November 30, 2010

Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman

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TV star Larry Hagman, best known for playing the roles of Texas oil tycoon JR Ewing on “Dallas” and Major Anthony Nelson on “I Dream of Jeannie,” recently won an $11.6 million securities fraud arbitration award against Citigroup. The Financial Industry Regulatory Authority says that the award is the largest that has been issued to an individual investor for 2010 and the ninth largest ever. Citi Global Markets is now seeking to dismiss the award.

The investment firm contends that the arbitration panel’s chairman did not disclose a possible conflict of interest. In its petition, Citi cites a FINRA rule obligating arbitrators to reveal such conflicts that could prevent them from issuing an impartial ruling. The financial firm claiming that because the arbitration panel head was once a plaintiff in a lawsuit that dealt with the same type of claims and subject matter, he had an undisclosed potential conflict. Hagman’s legal team have since responded with a memo arguing that the arbitrator’s lawsuit was not related to this complaint and did not involve a securities investment, the same parties, or the same facts.

Hagman and his wife Maj had accused Citigroup of securities fraud, breach of fiduciary duty, and other allegations. They claimed financial losses on bonds and stocks and a life insurance policy. In addition to the arbitration award, which consists of $1.1 million in compensatory damages and $10 million in punitive damages that will go to a charity of Hagman’s choice, Citigroup must also pay a 10% interest on the award.

Related Web Resources:
Messing With J.R., Take Four, NY Times, November 23, 2010

Actor Larry Hagman Wins $12 Million in Finra Case With Citigroup, Bloomberg, October 7, 2010

Citigroup's petition to dismiss award to Larry Hagman

Citigroup, Stockbroker Fraud Blog

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Posted In: Arbitration , Citigroup , FINRA , Financial Firms

November 29, 2010

Compliance with 1934 Securities Exchange Act Reporting Requirements During Annual Broker-Dealer Audits is Key, Say SEC Officials

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Securities and Exchange Commission Division of Trading and Markets Robert Cook and Chief Accountant James Kroeker are reminding auditors that it is important that they comply with specific 1934 Securities Exchange Act reporting requirements when performing annual broker-dealer audits. Earlier this month, the two SEC officials sent a letter to American Institute of Certified Public Accountants Stock Brokerage and Investment Banking Expert Panel Chair Stephen Zammitti.

Per Kroeker and Cook, under the 1934 Securities Exchange Act’s Rule 17a-5, broker-dealers must file yearly reports, supplemental reports, and supporting schedules. They also noted that Under Rule 15c3-1, a supporting schedule must include required and actual net capital and, when applicable, computation of the customer reserve requirement, as well as information about possession or control requirements.

The two SEC officials issued the reminder that brokerage firms have to submit an accountant’s report about the supporting schedule from a registered public accounting firm and that the yearly financial report audits must meet accepted auditing standards. Cook and Kroeker also said that even though the Dodd-Frank Act gave the Public Company Accounting Oversight Board the authority to put forth an auditing and attestation standard for broker dealers’ PCAOB-registered auditors, per recent SEC interpretive guideline auditors should keep adhering to AICPA standards until further rulemaking. The two SEC officials emphasized the need for accounting firms to review internal accounting records, the accounting system, and procedures for safeguarding securities and that, per Rule 17a-5, the audit and review’s scope must be enough to provide enough assurance that any “material inadequacies… would be disclosed.”

Related Web Resources:
View the Letter (PDF)

Read the SEC Guidance (PDF)

The 1934 Securities and Exchange Act


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Posted In: Miscellaneous , SEC Enforcement

November 26, 2010

Fiduciary Standard in Securities Industry Doesn't Need New Definition

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Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum says that there should be just one flexible, fiduciary standard for investment advisers and broker-dealers who offer personalized investment advice. Ketchum spoke at a conference earlier this month.

Ketchum noted that seeing as investment advisers and broker-dealers essentially work in the same business, it “doesn’t make sense” to act as if they work in different ones. He supports a flexible fiduciary standard that comes with a “few basic, simple rules.”

