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Archive for April, 2012


Former Morgan Stanley executive charged

The Securities and Exchange Commission today charged a former executive at Morgan Stanley with violating the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisers by secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds.

The SEC alleges that Garth R. Peterson, who was a managing director in Morgan Stanley’s real estate investment and fund advisory business, had a personal friendship and secret business relationship with the former Chairman of Yongye Enterprise (Group) Co. – a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai. Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official that he disguised as finder’s fees that Morgan Stanley’s funds owed to third parties. Peterson also secretly arranged for him, the Chinese official, and an attorney to acquire a valuable Shanghai real estate interest from a Morgan Stanley fund. Peterson was acquiring an interest from the fund but negotiated both sides of the transaction. In exchange for offers and payments from Peterson, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. Peterson’s deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley’s funds as their representative.

Peterson agreed to a settlement of the SEC’s charges in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct. The U.S. Department of Justice has filed a related criminal case against Peterson.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Peterson’s violations occurred from at least 2004 to 2007. His principal responsibility at Morgan Stanley was to evaluate, negotiate, acquire, manage and sell real estate investments on behalf of Morgan Stanley’s advisers and funds. He was terminated in 2008 due to his FCPA misconduct.

Los Angeles based man charged in municipal bond fraud scheme

The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of a Los Angeles man orchestrating a securities fraud by falsely presenting himself to investors as a specialist in municipal bond investments.

The SEC alleges that Michael Anthony Gonzalez raised approximately $1 million since February 2010 by telling investors he would invest their money in specific tax-exempt municipal bonds insured by the Securities Investor Protection Corporation (SIPC) . In reality, Gonzalez never purchased the bonds and instead deposited investor money into his own bank account for personal use. He later attempted to conceal the scheme by providing investors with phony confirmation statements.

According to the SEC’s complaint filed in the United States District Court for the Central District of California, Gonzalez falsely told investors that he was associated with New York-based broker-dealer May Capital Group in order to portray himself as a legitimate money manager. Gonzalez had no dealings with May Capital, and through his false representations and fake confirmations he succeeded in giving investors the false impression that their investments were insured and safe. Gonzalez also provided investors with phony trade confirmations that identified securities that were either not purchased or non-existent.

The Honorable S. James Otero, United States District Judge, granted the SEC’s request for a temporary restraining order against Gonzalez and issued orders freezing his assets, requiring accountings, prohibiting the destruction of documents, and granting expedited discovery .  The court will hold a hearing on the SEC’s motion for a preliminary injunction on May 25, 2012.

SEC adopts new swap rules

The Securities and Exchange Commission has adopted new rules defining terms used in regulation of the over-the-counter swaps market. The rule, jointly written with the Commodities Futures Trading Commission, was mandated by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which did not fully define terms like “security-based swap dealer” and “majority security-based swap participant.” 

Security-based swaps are based on the underlying performance of a single security, loan, narrow index of securities or events relating to the performance of a single issuer or issuers of securities in such an index. These swaps are regulated by the SEC, while all other swaps are regulated by the CFTC.

In an opening statement before the definitions were announced, commission chair Mary Schapiro said the SEC staff had worked hard to tailor the rules to met the commissioners’ goal of “preserving key counterparty and market protections while promoting regulatory efficiency.”  The definitions focus on monetary thresholds to distinguish dealers and market participants who make some security and non-security based swaps as part of their general market strategies and those who focus on such activities.

Velocity shares 2x long VIX investigated by Massachusetts after 60% drop

Massachusetts’s securities regulator said it is looking into an exchange-traded note managed by Credit Suisse hat has lost 60% of its value in the past week.

The Massachusetts inquiry comes as the Securities and Exchange Commission also is looking into the product. The SEC review is preliminary, according to people familiar with the matter. Meanwhile, the Financial Industry Regulatory Authority also has been monitoring the situation. “We have been closely looking at the events and trading around [the exchange-traded note], but cannot comment beyond that,” a Finra spokesman said.

Secretary of the Commonwealth William Galvin submitted a written request on March 23 to Credit Suisse for information and documents related to every purchase of shares in the VelocityShares 2x Long VIX Short Term Exchange note from Feb. 20 to March 23. The regulator also is seeking information on what time Credit Suisse filed its statement with the SEC on its plans to reopen issuance of the exchange-traded note, or ETN, beginning on March 23 and who was involved in making that decision.

