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Archive for February, 2012


Goldman Sachs faces regulators over mortgage backed securities

Goldman Sachs received a so-called Wells notice Feb. 24 from the Securities and Exchange Commission relating to disclosures for a late-2006 offering of $1.3 billion in subprime residential mortgage-backed securities, the firm said today in an annual financial report. Wells Fargo said it also got an SEC notice as the government examines whether it properly described facts and risks in offering documents.

Almost four years after mounting mortgage defaults prompted unprecedented government bailouts of the financial system, regulators are still examining how banks packaged and sold home loans to investors. The SEC is looking for evidence that firms failed to disclose underlying credit weaknesses in mortgage pools and delinquencies, Jason Anthony, special counsel for the agency’s structured products unit, said last week. He didn’t identify companies under scrutiny.

SEC lawyers send Wells notices when they intend to recommend that the agency bring claims.

Co-founders of Canopy Financial, Inc. sentenced

The U.S. Securities and Exchange Commission (Commission) announced that on February 15, 2012, co-founders of the bankrupt Canopy Financial, Inc., a health care transaction-software company based in Chicago, were sentenced to 15 and 13 years in prison for defrauding investors and clients of more than $93 million. Anthony Banas, Canopy’s chief technology officer, was sentenced to 160 months in prison, while Jeremy Blackburn, Canopy’s former president and chief operating officer, was sentenced to 180 months in prison. Both men pleaded guilty in late 2010 to one count of wire fraud, admitting they engaged in a fraud scheme that cheated investors of approximately $75 million and also misappropriated more than $18 million from customer accounts intended for health care savings and expenses. In imposing sentence, United States District Judge Ruben Castillo of the Northern District of Illinois noted that this case was the most aggravated financial fraud he had seen in his 18 years on the federal bench. The judge ordered both men to pay mandatory restitution and forfeiture totaling $93,125,918.

According to their plea agreements, Blackburn and Banas used false information about Canopy’s financial condition, including a bogus auditor’s report and falsified bank statements, to fraudulently obtain approximately $75 million from several private equity investors in 2009. Approximately $39 million of that money was used to redeem shares of other Canopy investors, including approximately $1.6 million that went to Blackburn and $975,000 that went to Banas, while another $29 million obtained from investors was deposited into Canopy operating accounts.

Also according to their plea agreements, Blackburn and Banas misappropriated Canopy operating funds for their own benefit. Blackburn took approximately $6 million in unauthorized withdrawals and transfers from Canopy bank accounts during 2009. Blackburn typically directed a Canopy employee, or occasionally Banas, to transfer Canopy funds to his bank accounts or to pay for his personal expenses, including credit card balances, luxury car purchases, and travel on a private jet. Blackburn also paid for personal home renovations, bought sports tickets and purchased jewelry and watches using misappropriated Canopy funds. Banas used misappropriated Canopy money to invest $300,000 in a nightclub. Banas also spent $400,000 between 2007 and 2009 on other personal expenses.

Hedge fund managers charged in Ponzi scheme complaint

US Attorney Anne M Tompkins made the announcement in conjunction with Chris Briese, Special Agent in Charge of the Federal Bureau of Investigation (FBI), Charlotte Division, and Jeannine A Hammett, Special Agent in Charge of the Internal Revenue Service-Criminal Investigation Division (IRS-CI).

According to the criminal indictment, the defendants operated “hedge funds” as part of a conspiracy that took in $40 million from victims for a Ponzi scheme operating under the name Black Diamond Capital Solutions (Black Diamond). The indictment alleges that the conspiracy lasted from about October 2007 through about April 2010. The indictment alleges that the defendants lied to get money from their victims by claiming, among other things, that they had done due diligence on Black Diamond and were operating legitimate hedge funds with significant safeguards, when in reality, neither claim was true. The indictment also alleges that, as Black Diamond began collapsing, the defendants and others created a new Ponzi scheme and with a separate Ponzi account that Davey administered. Thereafter, new victim money was deposited into the Ponzi account and used to make Ponzi payments to other victims and to fund the defendants’ lifestyles.