As to whether FINRA could play a part in supervising the imposition of a future fiduciary standard on broker-dealers, Ketchum said that if FINRA were to play this role it would do so with a discreet board that would include a minority of investment adviser professionals, as well as members of the public. While investment advisers currently have to comply with a fiduciary standard and are regulated under the 1940 Investment Advisers Act, broker-dealers must be in compliance with other standards, including an obligation to make sure that their recommendations to clients are “suitable” ones.

Securities and Exchange Commission Chairman Mary L. Schapiro has also shown a preference for a uniform fiduciary standard between the two groups. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until January 21, 2011 to turn in a report to the House Financial Services Committee about this matter. After completing its study, the SEC can write rules to establish a uniform standard of conduct for professionals who give retail clients personalized investment advice. However, the rule cannot be “less stringent” than current investment adviser standards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd had this to say about a fiduciary duty: “There is no need for disagreement over what kind of language should be use to define fiduciary duty in the securities industry. The term ‘fiduciary’ comes from the Latin word fides, which means faith, and fiducia, which means trust. English Common law, upon which our legal system was founded, long ago defined a fiduciary duty as a duty of loyalty and care, in which the fiduciary must put the interest of his client before that of himself. Courts all across our nation today recognize this same duty in a variety of relationships. The meaning of 'fiduciary duty' has been established for hundreds of years, so why would Wall Street need to have its own special definition? If it ain’t broke, why fix it?”

Related Web Resources:
Fiduciary Standard, More Adviser Oversight Likely -Finra Chief, The Wall Street Journal, November 16, 2010

Investment Advisers Act of 1940

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Posted In: FINRA , Legislation , Miscellaneous

November 23, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case

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As part of its growing investigation into possible inside trading in the $1.7 trillion hedge fund industry, the FBI has raided hedge funds Diamondback Capital Management LLC, Level Global Investors LP, and Loch Capital Management LLC, which has a close link to a witness who pleaded guilty in the insider trading probe involving hedge fund Galleon Group. (That investigation is one that prosecutors are calling the largest U.S. hedge fund insider trading case to date. Of the 23 people charged in civil or criminal court, 14 people, including ex- hedge fund S2 Capital LLC manager Steven Fortuna have pleaded guilty). Level Global Investors and Diamondback Capital Management are owned by ex-managers of Steven Cohen’s SAC Capital Advisors, which is also a hedge fund. Per public filings, Diamondback manages about $4.71 billion while Level Global manages about $3.09 billion.

The raids come just as federal prosecutors are getting ready to reveal a number of insider trading cases against hedge fund traders, Wall Street bankers, and consultants. In addition to trying to determine whether investment bankers and other parties let traders know about pharmaceutical company buyouts (companies have allegedly earned tens of millions of dollars in illegal profits because of secret information about mergers), officials are also looking at "expert network" firms that garner big fees from hedge funds for matching them with industry specialists.

Meantime, shares of Goldman Sachs Group Inc. dropped by 3.4% after The Wall Street Journal reported that the Justice Department is looking into possible leaks by Goldman employees about mergers.


Related Web Resources:
FBI raids 3 hedge funds in insider trading case, Reuters/Yahoo, November 22, 2010

Feds turn up heat on Wall St., raid 3 hedge funds, AP/Google, November 23, 2010

Continue reading "3 Hedge Funds Raided by FBI in Insider Trading Case" »

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Posted In: Hedge Funds , Insider Trading

November 22, 2010

Texas Securities Fraud: National Futures Association Takes Emergency Enforcement Action Against International Commodity Advisors and Its Principals

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The National Futures Association says it has taken an emergency enforcement action against International Commodity Advisors and its principals Gustave O. Woehr and Gregory W. Seitz. ICA, a Commodity Trading Advisor, has offices in Dallas, Texas and Marietta, Georgia.

NFA claims that ICA is soliciting or operating funds as a Commodity Pool Operator even though the CTA isn’t registered as a CPO. Because ICA and its principals have been unable to produce records, books, and other required information, NFA says that it is not able to identify the pool’s participants or determine the investments’ value or assets’ location.

The Associate Responsibility Action (ARA) and the Member Responsibility Action (MRA) prohibit ICA and its two principals from accepting or soliciting funds from customers, pools, or investors. The three parties are also not allowed to transfer or disburse the funds of pools, customers, or investors without the approval of the NFA. Also, ICA and its principals must either show that CPO registration is not required or register as one with the Commodity Futures Trading Commission and give NFA an approved disclosure document.