The scrutiny comes amid investor concern over trading in the ETN. The Credit Suisse product, which is designed to track stock-market volatility, plunged last week even though market volatility was little changed.

Penny stock promoter barred

The United States Securities and Exchange Commission (Commission) announced that on April 10, 2012, the Honorable Sidney A. Fitzwater of the United States District Court for the Northern District of Texas enjoined Ryan M. Reynolds of Dallas, TX, Timothy T. Page of Malibu, CA, Steven Fischer of Bonita Springs, FL, Phillip W. Offill, Jr., a Dallas attorney, RSMR Capital Group Inc. (RSMR), Page Properties LP, and ATN Enterprises LLC from violating Section 5 of the Securities Act of 1933. The Commission’s complaint alleged that these individuals and entities violated the securities laws by acting as underwriters engaged in a scheme to evade the securities registration requirements by offering and selling the securities of one or more of six companies when no registration statements were filed or in effect to provide information to public investors. The six companies issued penny stocks, which are defined as equity securities trading at a price of less than five dollars per share, and the defendants initiated public trading in the over-the-counter market under the following trading symbols: American Television & Film Company (ATFT), Ecogate, Inc. (ECGT), Media International Concepts, Inc. (MEIC), Vanquish Productions, Inc. (VQPI), Auction Mills, Inc. (AUML), and Custom Designed Compressor Systems, Inc. (CUPY). The court also barred Reynolds, Page, Fischer, RSMR, Page, and Page Properties for seven years, and Offill permanently, from participating in the offer or sale of penny stocks. In addition, the court enjoined Reynolds, RSMR, Page, and Page Properties from violating Section 15(a) of the Securities Exchange Act of 1934 by engaging in the securities transaction without registering as brokers or dealers with the Commission. The court also ordered the defendants to pay disgorgement totaling $12,219,468 of profits from their unregistered securities sales plus prejudgment interest, and civil penalties of $120,000 each. In addition, the court ordered relief defendants Timothy Barham and his company Ballad Enterprises, Inc. of Henderson, Tennessee, and Bellatalia LP, a company owned by Reynolds, to disgorge funds they received from the defendants’ illegal stock sales. The Commission’s claims for remedies against Shane Mullholand and his company Dissemination Services LLC remain to be resolved. The court previously enjoined Arizona attorney, David Stocker and his company Curtis-Case Inc. for their violations of Section 5 of the Securities Act, and barred them from participating in penny stock sales.

Ex-Enron CEO latest appeal rejected by Supreme Court

The Supreme Court on Monday turned aside jailed Enron executive Jeff Skilling’s second appeal, upholding his corporate corruption fraud conviction.

The justices without comment rejected call to take another look at the scope of a conspiracy charge — so-called “honest services” fraud.

The high court two years ago had given Skilling a temporary victory when it upheld the continued use of the popular federal prosecution tool but limited when it could be used against business executives and politicians. Lower federal courts were ordered to re-examine whether the trial judge should have allowed the jury to consider that charge. A federal appeals court subsequently ruled again for the government, prompting the latest Supreme Court appeal. 

Skilling, 58, is currently in federal prison. He was convicted of 19 counts of fraud, conspiracy, and insider trading relating to the collapse of the Texas-based energy services giant in late 2001.

SEC shuts down Los Angeles based Ponzi scheme

The Securities and Exchange Commission today obtained an emergency court order to halt an alleged ongoing $7.54 million Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles.

The Commission alleges that for the past two years, Shervin Neman raised money from investors by claiming to be a hedge fund manager. Neman told investors that his purported hedge fund, Neman Financial L.P., invested in foreclosed residential properties that would be quickly flipped for profit, in Facebook shares obtained in private transactions, and highly anticipated initial public offerings, including Groupon, Inc., and LinkedIn Corp., and Angie’s List, Inc. Although Neman promised investors exorbitant returns resulting from his investing acumen and access to pre-IPO shares of well-known companies, what they actually received was simply other investors’ monies, the hallmark of a Ponzi scheme.

