SEC CHARGES THREE TOP EXECUTIVES AT KCAP FINANCIAL INC., WITH OVERSTATING ASSETS DURING FINANCIAL CRISIS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 28, 2012 — The Securities and Exchange Commission today charged three top executives at a New York-based publicly-traded fund being regulated as a business development company (BDC) with overstating the fund’s assets during the financial crisis. The fund’s asset portfolio consisted primarily of corporate debt securities and investments in collateralized loan obligations (CLOs).

An SEC investigation found that KCAP Financial Inc. did not account for certain market-based activity in determining the fair value of its debt securities and certain CLOs. KCAP also failed to disclose that the fund had valued its two largest CLO investments at cost. KCAP’s chief executive officer Dayl W. Pearson and chief investment officer R. Jonathan Corless had primary responsibility for calculating the fair value of KCAP’s debt securities, while KCAP’s former chief financial officer Michael I. Wirth had primary responsibility for calculating the fair value of KCAP’s CLOs. Wirth, a certified public accountant, prepared the disclosures about KCAP’s methodologies to fair value its CLOs, and Pearson reviewed those disclosures.

The three executives agreed to pay financial penalties to settle the SEC’s charges.

"When market conditions change, funds and other entities must properly take into account those changed conditions in fair valuing their assets, said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. "This is particularly important for BDCs like KCAP, whose entire business consists of the assets that it holds for investment."

This is the SEC’s first enforcement action against a public company that failed to properly fair value its assets according to the applicable financial accounting standard — FAS 157 — which became effective for KCAP in the first quarter of 2008.

According to the SEC’s order instituting administrative proceedings against the fund and the three executives, KCAP did not record and report the fair value of its assets in accordance with Generally Accepted Accounting Principles (GAAP) and in particular FAS 157, which requires assets to be fair valued based on an "exit price" that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

The SEC’s order found that Pearson and Corless concluded that any trades of debt securities held by KCAP in the fourth quarter of 2008 reflected distressed transactions, and therefore KCAP determined the fair value of its debt securities based solely on an enterprise value methodology. However, this methodology did not calculate or inform KCAP investors of the FAS 157 "exit price" for that security. Wirth calculated the fair value of KCAP’s two largest CLO investments to be their cost, and did not take into account the market conditions during that period.

According to the SEC’s order, in May 2010, KCAP restated the fair values for certain debt securities and CLOs whose net asset values had been overstated by approximately 27 percent as of Dec. 31, 2008. Moreover, KCAP’s internal controls over financial reporting did not adequately take into account certain market inputs and other data.

"KCAP should have accounted for market conditions in the fourth quarter of 2008 in determining the fair values of its assets," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. "FAS 157 is critically important in fair valuing illiquid securities, and funds must consider market information in making FAS 157 fair value determinations and comply with their disclosed valuation methodologies."

KCAP’s overvaluation and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Pearson, Corless, and Wirth caused KCAP’s violations and directly violated Exchange Act Rule 13b2-1 by causing KCAP’s books and records to be falsified. Pearson and Wirth also directly violated Exchange Act Rule 13a-14 by falsely certifying the adequacy of KCAP’s internal controls.

Pearson and Wirth each agreed to pay $50,000 penalties and Corless agreed to pay a $25,000 penalty to settle the SEC’s charges. KCAP and the three executives, without admitting or denying the findings, consented to the SEC’s order requiring them to cease and desist from committing or causing any violations or any future violations of these federal securities laws.

The SEC’s investigation was conducted by Adam Aderton of the Asset Management Unit, Noel Gittens, and Richard Haynes, and was supervised by Assistant Director Ricky Sachar

SEC CHAIRMAN SCHAPIRO WILL STEP DOWN DECEMBER 12, 2012

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 26, 2012 — After nearly four years in office, SEC Chairman Mary L. Schapiro today announced that she will step down on Dec. 14, 2012

Chairman Schapiro, who became chairman in the wake of the financial crisis in January 2009, strengthened, reformed, and revitalized the agency. She oversaw a more rigorous enforcement and examination program, and shaped new rules by which Wall Street must play.

"It has been an incredibly rewarding experience to work with so many dedicated SEC staff who strive every day to protect investors and ensure our markets operate with integrity," said Chairman Schapiro. "Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rulemaking periods, and gained greater authority from Congress to better fulfill our mission."

Chairman Schapiro is one of the longest-serving SEC chairmen, having served longer than 24 of the previous 28. She was appointed by President Barack Obama on Jan. 20, 2009, and unanimously confirmed by the Senate.

During her tenure, Chairman Schapiro worked to bolster the SEC’s enforcement and examination programs, among others. As a result of a series of reforms, the agency is more adept at pursing tips and complaints provided by outsiders, better able to identify wrongdoers through vastly upgraded market intelligence capabilities, and more strategic, innovative and risk-focused in the way it inspects financial firms.

