SEC ANNOUNCES RESOLUTION OF OMR CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced today the resolution of an enforcement action filed by the Commission on October 19, 2010 in federal district court in Rhode Island against defendants David G. Stern and Online-Registries, Inc. (d/b/a Online Medical Registries) ("OMR") and relief defendant Michele Ritter. The court entered final judgment by consent against Stern on December 5, 2012 and entered a stipulation of dismissal of the claims against the relief defendant on December 27, 2012. The court previously had entered a final judgment by default against OMR on September 25, 2012.

The Commission's complaint alleged that Stern and OMR made false and misleading statements to investors in OMR, a web-based company founded and controlled by Stern, in connection with investors' purchase of stock in OMR. The misrepresentations generally related to OMR's business ventures, the status of its technology, its number of customers, and Stern's personal background, consisting of disbarment from the practice of law and a prior criminal conviction in federal district court in Massachusetts relating to financial wrongdoing. Based upon these and other allegations, including the misuse of investor funds, the Commission obtained a temporary restraining order and asset freeze on October 20, 2010, and a stipulated preliminary injunction on February 28, 2011 against Stern and OMR. On April 3, 2012, the court held Stern in contempt for violations of the preliminary injunction.

Without admitting or denying the allegations in the Commission's complaint, Stern agreed to the entry of a final judgment that: (i) permanently enjoins him from violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder; (ii) holds him liable for disgorgement of $197,875, representing amounts received as a result of the conduct alleged in the Commission's complaint, together with prejudgment interest thereon in the amount of $27,800.71, for a total of $225,675.71; and (iii) waives the payment of disgorgement and prejudgment interest and does not impose a civil penalty based upon the representations in Stern's sworn statement of financial condition. The final judgment by default entered against OMR (i) enjoins OMR from violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and (ii) orders OMR to pay disgorgement of $197,875 and prejudgment interest in the amount of $24,997.22. The Commission had initially charged that relief defendant Michele Ritter received some investor funds from Stern and sought the return of those funds. The Commission has now agreed to dismiss its charges against relief defendant Michele Ritter.

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

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

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SEC ALLEGES INSIDER TRADING DURING IBM ACQUISITION OF SPSS INC.

Credit:  Wikimedia Commons.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today announced additional charges in an insider trading case against two brokers who traded on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

In an amended complaint filed in federal court in Manhattan, the SEC is now charging research analyst Trent Martin, who was the brokers’ source of confidential information in an insider trading scheme that yielded more than $1 million in illicit profits. Martin worked at a brokerage firm in Connecticut and specialized in Australian equity investments, and he learned nonpublic information about the impending IBM-SPSS transaction from an attorney friend who was working on the deal. Rather than maintaining the confidence of the information, Martin used the information for his own benefit, purchasing SPSS securities and subsequently tipping his roommate Thomas C. Conradt, who traded and tipped his friend and fellow retail broker David J. Weishaus. Martin was specifically named as their source in instant messages between Conradt and Weishaus about their illegal trading.

The SEC charged Conradt and Weishaus with insider trading on November 29. Martin, who fled the U.S. to Australia soon after learning about the SEC’s investigation, currently lives in Hong Kong.

"Martin is a licensed professional who knowingly disregarded insider trading laws to enrich himself, and then fled the United States when he learned of our investigation," said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. "Martin could run but he could not hide, as the long arm of the SEC will extend to those who flee the United States hoping to avoid the consequences of their unlawful conduct."

The SEC alleges that Martin’s attorney friend expected him to maintain information in confidence and refrain from illegal trading or disclosing it to others. The attorney sought moral support, reassurance, and advice when he privately told Martin about his new assignment working on the IBM-SPSS acquisition. The lawyer disclosed to Martin such details as the anticipated transaction price and the identities of the acquiring and target companies while he was describing the magnitude of the assignment.

According to the SEC’s complaint, Martin attempted to purchase SPSS common stock on the very first business day after learning the nonpublic information from his friend. His first three orders were cancelled because he did not have sufficient funds in the account to make the purchases, but he later wired $50,000 from his checking account into his brokerage account to purchase SPSS shares.

The SEC’s complaint alleges that Martin, Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation, which is continuing, is being conducted by Mary P. Hansen, A. Kristina Littman, and John S. Rymas in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation.

The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the New Zealand Securities Commission, and the Australia Securities and Investments Commission. The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC CHARGES BROKERAGE FIRM FOR FAILING TO CURB MARKET MANIPULATION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a Toronto-based brokerage firm and its top two executives for failing to supervise overseas day traders who used the firm’s order management system to engage repeatedly in a manipulative trading practice known as layering.

In layering, a trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders, which the trader later cancels. The SEC’s investigation found that Biremis – whose worldwide day trading business enabled up to 5,000 traders on as many 200 trading floors in 30 countries to gain access to U.S. markets – failed to address repeated instances of layering by many of the overseas day traders using its system. The firm’s co-founders Peter Beck and Charles Kim ignored repeated red flags indicating that overseas traders were engaging in layering manipulations. Biremis served as the broker-dealer for an affiliated Canadian day trading firm, Swift Trade Inc.

