November 18, 2015

Securities Fraud Cases: Wedbush to Pay $813K Over Investment Fraud Allegations, SEC Files Pump-and-Dump Charges in Marley Coffee Case, and CFTC Accuses IB Capital of Soliciting $50M for Forex Trading While Unregistered

Wedbush to Pay Trusts, Family Members Over $813,000
A Financial Industry Regulatory Authority Panel says that Wedbush securities and investment advisor Kevin Thomas Scarpelli must jointly and severally pay several investors over $813,000 to resolve allegations of professional negligence and failure to supervise related to investments made in Natural Resources USA Corp. The respondents denied the allegations and asked that the claims be thrown own.

After considering the pleadings, evidence, and testimony, the panel decided that Wedbush and Scarpelli must pay claimants: Mary L. Riscornia TTEE nearly $263,000, Jennifer Tiscornia over $252,313, Nicolas E. Toussaint over $55,300, Nicolas E. Toussaint TTEE over $1800, Michael J. Nicolai over $18,4000, Michael Nicolai TTEE over $156,221, Jeffrey M. Nicolai over $22,154, Katherine M. Nicolai over $22,000 and Alexandria P. Nicolai over $22,000 in damages, interest, legal fees, and costs. The FINRA panel denied Scarpelli's request to have his record expunged of this securities case.

SEC Files Charges in $78M Pump-and-Dump Scam Involving Jammin’ Java Stock, Marley Trademark
The Securities and Exchange Commission is accusing ex-Jammin’ Java CEO Shane Whittle of masterminding a $78 million pump-and-dump scam involving the company’s shares. Jammin’ Java operates Marley Coffee, which uses the late reggae legend Bob Marley’s trademark to sell products.

According to the regulator, Whittle used a reverse merger to—in secret—get control of millions of Jammin’ Java shares, which he then spread to offshore entities under the control of Michael Sun, Wayne Weaver, and René Berlinger. The shares were dumped on the public after their price rose in the wake of bogus promotional campaigns. Whittle purportedly hid the scam by making misleading omissions and statements in reports submitted to the SEC.

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November 17, 2015

SEC Says Amish Investors Were Bilked in $3.9M Securities Fraud

The U.S. Securities and Exchange Commission is suing Earl D. Miller for securities fraud. According to the regulator, the Indiana man bilked investors, many of whom were Amish and new to investing, through private investment vehicles 5 Star Capital LLC and 5 Star Commercial LLC.

The SEC says Miller began recruiting investors last year. The private investment entities he created were supposed to invest in real estate property and green products with patents that one of the companies owned. However, claims the regulator, no patents were actually owned. Instead, contends the agency, the money went to companies that were supposedly developing other products, including energy-efficient washing machines and a pedal-run wheelchair. The bulk of these investments quickly failed. Most of the funds were invested in loans and were supposed to result in interest payments every month. However, such payments only were issued for five months and then they stopped completely.

Miller marketed his investment services in Amish newspapers and in Amish community meetings. He gave investors promissory notes for their money. The notes came with a fixed 8-12%/year return rate, which is a lot higher than the rates for other fixed-return investments, including bank deposits. He also purportedly said he was not paid any money for managing the fund even though he allegedly took $1M for his own spending. At least 70 investors were bilked.

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November 16, 2015

Southwest Securities Found Liable for $5.45M in Texas Investment Fraud

A Dallas jury says that Southwest Securities Inc., which is a broker-dealer owned by PlainsCapital subsidiary Hilltop Holdings, and broker Leighton Stallones are liable for statutory fraud, fraud, and conspiracy and violation of securities laws related to a 2007 real estate scam. Now, the firm must pay two investors, SSST Riviera Investments Ltd. and Gerritsen Beach Investments Ltd., more than $5.45M in the Texas securities case—$2.9M and $2.55M, respectively.

According to the two entities, Stallones assisted developer Stephen Jemal in concealing the scheme by lying about how his brokerage accounts were doing. Jemal is accused of modifying account records to make it seem as if he had millions of dollars when some of his accounts held under $1,000.