In each of the past two years, the agency has brought more enforcement actions than ever before, including 735 enforcement actions in fiscal year 2011 and 734 actions in FY 2012.

In addition, the SEC engaged in one of the busiest rulemaking periods in decades. Due to new rules now in place, investors can get clear information about the advisers they invest with, vote on the executive compensation packages at companies they invest in, benefit from additional safeguards that protect their assets held by investment advisers, and get access to more meaningful information about company boards and municipal securities.

"I’ve been so amazed by how hard the men and women of the agency work each and every day and by the sacrifices they make to get the job done," added Chairman Schapiro. "So often they stay late or come in on weekends to polish a legal brief, review a corporate filing, write new rules, or reconstruct trading events. And despite the complexity and the intense scrutiny, they always excel at what they do."

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency has implemented a new whistleblower program, strengthened regulation of asset-backed securities, laid the foundation for an entirely new regulatory regime for the previously-unregulated derivatives market, and required advisers to hedge funds and other private funds to register and be subject to SEC rules.

During Chairman Schapiro’s tenure, the agency worked to improve the structure of the market by approving a series of measures that have helped to strengthen equity market structure and reduce the chance of another Flash Crash. Among other things, the Commission for the first time has required the exchanges to create a consolidated audit trail that will enable the agency to reconstruct trading across various trading venues.

Chairman Schapiro previously served as a commissioner at the SEC from 1988 to 1994. She was appointed by President Ronald Reagan, reappointed by President George H.W. Bush in 1989, and named Acting Chairman by President Bill Clinton in 1993. She left the SEC when President Clinton appointed her as chairman of the Commodity Futures Trading Commission, where she served until 1996. She is the only person to have ever served as chairman of both the SEC and CFTC.

As SEC chairman, Schapiro also serves on the Financial Stability Oversight Council, the FHFA Oversight Board, the Financial Stability Oversight Board, and the IFRS Foundation Monitoring Board.

INVESTMENT ADVISORY FIRM ACCUSED OF MOVING DECIMAL POINTS ON SPREADSHEETS SHOWING CLIENT ACCOUNTS

Credit:  U.S. Government

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 20, 2012 — The Securities and Exchange Commission sanctioned two investment advisory firms for impeding examinations conducted by SEC staff.

An SEC investigation found that Evens Barthelemy and his New York-based firm Barthelemy Group LLC misled SEC examiners by inflating the firm’s claimed assets under management (AUM) ten-fold in an apparent attempt to show that the firm was eligible for SEC registration. Another SEC investigation found that Seth Richard Freeman and his San Francisco-area firm EM Capital delayed nearly 18 months in producing books and records related to the firm’s mutual fund advisory business.

Both firms agreed to settle the SEC’s charges against them.

"Barthelemy was not truthful and Freeman was not responsive during their respective interactions with SEC examiners," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "We will continue to pursue enforcement actions against firms that obstruct or delay the SEC’s critical work in overseeing investment advisers."

Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, "Examinations of SEC-registered firms play a vital role in protecting markets and investors, and we expect their candor and prompt cooperation as SEC staff works to promote compliance, monitor risk, and prevent fraud."

According to the SEC’s order against Barthelemy and his firm, when examiners asked for a list of client assets, Barthelemy misrepresented his firm’s AUM as $26.28 million instead of the actual $2.628 million. He downloaded client account balances from the firm’s online custodial platform onto a spreadsheet, and then manually moved the decimal points for each client one place to the right before providing it to the SEC staff. From July 2009 to early 2011, Barthelemy improperly registered Barthelemy Group with the SEC on the basis of the aspirational AUM that was 10 times higher than reality. Barthelemy Group, through Barthelemy’s actions as chief compliance officer, also failed to adopt reasonable compliance policies and procedures or to maintain required books and records concerning codes of ethics and providing the firm’s disclosure brochure to clients.

Barthelemy agreed to be barred from the securities industry and from associating with an investment company, with the right to reapply after two years. Without admitting or denying the allegations, Barthelemy and his firm consented to cease-and-desist orders, and the firm was censured. Barthelemy and his firm also will provide a copy of the proceeding to their clients and appropriate state securities regulators, will post a copy on the firm’s website, and will disclose the proceeding in an amended SEC Form ADV filing.

According to the SEC’s order issued today against Freeman and his firm, they failed to immediately furnish the required books and records upon request by SEC staff in December 2010. EM Capital and Freeman repeatedly promised to provide the records including financial statements, e-mails, and documents related to their management of a mutual fund. However, they did not fully comply until September 2012, months after learning that SEC staff was considering enforcement action against them.

Freeman and EM Capital agreed to pay a combined $20,000 penalty. Without admitting or denying the SEC’s findings, Freeman and EM Capital also agreed to censures and cease-and-desist orders.