$2.5 million civil penalty levied against investment advisor

The Securities and Exchange Commission announced that on February 2, 2012, United States District Judge William C. Caldwell of the United States District Court for the Middle District of Pennsylvania entered an order imposing a $2,500,000 civil penalty jointly and severally against defendants Robert Glenn Bard and Vision Specialist Group, LLC. In an earlier order on November 10, 2011, the Court found that defendants made false statements to thirty-three of their investment advisory clients on 146 separate occasions about what type of securities and holdings they had, where the assets were, and the value of the assets, and that they charged at least one client excessive fees. In assessing the penalty, the Court found that the egregiousness of defendants’ behavior, the recurrent nature of the conduct, the lack of cooperation with authorities, defendants’ degree of scienter, and the risk of loss created by defendants’ actions all weighed in favor of imposing a substantial penalty.

This case arises out of allegations by the Commission in a complaint filed on July 30, 2009, that defendant Bard, an investment adviser, and his solely-owned company Vision Specialist Group, LLC, had violated the federal securities laws through fraudulent misrepresentations regarding client investments, account performance and advisory fees, the creation of false client account statements, and forgery of client documents. On November 10, 2011, the Court granted the Commission’s motion for summary judgment. The Court found Bard and Vision Specialist liable for violations of § 17(a) of the Securities Act of 1933, § 10(b) of the Exchange Act of 1934, and Rule 10b-5 thereunder, and §§ 206(1) and 206(2) of the Investment Advisers Act of 1940. In that order, the Court also entered permanent injunctions against the defendants for violations of those provisions, and held the defendants jointly and severally liable for disgorgement of $450,000, plus prejudgment interest in an amount to be determined.

AIJ Investment Advisor’s operations frozen – investor losses believed to be more than $2 billion

AIJ Investment Advisors Co.’s operations were halted Friday after regulators said the firm allegedly lost “most of'” the ¥183 billion ($2.3 billion) in pension assets it managed.

Japanese credit rater Rating & Investment Information Inc. warned in a 2009 newsletter to clients that AIJ had “unnaturally stable returns” despite a down market. Although AIJ wasn’t named in the newsletter, the description given was enough to identify it for most pension-industry experts, says Hidekazu Nagamori, the managing director in charge of the newsletter.

The warning came a year after AIJ, which has a staff of 12 employees, had been ranked No. 1 by Japanese pension funds in a customer-satisfaction survey conducted by R&I. Bankers familiar with the investment industry say AIJ was known among bigger asset managers for boasting consistently high returns.

Harbinger bet on LightSquared draws SEC scrutiny

Phil Falcone’s Harbinger Capital Partners LLC lost 47 percent for investors in his main hedge fund last year as he was forced to slash the value of his troubled wireless venture by more than half.  Most of the decline in the Harbinger Capital Partners Offshore Fund I came from Falcone’s investment in LightSquared Inc., which plans to offer high-speed data service to as many as 260 million people. The Reston, Virginia-based company is awaiting final clearance from the Federal Communications Commission as regulators weigh test results that show the service’s signals disrupt global-positional system equipment used by cars, tractors, boats and planes.

“The decline was primarily due to a conservative adjustment in the fund’s holdings of LightSquared, to be consistent with the results of work done by the fund’s third- party valuation firm,” Lew Phelps, a spokesman for the New York-based fund, said in a statement. “The valuation takes into account uncertainty about the outcome of political issues related to alleged interference with the GPS system by LightSquared transmitters,” added Phelps, who confirmed the fund’s loss.

The 59 percent reduction in the value of the fund’s LightSquared stake illustrates the precarious nature of the investment on which Falcone, who is also under investigation by U.S. regulators, is betting the future of his firm. Harbinger, which managed $4 billion at the end of last year, put about $3 billion into LightSquared, and the investment accounted for 62 percent of the main fund at the end of May.

The SEC is investigating whether Harbinger gave some investors preferential treatment by allowing them to withdraw money while barring others from doing so. Harbinger is also being investigated by the SEC and the U.S. Attorney’s office over a $113 million loan Falcone took from one of his funds.

Falcone has denied giving preferential treatment to any investors.

SEC charges Steven Hamilton with running Ponzi schemes

The Securities and Exchange Commission today announced it has charged Steven L. Hamilton and Verde Retirement LLC, Verde FX Nevada, LLC, Covenant Capital Partners with securities fraud for defrauding at least 23 investors out of $1.6 million in a series of Ponzi schemes.