The ARA and MRA will stay in effect until ICA and its principals show to the NFA’s satisfaction that they are in full compliance with all NFA Requirements. NFA members that have accounts that are controlled by ICA, Woehr, Seitz, or any entity or person acting for any of them and who receive notice of the MRA and ARA are not allowed to transfer or disburse funds to ICA and the two principals or any entity controlled by any of them without NFA approval.

NFA takes emergency enforcement action against International Commodity Advisors and its principals, NFA, November 17, 2010

Commodity Pool Operator

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Posted In: Texas Securities Fraud

November 21, 2010

Non-Customers of Wachovia Cannot Bring Stock Loan Related Claim to FINRA, Says Court

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The U.S. District Court for the Northern District of California has ruled that a married couple and their investment vehicles are not Wachovia “customers” and, therefore, they are not entitled to bring their stock loan related claims against Wachovia Securities Financial Network LLC and financial adviser George Gordon III to Financial Industry Regulatory Authority arbitration. Judge Saundra Brown Armstrong granted Wachovia and Gordon’s request for a preliminary injunction.

Per the statement of claim submitted to FINRA, Gregory and Susan Raifman initiated arbitration as trustees of a family trust, as Gekko Holdings Inc. members, and as the beneficial owners and assignees in interest of Helicon Investments Ltd. The Raifmans accused Wachovia and Gordon of committing securities fraud, breach of fiduciary duties, and violations of the California Securities Act and the rules of both the New York Stock Exchange and National Association of Securities Dealers.

The Raifmans contended that Gekko and Helicon each went into three separate stock loan transactions that Derivium Capital LLC, a third party, had promoted so they could borrow up to 90% of their stock holdings’ value without triggering capital gain on the stock sale. After the three-year loan term ended, the Raifmans were to pay the loan balance and get back or surrender their collateral or renew their loan.

To execute their plan, the Raifmans opened a Wachovia account for the trust in 2003 and transferred nearly $3 million in ValueClick (VLCK) shares into an account owned by a Derivium affiliate. Almost 12 months later, Helicon placed 300,000 ValueClick shares into another Derivium affiliate’s Wachovia account under a 90 percent stock loan agreement. Gekko later deposited 200,000 ValueClick shares in the same account (and also under a 90 percent stock loan agreement).

It wasn’t until 2007 that the Raifmans found out that their Value Click shares had been sold as soon as they were placed in the Derivium affiliates’ accounts. They also had not known that the sales proceeds had been loaned back to them while Wachovia and Derivium kept 10 – 14% of the sales proceeds.

The Raifmans attempted to start the arbitration process in July but Gordon and Wachovia filed their complaint seeking enjoinment against the couple, Helicon, and Gekko. They also requested a stay of the arbitration proceedings. The financial firm and investment adviser contended that they did not have an agreement with the defendants, who were not their customers and therefore not entitled to FINRA arbitration. The district court agreed.

Related Web Resources:
Wachovia Securities LLC v. Raifman

Arbitration and Mediation, FINRA

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Posted In: FINRA , Financial Firms , Securities Fraud , Stock-Loan Fraud Scams , Wachovia

November 19, 2010

LPL Financial Management and Private Equity Backers TPG and Hellman & Friedman Could Make Over $450M from IPO

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Investors are jumping on LPL Financial Management's initial public offering debut. At midafternoon on Wednesday, shares were up 8% at $32 plus change. (This, compared this to the 6% increase in GM’s IPO.) According to CNN, the Boston-based brokerage service and private equity backers TPG and Helllman & Friedman may make than $450 million from the deal.

LPL provides research, technology, and financial services to 12,000 independent financial advisers in small and medium-sized shops. This allows them to provide services, including financial advice that is supposed to be free from conflict or bias, to retail investors. Seeing as there have been so many alleged incidents recently reported of bankers trying to earn fees by pressing clients to take part in certain deals, LPL says in its IPO prospectus that it make sense that today more investors are drawn to independent advisers. The brokerage service company also says that over the last decade, as rich individuals and brokers have started to question the benefits of dealing with the larger banks, its broker clientele as gone up at a 13% compound annual rate.