The SEC’s investigation of Barthelemy Group was conducted by David Neuman and Scott Weisman of the SEC’s Asset Management Unit. The examination of Barthelemy Group was conducted by Dawn Blankenship, Kristine Geissler, Arjuman Sultana, Margaret Pottanat, and Anthony Fiduccia of the New York Regional Office’s investment adviser/investment company examination program. The SEC’s investigation of EM Capital was conducted by Sahil W. Desai and Erin E. Schneider of the San Francisco Regional Office, who are members of the SEC’s Asset Management Unit. The examination of EM Capital was conducted by Tom Dutton, Ada Chee, and Ed Haddad of the San Francisco Regional Office’s investment adviser/investment company examination program.

SEC HAS NEAR RECORD RESULTS FOR FISCAL YEAR 2012

Photo Credit:  Wikimedia.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 14, 2012 — Building on last year’s record results, the Securities and Exchange Commission today announced that it filed 734 enforcement actions in the fiscal year that ended Sept. 30, 2012, one shy of last year’s record of 735. Most significantly, that number included an increasing number of cases involving highly complex products, transactions, and practices, including those related to the financial crisis, trading platforms and market structure, and insider trading by market professionals. Twenty percent of the actions were filed in investigations designated as National Priority Cases, representing the Division’s most important and complex matters.

The SEC also announced that it obtained orders in fiscal year 2012 requiring the payment of more than $3 billion in penalties and disgorgement for the benefit of harmed investors. It represents an 11 percent increase over the amount ordered last year. In the past two years, the SEC has obtained orders for $5.9 billion in penalties and disgorgement.

"The record of performance is a testament to the professionalism and perseverance of the staff and the innovative reforms put in place over the past few years," said SEC Chairman Mary L. Schapiro. "We’ve now brought more enforcement actions in each of the last two years than ever before including some of the most complex cases we’ve ever seen."

Robert Khuzami, Director of the SEC’s Division of Enforcement, added, "It’s not simply numbers, but the increasing complexity and diversity of the cases we file that shows how successful we’ve been. The intelligence, dedication, and deep experience of our enforcement staff are, more than any other factors, responsible for the Division’s success."

The sustained high-level performance comes two years after the Division underwent its most significant reorganization since it was established in the early 1970s. The results in 2012 were aided by many of the reforms and innovations put in place in the past two years, such as increased expertise in complex and emerging financial markets, products, and transactions, including through enhanced training, the hiring of industry experts, and the creation of specialized enforcement units focused on high-priority misconduct; a flatter management structure; streamlined and centralized processes and the improved utilization of information technology; and a vastly enhanced ability to collect, process, and analyze tips and complaints.

Financial Crisis-Related Cases

Among the cases filed by the SEC in FY 2012 were 29 separate actions naming 38 individuals, including 24 CEOs, CFOs and other senior corporate officers, regarding wrongdoing related to the financial crisis.

These cases included enforcement actions involving:
The former senior officers of Fannie Mae and Freddie Mac for misleading statements regarding the extent of each company’s holdings of higher-risk mortgage loans.

Former investment bankers at Credit Suisse for fraudulently overstating the prices of $3 billion in subprime bonds.
Several bank and mortgage executives including those at United Commercial Bank, TierOne Bank, Franklin Bank, and Thornburg Mortgage for misleading investors about mounting loan losses and the deteriorating financial condition of their institutions.
The U.S. investment banking subsidiary of Japan-based Mizuho Financial Group for misleading investors in a CDO by using "dummy assets" to inflate the deal’s credit ratings.

During the last 2½ years, the agency has filed actions related to the financial crisis against 117 defendants – nearly half of whom were CEOs, CFOs and other senior corporate executives, resulting in approximately $ 2.2 billion in disgorgement, penalties, and other monetary relief obtained or agreed to. The SEC brought enforcement actions against Goldman Sachs, J.P Morgan Securities, and Morgan Keegan as well as senior executives from Countrywide, New Century, and American Home Mortgage.

Insider Trading Cases

Insider trading cases also are on the upswing with 58 actions filed in FY 2012 by the SEC, an increase over last year’s total of 57 actions. The 168 total insider trading actions filed since October 2009 have been the most in SEC history for any three-year period.

In these actions, the SEC has charged approximately 400 individuals and entities for illegal trading totaling approximately $600 million in illicit profits. Among those charged in SEC insider trading cases in 2012 were:
Former McKinsey & Co. global head Rajat Gupta for illegally tipping convicted hedge fund manager Raj Rajaratnam.

Hedge funds Diamondback Capital and Level Global Investors and affiliated traders and analysts.
Hedge fund manager Douglas Whitman.

John Kinnucan and his expert network consulting firm Broadband Research Corporation.
A second round of charges in an insider trading case involving former professional baseball players and the former top executive at Advanced Medical Optics.

