budget as adopted did not include funds for debt guarantee payments. The 2009 budget also misstated Harrisburg’s credit as being rated "Aaa" by Moody’s when in fact Moody’s had downgraded Harrisburg’s general obligation credit rating to Baa1 by December 2008.

According to the SEC’s order, another public statement available to investors on the city’s website was the annual State of the City address delivered on April 9, 2009. The address only discussed the municipal resource recovery facility as a situation that was an "additional challenge" and an "issue that can be resolved." The address was misleading because it failed to mention that by this time, Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt. It also omitted the total amount of the debt that the city would likely have to repay from its general fund. By this time, Harrisburg knew that the Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor.

According to the SEC’s order, Harrisburg’s 2009 mid-year fiscal report available on its website was designed to provide a snapshot of budget-to-actual figures at the middle of the year. However, the report did not reference any of the guarantee payments the city had made on the municipal resource recovery facility debt, which at this mid-year point totaled $2.3 million (7 percent of its general fund expenditures).

The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The city neither admits nor denies the findings in the order. In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.

The SEC’s investigation was conducted by members of the Enforcement Division’s Municipal Securities and Public Pensions Unit including Senior Enforcement Counsel Yolanda Gonzalez and Assistant Director Ivonia K. Slade with assistance from Municipal Securities Specialist Jonathan D. Wilcox. The investigation was supervised by Unit Chief Elaine C. Greenberg and Deputy Chief Mark R. Zehner.

SEC CHARGES STATE OF ILLIONOIS WITH SECURITIES FRAUD

Map:  Illinois.  Credit:   Wikimedia Commons.  GNU. 

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

"Municipal investors are no less entitled to truthful risk disclosures than other investors," said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. "Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system."

Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, "Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit."

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.

The SEC’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Peter K. M. Chan along with Paul M. G. Helms in the Chicago Regional Office and Eric A. Celauro and Sally J. Hewitt in the Municipal Securities and Public Pensions Unit. They were assisted by other specialists in the unit including Joseph O. Chimienti, Creighton Papier, and Jonathan Wilcox.

ENRON BROADBAND SERVICES EXECUTIVES SETTLE FRAUD CHARGES WITH SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced today that former Enron senior vice presidents Rex T. Shelby and Scott Yeager and the former chief financial officer of Enron Broadband Services (EBS) Kevin A. Howard have agreed to settle the SEC's pending civil actions against them.

The SEC charged Shelby and Yeager with securities fraud and insider trading on May 1, 2003, amending a complaint previously filed March 12, 2003, which charged Howard and Michael W. Krautz, a former senior director of accounting at EBS, with securities fraud. The SEC’s civil case was stayed by the U.S. District Court while criminal proceedings occurred against these defendants.

To settle the SEC’s action against them, Shelby agreed to pay a civil penalty of $1 million, and Yeager and Howard agreed to pay civil penalties of $110,000 and $65,000, respectively. In addition, they each consented to the entry of a final judgment enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and permanently barring them from serving as an officer or director of a public company. Howard also agreed to be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. These settlement agreements are subject to court approval. Separately, Howard also consented to the entry of an Administrative Order, pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant.

In the related criminal proceedings, the Department of Justice previously entered into plea agreements with Shelby and Howard on related charges. Shelby and Howard agreed to respectively forfeit $2,568,750 and $25,000 that, along with the Commission's civil penalties announced today, will contribute $3,658,750 for the benefit of injured investors through the Commission's Enron Fair Fund. Yeager was acquitted in a related criminal proceeding.

As alleged in the Commission's complaint, Shelby, Yeager and other EBS executives engaged in a fraudulent scheme to, among other things, make false or misleading statements about the technological prospects, performance, and financial condition of EBS. These statements were made at Enron's annual analyst conference and in multiple press releases during 2000. While aware of material non-public information concerning the true nature of EBS' technological and commercial condition, Shelby and Yeager sold a large amount of Enron stock at inflated prices. In another part of the scheme, Howard engaged in a sham transaction, known as "Project Braveheart," in which Enron improperly recognized $53 million in earnings in the fourth quarter of 2000 and $58 million in earnings in the first quarter of 2001.