That said, the investment adviser system—whether involving independent advisers or those with ties to investment banks—is far from perfect. As Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd points out, “We have seen a number of complaints regarding LPL which seemed to stem from failure to supervise. Perhaps this is because LPL has so many advisor/agents in one or two person offices having somewhat detached contact with their supervisor(s). It was recently reported that LPL may have sought to hire another firm to handle its supervisory duties.”

LPL CEO Mark Casady and President COO Esther Stearns are expected to make millions from the IPO—almost $58 million for Casady and $35.1 million for Stearns. LPL executive William Dwyer could make $8.24 million, while the shares that General Counsel Stephanie Brown plans to sell could make her $3.77 million.

Related Web Resources:
LPL Financial IPO outpaces GM, CNN Money, November 18, 2010

LPL Executives Likely To Reap Millions In Public Offering, The Wall Street Journal, November 18, 2010

LPL Investment IPO Faces Struggle, The Street, November 15, 2010

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Posted In: Financial Firms , LPL Financial

November 17, 2010

Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case

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Federal officials say that Jean “Richard” Charbit has pleaded guilty to one count of conspiracy to commit securities fraud in connection with a South Florida stock scam involving the microcap market that was under investigation by an undercover FBI sting. Charbit is facing a maximum 5 years in prison.

He and defendant Tzemach David Netzer Korem are accused of trying to pay kickbacks to a stockbroker so they could use client accounts to buy shares from the defendants’ company. This made it look as if there was a demand for the instruments, which allowed the defendants to dump their holdings at inflated prices.

Charbit and Korem controlled or owned about 5.6 million shares of ZNext Mining Corp. (ZNXT). Charbit offered the “broker,” who was actually an FBI agent, $100,000 to misappropriate $300,000 from discretionary accounts to purchase common stock in ZNXT. Per the criminal complaint, the goal was to raise the individual common share price from 4 cents to 50 cents.

Eight other microcap stock promoters and market insiders have been charged with securities fraud related to this scheme. Some also are facing criminal charges. One of the persons charged in the microcap market fraud case is Larry Wilcox, the former star of the TV show “CHiPs.” As part of his plea agreement, he admitted to conspiring to defraud a pension plan of $40,000.

Related Web Resources:
SEC v. Jean R. Charbit and Tzemach David Netzer Korem, Civil Action No. 1:10-cv-23604-CMA (U.S. District Court for the Southern District of Florida), SEC.gov

Stock scammer pleads guilty, South Florida Business Journal, November 1, 2010

Institutional Investor Securities Blog

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Posted In: Microcap Market Fraud , Securities Fraud

November 16, 2010

Multimillion Texas Stock Sale Fraud Results in Multiple Indictments

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Federal court prosecutors have issued new information regarding the securities fraud allegations made against an ex-Tiki Island resident and nine of his accomplices. Harris Dempsey “Butch” Ballow faces charges related to a seven-year multimillion-dollar stock sale scam.

Ballow, 67, was indicted in 2003 for alleged money laundering and fraud. He pleaded guilty to the money laundering charge, agreed to cooperate with the US Securities and Exchange Commission, and was released on $100,000 bond. However, he didn’t show up for his sentencing hearing and left the country. An arrest warrant was issued in 2004.

As a fugitive, Barrow is accused of using numerous aliases, including the names Tom Brown, John Gel, Marty Twinley, and Melvyn John Gelsthorpe. He allegedly used these names to control the following publicly traded companies: Medra, E-SOL International, Aztec Technology Partners (known as Ultimate Lifestyles), and Deep Earth Resources. He was living in Puerto Aventuras, Mexico on 2008 but disappeared the following year after allegedly persuading an investor to transfer $5 million to one of his companies. Mexican federal police finally arrested him at his home in Puerto Vallarta last July.

Also charged with wire fraud are Ballow’s wife Robin Harless Ballow, ex-Houston residents Ruben Garza Perez and Kelly Lyn Boothe, Austin, Texas attorney Patrick Lanier, Jeffrey Janssen Anuth, and five others. According to authorities, the defendants allegedly sold stock shares in the companies that Ballow acquired and controlled while he was a fugitive. They also are accused of concealing Ballow’s real name when they sold the stock to investors, issuing false information to raise and maintain stocks’ value, and not taking away the restrictions that kept investors from selling the stock and land ownership interests in a real estate development that never became a reality.