Biremis and the two executives agreed to a settlement in which the firm’s registration as a U.S. broker-dealer is revoked and permanent industry bars are imposed on Beck and Kim, who also will pay a combined half-million dollars to settle the SEC’s charges.

"Engaged and forceful supervisors are the first line of defense against individual misconduct in financial services companies," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Beck and Kim were neither, as they saw obvious red flags of market manipulation by their firm’s traders but failed to respond or take any steps to prevent the manipulation. They have learned the painful lesson that supervisors who fail to heed repeated red flags of misconduct will no longer have any place in the securities industry."

According to the SEC’s order instituting settled administrative proceedings, Biremis, Beck, and Kim exercised substantial control over the overseas day traders. They backed the traders’ trading with capital from Biremis, determined the amount of Biremis capital available to each individual trader to purchase stocks, and set and enforced daily loss limits on each trader. They also wielded authority to reprimand, restrict, suspend, or terminate traders.

The SEC’s order found that many of the Biremis-affiliated overseas day traders engaged in repeated instances of layering from January 2007 to mid-2010. Beck and Kim learned from numerous sources – including three U.S. broker-dealers and a Biremis employee – that layering was occurring, yet they failed to take any steps to prevent it. For example, in spring 2008, representatives of one U.S. broker-dealer warned Beck and Kim that certain overseas traders were "gaming" U.S. stocks by altering those stocks’ bid and offer prices in order to buy or sell the stock at the altered price. Beck and Kim failed to act on this information.

According to the SEC’s order, Biremis also failed to retain virtually all of its instant messages related to its broker-dealer business, and failed to file any suspicious activity reports (SARs) related to the manipulative trading.

"Broker-dealers must recognize that their supervisory responsibilities over their associated persons don’t end at the U.S. border," said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. "Broker-dealers face severe consequences if they fail to supervise their traders who engage in manipulative trading, whether those traders are located in the U.S. or abroad."

The SEC’s order finds that Biremis, Beck, and Kim failed reasonably to supervise the firm’s associated persons (the overseas day traders) with a view to preventing and detecting their layering manipulations. The order also finds that Biremis willfully violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs and Section 17(a) and Rule 17a-4(b)(4) by failing to retain instant messages.

The SEC’s order revokes Biremis’ registration as a broker-dealer and requires the firm to cease and desist from committing or causing violations of Exchange Act Section 17(a) and Rules 17a-4(b)(4) and 17a-8. The SEC imposed permanent industry bars on Beck and Kim, who each agreed to pay penalties of $250,000. Biremis, Beck, and Kim neither admitted nor denied the findings contained in the SEC’s order.

The SEC’s investigation was conducted by senior counsel Paul J. Bohr and supervised by assistant director Ricky Sachar. The SEC acknowledges the assistance of the Ontario Securities Commission, the U.K. Financial Services Authority, and the Financial Industry Regulatory Authority (FINRA).

FORMER CHAIRMAN OF THE BOARD CHARGED BY SEC WITH FRAUD

 

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Former Chairman of Board In Connection With A Fraudulent Plan To Evade The Beneficial Ownership Reporting Requirements

The United States Securities and Exchange Commission (Commission) announced today it filed a civil action against Lee S. Rosen, the former Chairman of the Board of publicly traded New Generation Biofuels Holdings, Inc., alleging that he fraudulently evaded the reporting requirements concerning his ownership interest in New Generation shares held in five separate trusts in violation of the antifraud provisions and beneficial reporting provisions of the federal securities laws. According to the Commission's complaint, at various times from June 2007 through May 2010, Rosen, directly or indirectly profited from the sale of New Generation shares held in two of the five trusts and benefited from using shares in two trusts as payment toward an ultimately unsuccessful purchase of a yacht. The complaint alleges that Rosen received at least $666,000 in direct payments from sales of New Generation stock held in three of the trusts and from a trustee's individual brokerage account. The complaint also alleges that Rosen indirectly benefited from using New Generation shares held in two trusts as partial payment in an effort to purchase a yacht. Further, the complaint alleges that Rosen failed to disclose these transactions and his true holdings in New Generation securities in various Commission filings and that Rosen made false and misleading statements and omissions in Commission filings regarding his true beneficial ownership of New Generation shares.

The SEC's complaint, which was filed in the United States District Court for the Southern District of Florida, charges Rosen with violating Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(d) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13d-1, 13d-2, 16a-3, and 16a-8 thereunder. Rosen has agreed to settle the SEC's charges without admitting or denying the allegations. Rosen consented to a permanent injunction, and an order requiring him to pay $666,000 in disgorgement, plus $50,484 in prejudgment interest, a $195,000 civil money penalty, and barring him from serving as an officer or director.