The Commission also announced today that it filed notices of voluntary dismissal of its case against Krautz, along with its case against Schuyler M. Tilney and Thomas W. Davis, two former Merrill Lynch executives who were charged on March 17, 2003 with aiding and abetting Enron’s securities fraud. Krautz was acquitted at trial in a related criminal proceeding.

FORMER SOYO GROUP EXEC. ORDERED TO PAY $15.6 MILLION PENALTY

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former Chief Financial Officer of Soyo Group Ordered to Pay $15,600,000 Penalty for Securities Fraud

The Securities and Exchange Commission announced today that Nancy Shao Wen Chu, the former Chief Financial Officer for the now defunct Soyo Group, Inc., was ordered to pay $15,600,000 in penalties for committing securities fraud. Another defendant, Eric Jon Strasser, was ordered to pay a penalty of $260,000. The SEC alleged that between January 2007 and November 2008, Soyo, through the actions of Chu and another defendant, booked over $47 million in fraudulent sales revenues arising from at least 120 fictitious transactions. The scheme had the effect of nearly doubling Soyo’s net revenues for 2007 over the previous year. Soyo’s share price thus increased from a low of $.28/share in the first quarter of 2007, to a high of $1.80/share in the fourth quarter of 2007. The SEC alleged that Chu actively participated in the fraudulent sales transactions and took deliberate steps to hide the scheme from Soyo’s auditor.

Further, the SEC alleged that in order to obtain additional bank financing for Soyo and keep its existing line of credit from defaulting, Chu also misled Soyo’s investors, its primary lending bank, and its auditor regarding a six million dollar debt-for-equity transaction Soyo was negotiating with a vendor. Despite that fact that discussions with the vendor were not finalized and subject to cancelation, Chu signed and caused to be filed a Soyo Form 10-Q for the quarter ended June 30, 2008, reporting that the transaction was complete, eliminating an outstanding accounts payable of slightly over $6 million, and thereby reducing Soyo’s current liabilities by 14% and its accounts payable by 42%.

Strasser, a consultant who prepared Soyo’s SEC filings, was alleged to have been well aware that Soyo’s second quarter Form 10-Q falsely reported the debt-for-equity transaction as complete and to have withheld this information from Soyo’s auditor. In addition, Strasser prepared Soyo’s Form-10-Q for the next quarter, making the same false disclosures and omitting the same liabilities relating to the debt-for-equity transaction.

Neither Chu nor Strasser answered the Commission’s complaint and both were found to be in default. The Court ordered the maximum third-tier penalty of $130,000 against Chu for each of the 120 fictitious transactions she concocted and against Strasser for each of the two fraudulent SEC filings.

3 FORMER EXECUTIVES OF FAIR FINANCIAL COMPANY CONVICTED FOR ROLES IN $200 MILLION FRAUD

FROM:  U.S. DEPARTMENT OF JUSTICE 
Thursday, June 21, 2012
Three Former Executives Convicted for Roles in $200 Million Fraud Scheme Involving Fair Financial Company Investors
Three former executives of Fair Financial Company, an Ohio financial services business, were found guilty for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; Joseph H. Hogsett, U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Robert Holley of the FBI in Indiana announced today.

Following an eight-day trial, a federal jury in the Southern District of Indiana returned its verdict late yesterday.   Timothy S. Durham, 49, the former chief executive officer of Fair, 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, 56, the former chairman of the board of Fair, 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, 48, the former chief financial officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and three counts of wire fraud.

“Mr. Durham and his co-conspirators used lies and deceit as their business model,” said Assistant Attorney General Breuer.   “They duped investors into thinking they were running a legitimate financial services company and misled regulators and others about the health of their failing firm.   But all along, they were lining their pockets with other people’s money.   The jury held them accountable for their crimes, and they each now face the prospect of significant prison time.”

