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Archive for June, 2013


SEC charges San Diego penny stock promoter

The Securities and Exchange Commission charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that David F. Bahr of Rancho Santa Fe, Calif., artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today filed criminal charges against Bahr.

Energy related investment fraud on state regulator’s radar

In the North American Securities Administrators Association’s (NASAA) most recent enforcement report, oil and gas investments were the fourth most common product involved in state securities enforcement cases, with nearly 40% of responding jurisdictions reporting energy-related faud cases.

“Many of these investments are highly risky and illiquid and therefore are not appropriate for many investors,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner. “It is not unusual for unscrupulous promoters to use the lure of current events or innovative technologies to take advantage of unsuspecting investors by engaging in fraudulent practices.”  Abshure said promoters sometimes prey on investors interested in socially responsible products by labeling them as “green energy” investment opportunities. The phrase “green energy” implies that the products are ecologically friendly. In some cases, the promoters may be operating a fraudulent shell company and not producing anything.

Energy-related investments can take many forms: as a private placement purchased through a subscription agreement, a limited or general partnership, or as a joint venture. Issues are also offered as common stocks, bonds and ETFs.

Critics of Dodd-Frank acknowledge little chance of repeal

One of the staunchest critics of the Dodd-Frank Act says a full repeal of the financial reform law isn’t in the cards.  Rep. Scott Garrett (R-N.J.) said legislation to strike down the law, now pending in the House and the Senate, won’t pass.  “That ain’t gonna happen,” he said Thursday night during remarks at a Hedge Fund Association symposium on forthcoming financial regulations.   Garrett said he was optimistic that the SEC’s new chairman, Mary Jo White, would operate in an open, bipartisan manner, but he said the agency’s priorities were out of order.

SEC charges two executives in Ponzi Scheme at Dallas-based medical insurance company

The Securities and Exchange Commission today charged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleges that Duncan MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. In reality, GCA was merely a start-up company with no operating history and virtually no revenue. As they raised investor funds, MacDonald and Solomon used proceeds from new investors to pay returns to existing investors. Once they couldn’t find any new investors, MacDonald and Solomon used a stall campaign of purported excuses to delay making any further payments to investors.

“MacDonald and Solomon raised millions of dollars by lying to investors about their company’s business and history and their planned use of investor funds,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office.  “When they could no longer fuel their Ponzi scheme with money from new victims, they told more lies in a failed effort to prevent their scheme from unraveling sooner.”

David Peavler, Associate Director of the SEC’s Fort Worth Regional Office, added, “MacDonald and Solomon created fake monthly statements to falsely portray GCA as a thriving health insurance company successfully enrolling thousands of premium-paying policyholders each month. In reality, they never had more than 40 policyholders, and half of those were GCA’s own employees.”

In a parallel action, the U.S. Attorney’s Office for the Northern District of Texas has filed criminal charges against MacDonald and Solomon.

According to the SEC’s complaint filed in federal court in Dallas, MacDonald set out in 2008 to start an insurance company that would market medical insurance to large groups. He tried for months to find a single investor to fund the company’s initial capital needs, but was unsuccessful. Meanwhile, MacDonald and Solomon began spending money on the business before raising any capital. They hired employees, heavily marketed the program, and secured a sponsorship agreement with a large national membership group. MacDonald was GCA’s president and chairman, and Solomon was chief administrative officer.

The SEC alleges that when unable to land a major investor, MacDonald fractionalized his efforts and sought individual investors who could contribute smaller amounts. When pitching GCA to investors as well as brokers assisting him in identifying investors, MacDonald significantly misrepresented the history and state of his business. Besides misleading investors to believe there were more than 100,000 premium-paying members, MacDonald misrepresented that GCA had previously sold a portion of its revenue stream from paying members to a Chinese hedge fund. GCA had no relationships with a Chinese hedge fund or any other institutional investors.

According to the SEC’s complaint, MacDonald and Solomon began fabricating enrollment numbers to make it appear that GCA was enrolling new members each month. They created a so-called “Monthly Overage Disbursement Statement” that purported to show the monthly member enrollments and cancellations. The statements were meant to look as if they were generated from a database, but they were actually made in Excel and populated by Solomon. These monthly statements were provided to the brokers by MacDonald and Solomon so they could be used to induce investments from potential investors and serve as the basis for payments to existing investors. At MacDonald’s direction, Solomon was primarily responsible for making the monthly payments to investors based on the false enrollment numbers. In reality, these were Ponzi payments rather than revenues from policyholders.