SEC CHARGES 4 INDIVIDUALS IN ALLEGED FRAUDULENT PENNY STOCK SCHEME

Picture:  Black Hole.  Credit:  NASA

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today charged four securities industry professionals with conducting a fraudulent penny stock scheme in which they illegally acquired more than one billion unregistered shares in microcap companies at deep discounts and then dumped them on the market for approximately $17 million in illicit profits while claiming bogus exemptions from the federal securities laws.

The SEC alleges that Danny Garber, Michael Manis, Kenneth Yellin, and Jordan Feinstein acquired shares at about 30 to 60 percent off the market price by misrepresenting to the penny stock companies that they intended to hold the shares for investment purposes rather than immediately re-selling them. Instead, they immediately sold the shares without registering them by purporting to rely on an exemption for transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to their transactions. To create the appearance that the claimed exemption was valid, they created virtual corporate presences in Minnesota, Texas, and Delaware. The SEC also charged 12 entities that they operated in connection with the scheme.

According to the SEC’s complaint filed in federal court in Manhattan, Garber, Manis, Yellin, and Feinstein all live in the New York/New Jersey area and operated the scheme from 2007 to 2010. They each have previously worked in the securities industry either as registered representatives or providers of investment management or financial advisory services.

"These penny stock purchasers had enough securities industry experience to know that their penny stock trading was not exempt from the securities laws as they claimed," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "They repeatedly violated the registration provisions and in the process also committed securities fraud. We will continue to fight microcap stock abuses that result in the unregistered distribution of shares without vital information about those companies being known to investors."

The SEC’s complaint alleges that Garber, Manis, Yellin, Feinstein and the named entities violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC’s complaint seeks a final judgment, among other things, ordering all of the defendants to pay disgorgement, prejudgment interest and financial penalties; permanently enjoining all the defendants from future violations of the securities laws; and permanently enjoining all the defendants from participating in penny stock offerings.

The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Laura Yeu, Elzbieta Wraga, Haimavathi Marlier, Yitzchok Klug and Paul Gizzi of the New York Regional Office. Mr. Gizzi and Ms. Marlier will lead the SEC’s litigation.

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.

ELI LILLY AND COMPANY SETTLES FOREIGN CORRUPT PRACTICES CHARGES WITH SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China and Poland.

The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore "marketing agreements" to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services, and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with off-shore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.

The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.

As alleged in the SEC’s complaint filed in federal court in Washington D.C.:
Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged "marketing services" in order to induce pharmaceutical distributors and government entities to purchase Lilly’s drugs, including approximately $2 million to an off-shore entity owned by a government official and approximately $5.2 million to off-shore entities owned by a person closely associated with an important member of Russia’s Parliament. Despite the company’s recognition that the marketing agreements were being used to "create sales potential" with government customers and that it did not appear that any actual services were being rendered under the agreements, Eli Lilly allowed its subsidiary to continue using the agreements for years.
Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians.
Lilly’s subsidiary in Brazil allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate $1.2 million in sales of a Lilly drug product to state government institutions.
Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list.
Lilly agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8,700,000 for a total payment of $29,398,734. Without admitting or denying the allegations, Lilly consented to the entry of a final judgment permanently enjoining the company from violating the anti-bribery, books and records, and internal controls provisions of the FCPA, Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act. Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures. The settlement is subject to court approval.

CDOs AND MISREPRESENTATION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged a Connecticut-based investment adviser with falsely stating to clients that it was co-investing alongside them in two collateralized debt obligations (CDO).

The SEC’s investigation found that Aladdin Capital Management’s co-investment representation was a key feature and selling point for its Multiple Asset Securitized Tranche (MAST) advisory program involving CDOs and collateralized loan obligations (CLOs). For example, Aladdin Capital Management asked in one marketing piece, "Why is an investor better off just investing in Aladdin sponsored CLOs and CDOs?" It then emphasized that the "most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors." Aladdin Capital Management in fact made no such investments in either CDO, and its affiliated broker-dealer Aladdin Capital collected placement fees from the CDO underwriters.

Aladdin Capital Management and Aladdin Capital agreed to pay more than $1.6 million combined to settle the SEC’s charges. One of the firms’ former executives Joseph Schlim agreed to pay a $50,000 penalty to settle charges against him for his role in the misrepresentations.

"If you sell an investment with the pitch that you are co-investing and have ‘skin in the game,’ then you better actually have ‘skin in the game,’" said Robert Khuzami, Director of the SEC’s Enforcement Division. "Such a representation by an investment adviser or broker-dealer is an important consideration to investors in complex products."

Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit, added, "Aladdin marketed these CDOs via the co-investment representation, but then did not take steps to ensure that the representation was accurate. This action demonstrates our continuing commitment to holding market participants, including individuals, responsible for their misconduct leading up to the financial crisis."

