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Archive for May, 2012


SEC targets Apartments America, LLC

On May 10, 2012, the Securities and Exchange Commission charged a California-based real estate company and its owners with defrauding potential investors by boasting a false company track record to tout their purported real estate expertise while concealing the bankruptcy of their previous company.

The SEC alleges that Michael J. Stewart, John J. Packard, and Randall A. Smith created Apartments America, LLC to pool investor proceeds from an unregistered offering of securities and invest primarily in apartment buildings in Southern California and Arizona. They solicited potential investors through a website, Internet advertisements and postings, cold calls, solicitation letters, and advertising in a national newspaper. They boasted a track record of producing more than a 60 percent annual return on investment and creating more than $100 million in net equity.

According to the SEC’s complaint filed in federal court in Orange County, California, what potential investors did not know is that Apartments America was a new company with no assets and no track record. Stewart, Packard, and Smith were merely using the same investment strategy and selective statistics from their prior bankrupt company that had defaulted on $91.6 million in promissory notes held by 647 investors.

According to the SEC’s complaint, Stewart lives in San Clemente, California, and Packard and Smith each live in Long Beach, California. Together they formed Apartments America in September 2009, just three months after Pacific Property Assets (PPA) filed for bankruptcy. Stewart and Packard owned PPA and Smith worked for them. In the months prior to defaulting on its promissory notes, PPA was actively soliciting investor funds and promising an annual interest rate of 24 to 30 percent.

Georgia man consents to insider trading charges

On May 10, 2012, the U.S. District Court for the Northern District of Georgia entered a consent order requiring, among other things, that Defendant Dr. Bobby V. Khan, a Georgia-based doctor, pay more than double the amount of his trading profits obtained through alleged insider trading.

The Commission filed charges against Dr. Bobby V. Khan in September 2010, alleging that he traded illegally in the stock of Georgia-based pharmaceutical company Sciele Pharma, Inc. on the basis of nonpublic information he received just days before the public announcement of a tender offer by a Japanese company to purchase all of that company’s shares. Khan obtained confidential details about the acquisition from a longtime business associate and friend who was a senior officer at Sciele. Khan subsequently opened an online brokerage account for the first time in several years, transferred approximately one-third of his liquid net worth into it, and purchased 4,000 shares of Sciele stock just days before the tender offer’s public announcement. Khan sold all of his shares after the announcement for an illicit profit of $47,171.

Without admitting or denying the Commission’s allegations, Dr. Khan agreed, as set forth in the Court’s order, to pay a total of $100,857.79, consisting of disgorgement, prejudgment interest thereon, and a civil penalty. Dr. Khan also consented to permanent injunctions against violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder.

SEC charges Arizona resident

The Securities and Exchange Commission (“Commission”) filed a civil injunctive action in Atlanta, Georgia on May 8, 2102, alleging that Gerald D. Kegley (“Kegley”) and the company he operates, Prism Financial Services, LLC (“Prism”), participated in a fraudulent “Prime Bank” scheme that violated the antifraud and securities and broker dealer registration provisions of the federal securities laws.

The Commission’s complaint alleges that from at least April 8, 2010 through at least August 20, 2010, the defendants were directly responsible for introducing six individuals, who invested $1.95 million, to the fraudulent scheme. The complaint alleges that in furtherance of the scheme, the defendants forwarded misrepresentations made by others to investors. These misrepresentations included: 1) that investors could draw upon bank issued guarantees worth millions of dollars without having to repay the withdrawn funds; and 2) that investor funds would be held in escrow until the bank guarantees were issued. The complaint alleges that defendants knew or were reckless in not knowing that both of these representations were false because no such bank guarantees existed and investor funds were misappropriated immediately upon receipt.

Defendants also misrepresented that they would be paid commissions only once the investor received the bank guarantee. In fact, defendants were paid commissions relatively soon after the investors transferred the money. Defendants further told investors that they had previously worked on a successful bank guarantee program. Defendants, however, had actually reported this purportedly successful bank guarantee program to the Federal Bureau of Investigation because they believed it was a fraud.

FINRA fines firms $9 million for leveraged ETFs

The Financial Industry Regulatory Authority, or Finra, has ordered Citigroup Inc. (C), Morgan Stanley (MS), UBS AG (UBS) and Wells Fargo & Co. (WFC) to pay a combined $9.1 million for allegedly improper sales of leveraged and inverse exchange-traded funds.

Wall Street’s self-regulator fined the companies a total of more than $7.3 million and also ordered them to pay $1.8 million in restitution to customers who bought the ETFs.

Finra said the brokerages failed to reasonably supervise sales of these types of ETFs in 2008 and part of 2009, and wrongly steered some clients to them. Leveraged and inverse ETFs are designed for short-term trading, and aren’t for long-term investors.

ETFs trade daily on exchanges like stocks, and the leveraged versions use futures or derivatives to multiply the daily returns of an index, sometimes striving to double or triple the return. Inverse ETFs seek to return the opposite of the index. Over terms longer than a day, the compounding effect can lead to results that vary significantly from the one-day outcome, making them unpredictable and highly risky to hold for longer periods.

Finra said Tuesday that each of the four companies sold billions of dollars of these non-traditional ETFs to customers, and some were held for extended periods when markets were volatile.

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