Other Enforcement Matters

In order to ensure fair trading and equal access to information in the securities markets, the SEC brought several actions involving compliance failures and rules violations relating to stock exchanges, alternative trading platforms, and other market structure participants.

These cases included:
First-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.
The first-ever action against a "dark pool" trading platform (Pipeline Trading Systems) for failing to disclose to its customers that the vast amount of orders were filled by an affiliated trading operation.
An action against Direct Edge Holdings LLC for violations at two of its electronic stock exchanges and a broker-dealer arising out of weak controls that resulted in millions of dollars in trading losses and a systems outage.

In the NYSE matter, the exchange and its parent company NYSE Euronext agreed to pay a $5 million penalty, marking the first-ever SEC financial penalty against an exchange.

Investment Advisers: The SEC filed numerous actions resulting from several risk-based, proactive measures that identify threats at an early stage so that early action to halt the misconduct can be initiated and investor harm minimized. In 2012, several actions resulted from the Division’s investment adviser compliance initiative, which looks for registered investment advisers who lack effective compliance programs designed to prevent securities laws violations.

The SEC also filed actions charging three advisory firms and six individuals as part of the Aberrational Performance Inquiry into abnormal performance returns by hedge funds. Other actions against investment advisers included cases against UBS Financial Services of Puerto Rico and two executives for misleading disclosures relating to certain proprietary closed-end mutual funds, Morgan Stanley Investment Management for an improper fee arrangement, and OppenheimerFunds for misleading investors in two funds suffering significant losses during the financial crisis. UBS paid more than $26 million to settle the SEC’s charges while OppenheimerFunds paid more than $35 million for its violations.

The SEC filed 147 enforcement actions in 2012 against investment advisers and investment companies, one more than the previous year’s record number.

Issuer Disclosures:
The SEC brought 79 actions in FY 2012 for financial fraud and issuer disclosure violations. Those cases included actions against Life Partners Holdings and senior executives for fraudulent disclosures related to life settlements; two executives at China-based Puda Coal for defrauding investors about the nature of the company’s assets; and an enforcement action against Shanghai-based Deloitte Touche Tohmatsu for its refusal to provide the SEC with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.

Broker-Dealers:
The agency filed 134 enforcement actions related to broker-dealers, a 19 percent increase over the previous year. Broker-dealer actions included charges against a Latvian trader and electronic trading firms for their roles in an online account intrusion scheme that manipulated the prices of more than 100 NYSE and Nasdaq securities as well as charges against New York-based brokerage firm Hold Brothers On-Line Investment Services and three of its executives for their roles in allowing overseas traders to access the markets and conduct manipulative trading through accounts the firm controlled. The defendants in the Hold Brothers action paid a total of $4 million to settle the SEC’s charges.

FCPA:
The SEC filed 15 actions in FY 2012 for violations of the Foreign Corrupt Practices Act. FCPA actions were filed against former Siemens executives, Magyar Telekom, Biomet, Smith & Nephew, Pfizer, Tyco International, and a former executive at Morgan Stanley’s real estate investment and fund advisory business.

Municipal Securities:
The SEC filed 17 enforcement actions related to municipal securities, more than double the number filed in 2011. Among those charged in SEC municipal securities actions were the former mayor and city treasurer of Detroit in a pay-to-play scheme involving investments of the city’s pension funds, and Goldman Sachs for violations of various municipal securities rules resulting from undisclosed "in-kind" non-cash contributions that one of its investment bankers made to a Massachusetts gubernatorial candidate.

CHARGES FILED IN SEC'S LARGEST EVER INSIDER TRADING CASE

Photo Credit:  SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

November 20, 2012

The Securities and Exchange Commission today charged Stamford, Conn.-based hedge fund advisory firm CR Intrinsic Investors LLC and its former portfolio manager along with a medical consultant for an expert network firm for their roles in a $276 million insider trading scheme involving a clinical trial for an Alzheimer's drug being jointly developed by two pharmaceutical companies. The illicit gains generated in this scheme make it the largest insider trading case ever charged by the SEC.

The SEC alleges that Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who served as chairman of the safety monitoring committee overseeing the trial. Dr. Gilman was selected by Elan Corporation and Wyeth to present the final drug trial results to the public. In phone calls that were arranged by a New York-based expert network firm for which he moonlighted as a medical consultant, Dr. Gilman tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week.

Dr. Gilman, who lives in Ann Arbor, Mich., where he works as a medical school professor, has agreed to settle the SEC's charges and cooperate in this action and related SEC investigations. In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Martoma and a non-prosecution agreement with Dr. Gilman. Martoma lives in Boca Raton, Fla.