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November 14, 2015

SEC Headlines: Regulator Warns Investment Advisors About Outsourcing Compliance, Chairwoman White Talks About Private Placement Fundraising, Criticizes Bill Seeking to Place Limits on BDCs

The Securities and Exchange Commission is reminding advisory firms to stay aware of their own compliance functions. After about 20 examinations of advisers that utilized compliance firms, the regulator found that external compliance officers sometimes were not aware of a firm’s business access, did not communicate regularly with firm principals, nor did they have access to company documents.

Issuing a risk alert, the SEC said that whether a chief compliance officer is a direct employee of a registrant, a consultant, or a contractor, this employee should be given adequate information and authority to be able to do the job. The Commission said that it is the job of the registrant to put into place and execute a compliance program that works. It also warned that firms that do outsource their compliance function might be at risk of not comprehending their own possible shortcomings in this matter. The SEC said that outsourced CCOs should be careful about using “standardized checklists” to get information from advisory firms.

In other SEC news, Commission chairwoman Mary Jo White said that even though private placement issuers, private equity managers, and hedge funds are raising more funds from investors now more than before, the incidents of related fraud is not rising. Some people worried that when the 2012 Jumpstart Our Business Startups Act got rid of the ban on the general solicitation of certain kinds of private placements, there would be those that would use this as an opportunity to take advantage of less sophisticated investors. However, even with the new regulations, not that many private equity managers, hedge funds, and private placement issuers are taking advantage of the opportunity to advertise directly to investors.

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November 11, 2015

Oil Companies Expected to Default

Unpaid debt incurred by oil companies to pay for new drilling equipment and rigs could lead to a number of them defaulting. According to CNN, many of these companies had expected prices for oil to hit the $100 range when they incurred the debt and are now contending with oil prices of about $45 and no sign of the original expectation being met in the near future.

Unlike a year ago, when low interest rates and junk bond markets helped spur the energy boom in the United States and inexpensive credit let companies invest in new technologies for oil drilling, there has been a rise in credit costs. At’s recent Fixed Income Conference, DoubleLine Capital founder Jeffrey Gundlach said that while US production of oil has slowed, the inventories for domestic crude oil levels have stayed high.

In August, Moody’s Investors Services said that it expected more US oil companies to default because banks have become stricter about lending standards and contracts that had committed to higher crude prices for production in the future get set to expire. The credit rating agency said that the energy sector would be a main default driver in 2016.

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November 10, 2015

Securities Fraud Headlines: NBA’s Tim Duncan Sues Financial Adviser Again, JPMorgan Hackers Face Criminal Charges, and FINRA Warns Military Vets May Be Targeted by Their Own

Spurs Star Tim Duncan Says Ex-Financial Adviser Bilked Him of Millions
NBA star Tim Duncan is suing his former financial adviser again. The San Antonio Spurs player says that Charles Banks cost him millions of dollars because he persuaded him to invest $1.1 million in a cosmetics company. Banks purportedly told him that the company was profitable even though it was about to go bankrupt.

Duncan sued Banks in January in another Texas securities case accusing the latter of making unsuitable recommendations that cost him some $25 million. Banks gave financial advice to the NBA player for almost twenty years. Duncan claims that some of the recommendations made were in his former financial adviser’s best interests while detrimental to him.

JP Morgan Hackers are Indicted for Securities Fraud
US Attorney Preet Bharara says that Joshua Samuel Aaron, Gery Shalon, and Ziv Oreinstein committed “securities fraud on cyber steroids” when they stole customer data from JPMorgan (JPM) and hacked 11 other financial institutions. At least 83 million customers who trade significantly saw their personal information stolen.

Bharara said the men took a typical stock scam into cyberspace, utilizing the stolen private information to send out emails promoting penny stocks in massive pump and dump schemes. Investors would purchase stock, which would raise the price. The men would then cash out before the stock price fell.

They also allegedly conducted reverse mergers of private companies with public shell corporations under Shalon’s control. The defendants are accused of making over $100 million, using 75 shell companies, and 30 bogus passports from 17 nations to conceal their scheme. They were indicted and charged on numerous counts.

The authorities initially thought that Russian hackers were involved.

FINRA Cautions Military Vets to Watch Out for Fraud
On its website recently, the Financial Industry Regulatory Authority reminded military veterans that they can be targeted by investment scammers and in some instances the fraudster may be a fellow vet. This type of financial scheme, where the scammer exploits his/her financial ties to gain an investor's trust is known as affinity fraud. As FINRA Investor Education Foundation's Military Financial Readiness Program Director Bud Schneeweis warns, just because someone served with you doesn’t mean you shouldn’t check their credentials to make sure that the person has the professional experience, educational background, and proper registrations to serve as your broker or investment adviser.