The SEC alleges from 2007 through February 2011, Hamilton solicited investors through the internet and via direct solicitation. The SEC’s complaint alleges that Hamilton told Covenant Capital investors they were investing in real estate loans secured by deeds of trust, told Verde Retirement investors they were investing in either real estate loans secured by deeds of trust, certificates of deposit, and told Verde FX investors they were pooling their money to invest in the construction of a new FedEx distribution facility in Las Vegas, Nevada.

According to the SEC’s complaint, Hamilton never placed any investor money in real estate loans secured by deeds of trust, certificates of deposit or a FedEx facility. Instead, Hamilton used the $1.6 million he raised to pay his personal living expenses and return capital to investors.

Bail set for Oregon investment research analyst

Bail was set at $5 million Thursday for the president of an Oregon investment research firm whose obscenity-laced phone calls to prosecutors and FBI agents was described as disgraceful by the judge who will preside over his securities fraud case.

U.S. District Judge Deborah A. Batts said the bail for John Kinnucan can be secured with $100,000 in cash or property, but his lawyer said the defendant’s home cannot be used because he owes more than it is worth.

The judge also ordered Kinnucan not to use any electronics such as computers or telephones while he awaits trial on charges that he used his position as president of Broadband Research LLC to lure secrets out of public company insiders. The government said he would then sell the information to hedge funds and money managers as if it were legitimate research.

SEC Charges advisor Brenda Eschbach

The U.S. Securities and Exchange Commission announced today that on February 14, 2012, it filed a civil injunctive action in the U.S. District Court for the Central District of California charging Brenda A. Eschbach of Tustin, California with securities fraud, investment advisory fraud, and acting as an unregistered broker-dealer. In its complaint, the Commission alleged that Eschbach misappropriated over $3 million in investment advisory client funds from 2003 through 2009.

The Commission’s complaint alleges that Eschbach violated Section 17(a) of the Securities Act of 1933(Securities Act), Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and seeks a permanent injunction against future violations of those provisions, disgorgement of her ill-gotten gains, with prejudgment interest thereon, and a civil money penalty.

The complaint alleges that Eschbach began to misappropriate client funds while operating a franchise of a large investment adviser and broker-dealer and that the theft of client funds continued after Eschbach founded Aventine Investment Services, Inc., a now-defunct California corporation. The complaint further alleges that Eschbach did not make investments as directed by her clients, instead stealing their funds and using them to pay for, among other things, living expenses, business expenses, credit card payments, Mercedes lease payments, private school tuition for her daughter, and trips to Las Vegas and Atlanta. The complaint alleges that Eschbach concealed her misappropriations by issuing and mailing false and misleading account statements to those clients whom she had defrauded.

Without denying the Commission’s allegations, Eschbach has consented to entry of a proposed final judgment: (1) permanently enjoining her from violating Section 17(a) of the Securities Act, Sections 10(b) and 15(a) of the Exchange Act, Exchange Act Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act; and (2) ordering disgorgement of $2,561,873, payment of which would be deemed satisfied dollar for dollar by criminal restitution ordered in a related criminal proceeding, U.S. v. Brenda A. Eschbach, 8:10-cr-00017-JVS (C.D. Cal.). Entry of the proposed final judgment is subject to approval by the U.S. District Court for the Central District of California.

Citigroup to pay $158 million in mortgage fraud settlement

Citigroup Inc has agreed to pay $158.3 million to settle U.S. civil claims that it defrauded the government into insuring thousands of risky home loans made by its CitiMortgage unit.  Wednesday’s settlement resolves claims under the federal False Claims Act against the third-largest U.S. bank, and arose from a “whistleblower” lawsuit brought by Sherry Hunt, a CitiMortgage employee in Missouri.

CitiMortgage “admits, acknowledges and accepts responsibility” for misleading the government into insuring risky home loans, according to settlement papers filed in U.S. District Court in New York. Investigators said the misconduct lasted for more than six years.

The civil fraud case is part of a crackdown by the Department of Justice against lenders it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.  Whistleblowers can receive up to 25 percent of settlements reached with the government in such cases, depending on how much work they contributed.

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