According to the SEC's complaint filed in federal court in Manhattan, Martoma first met Dr. Gilman through paid consultations arranged by the expert network firm. Dr. Gilman provided Martoma with material nonpublic information concerning the Phase II trial of the potential Alzheimer's drug called bapineuzumab (bapi). They coordinated their expert network consultations around scheduled safety monitoring committee meetings, and during their phone calls they discussed PowerPoint presentations made during the meetings and Dr. Gilman provided Martoma with his perspective on the results. Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil.

The SEC alleges that Martoma caused hedge funds managed by CR Intrinsic as well as hedge funds managed by an affiliated investment adviser to trade on the negative inside information he received from Dr. Gilman. Although Elan and Wyeth's shares rose on June 17, 2008, on the public release of top-line results of the Phase II trial, market participants were disappointed by the detailed final results issued on July 29, 2008. Double-digit declines in Elan and Wyeth shares ensued. After Martoma was tipped, the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than $700 million, but went on to hold substantial short positions in both securities. This massive repositioning allowed CR Intrinsic and the affiliated advisory firm to reap approximately $82 million in profits and $194 million in avoided losses for a total of more than $276 million in illicit gains.

According to the SEC's complaint, Martoma received a $9.3 million bonus at the end of 2008 - a significant portion of which was attributable to the illegal profits that the hedge funds managed by CR Intrinsic and the other investment advisory firm had generated in this scheme. Dr. Gilman, who was generally paid $1,000 per hour as a consultant for the expert network firm, received more than $100,000 for his consultations with Martoma and others at the hedge fund advisory firms. Dr. Gilman also received approximately $79,000 from Elan for his consultations concerning bapi in 2007 and 2008.

The SEC's complaint charges each of the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

Dr. Gilman has agreed to pay more than $234,000 in disgorgement and prejudgment interest. He also agreed to a permanent injunction against further violations of the federal securities laws. The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate.

SEC CHARGES MICHIGAN BUSINESSMAN DEFRAUDED INVESTORS IN REAL ESTATE INVESTMENT SCHEME

Photo Credit:  U.S. National Guard.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced that it has obtained an emergency court order against a Bay City, Michigan-based real estate promoter, and that it has suspended trading in one of the promoter's companies, American Realty Funds Corporation.

According to the SEC's complaint, Joel I. Wilson defrauded investors who bought unregistered securities offered by his company, Diversified Group Partnership Management, LLC, and sold through his brokerage firm, W R Rice Financial Services, Inc. Wilson raised approximately $6.7 million from approximately 120 investors who bought Diversified Group's securities from September 2009 through October 2012, and used the funds to finance his business of buying, renovating, and selling houses in and around Bay City, the SEC alleged.

Although Wilson promised investors that he would invest their money in real estate that would yield returns of 9.9% per year, he used most of it to make unsecured loans to his real estate business, which did not generate enough income to repay the investors. Wilson also diverted $582,000 of investor money to pay personal expenses, including $75,000 he used to buy W R Rice Financial, $46,780 he spent on travel, and $35,000 for his wife's business. In addition, the SEC said Wilson used investors' money to pay for a sponsorship and tickets to the Saginaw Sting football team and to buy thousands of dollars worth of tickets to the Detroit Red Wings.

The SEC alleges that Wilson raised additional funds for his real estate business through stock sales for another of his companies, American Realty Funds Corporation, which trades on the OTC Bulletin Board under the symbol ANFDE. The complaint alleges that there were misrepresentations and omissions in some of the reports the company filed with the SEC, which Wilson signed, including that American Realty has failed to make loan payments and that its purportedly independent directors have undisclosed personal and business relationships with Wilson. American Realty is delinquent in filing its annual report on Form 10-K for the fiscal year ended June 30, 2012, which was due October 15, and its quarterly report on Form 10-Q for the quarter ended September 30, which was due on November 14. Because of the questions concerning the accuracy of publicly disseminated information in the company's public filings and financial statements, the SEC issued an administrative order suspending trading in American Realty stock until 11:59 p.m. EDT on November 29, 2012.

The SEC's complaint, filed on November 15, 2012 in the U.S. District Court for the Eastern District of Michigan, charges Wilson and Diversified Group with violations of the registration and antifraud provisions of the federal securities laws and American Realty with violations of the antifraud and reporting provisions of the federal securities laws. The Court granted the SEC's request for an order prohibiting the defendants from altering or destroying documents and an order granting the parties leave to conduct expedited discovery. The Court scheduled a hearing on the SEC's motions for an asset freeze and preliminary injunction for December 10, 2012, at 10:00 a.m. at the U.S. District courthouse located at 1000 Washington Ave. in Bay City, Michigan.

SEC CHARGES NEW YORK-BASED MAN WHO ALLEGEDLY SPENT INVESTOR FUNDS ON DRUGS AND GAMBLING

Credi:  CIA World Factbook

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today charged a purported investment adviser in New York with defrauding investors who he convinced to invest in his start-up businesses while in reality he was spending their money on illegal drugs and gambling.

