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Archive for the ‘SEC’ Category


SEC stops pyramid scheme targeting Asian and Latino communities

The Securities and Exchange Commission today announced charges and asset freezes against the operators of a worldwide pyramid scheme targeting Asian and Latino communities in the U.S. and abroad.  The SEC alleges that three entities collectively operating under the business names WCM and WCM777 are posing as multi-level marketing companies in the business of selling third-party cloud computing services, which can include website hosting, data storage, and software support.  The entities are based in California and Hong Kong and controlled by “Phil” Ming Xu, who is a resident of Temple City, California. 

According to the SEC’s complaint filed in federal court in Los Angeles, WCM and WCM777 have raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that the return on investment in the cloud services venture would be 100 percent or more in 100 days.  Investors were told they would receive “points” for making investments or enrolling other investors.  The points would be convertible into equity in initial public offerings of high-tech companies their money would help launch.  However, rather than building out cloud services or incubating high-tech companies, Xu and the WCM entities used investor funds to make Ponzi payments of purported investment returns to some investors.  They also spent investor money to purchase golf courses and other U.S.-based properties among other unauthorized expenditures. 

The court has granted the SEC’s request for an asset freeze and the appointment of a temporary receiver over the assets of WCM, WCM777, and several other entities named as relief defendants for the purpose of recovering money from the scheme in their possession. 

According to the SEC’s complaint, WCM and WCM777 sell their products exclusively to investors and have no other apparent sources of revenue.  Their offerings and operations depend almost entirely on the recruitment of new investors and purchases by existing investors to provide the money for returns.  On its website, WCM777 specifically addressed the question “Is WCM777 a Ponzi Game?” by writing, “In summary, we are not a Ponzi game company. We are creating a new business model.” 

The SEC alleges that Xu and his entities made various false claims to investors about purported partnerships with more than 700 major companies such as Siemens, Denny’s, and Goldman Sachs – in some instances falsely representing that they had permission to use their logos.  Meantime, besides buying two golf courses with investor money, Xu and his entities also purchased a warehouse, vacant land, and several single family homes  They also used investor funds to play the stock market and make other related investments through intermediary companies, such as an oil and gas offering.  They also sent investor money to a rough diamond jewel merchant in Hong Kong and another unrelated company affiliated with Xu.

The SEC’s complaint alleges that WCM, WCM777, and Xu 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 complaint further alleges that Xu violated Section 20(a) of the Exchange Act.  In addition to the asset freezes and appointment of a temporary receiver, the Honorable Christina A. Snyder also granted the SEC’s request for an order prohibiting the destruction of documents and requiring the defendants to provide accountings. A court hearing has been scheduled for April 10, 2014.

SEC issues alert on Investment Adviser due diligence of alternative investments

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today issued a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.  

The alert describes current industry trends and practices in advisers’ due diligence. Compared to observations from prior periods, the staff noted that advisers are:

  • Seeking more information and data directly from the managers of alternative investments
  • Using third parties to supplement and validate information provided by managers of alternative investments 
  • Performing additional quantitative analysis and risk assessment of alternative investments and their managers.

 Additionally, staff observed certain deficiencies in several of the advisory firms examined, including:

  • Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients
  • Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted
  • Having due diligence practices that differed from those described in the advisers’ disclosures to clients.

The alert can be found by clicking here.

Former broker ordered to pay $5.6 Million for insider trades

The Securities and Exchange Commission obtained a final judgment against a former registered representative who misappropriated material nonpublic information from his customer and used it to trade Burger King Holding, Inc.’s (“Burger King”) securities and tip others before the company’s September 2, 2010 announcement that it was being acquired by a New York private equity firm.

On January 7, 2014, the SEC obtained a final judgment against Waldyr Da Silva Prado Neto (“Prado”), a citizen of Brazil formerly employed by Wells Fargo Advisors, LLC in Miami. Prado learned about the impending acquisition from one of his customers who invested in a fund managed by the private equity firm that was used to acquire Burger King. Prado misused the confidential information to illegally trade in Burger King securities for $175,000 in illicit profits, and he tipped others living in Brazil and elsewhere.

The final judgment entered by the U.S. District Court for the Southern District of New York on the SEC’s motion for a default judgment, permanently enjoins Prado from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The judgment orders Prado to disgorge $397,110 in ill-gotten gains from the illegal Burger King trading plus prejudgment interest of $41,622. Prado is also ordered to pay $5,195,500 in penalties.

SEC Announces Fraud Charges Against Detroit-Based Money Market Fund Manager

The Securities and Exchange Commission today announced fraud charges against a Detroit-based investment advisory firm and a portfolio manager for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund’s portfolio. 

 Money market funds seek to maintain a stable share price by investing in highly safe securities.  Under the federal securities laws, a money market fund may only invest in securities determined by the fund’s board of trustees to present minimal credit risk.