“No matter who you are, no matter how much money you have, no matter how powerful your friends are, no one is above the law,” U.S. Attorney Hogsett said. “The Office of the United States Attorney will not stand idly by and allow a culture of corruption to exist in this community, this state, or this country.   The decision made in this courtroom sends a powerful warning that if you sacrifice the truth in the name of greed, if you steal from another’s American dream to try and make your own, you will be caught.”

“This verdict represents a victory in the pursuit of justice,” said FBI Special Agent in Charge Holley.   “I would like to commend the hard work and dedication of the prosecution team and the FBI investigative team, however, we must remember that the victims of this fraud are still suffering.  I would also like to thank Indiana State Police Superintendent Paul Whitesell for the contributions of his task force officer in this investigation.”

Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002.  According to the evidence presented at trial, between approximately February 2005 through the end of 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, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.  

After Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds.   Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.

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.
         
The evidence presented at trial established that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the State of Ohio Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates.   The defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.

The defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making 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, and directing 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 was prosecuted by Assistant U.S. Attorneys Winfield D. Ong and NicholasE. Surmacz of the Southern District of Indiana, Trial Attorney Henry P. Van Dyck and Senior Deputy Chief for Litigation Kathleen McGovern of the Fraud Section in the Justice Department’s Criminal Division.  The investigation was led by the FBI in Indianapolis.

Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count.   Additionally, each defendant could be fined $250,000 for each count of conviction.
         
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

FORMER GATEWAY CFO SETTLES SEC FRAUD ACTION

FROM:  SEC
April 18, 2012
On April 10, 2012, a final judgment was entered against John J. Todd, a former CFO of Gateway, Inc. Todd consented to entry of the final judgment without admitting or denying the allegations made by the Securities and Exchange Commission that he engaged in fraud and other violations of the federal securities laws in connection with Gateway’s recognition of revenue in the third quarter of 2000. This concludes the litigation of this action, brought in 2003 against three former officers of Gateway.

The SEC alleged that Todd falsely represented Gateway’s financial condition in the third quarter of 2000 in order to meet financial analysts’ earnings and revenue expectations. Among other transactions, the SEC alleged that Todd caused Gateway to record $47.2 million in revenue from a one-time sale of fixed assets to Gateway’s third-party information technology services provider in violation of Generally Accepted Accounting Principles (GAAP), and that Todd, then Gateway’s CFO, caused Gateway to recognize an additional $21 million in revenue from an incomplete sale of computers to a second entity, also in violation of GAAP. The SEC alleged that absent either of these transactions, Gateway would not have met analysts’ expectations with regard to its third quarter revenue.

Todd consented to a final judgment permanently enjoining him from violations of the antifraud provisions of Section 10(b) and Rule 10b-5 thereunder, and from violations of SEC Rule 13b2-2, which prohibits making misrepresentations and omissions of material fact to company auditors, as well as from aiding and abetting the issuer reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Todd further consented to be barred for ten years from acting as an officer or director of a public company, and to pay disgorgement of $165,000, constituting his salary and bonus for the relevant quarter, together with prejudgment interest thereon of $138,162.24 totaling $303,162.24, and a $110,000 penalty.

Previously, on March 7, 2007, a jury had rendered a unanimous verdict finding Todd and defendant Robert D. Manza, Gateway’s former controller, liable for fraud, making false representations to auditors, aiding and abetting issuer reporting violations and other violations following a three week trial. On May 30, 2007, the Honorable Roger T. Benitez overturned the jury verdict as to the fraud and certain other claims. The SEC appealed that ruling, as well as the District Court’s prior August 1, 2006, grant of summary judgment to Gateway’s former CEO, Jeffrey Weitzen, dismissing the SEC’s case as to Weitzen. On June 23, 2011, the Ninth Circuit reversed those rulings and remanded the matter to the District Court. On January 25, 2012, the Court entered final judgments against Weitzen and Manza pursuant to their consents. [LR 22244 (January 31, 2012.]