Related Web Resources:
Harris Dempsey "Butch" Ballow and Nine Others Charged with Allegedly Executing Stock Fraud Scheme While Ballow was a Fugitive from Justice, FBI, November 2, 2010

Indictments detail multimillion stock sale fraud, Galveston Daily News, November 4, 2010

'Butch' Ballow: A Wanted Man Click 2 Houston, December 9, 2009

Institutional Investor Securities Blog

Texas Securities Fraud, Stockbroker Fraud Blog

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Posted In: Texas Securities Fraud

November 12, 2010

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation

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The Financial Industry Regulatory Authority says it is fining Goldman Sachs $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made.

The SEC had accused Tourre of being “principally responsible” for Abacus 2007-AC1, a synthetic collateralized debt obligation, and selling the bonds to investors, who ended up losing more than $1 billion while Goldman yielded profits and hedge fund manager John A. Paulson made money from bets he placed against specific mortgage bonds. The SEC contends that Goldman failed to notify investors that Paulson had taken a short position against Abacus 2007-AC1. This summer, Goldman settled for $550 million SEC charges that it misled investors about this CDO, just as the housing market was collapsing.

Regarding Goldman’s failure to disclose that the SEC was investigating two of its brokers, even though investment firms are required to file a Form U4 within 30 days of finding out that a representative has received a Wells notice about the probe, FINRA says that Tourre’s U4 wasn’t amended until May 3, 2010. This date is more than 7 months after Goldman learned about his Well Notice and after the SEC filed its complaint against the investment bank and Tourre. FINRA also says that Goldman’s “employee manual” for brokers does not even specifically mention Wells Notices or the need for disclosure after one is received.

By agreeing to settle with FINRA, Goldman is not admitting to or denying the charges.

Goldman Sachs to Pay $650,000 for Failing to Disclose Wells Notices, FINRA, November 9, 2010

Related Web Resources:
Goldman Fined $650,000 for Lack of Disclosure, New York Times, November 9, 2010

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million,
Stockbroker Fraud Blog, July 30, 2010

Goldman Sachs, Institutional Investor Securities Blog

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Posted In: Collateral Debt Obligation , FINRA , Financial Firms , Goldman Sachs , Goldman Sachs

November 10, 2010

Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million

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In a default judgment, The U.S. District Court for the Western District of Washington is mandating that investment adviser Enrique Villalba and affiliated entities pay investors over $20 million. The 47-year-old has been sentenced to almost 9 years in prison for defrauding clients of over $30 million.

Most of the funds that were taken from investors were lost in unauthorized, high risk investments in futures contracts. Villalba also used some of the funds to run Rico Latte coffee shops and purchase property. Among his victims was one woman who lost almost $12 million. Another man, former ER doctor David Ernst, lost his life savings. Tom Mulgrey, 56, lost $4 million.

Villalba has not been in touch with the plaintiffs of this securities fraud lawsuit since September 2009. His investment fraud victims are located in different US states. In their securities complaint, the plaintiffs are alleging claims under the Washington Securities Act and the 1934 Securities Exchange Act.

In granting the plaintiffs’ motion to obtain a default judgment, the court noted that per the two statutes, rescission is the way to calculate damages. In this case, the court deemed rescission appropriate because it “undoes the transactions” while returning the plaintiffs to their original state had they never invested their funds with the defendants.

Also, under the Washington Securities Act, the court determined that not only are the plaintiffs entitled to interest on the damages amount beginning the date of each deposit, but also they are entitled to recover lawyers’ fees and costs. The Washington Consumer Protection Act also entitles them to legal fees. Per the default judgment, the plaintiffs have been awarded $20,080,637.89, which includes the principal amount of $13,393,650.67, $6,669,053.22 in interest, and $17,934 in lawyers’ fees and costs.

Related Web Resources:
Court Orders Investment Manager To Pay Defrauded Clients Over $20 million, BNA/Alacrastore.com, November 5, 2010

Investment adviser caught in $30 million fraud sent to prison for almost 9 years, Cleveland.com, September 8, 2010

Read the Order

Securities Act of Washington

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Posted In: Investment Advisers , Securities Fraud

November 9, 2010

“Flash Crash” – Why is This So Hard to Understand?