According to the SEC’s orders instituting settled administrative proceedings, Aladdin Capital Management’s clients committed to investing in upcoming CDO deals that would be managed by the firm. Aladdin Capital Management inaccurately informed a municipal retirement plan, a pension plan, and an individual entrepreneur that it would co-invest alongside them. After those three clients invested in the two CDOs, Aladdin Management erroneously continued to inform clients from 2007 to 2010 that the firm had skin in the game.

According to the SEC’s order against Schlim, he was significantly involved in the MAST program on a day-to-day basis. He made sales calls to potential clients and negotiated with CDO and CLO underwriters about the amount of equity in those securities that Aladdin Capital could place with customers or purchase for itself. Schlim also negotiated the placement fees to be received by Aladdin Capital for securing MAST investments in equity tranches of each CDO or CLO.

The SEC found that Schlim knew that Aladdin used the co-investment representation as a significant marketing feature in its pitches to clients, but he failed to take any action to ensure that such representations were accurate when they were made. As the CFO of Aladdin, Schlim was responsible for reserving funds for Aladdin to co-invest alongside its MAST clients, yet he failed to ensure that funds were reserved or allocated for any co-investments alongside clients in either CDO.

Aladdin Capital Management and Schlim agreed to cease-and-desist orders without admitting or denying the SEC’s allegations. The Aladdin entities agreed to jointly pay $900,000 in disgorgement, $268,831 in prejudgment interest, and a $450,000 penalty. Schlim agreed to pay a $50,000 penalty.

The SEC’s investigation was conducted by James Goldman, Neil Smith, Kathleen Shields, and Kenneth Leung in the SEC’s Boston Regional Office. Mr. Goldman is a member of the Structured and New Products Unit. Mr. Leung participated in a related SEC examination of Aladdin Capital Management.

GERMAN COMPANY CHARGED BY SEC WITH FOREIGN CORRUPT PRACTICES VIOLATIONS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

"Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars," said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using "special purpose accounts" to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

According to the SEC’s order, the second complaint was made to Allianz’s external auditor in 2009. Allianz failed to properly account for certain payments in their books and records. The improper payments were disguised in invoices as an "overriding commission" for an agent that was not associated with the government insurance contract. In other instances, the improper payments were structured as an overpayment by the government insurance contract holder, who was later "reimbursed" for the overpayment. Excess funds were then paid to foreign officials who were responsible for procuring the government insurance contracts. Allianz lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting.

The SEC’s order found that Allianz violated the books and records and internal controls provisions of the FCPA, specifically Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.

The SEC’s investigation was conducted by Irene Gutierrez, Jennifer Baskin and Tracy L. Price of the FCPA Unit.

SEC ALLEGES CREATION OF FRAUDULENT VALUATIONS OF COMPANY STOCK

Photo:  Patterns In Nature.  Credit:  National Science Foundation.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Massachusetts Company, CEO and Promoters With $9 Million Securities Fraud


The Securities and Exchange Commission filed an enforcement action today in federal court in Boston against BioChemics, Inc., a biopharmaceutical company based in Danvers, Massachusetts, its CEO and two individuals it paid to solicit investors. The SEC alleges, among other things, that the defendants made false statements to investors about collaborations with major pharmaceutical companies and the status and results of drug trials of the company’s main product, and that they created fraudulent valuations of the company’s stock in order to raise millions of dollars from investors. The action charges BioChemics, its CEO John Masiz of Topsfield, Massachusetts, Craig Medoff of New York, New York and Gregory Kroning of Norwood, New Jersey, with violating the federal securities laws in a fraudulent scheme that raised at least $9 million from 70 investors in 19 states from at least 2009 until 2012.

According to the SEC’s complaint, filed in the United States District Court for the District of Massachusetts, BioChemics purportedly makes a transdermal drug delivery system. The defendants allegedly told investors that BioChemics was engaged in active research and development collaborations with major pharmaceutical companies, that it had two drugs under FDA review, and that it was conducting specific clinical trials—all of which was false. According to the complaint, when BioChemics finally did conduct one clinical trial, it misrepresented the results of that trial. The SEC’s complaint further alleges that defendants Masiz and Medoff created and gave to investors fraudulent valuations setting the worth of BioChemics at between $500 million and $2 billion. However, according to the complaint, the valuations had no reasonable basis and the defendants’ representations that the valuations had been developed by reputable independent investment banks were false. In addition, the complaint alleges that defendants told investors their money would be used to fund clinical trials and for operating expenses, but in fact used some investor funds to pay for personal expenses for Masiz including meals, massages, clothes and sporting goods and to make interest-free loans of over $200,000 to Kroning in addition to paying for his personal expenses including a leased BMW.