The SEC alleges that Stephen A. Colangelo, Jr. repeatedly misled investors while raising $3 million in investments for four start-up companies that he created. He also persuaded three other investors to let him act as their investment adviser, and they gave him more than $1 million to invest in the markets on their behalf. Colangelo boasted a phony professional and educational background and hid his past criminal activities from potential investors, and he falsely claimed to have historically achieved extremely high returns buying and selling securities. Meanwhile, Colangelo siphoned off at least $1 million in investor funds to pay such unauthorized personal expenses as his federal income taxes, illegal narcotics, gambling, cigars, and travel for him and his family.

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

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of New York, Colangelo’s fraudulent scheme began in 2009 when he induced investors to invest more than $750,000 in the Brickell Fund LLC, a pooled investment vehicle that he created, advised, and controlled. In March 2009 when the Brickell Fund did not have any investors and Colangelo was not buying and selling securities on behalf of the fund, he sent numerous e-mails to potential investors boasting phony information. For instance, one e-mail claimed, "BEST TRADING DAY OF MY LIFE!!!!!!!. . . . Up over 400% and documented. Mind boggling to say the least." In reality, Colangelo did not make any trades that day.

The SEC alleges that after spending or losing all of the money invested in the Brickell Fund, Colangelo continued to fraudulently raise funds from investors for three other startup businesses he created — Hedge Community LLC, Start a Hedge Fund LLC, and Under the Radar SEO LLC. Some individuals provided Colangelo with funds directly to invest on their behalf. Colangelo continued to use investor funds for a variety of purposes that weren’t disclosed to investors, namely personal expenses and unrelated business expenses.

According to the SEC’s complaint, Colangelo created a profile on the LinkedIn website used for professional networking and misrepresented that he had studied finance at Nyack College from 1986 to 1989. Colangelo provided a link to his profile to potential and existing investors in one of his start-up companies. His representations to investors were false because he never attended Nyack College and has not graduated from high school.

The SEC’s complaint charges Colangelo with violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

The SEC’s investigation was conducted in the New York Regional Office by Senior Attorney Christina McGill and Assistant Regional Director Wendy B. Tepperman. The SEC’s litigation will be led by Senior Trial Counsel Kevin McGrath. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.

SEC SAYS IT RECEIVED OVER 3000 WHISTLEBLOWER TIPS OVER THE PAST YEAR

SEC Headquarters.  Credit:  Wikimedia Commons  

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C., Nov. 15, 2012 — Over the past year, the Securities and Exchange Commission received more than 3,000 whistleblower tips from all 50 states and from 49 countries, according to the agency's 2012 Annual Report on the Dodd-Frank Whistleblower Program released today.

The report, which is required by the Dodd Frank Wall Street Reform and Consumer Protection Act, summarizes the activities of the SEC's Office of the Whistleblower.

"In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud," said SEC Chairman Mary L. Schapiro. "When insiders provide us with high-quality road maps of fraudulent wrongdoing, it reduces the length of time we spend investigating and saves the agency substantial resources."

Among other things, the report notes:
The SEC made its first award under the new program to a whistleblower who helped the SEC stop an ongoing multi-million dollar fraud. The whistleblower received an award of 30 percent of the amount collected in the SEC's enforcement action, which is the maximum percentage payout allowed by law.
The SEC received 3,001 tips, complaints, and referrals from whistleblowers from individuals in all 50 states, the District of Columbia, and the U.S. territory of Puerto Rico as well as 49 countries outside of the United States.
The most common complaints related to corporate disclosures and financials (18.2 percent), offering fraud (15.5 percent), and manipulation (15.2 percent).
There were 143 enforcement judgments and orders issued during fiscal year 2012 that potentially qualify as eligible for a whistleblower award. The Office of the Whistleblower provided the public with notice of these actions because they involved sanctions exceeding the statutory threshold of more than $1 million.
Under the Dodd-Frank Act, the SEC can pay financial awards to whistleblowers who provide high-quality, original information about a possible securities law violation that leads to a successful SEC enforcement action with more than $1 million in monetary sanctions. The SEC is authorized to pay the whistleblower 10 to 30 percent of the sanctions collected. Awards are paid from the Investor Protection Fund established by Congress to fund payments.

Information on eligibility requirements, directions on how to submit a tip or complaint, instructions on how to apply for an award, and answers to frequently asked questions are available at: www.sec.gov/whistleblower.

J.P. MORGAN SECURITIES LLC CHARGED BY SEC WITH MISLEADING INVESTORS IN RMBS OFFERINGS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission today charged J.P. Morgan Securities LLC and affiliated entities with misleading investors in offerings of residential mortgage-backed securities (RMBS). The firm agreed to a settlement in which it will pay $296.9 million. The SEC plans to distribute the money to harmed investors.

The SEC alleges that JP Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. JP Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. JP Morgan also is charged for Bear Stearns' failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.