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“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the 'third market.' Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”

Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.

The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.


Related Web Resources:
Flash crash' shows need for price discovery and safeguards, NYSE

CFTC And SEC Release "Flash Crash" Report, FuturesMag.com

Read the SEC and CFTC Report (PDF)

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Posted In: Miscellaneous , Securities Fraud

November 8, 2010

Texas Securities Fraud: M25 Investments Inc., M37 Investments LLC, and Two Individuals Must Pay $16.2M Over Alleged Forex and Ponzi Scams

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M37 Investments LLC, M25 Investments Inc., Jeffery Lyon, and Scott Kear Sr. have settled for $16.2 million Commodity Futures Trading Commission charges involving the alleged defrauding of over 200 individuals in a foreign currency scheme. Many of the investment fraud victims were senior investors. The Texas securities fraud agreement was reached between the parties in district court.

The CFTC contends that the defendants solicited about $8 million from approximately 213 individuals to trade off-exchange leveraged foreign currency,
commodity futures contracts, and forex options. The commission says that between December 2007 and September 2009, investors in Texas, West Virginia, Maryland, and Mississippi, and other states were solicited for the trades. Many of the seniors who were targeted were solicited through their churches.

The defendants are accused of guaranteeing investors renewal bonuses, if they reinvested, in addition to guaranteed interest payments on investments. The investors were also allegedly told that “profitable trading” would garner returns. Unfortunately, what ended up happening is that most of the investors’ funds didn’t go toward trading and what was traded resulted in substantial losses.

CFTC says that the few funds that M35 and M25 paid to investors was money that had come from other clients. Because of this, CFTC contends, the two firms ended up running Ponzi scams. The agency also is accusing the defendants of covering up the securities fraud with monthly statement accounts that gave clients the false impression that they were making the 2% monthly interest that they had been promised.

Jointly and severally the defendants will pay $7.404 million in restitution. The two companies will jointly and severally pay a fine of $7.1 million. Lyon’s fine is $375,00 and Kear will pay $1.4 million.

Related Web Resources:
Federal Court Orders More than $16.2 Million in Customer Restitution and Monetary Penalties against Texas Defendants Scott P. Kear, Sr., Jeffery L. Lyon and their Firms in CFTC Anti-Fraud Action, CFTC, October 27, 2010

Read the Complaint (PDF)

Texas Securities Fraud, Stockbroker Fraud Blog

Institutional Investor Securities Blog

Continue reading "Texas Securities Fraud: M25 Investments Inc., M37 Investments LLC, and Two Individuals Must Pay $16.2M Over Alleged Forex and Ponzi Scams" »

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Posted In: CFTC , Foreign Currency Scam , Ponzi Scams , Texas Securities Fraud

November 5, 2010

Investment Adviser Southridge Capital Management and Its Hedge Fund Manager Face SEC Securities Fraud Charges for Allegedly Overvaluing Portfolio Assets

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Along with Connecticut regulators, the Securities and Exchange Commission is charging Southridge Capital Management and its hedge fund investment manager Stephen M. Hicks with financial fraud. The two are accused of fraudulently overvaluing portfolio assets.

According to the SEC, Hicks fraudulently misstated the assets’ acquisition price when he overvalued the largest position that the funds held. Hicks also allegedly arranged a transaction involved the sale of a Southridge fund-acquired telecommunications company (when the company defaulted on a $769,000 note) to Fonix Corporation, which made the purchase in exchange for securities that were valued at $33 million in 2004.

The SEC claims that the asset sold and the securities obtained were not accurately valued, Fonix’s position was wrongfully valued at its acquisition cost, and since 2004 the funds have accrued or paid hundreds of thousands of dollars in management fees. The SEC also contends that Hicks fraudulently solicited clients to place their money in new funds and told them that most of their money would be placed in free trading shares that were unrestricted, near cash, or cash. However, by 2007 many of the investors were having a difficult time redeeming their money from what were significantly illiquid securities. The SEC is seeking disgorgement of profits, injunctive relief, financial penalties, and prejudgment interest.