That said, there are military vets who are legitimate financial advisers who are qualified to help other vets manage their money. Doing your due diligence can allow you to make sure you are picking someone who has your best interests at heart, knows how to handle your investments, and can help you meet your financial goals.

At Shepherd Smith Edwards and Kantas, LTD LLP, we help investors in pursuing claims against negligent brokers, investment advisers, and financial firms. We would like to offer you a free case consultation. Contact us today.

Tim Duncan says ex-financial adviser cost him millions, USA Today, November 9, 2015

Trio Indicted in Massive JPMorgan Hack, eWeek, November 10, 2015

November 9, 2015

Investors May Have Lost Up to 88% in Goldman Sachs BRIC Fund

Goldman Sachs Group Inc. (GS) is folding its BRIC fund and merging it with a broader emerging market fund. The BRIC fund, which invests in Russia, China, Brazil, and India, has been losing money. In its filing to the SEC, the bank said that it doesn’t see the nine-year-old product experiencing “significant asset growth." Unfortunately for some investors of the BRIC fund, depending on when you invested, you may have lost up to 88%.

The acronym for the fund comes from the names of the countries in which it invested. Goldman’s BRIC fund allowed investors to bet on growth in Brazil, Russia, India, and China. It was Goldman Sachs Chief Economist Jim O’Neill who invented the name, selecting the nations for their potential for growth and their importance to the economy some 14 years ago.

Following an investment boom, these large emerging markets are now starting to falter, as have investors’ previous gains. China is expected to experience its weakest expansion in 25 years and Brazil and Russia are going into recessions. While India has experienced growth, the nation’s prime minister is finding it challenging to put reforms into place.

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November 7, 2015

Securities Headlines: FINRA Seeking to Fine MetLife Over Variable Annuity Sales, SEC Accuses Scottish Trader of Sending Fake Tweets, Market Rigging, and Judge Orders Man to Stop Crowdfunding Fraud

FINRA Plans to Fine MetLife for Purported Variable Annuities Violations
The Financial Industry Regulatory Authority is looking to impose a significant fine against MetLife’s broker-dealer unit related to possible violations involving variable annuities. The company is cooperating with the regulator’s probe, which is looking at alleged suitability, misrepresentation, and supervision issues related to the selling and replacements of variable annuities.

According to MetLife’s quarterly regulatory filing, FINRA told the insurance giant that it plans to recommend disciplinary action. InvestmentNews reports that in an e-mailed statement, MetLife spokesperson John Calagna said that the company did not agree with the conclusions reached by the regulator and plans to defend itself.

SEC Charges Scottish Trader with Over Market Rigging Involving False Tweets
The Securities and Exchange Commission has filed securities fraud charges against James Alan Craig of Scotland for allegedly filing false tweets that caused sharp declines in the stock prices of two companies, even causing one of them to experience a trading halt. The regulator said that Craig sent out false statements via Twitter on accounts that he deceptively set up to make them look like legitimate Twitter accounts of known securities research firms.

According to the SEC’s complaint, Craig’s first bogus tweets caused the share price of one company to drop 28% until Nasdaq temporarily stopped trading. The next day, he sent out false tweets about another company that led to a 16% drop in the share prices of that company. Both days he purchased and sold shares of the companies he targeted to try to profit from the sharp price changes. He was mostly successful in his efforts.

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November 5, 2015

JPMorgan Ordered to Pay Family Trust Over $1M Related To Purported Violations Involving Short Trading, Leveraged ETFs and Ex-Firm Adviser Must Pay $22M for Fraud

A Financial Industry Regulatory Authority panel has awarded The Elliot Family Trust DTD, Eugene Elliot, Genraza LLC, and Shawn Elliot Over $1M in their securities arbitration case against J.P. Morgan Securities (JPM).

The claimants are contending fraud, breach of fiduciary duty, misrepresentation and omissions, failure to control and supervise, and violations of federal and state securities laws related to the alleged short trading of US Treasury securities and the unsuitable purchase and allocation of securities, including leveraged exchange-traded funds and unspecified options. They had initially sought compensatory damages no lower than $1.75M, rescission of the purportedly unsuitable investments, punitive damages, legal fees, and other costs. Meantime, the financial firm sought to have their case dismissed.