The Honorable Jacqueline H. Nguyen for the U.S. District Court for the Central District of California granted the Commission’s request for a temporary restraining order and asset freeze against Neman and the entities he controlled.

According to the Commission’s complaint, Neman raised funds from at least 11 investors in the fraudulent securities offering. Most of these investors were members of the Los Angeles Persian-Jewish community, of which Neman is also a member.

The Commission alleges that more than 99% of the money Neman raised was used either to pay returns to existing investors, or to fund his lavish lifestyle. According to the Commission, Neman spent nearly $1.6 million of investor funds to buy jewelry, pay for his wedding and honeymoon, as well as high-end cars, VIP tickets to sporting events, and vacations.

SEC charges Silicon Valley man for start up fraud

The Securities and Exchange Commission today charged a Silicon Valley businessman raised millions for two Internet start-ups by falsely promising investors that his companies were on the verge of undergoing successful initial public offerings and were well on their way to becoming the “next Google.”

The SEC alleges that Benedict Van, of San Jose, Calif., lured investors into web-based start-ups hereUare, Inc. and eCity, Inc. by falsely telling them that the companies would go public within a matter of months and generate millions in quick returns. In truth, Van had no plans to take the companies public and relied solely on investor funds to stay in business. Ultimately, when investor funds ran out by the end of 2008, Van was forced to shut down operations.

According to the SEC’s complaint, filed in federal court in the Northern District of California, Van raised more than $6.2 million from investors for hereUare in 2007 and 2008, and raised $880,000 in investor funds for eCity in 2008. In presentations to prospective investors, chiefly in homes in Sacramento and Stockton, Van held himself out as a wealthy venture capitalist with prior IPO experience. Van told prospective investors that the companies had lucrative deals and patents, and that he had retained Goldman Sachs and an international law firm to help take the companies public within six months. According to the SEC, everything Van told prospective investors was false.

The complaint alleges that, by their conduct, Van, hereUare, and eCity violated Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5(b) thereunder; Van and hereUare also violated Sections 5(a) and 5(c) of the Securities Act. The defendants’ signed consents — which are subject to approval by the court — provide that each defendant is permanently enjoined against future violations of the statutes and rules each is alleged to have violated. In addition, defendant Van’s signed consent provides that, without admitting or denying the Commission’s allegations, he is permanently barred from serving as the officer or director of a public company. The Commission waived disgorgement and declined to assess a penalty against Van based on his demonstrated inability to pay.

Rothstein colleague indicted in Ponzi scheme case

Steven Lippman, 49, of Plantation, was charged with conspiracy to violate the Federal Election Campaign Act, to defraud the U.S., and to defraud a financial institution.

Prosecutors said Lippman, a shareholder in Rothstein’s now defunct law firm, Rothstein, Rosenfeldt and Adler (RRA), was illegally reimbursed by RRA for certain political contributions he made including the presidential campaign of John McCain.  The indictment claims Rothstein enlisted Lippman and others to contribute tens of thousands of dollars to the McCain campaign and RRA would unlawfully reimburse them.

In one instance, prosecutors said, Lippman made a $67,800 contribution to McCain-Palin Victory 2008. Lippman, in turn, received a check from RRA in the amount of $77,500, which constituted reimbursement of the funds he used to make the contribution.

Lippman also allegedly took part in a bank fraud scheme with Rothstein that made it appear RRA was an affluent and successful law firm and to gain additional time to meet the financial obligations of RRA. Prosecutors claim he did this in a scheme called “check kiting,” which is floating checks between accounts to inflate posted balances.

Lippman was also charged with tax fraud for failing to report certain expense reimbursements and other income from RRA.

Schwab considers warning customers about complex ETF’s

The move follows the sudden plunge in an exchange-traded note called VelocityShares Daily 2X VIX Short-Term ETN, or TVIX, which lost 60 percent of its value in a short span of March.

The warning would be similar to one that pops up when investors trade options related to volatility, which are more complex than stocks.  The note, which pops up at the final verification stage of a trade, will serve as a last warning to a customer.  Schwab’s review and consideration of a warning for investors is significant because it comes at a moment after federal and state regulators have zeroed in on volatile trading and other activity involving exchange-traded notes.

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