Masiz and Medoff have previously been sued by the Commission in connection with earlier securities frauds. Masiz was a defendant in a 2004 SEC enforcement action alleging false and misleading statements by VASO Active Pharmaceuticals, a BioChemics subsidiary. A final judgment by consent was entered against Masiz that permanently enjoined him from violating the antifraud provisions of the federal securities laws. Medoff was a defendant in a 1993 SEC enforcement action alleging the fraudulent offering of unregistered securities. That case resulted in a final judgment by consent against Medoff in 1994 that permanently enjoined him from violating the antifraud provisions of the federal securities laws. The Commission also issued an Order in January 1995 barring Medoff from associating with, among others, brokers, dealers, and investment advisers. In a separate case involving different conduct, Medoff also pled guilty to criminal securities fraud charges in 1995.

The complaint charges all defendants with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder and also charges Kroning and Medoff with violating Section 15(a) of the Exchange Act by acting as unlicensed brokers and Medoff with violating Section 15(b) of the Exchange Act by acting as a broker after being permanently barred from the industry in a previous action by the Commission. The complaint seeks injunctive relief, disgorgement, and civil penalties, as well as an order barring Masiz from serving as an officer or director of any public company. The complaint also seeks an order barring Masiz and Medoff and any entity they own or control from participating in the issuance, offer, or sale of any security aside from their own personal trading accounts.

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

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

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

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

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

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

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

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

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

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

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

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

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

SEC CHARGES U.S. BASED CONSULTANTS TO NUMEROUS CHINESE REVERSE MERGER COMPANIES WITH SECURITIES FRAUD

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today filed fraud charges, among others, against Huakang "David" Zhou (Zhou) and his consulting firm Warner Technology and Investment Corporation (Warner Investment) in connection with its investigation into China Yingxia International, Inc. (China Yingxia), a now defunct Chinese reverse merger company.

The SEC alleges that Zhou and Warner Investment, key players assisting numerous Chinese companies access and navigate the U.S. capital markets in recent years, engaged in varied misconduct from at least 2007 through 2010. Zhou and Warner Investment, through Zhou, have acted as advisers to over twenty Chinese issuers, locating private companies in China to bring public in the U.S., conducting reverse mergers and, for some, thereafter maintaining prominent, if not controlling, roles with the companies’ management and financial operations.

Zhou engaged in unregistered sales of securities for several clients, including by conducting an unregistered public offering of over $5 million in securities to roughly 85 Chinese-Americans in several states. Zhou and his firm also improperly assisted with securities offerings for two clients while acting as unregistered securities brokers, and further aided and abetted others’ unregistered broker-dealer violations.

In connection with raising $2 million for one client, Zhou engaged in deceptive conduct and made material misrepresentations and omissions to investors. Among other things, Zhou misused a significant portion of the investment proceeds to pay $271,500 towards his mortgage on a million-dollar condo in New York City. As well, Zhou concealed from investors that their money would be put at risk due to the circuitous manner in which Zhou sent proceeds to China. Unknown to the investors, Zhou sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who apparently had no affiliation with the company. The individuals supposedly then wired the money to the company’s chief executive officer, who in turn purportedly transferred the money to the company’s Chinese bank account.

Further, Zhou committed securities fraud by orchestrating an elaborate scheme in an apparent effort to list another client, a Chinese real estate company, on a national securities exchange. Zhou engaged in manipulative trading, including matched orders, to meet the minimum bid required for listing. As well, via gifts of stock and a purportedly private sale to a broker dealer, Zhou in effect artificially created a sufficient number of shareholders to meet a listing requirement that applicants have in excess of 400 round lot shareholders (holders of 100 shares or more). Zhou’s scheme succeeded, and the company was approved for listing in the fall of 2010.

The SEC’s complaint against Zhou and Warner Investment alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3 thereunder, and control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b) thereunder.

MIAMI ENTREPRENEUR CHARGED BY SEC WITH EXAGERATING THE FINANCIAL SUCCESS OF HIS COMPANY



FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C., Dec. 7, 2012 — The Securities and Exchange Commission today charged a prominent Miami-based entrepreneur with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. Claudio Osorio stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.

The SEC alleges that Osorio, who is a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. Osorio sometimes solicited investors one-on-one at political fundraising events. To add an air of legitimacy to his company, Osorio assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. Osorio falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.

The SEC also charged InnoVida's chief financial officer Craig Toll, a certified public accountant living in Pembroke Pines, Fla., who helped Osorio create the false financial picture of InnoVida.

The SEC alleges that besides his Miami Beach mansion, Osorio illegally used investor money to pay for his Maserati, a Colorado mountain retreat home, and country club dues. He stole at least $8.1 million in investor funds.

"From his lap of luxury, Osorio concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

In a parallel action, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, the scheme began in 2007 and lasted until 2010. InnoVida was purportedly in the business of manufacturing building panels used to construct houses and other structures resistant to fires and hurricanes. The company entered bankruptcy in 2011.