Following the pleadings, the FINRA arbitration panel decided that the respondent is liable for and must pay claimants over $1.145M in compensatory damages, interest on that amount, and over $43,000 in other fees.

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November 4, 2015

Securities Cases: More Brokers Identified by SEC in Stock Rigging Case, Former Ameriprise Broker Gets Prison Term for Fraud, and Boeing Settles 401K Case for Almost $57M

SEC Names More Brokers in Penny Stock Rigging Case Filed Last Year
The Securities and Exchange Commission is charging three more people related to a $300M penny stock rigging case that it filed last year. In federal court, the regulator sought to lift the stay in its civil case to submit an amended lawsuit and now also name brokers Ronald Heineman and Michael Morris, as well as lawyer Darren Ofsink.

The SEC says that Morris and Heineman executed the scam through their brokerage firm awhile Ofsink made money illegally by selling unregistered shares even though no exemption for registration was valid. Meantime, the U.S. Attorney’s Office in New York is fling criminal charges against Ofsink ad Morris.

Per the amended SEC complaint, in 2013 Abraxas Discala, Marc Exler, and brokers Craig Josephburg and Matthew Bell were involved in a scam to raise the price of CodeSmart Holdings stock. The men intended to make money at the expense of Josephberg’s customers and Bell’s clients. Heineman and Morris, who own Halcyon Cabot Partners—the firm where Josephberg was employed—allegedly were involved in the securities scam. The two men are accused of secretly consenting to buy shares of CodeSmart at pre-set prices so that Discala could liquidate his positions at prices that were artificially raised. Meantime, Ofsink, who played a part in the execution of the company’s reverse merger into a public shell company, made money by illegally selling securities of CodeSmart that were not registered.

Trading in CodeSmart has been suspended because the company hasn’t submitted periodic reports since late 2014 and due to purportedly suspect market activity.

Former Ameriprise Adviser Gets Prison Term for Defrauding Clients of Over $1M
Former Ameriprise (AMP) adviser Susan Elizabeth Walker wills serve more than seven years behind bars for defrauding at least 24 retirement accounts of over $1.1M. Walker was convicted of tax evasion and mail fraud. She pled guilty last year to the criminal accounts.

Walker offered financial planning services through the firm from October 2008 through March 2013. She also was registered with the Financial Industry Regulatory Authority and was a securities agent under the Minnesota Department of Commerce.

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November 2, 2015

FINRA Cautions Against Binary Options and Their Risk of Fraud

The Financial Industry Regulatory Authority has issued a warning about the risks involved with binary options trading. The alert comes in the wake of numerous calls the regulator has received through its Securities Helpline for Seniors – HELPS™. According to callers, there are business entities claiming to be binary options trading firms that are failing to deposit investors’ funds into their accounts, refusing to give investors back their money, or demanding a payment fee to make such a refund. One fraudster even purportedly pretended to be a regulator organization and demanded that investor pay money for taking part in an allegedly illegal binary options trading.

FINRA wants investors to be especially careful of non-US companies that offer binary options trading platforms, especially trading applications with names implying easy wealth, as well as demo accounts that give users a chance to try binary potions tradings without risking assets.

The self-regulatory organization said that these types of accounts may act as bait to get investors to ultimately fund a “real” account. Exposure to such accounts may also expose people to identity theft as they hand over personal information and other details.

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October 31, 2015

SEC Probes Advisers With Access to Client Retirement Accounts, Approves Crowdfunding Rules Connecting Investors with Small Businesses

According to InvestmentNews, the Securities and Exchange Commission is looking at instances in which advisers have access to their clients’ financial accounts that they don’t manage. The SEC wants to make sure that these advisors are unable to take distributions from these accounts if they don’t have custody over them.

The SEC has been taking a closer look at custody since the Bernard Madoff Ponzi scam that bilked investors billions of dollars. Madoff was in control of most of his clients’ money.

In 2013, the regulator, seeking to stave off the next big investor scheme, noted that red flags were raised for 140 firms that were examined in 2012 because of they way they had access to or held the assets of clients. “Significant deficiencies" were found.

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