FORMER CHAIRMAN STANFORD INTERNATIONAL BANK CONVICTED IN $7 BILLION FRAUD SCHEME

The following excerpt is from the Department of Justice website:

Tuesday, March 6, 2012
"Allen Stanford Convicted in Houston for Orchestrating $7 Billion Investment Fraud Scheme
WASHINGTON – A Houston federal jury today convicted Robert Allen Stanford, the former Board of Directors Chairman of Stanford International Bank (SIB), for orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion from SIB to finance his personal businesses.

The guilty verdict 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; Special Agent in Charge Lucy Cruz of the Internal Revenue Service-Criminal Investigations (IRS-CI).

Following a six-week trial before U.S. District Judge David Hittner, and approximately three days of deliberation, the jury found Stanford guilty on 13 of 14 counts in the indictment.

Stanford, 61, was convicted of one count of conspiracy to commit wire and mail fraud, four counts of wire fraud, five counts of mail fraud, one count of conspiracy to obstruct a U.S. Securities and Exchange Commission (SEC) investigation, one count of obstruction of an SEC investigation and one count of conspiracy to commit money laundering.  The jury found Stanford not guilty on one count of wire fraud.

At sentencing, Stanford faces a maximum prison sentence of 20 years for the count of conspiracy to commit wire and mail fraud, each count of wire and mail fraud, and the count of conspiracy to commit money laundering, and five years for the count of conspiracy to obstruct an SEC investigation and the count of obstruction of an SEC investigation.

The investigation was conducted by the FBI’s Houston Field Office, the U.S. Postal Inspection Service, the IRS-CI and the U.S. Department of Labor, Employee Benefits Security Administration.  The case was prosecuted by Deputy Chief William Stellmach of the Criminal Division’s Fraud Section, Assistant U.S. Attorney Gregg Costa of the Southern District of Texas and Trial Attorney Andrew Warren of the Criminal Division’s Fraud Section.”

FORMER CEO MUST PAY $10 MILLION IN SECURITIES FRAUD CASE

The following excerpt is from the SEC website: 

"Washington, D.C., March 2, 2012 — The Securities and Exchange Commission today announced that a federal judge has ordered the former CEO of Brookstreet Securities Corp. to pay a maximum $10 million penalty in a securities fraud case related to the financial crisis.

The SEC litigated the case beginning in December 2009, when the agency charged Stanley C. Brooks and Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom the securities were unsuitable. Brookstreet and Brooks continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight. The fraud caused severe investor losses and eventually caused the firm to collapse.

The Honorable David O. Carter in federal court in Los Angeles granted summary judgment in favor of the SEC on February 23, finding Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5. The judge entered a final judgment in the case yesterday and ordered the financial penalty sought by the SEC.

“Brooks’ aggressive promotion and sale of risky mortgage products to seniors and other risk-averse investors deserves the maximum penalty possible, and that is what he got,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Those who direct such exploitative practices from the boardroom will be held personally accountable and face severe consequences for their egregious actions.”

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added, “The CMOs that Brookstreet sold its customers were among the most risky of all mortgage-backed securities. This judgment highlights the responsibility of brokerage firm principals to ensure the suitability of the securities they sell to customers.”

In addition to the $10,010,000 penalty, Brooks was ordered to pay $110,713.31 in disgorgement and prejudgment interest. The court’s judgment also enjoins both Brookstreet and Brooks from violating Section 10(b) of the Exchange Act as well as Rule 10b-5.

The SEC is awaiting a court decision in a separate Brookstreet-related enforcement action filed in federal court in Florida. In that case, the SEC charged 10 former Brookstreet registered representatives with making misrepresentations to investors in the purchases and sales of risky CMOs. Two representatives settled the charges, and the SEC tried the case against the remaining eight representatives in October 2011.

The SEC has brought enforcement actions stemming from the financial crisis against 95 entities and individuals, including 49 CEOs, CFOs, and other senior officers.