The SEC alleges that by the time the scheme collapsed, GCA had raised nearly $10 million from investors and returned about $2 million to investors in the form of Ponzi payments. MacDonald and Solomon each took around $1 million of investor funds, and spent the remaining investor funds on various business-related expenses until GCA’s accounts were left with a negative balance. After investor money was gone and GCA could no longer make monthly payments to investors, MacDonald and Solomon spent the next year concocting various reasons to investors about why they could not make payments. Meanwhile, MacDonald was pursuing alternative means of financing the company and redeeming the investors, but no more money ever came.

The SEC’s complaint charges MacDonald and Solomon with securities fraud and conducting an unregistered securities offering while acting as unregistered broker-dealers. The SEC seeks various relief for investors including disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions.

Mandatory arbitration in the news again

The system of mandatory arbitration of disputes between brokerage firms and customers is again in the news.  This time the North American Securities Administrators Assocation, Inc. has been lobbying the SEC to act on its authority under Dodd-Frank to end or limit the use of pre-dispute mandatory arbitration agreements included in virtually all customer agreements used by Wall Street.

Heath Abshure, Arkansas’ securities commissioner and NASAA president, used an example of an investor whose individual retirement account totals $27,000.  “If he’s got a mandatory arbitration provision with a Charles Schwab class action waiver, that means he’s going to arbitration. That’s the only alternative he has. Find the securities lawyer who is going to take a $27,000 class action fraud case…”  He added that the way things are currently set up, “The [arbitration system] really presents an absolute prohibition and an impossibility for small investors to seek redress for securities fraud.”

Ira Hammerman, senior managing director and general counsel at SIFMA, countered that the arbitration process, which is administered by FINRA, is the fairest and most efficient way to help small investors.

“It is one where customers who have small claims can go and have those claims resolved. A customer can literally fill out in handwriting a piece of paper … and even in that $27,000 account can have their so-called day in court, where if it were a real court, there’s no way that anyone could pursue that case,” Mr. Hammerman said at the InvestmentNews event.

The defendants in arbitration cases also have misgivings. Among independent broker-dealers, there has been a growing “disenchantment” with the system over the last year, according to Dale Brown, president and chief executive of the FSI.

DOL fiduciary standard draft to arrive fall 2013

The Department of Labor’s reproposed fiduciary rule will likely be released a “couple months after July,” Phyllis Borzi, assistant secretary for DOL’s Employee Benefits Security Administration, said during a Tuesday afternoon meeting with the ERISA Advisory Council.  After pulling the original draft of the rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) last year, Borzi and her team had said that a redraft would likely come in July.

Receiver imposes deadline for Ponzi scheme investors who profited

Receiver Kenneth Bell sent emails earlier this year to 16,000 investors who made money from the Lexington, N.C.-based online company ZeekRewards. He also posted a letter on the ZeekRewards receivership website, saying the investors, or net winners, had until May 31 to contact his office to negotiate a settlement or face possible legal action.

“It’s a deadline to contact us. That doesn’t mean we’re going to start suing people on Monday,” he said. “If somebody contacts us in the next week and says, ‘Will you still talk to me?’, we will of course talk to them. We probably will be a little firmer in our negotiations than we would have been if they had contacted us more timely. But we will still talk to folks who want to settle without litigation.”

The deadline is the latest development in one of the largest Ponzi schemes in U.S. history.  Authorities say ZeekRewards owner Paul Burks, 66, of Lexington, was the mastermind of the scam, which attracted 1 million investors, including nearly 50,000 in North Carolina.

FINRA fines Wells Fargo and Banc of America

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined two firms a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

OC resident sentenced to 8 years for Ponzi scheme

A 70-year-old Orange County man has been sentenced to eight years in federal prison for running a Ponzi scheme that bilked more than two dozen investors out of nearly $3 million.

The Orange County Register reports (http://bit.ly/10yzYWf) Timothy Melvin Murphy was also ordered Tuesday to pay $2.95 million in restitution.

Murphy pleaded guilty last year to one count of mail fraud.  Prosecutors say he ran the scheme through his Orange-based business, Capital Investors Inc. The government estimates Murphy’s 26 victims lost $2.95 million they invested over a decade.

Murphy used the money for personal expenses, including refurbishing and maintaining a classic car collection. He also paid for treatments at a weight-loss clinic.  Murphy retired as a colonel in the California Army National Guard in 2006.

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