According to the SEC's complaint against JP Morgan filed in federal court in Washington D.C., federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering. Information about the delinquency status of mortgage loans in an RMBS transaction is important to investors because those loans are the primary source of funds by which investors can earn interest and obtain repayment of their principal.

The SEC alleges that in the prospectus supplement for the $1.8 billion RMBS offering that occurred in December 2006, JP Morgan made materially false and misleading statements about the loans that provided collateral for the transaction. The firm represented that only four loans (.04 percent of the total loans collateralizing the transaction) were delinquent by 30 to 59 days, and that those four were the only loans that had had an instance of delinquency of 30 or more days in the 12 months prior to the "cut-off date" for the transaction. However, at the time JP Morgan made these representations, the firm actually had information showing that more than 620 loans (above 7 percent of the total loans collateralizing the transaction) were, and had been, 30 to 59 days delinquent, and the four loans represented as being 30 to 59 days delinquent were in fact 60 to 89 days delinquent.

The SEC's complaint also alleges that Bear Stearns' bulk settlements covered loans collateralizing 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts. The firm - both before and after the merger with JP Morgan - then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans. Bear Stearns repurchased only about 13 percent of these defective bulk settlement loans from the trusts, compared to a nearly 100 percent repurchase rate when loan originators agreed to buy back the defective loans. For most loans covered by bulk settlements, the firm collected money from originators without paying anything to the trusts.

JP Morgan and J.P. Morgan Acceptance Corporation I settled the SEC's charges by consenting to pay disgorgement of $39,900,000, prejudgment interest of $10,600,000, and a penalty of $24,000,000 for the delinquency misstatements, which the SEC will seek to distribute to harmed investors in the transaction through a Fair Fund. JP Morgan; EMC Mortgage, LLC; Bear Stearns Asset Backed Securities I, LLC; Structured Asset Mortgage Investments II, Inc.; and SACO I, Inc. agreed to pay disgorgement of $137,800,000, prejudgment interest of $24,265,536, and a penalty of $60,350,000 for the bulk settlement practice misconduct, and the SEC will seek to distribute these funds to harmed investors through a separate Fair Fund. JP Morgan and each of the other defendants consented, without admitting or denying the allegations, to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933. The settlement is subject to court approval.

SOUTH FLORIDA MAN CHARGED IN PONZI SHEME

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges South Florida Man with Recruiting Victims of Ponzi Scheme
The Securities and Exchange Commission today charged a South Florida man with defrauding at least 14 investors by soliciting them to invest in a Ponzi scheme. A significant number of the victims were members of the gay community in Wilton Manors, Florida and included inexperienced, unaccredited investors.

In the complaint filed in the U.S. District Court for the Southern District of Florida, the SEC alleges that James F. Ellis, 69, a resident of Wilton Manors, Florida, fraudulently solicited investors for George Elia from 2004 to 2011. Elia operated pooled investment vehicles under the names Investor Funding Club and Vision Equities Funds. Elia purported to trade in stocks and earn annual returns as high as 26 percent, but was actually running a Ponzi scheme and paying returns to existing investors from new investor funds. In April 2012, the Commission charged Elia with securities fraud. See Litigation Release No. 22319 (April 6, 2012).

According to the Commission's complaint against Ellis, Ellis persuaded prospective investors by falsely telling them that he had personally invested with Elia at least $5 million that he had inherited from his parents. Ellis variously told investors that he earned 16% to 20% annual returns on his investment with Elia or that he earned $20,000 to $24,000 per month. Elia and his entities did in fact pay Ellis over $2.1 million over seven years. However, those payments were not investment returns because, as Ellis knew, he had not made an investment with Elia that would have returned such large sums of money. According to the complaint, Ellis also reassured prospective investors of the safety of the investment by falsely telling them that he had tested Elia by depositing a large amount of money with Elia, then asking for and receiving it back.

According to the complaint, Ellis bolstered his deceptive claims about the success of his investment with Elia with ostentatious displays of wealth, including expensive real estate, luxury cars, jewelry, opulent entertaining of his friends, and expensive cruises. Though Ellis claimed that his investments with Elia made his luxurious lifestyle possible, he failed to disclose to investors that his wealth derived not from legitimate investment returns but from the money that Elia paid him for fraudulently touting Elia's investment vehicles.

The Commission's complaint charges Ellis with securities fraud in violation of Section 17(a)(1), (2) and (3) 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. The complaint also alleges that Ellis violated the registration provisions of Sections 5(a) and (c) of the Securities Act. The Commission is seeking permanent injunctions against Ellis for violating the above provisions of the securities laws, disgorgement of ill-gotten gains plus pre-judgment interest, and civil penalties.

Separately, the United States Attorney's Office for the Southern District of Florida today announced criminal charges against Ellis for his conduct in the scheme.