To induce funds from investors, Osorio and Toll allegedly produced false pro forma financial statements. A pro forma financial statement for March 31, 2009, stated that InnoVida had more than $35 million in cash and cash equivalents and more than $100 million of equity. A pro forma financial statement for Dec. 31, 2009, listed more than $39 million in cash and cash equivalents and $122 million of equity. In reality, the company's bank accounts held less than $185,000 on March 31, 2009, and less than $2 million on Dec. 31, 2009. Toll failed to review all of InnoVida's bank account statements when he drafted financial statements. Instead, he accepted Osorio's misrepresentations that InnoVida had these assets in an account to which Toll did not have access.

The SEC alleges that Osorio offered bogus share prices to prospective investors based on false valuations. He told one investor that InnoVida was valued at $250 million, and then a week later told a different investor that the company was worth $50 million. The latter investor purchased $100,000 of Osorio's stake in the company for five cents per share.

The SEC further alleges that Osorio lied to an investor when he said that he had personally invested tens of millions of dollars into InnoVida. He had in fact made no such investment. Osorio also enticed an investor to increase an investment in InnoVida by touting a supposed $500 million deal he was negotiating with a Middle Eastern sovereign wealth fund that would significantly benefit InnoVida investors. Osorio went so far as to create a document showing the investor how much he would make once the sovereign wealth deal closed and was funded. Based on Osorio's misrepresentations, the investor was able to raise approximately $700,000 and later borrowed $3 million from a close friend. However, no sovereign wealth buyout deal ever materialized, and InnoVida investors never benefited as promised.

The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against InnoVida, Osorio, and Toll to enjoin them from future violations of the federal securities laws. The complaint also seeks an order barring Osorio and Toll from serving as an officer or director of a public company.

The SEC's investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller and Accountant Karaz S. Zaki under the supervision of Assistant Regional Director Elisha L. Frank. Amie Riggle Berlin will lead the SEC's litigation. The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of Florida, and the Federal Bureau of Investigation's Miami Division.

SEC CHARGES LAWYER WITH ISSUING FRAUDULENT OPINION LETTERS REGARDING ISSUANCE OF MICROCAP STOCK

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 7, 2012 — The Securities and Exchange Commission today announced charges against a Florida-based securities lawyer for issuing fraudulent attorney opinion letters that resulted in more than 70 million shares of microcap stock becoming available for unrestricted trading by investors.

An attorney opinion letter is required from a licensed and duly authorized securities lawyer in order to facilitate the transfer of restricted microcap shares on the over-the-counter markets. In April 2010, the Pink Sheets (now OTC Markets Group) banned Guy M. Jean-Pierre of Pompano Beach, Fla., from issuing attorney opinion letters due to "repeated missing information and inconsistencies" about the issuers and his lack of due diligence in his past letters.

The SEC alleges that Jean-Pierre has since engaged in a scheme to continue writing and issuing attorney opinion letters in the name of his niece by applying her signature without her consent. Jean-Pierre (also known as Marcelo Dominguez de Guerra) sought to evade the ban by forming a new company called Complete Legal Solutions and misrepresenting that his niece was conducting the legal work that was allegedly performed.

"Securities lawyers are trusted gatekeepers in the issuance of stock, and it is particularly offensive when attorneys like Jean-Pierre blatantly break the rules and commit fraud," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "The SEC is committed to punishing offenders like Jean-Pierre as we continue to root out the enablers of microcap fraud in our markets."

According to the SEC’s complaint filed late yesterday in U.S. District Court for the Southern District of New York, Jean-Pierre hatched a plan within two weeks of his ban to continue issuing attorney opinion letters through Complete Legal and his niece’s identity. Jean-Pierre’s niece, a licensed attorney herself, was looking for work at the time. Jean-Pierre told his niece about his work issuing attorney opinion letters and offered to pay her to assist him. He suggested they form Complete Legal and asked her to send him three copies of her signature and a copy of her driver’s license. Jean-Pierre’s niece complied with his requests with the understanding this information was needed to incorporate Complete Legal. Afterwards, Jean-Pierre never requested that his niece do any legal work at Complete Legal and she was not compensated for any such work.

Instead, the SEC alleges that Jean-Pierre used the new company and his niece’s identity to continue his prior practice of issuing attorney opinion letters. Each of these letters contained fraudulent statements and falsely represented his niece as the signatory. Jean-Pierre’s niece did not write any of the letters and did not make the representations concerning the issuers. Jean-Pierre fabricated attorney opinion letters on Complete Legal letterhead for at least 11 companies that traded publicly on the Pink Sheets. Certain letters resulted in Pink Sheet issuers being granted the improved status of having adequate current information in the public domain under Rule 144(c)(2) of the Securities Act of 1933. This status kept the issuers from being tagged on the Pink Sheets’ website with a red "STOP" sign near its ticker symbol with the moniker of "OTC Pink No Information" and a large warning that the company "may not be making material information publicly available."

According to the SEC’s complaint, adequate current public information about an issuer must be available for certain selling security holders to comply with the Rule 144 safe harbor allowing companies to issue unregistered securities pursuant to Section 4(1) of the Securities Act. Jean-Pierre falsely issued letters bearing his niece’s signature to transfer agents opining that restrictive legends could be legally removed from either pre-existing stock certificates or newly issued stock certificates pursuant to Rules 144 or 504 of the Securities Act.