 The SEC’s Enforcement Division alleges that Ambassador Capital Management and Derek Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio.  Trustees also were misled about the fund’s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund’s portfolio. 

 “Money market fund managers must not hide the ball from a fund’s board,” said George S. Canellos, co-director of the SEC’s Enforcement Division.  “Ambassador Capital Management and Oglesby weren’t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price.”

 The enforcement action stems from an ongoing analysis of money market fund data by the SEC’s Division of Investment Management, in this case a review of the gross yield of funds as a marker of risk.  The performance of the Ambassador Money Market Fund was identified as consistently different from the rest of the market.  Upon further examination by the SEC’s Office of Compliance Inspections and Examinations, the matter was referred to the Enforcement Division’s Asset Management Unit for investigation.

The Enforcement Division’s investigation found that Ambassador Capital Management and Oglesby misrepresented or withheld critical facts from the fund’s trustees:

  • The firm’s self-imposed holding period restrictions were frequently exceeded for securities in the fund’s portfolio.
  • The fund regularly purchased securities that had greater than minimal credit risk under the firm’s own guidelines.
  • Throughout the Eurozone credit crisis in 2011, the fund continually purchased securities issued by Italian-affiliated entities despite Oglesby’s claim that Ambassador Capital Management was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market.
  • The fund’s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees.

According to the SEC’s order instituting administrative proceedings, Ambassador Capital Management also caused the fund to deviate from the risk-limiting provisions of Rule 2a-7 under the Investment Company Act of 1940.  The firm also failed to conduct an appropriate stress test of the fund’s portfolio.  Since the Ambassador Money Market Fund failed to follow the risk-limiting provisions of Rule 2a-7, it was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $1 per share.  It also shouldn’t have been represented to investors as a money market fund.

SEC approves change to FINRA arbitrator appointment process

The SEC approved a FINRA rule proposal which simplifies the way investors select arbitrators in disputes with their brokerage firms.  Arbitrations, rather than court proceedings, are mandatory in disputes between investors and their brokers, who are regulated by FINRA — the Financial Industry Regulatory Authority. Clients and brokers have some options to chose the arbitrators from a pool of panelists with industry experience, or the general public.

Under the new rules, customers wouldn’t have to first decide whether they want an all-public panel, or one with public and industry arbitrators. Instead, the parties can directly choose from a list of public and non-public arbitrators without deciding first which methodology to use. Parties can select an all-public arbitration panel.  FINRA data show that investors fare better with all-public panels.

SEC charges former Oppenheimer private equity fund manager

The Securities and Exchange Commission today charged a former portfolio manager at Oppenheimer & Co. with misleading investors about the valuation and performance of a fund consisting of other private equity funds.
 
An SEC investigation found that Brian Williamson disseminated quarterly reports and marketing materials to prospective investors misstating that the valuation of the Oppenheimer fund’s holdings was based on values received from the portfolio managers of those underlying funds.  Williamson actually valued the fund’s largest investment at a significant markup to the manager’s estimated value.  He also sent marketing materials reporting an internal rate of return that failed to deduct fees and expenses.  As a result, the fund’s reported performance as measured by its internal rate of return – a key indicator of the fund’s performance – was significantly enhanced.
 
According to the SEC’s order instituting administrative proceedings against Williamson, he was an Oppenheimer employee from 2005 to 2011.  Williamson marketed Oppenheimer Global Resource Private Equity Fund I, L.P. to pensions, foundations, endowments, and high net worth individuals and families.  From September to October 2009, Williamson marketed the fund using materials that reported an internal rate of return that did not take into account any fees and expenses that the fund paid to underlying fund managers or the additional fees and expenses that the fund paid Oppenheimer.  Furthermore, Williamson modified the Oppenheimer fund’s marketing materials in October 2009 by increasing the reported value of the fund’s largest investment – Cartesian Investors-A LLC – from $6 million to approximately $9 million.  This increase was a significant markup to the underlying manager’s estimated value.  Nonetheless, the marketing materials falsely stated that underlying fund values were “based on the underlying manager’s estimated values.”
 
According to the SEC’s order, Williamson made or approved additional material misrepresentations that created the misleading impression that the Oppenheimer fund’s increased internal rate of return was due to increased performance or third party valuations.  In fact, it was Williamson’s revised valuation of Cartesian that resulted in a material increase in the Oppenheimer fund’s reported performance.  For example, for the quarter ended June 30, 2009, Williamson’s markup of the Cartesian investment increased the reported internal rate of return from approximately 3.8 percent to 38.3 percent.

Falcone and Harbinger Capital agree to SEC settlement

The Securities and Exchange Commission today announced that New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing.  Falcone also agreed to be barred from the securities industry for at least five years.

The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty.  The Harbinger entities are required to pay a $6.5 million penalty.  Falcone has consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years.  The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.

Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.

During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.

In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Flcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed.  Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.

Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

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.

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.

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