The Commission thanks the U.S. Attorney's Office and the Federal Bureau of Investigation for their assistance in this matter.

GAMING EXECUTIVES CHARGED BY SEC WITH LYING TO INVESTORS

Photo Credit:  SEC.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 8, 2012 — The Securities and Exchange Commission today charged three executives with repeatedly lying to investors about the operations and financial condition of an Irvine, Calif.-based company that purported to sell credit card-size electronic games. The SEC also charged the company’s independent auditor with facilitating the scheme.

The SEC alleges that chief executive officer Lee Cole and chief financial officer Linden Boyne orchestrated a scheme in which Electronic Game Card Inc. (EGMI) enticed investors by claiming to have millions of dollars in annual revenue, hold millions of dollars in investments, and own an off-shore bank account worth more than $10 million. In reality, many of the company’s purported contracts were phony, the purported investments were merely in entities affiliated with Cole or Boyne, and the bank account did not exist. As a result of EGMI’s false claims, the company’s outstanding common stock was once valued as high as $150 million. EGMI is now bankrupt and its stock is worthless.

The SEC charged the company’s outside auditor — certified public accountant Timothy Quintanilla — with repeatedly issuing clean audit opinions about EGMI based on reckless and deficient audit work. Also charged is Kevin Donovan, who later replaced Cole as CEO and ignored many red flags about the accuracy of the company’s public statements and the integrity of Cole and Boyne. He provided false information during conference calls with analysts and investors.

"Cole and Boyne played a game of make-believe with a publicly-traded microcap company," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "We will continue to fight microcap fraud and bring charges against not only the company executives but also the auditors or other gatekeepers who legitimize a fraud and allow investors to be victimized."

According to the SEC’s complaint filed in federal court in Manhattan, EGMI’s material misrepresentations and omissions in SEC filings and public statements occurred from 2007 to 2009. The company repeatedly reported non-existent revenues and assets, misrepresented its business operations, and failed to disclose related-party transactions. Those misrepresentations and others like them were just part of a scheme that Cole and Boyne orchestrated through EGMI to reap approximately $12 million in unlawful gains. While they were making material misrepresentations to inflate EGMI’s stock price, Cole and Boyne also secretly funneled millions of shares of EGMI stock to entities based in Gibraltar that they secretly controlled. They directed the Gibraltar entities to sell the shares, and proceeds of those sales were transferred to people or entities associated with Cole and Boyne or to EGMI itself. Cole and Boyne bolstered their lies by providing falsified documents to the company’s outside auditors.

The SEC alleges that as EGMI’s engagement partner, Quintanilla and the public accounting firm Mendoza Berger & Co. LLP issued clean audit opinions for EGMI’s year-end financial statements for 2006, 2007, and 2008, even though those statements were riddled with material misstatements and omissions. Mendoza Berger and Quintanilla knowingly or recklessly misrepresented that the firm had conducted audits of EGMI’s financial statements "in accordance with the standards of the Public Company Accounting Oversight Board (United States)." Mendoza Berger’s opinion stated that EGMI’s financial statements "present[ed] fairly, in all material respects, the financial position" of EGMI. In fact, Mendoza Berger had not audited critical aspects of EGMI’s financial statements, and its work did not conform to the standards of the Public Company Accounting Oversight Board (PCAOB). Quintanilla had no meaningful basis to have Mendoza Berger issue an opinion on EGMI’s financial statements.

The SEC further alleges that shortly after Donovan became CEO, he was notified of many red flags related to the company’s public statements about its operations, finances, and share count. Donovan violated the antifraud provisions of the securities laws when he led several public conference calls with securities analysts and investors in 2009, and knowingly or recklessly relayed false financial information about the company that had been provided to him by Cole and Boyne.

The SEC’s complaint alleges that Cole and Boyne violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Sections 10(b), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 13d-1, 13d-2, 16a-2, and 16a-3; and Section 304 of the Sarbanes-Oxley Act of 2002. The SEC also alleges that Cole and Boyne are liable as control persons and for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13. The SEC charges that Donovan violated Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The SEC alleges that Quintanilla violated Section 17(a) of the Securities Act and Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5. Quintanilla also is charged with aiding and abetting violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder.

The SEC’s complaint seeks, among other things, a final judgment ordering Cole, Boyne, Donovan, and Quintanilla to pay financial penalties and permanently enjoining them from future violations of the securities laws; enjoining Cole, Boyne, and Donovan from serving as officers and directors of public companies and from participating in penny stock offerings; and ordering Cole, Boyne, and Quintanilla to disgorge their ill-gotten gains with prejudgment interest.

The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Stephen Larson, James Addison, Gwen Licardo, and Aaron Arnzen of the New York Regional Office. Mr. Arnzen will lead the SEC’s litigation. The SEC thanks the PCAOB for its assistance in this matter.