The SEC’s complaint alleges that Jean-Pierre violated Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, a permanent injunction, and a bar from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.

The SEC’s investigation, which is continuing, has been conducted by Megan Genet and Steven G. Rawlings in the New York Regional Office. Todd Brody, Barry Kamar, and Ms. Genet are handling the SEC’s litigation.

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

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

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

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

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

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

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

SEC CHARGES ACCOUNTING FIRMS WITH FAILURE TO PRODUCE AUDIT WORK PAPERS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission today began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.

The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:
BDO China Dahua Co. Ltd
Deloitte Touche Tohmatsu Certified Public Accountants Ltd
Ernst & Young Hua Ming LLP
KPMG Huazhen (Special General Partnership)
PricewaterhouseCoopers Zhong Tian CPAs Limited
According to the SEC’s order instituting the proceedings, SEC investigators have been making efforts for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the U.S. The audit firms have refused to cooperate in the investigations.

"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."

An administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms. The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order.

The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms. Earlier this year, the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients. That proceeding is ongoing. The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited. In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.

"U.S. investors should be able to rely on the quality of audited financial statements," said Kara Brockmeyer, co-head of the SEC’s Cross Border Working Group. "Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud."

This enforcement action was coordinated by the Cross Border Working Group and involved investigative teams in SEC offices in Washington D.C., Boston, New York, Fort Worth, and Los Angeles.

SEC FILES FRAUD CHARGES AGAINST CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND CORPORATE OFFICERS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

 
The Securities and Exchange Commission today announced that, on November 29, 2012, the Commission filed fraud and other related charges against China North East Petroleum Holdings (CNEP); its CEO, President and former Chairman of the Board of Directors, Wang Hongjun (Wang); its founder, former director and Wang's mother, Ju Guizhi (Ju); and its Vice President of Corporate Finance and Secretary, Jiang Chao. The Commission also named Wang's wife, Sun Jishuang (Sun), and Jiang Chao's father, Jiang Mingfu, as Relief Defendants to recover company monies that they improperly received.

The Commission alleges that CNEP, Wang, Ju and Jiang Chao diverted offering proceeds to the personal accounts of corporate insiders and their immediate family members, and also engaged in fraudulent conduct in connection with at least 176 undisclosed transactions between the company and its insiders or their immediate family members, otherwise known as related-party transactions.

The Commission alleges that, in connection with its two public stock offerings in late 2009, CNEP falsely stated to investors in a registration statement and other public filings signed by Wang that the offering proceeds would be used to fund future business expansion and for general working capital purposes. Instead, consistent with a pre-existing pattern of engaging in undisclosed, related-party transactions, Jiang Chao then diverted over $900,000 of offering proceeds to his father, Jiang Mingfu, and at the direction of Ju, diverted at least $6 million dollars to her and Sun, who is her daughter-in-law and Wang's wife.

The Commission further alleges that during 2009, CNEP, Wang and Ju engaged in at least 176 undisclosed, related-party transactions. This fraudulent conduct involved approximately $28 million in transactions from CNEP to Wang or Ju; approximately $11 million purportedly loaned to CNEP or paid to third parties on behalf of CNEP by Wang or Ju; and $20 million of unusual post-year-end adjustments that purported to eliminate the remaining debts owed by Wang and Ju to CNEP. Together, these transactions totaled approximately $59 million of related-party activity during 2009. Neither the magnitude nor the volume of these related-party transactions has been fully disclosed to the investing public.

SEC SAYS "HOLD THE PICKLES, HOLD THE LETTUCE. INSIDER TRADING THAT UPSET US."

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 30, 2012 — The Securities and Exchange Commission today announced insider trading charges against a Brazilian ex-banker for his role in a scheme to illegally trade Burger King securities

The SEC alleges that Igor Cornelsen and his firm through which he made trades - Bainbridge Group - reaped illicit profits of more than $1.68 million by trading Burger King options based on confidential information ahead of the company's September 2010 announcement that it was being acquired by a New York private equity firm. Cornelsen is now a resident of the Bahamas with a home in South Florida after holding high-ranking positions at several banks in Brazil before his retirement. He sought inside information from his broker Waldyr Da Silva Prado Neto by sending him e-mails with such masked references as, "Is the sandwich deal going to happen?" Prado was stealing the inside information from another Wells Fargo brokerage customer involved in the Burger King deal.

Cornelsen and Bainbridge Group agreed to pay more than $5.1 million to settle the SEC's charges. The settlement is subject to court approval. The litigation continues against Prado, whose assets have been frozen by the court.

"Cornelsen shamelessly prodded Prado for details on 'the sandwich deal' and Prado happily obliged to satisfy his customer's appetite for inside information," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit and Director of the Philadelphia Regional Office.