Meantime, in Connecticut, Banking Commissioner Howard F. Pitkin is charging Southridge and Hicks with overvaluing assets that they managed and lying to investors. The state is accusing the investment firm of purposely using bogus financial statements to overvalue the assets of five funds so that clients could be charged larger fees. State regulators contend that the alleged securities misconduct allowed Hicks and Southridge to collect over $26 million in fees.


Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager with Fraud in Valuing Portfolio Assets, Making Misrepresentations to Investors, and Misuse of Investor Assets, SEC.gov, October 25, 2010

Southridge Capital Management Founder Charged With Fraud Though He May Not Know It Yet, Dealbreaker, October 25, 2010

Institutional Investor Securities Blog

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Posted In: SEC Enforcement

November 3, 2010

San Diego Officials Settle SEC Municipal Bond Charges for $80,000

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Four ex- San Diego officials will pay $80,000 in fines to resolve municipal bond charges by the US Securities and Exchange Commission for allegedly misleading investors. Never before has the SEC obtained financial penalties against a city’s officials for municipal securities fraud. By agreeing to settle, ex-San Diego City Manager Michael Uberuaga, ex-Deputy City Manager for Finance Patricia Frazier, ex-Auditor and Comptroller Edward Ryan, and ex-City Treasurer Mary Vattimo are not denying or admitting to the charges. There are still charges pending against San Diego’s ex-Assistant Auditor and Comptroller Teresa Webster.

The SEC filed its securities fraud charges against the former city officials in 2008. The officials are accused of knowing that the city of San Diego had purposely underfunded its pension obligations to increase benefits will deferring costs. The SEC also contends that the ex- officials understood that without cuts to city services, employee benefits, or new revenues, it would be difficult to fund future retirement obligations. Yet the former officials allegedly did not let investors know about the serious funding problems and made false and misleading statements in 2002 and 2003.

Regulators contend that when San Diego sold over $260 million in bonds, city officials did not disclose that the pension deficit was expected to hit $2 billion in 2009. According to Rosalind Tyson, the director of the SEC’s Los Angeles Regional Office, municipal officials are obligated to make sure that investors get accurate and full information about the financial condition of an issuer.


Related Web Resources:
Ex-San Diego Officials Agree to Pay Fines to End SEC Pension Fraud Case, Bloomberg, October 27, 2010

Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case, Asset International October 29, 2010

More Municipal Bond Blog Posts, Stockbrokerfraudblog.com

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Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Municipal Bonds , Municipal Securities Offerings , Securities Fraud

November 2, 2010

Texas Securities Fraud: Man Admits to $1.7 Million Investment Scam Involving Therapeutic Horseshoes

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Samuel Serritella, 66, has pleaded guilty to securities fraud. He reportedly received some $1.7 million from 300 investors.

Serritella has admitted that he convinced investors to purchase unregistered shares in International Surfacing Inc. the New Jersey-based company he was chairman, chief financial officer, and president of that was supposedly going to make therapeutic horseshoes to help horses get ready for the Olympics.

Serritella, who was not authorized to sell securities in the state, is accused of making the share sales between February 2004 and May 2006, placing investors’ funds into several bank accounts that were under his control, and using the money to pay for personal expenses (including travel, hotel bills, tavern expenses, and medical bills) and lend $84,000 to three friends.

While Serritella did use some of the money for startup expenses and payments to the company contracted to help make the horseshoes, prosecutors say he never actually purchased the equipment for manufacturing them. He had also charged Serritella with theft by deception, money laundering, misapplication of entrusted property, and misconduct by a corporate official,

As Texas Securities Fraud Lawyer William Shepherd, noted, “100 years ago it was legal in Texas to shoot a horse thief; but getting scammed into investing in “orthopedic shoes” for horses? The “buyer-beware” principle may apply.

Serritella will have to pay back his investor. If convicted, he could end up behind bars for up to a decade.

Related Web Resources:
NJ man admits $1.7M fraud involving horseshoes, Washington Post, October 25, 2010

Garfield man charged with bilking investors of $1.7M, NJ Newsroom, July 21, 2009


Continue reading "Texas Securities Fraud: Man Admits to $1.7 Million Investment Scam Involving Therapeutic Horseshoes" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Texas Securities Fraud

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