Sanjay Wadhwa, Deputy Chief of the Market Abuse Unit and Associate Director of the New York Regional Office, added, "Foreign investors who access the U.S. capital markets must play by the rules and not rig the market in their favor, otherwise they face getting caught by the SEC and paying a hefty price as Cornelsen is here."

According to the SEC's complaint filed today in federal court in Manhattan, Cornelsen became Prado's customer in 2008. On May 17, 2010, Prado sent Cornelsen an e-mail written in Portuguese that translates to, "Igor, if you are around call me at the hotel … I have some info … You have to hear this." Cornelsen called Prado at his hotel and they had a 10-minute conversation. Earlier that same day, Prado told a friend that he had knowledge of the impending Burger King deal. After talking with Prado, Cornelsen began trading out-of-the-money Burger King call options the very next day. Cornelsen had never previously traded Burger King securities.

The SEC alleges that Cornelsen continued trading Burger King options over that summer despite losing money in some instances. In August, Cornelsen sent Prado e-mails seeking assurances that 'the sandwich deal' was going to happen, and Prado responded with such statements as "Yes it's going to happen" and "Everything is 100% under control." Cornelsen then purchased additional Burger King call options. Cornelsen took steps to minimize his connection to Prado by purchasing the Burger King call options in accounts held at brokerage firms other than where Prado worked.

The SEC alleges that after the public announcement of the Burger King deal, Cornelsen e-mailed Prado to inquire about the acquisition price. Upon learning the new per share price that would yield him substantial illegal profits, Cornelsen e-mailed back, "Wow! What a day!"

The SEC's complaint charges Cornelsen and Bainbridge Group with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The proposed final judgment orders them to jointly and severally pay $1,681,090 in disgorgement and $136,620.96 in prejudgment interest. Cornelsen is ordered to pay a $3,362,180 penalty. They neither admit nor deny the SEC charges. The proposed final judgment also enjoins them from future violations of these provisions of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by Market Abuse Unit members Megan Bergstrom, David Brown, and Diana Tani in the Los Angeles office with assistance from Charles D. Riely in the New York office. The SEC appreciates the assistance of the Comissão de Valores Mobliliários (Securities and Exchange Commission of Brazil), the Options Regulatory Surveillance Authority (ORSA), and the Financial Industry Regulatory Authority (FINRA).

SEC CHARGES TWO BROKERS WITH TRADING ON NONPUBLIC INFORMATION REGARDING THE ACQUISITION OF SPSS INC., BY IBM CORPORATION

 

Photo:  NYSE.  Credit:  Wikimedia.

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today charged two retail brokers who formerly worked at a Connecticut-based broker-dealer with insider trading on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

The SEC alleges that Thomas C. Conradt learned confidential details about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction who discussed it in confidence. Conradt purchased SPSS securities and subsequently tipped his friend and fellow broker David J. Weishaus, who also traded. The insider trading yielded more than $1 million in illicit profits. The SEC’s investigation uncovered instant messages between Conradt and Weishaus where they openly discussed their illegal activity. The SEC’s investigation is continuing.

"When licensed professionals who are privileged to work in the securities industry violate legal duties and enrich themselves at investors’ expense, it undermines public confidence in the integrity of the markets," said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. "As industry professionals, Conradt and Weishaus clearly understood that what they were doing was wrong, but did so anyway while knowing the consequences they would face if caught."

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Conradt and Weishaus, who live in Denver and Baltimore respectively.

According to the SEC’s complaint filed in federal court in Manhattan, the scheme occurred in 2009. Conradt revealed in instant messages that he received the information from the research analyst and warned Weishaus that they needed to "keep this in the family." Weishaus agreed, typing "i don't want to go to jail." They went on to discuss other people who have been prosecuted for insider trading. In another series of instant messages, Conradt bragged that he was "makin everyone rich" by sharing the nonpublic information. Weishaus later noted, "this is gonna be sweet."

The SEC alleges that the research analyst’s attorney friend sought moral support, reassurance, and advice when he privately told the research analyst about his new assignment at work on the SPSS acquisition by IBM. In describing the magnitude of the assignment, the lawyer disclosed material, nonpublic information about the proposed transaction, including the anticipated transaction price and the identities of the acquiring and target companies. The associate expected the research analyst to maintain this information in confidence and refrain from trading on this information or disclosing it to others.

The SEC alleges that Conradt, Weishaus, and other downstream tippees purchased common stock and call options in SPSS. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Conradt, Weishaus, and other downstream tippees invested so heavily in SPSS securities that the investments accounted for 76 percent to 100 percent of their various brokerage accounts. Conradt and Weishaus both hold law degrees. Conradt is admitted to practice law in Maryland, and he passed the Colorado bar examination administered in February 2012.

The SEC alleges that Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation is being conducted by Mary P. Hansen, A. Kristina Littman and John S. Rymas, in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.