July 30, 2014

SEC News: Ex-Harbinger COO Settles Hedge Fund Fraud Case and Regulator Files More Charges in “Solar Farm” Scam and Football-Like Boiler Room Case

Ex- Harbinger Capital Partners LLC COO Admits Wrongdoing in Hedge Fund Case
Peter A. Jenson, the former chief operating officer at Harbinger Capital Partners LLC, has agreed to pay $200,000 and admit to wrongdoing in the U.S. Securities and Exchange Commission’s case accusing him of assisting in hedge fund fraud. The scam involved his former firm and its owner Philip A. Falcone and sought to misappropriate millions of dollars so Falcone could pay his taxes.

The SEC charged Jenson, Falcone, and Harbinger in 2012. As part of his settlement, Jenson is acknowledging that he knew about the violations committed by Harbinger and Falcone. He said that he helped Falcone take part in a related party loan by failing to make sure the lender, Harbinger Capital Partners Special Situations Fund, had its own counsel, the loan was consistent with the fiduciary duties that Falcone owed the Special Situations Fund, and that Falcone paid an interest rate on the loan that was “above market.”

Jenson also admitted that he failed to tell investors about the loan in a timely manner and acted so as to compel the lender to hurry Falcon’s loan payment once investors in the Special Situations Fund were allowed to redeem their investments.

SEC Files More Charges in Penny Stock Scam Involving Solar Farms
The SEC is filing securities fraud charges against MSGI Technology Solutions and its CEO J. Jeremy Barbera. The regulator claims that they bilked investors by promoting a joint venture involving solar energy farms on land that purportedly belonged to an electricity provider run by Christopher Plummer. The agency previously charged Plummer and another penny stock company and CEO with putting out misleading press releases.

Now, the regulator is contending that Barbera also conspired with Plummer. The two of them are accused of falsely portraying in press releases that MSGI was a successful renewable energy company involved in solar energy projects that were about to become profitable. In fact, the penny stock company has no customers, operations, or revenue. Also, Plummer’s company didn’t have the financing or assets required to generate solar energy farms.

Barbera and MSGI are settling the SEC charges, which includes Barbera paying a $100,000 penalty. He also has consenting to a permanent bar from either acting as a director or an officer of a public company or taking part in a penny stock scheme again.

SEC Files More Charges in Boiler Room Scam That Touted Super Bowl Connection
The SEC has filed charges against four executives and their three companies, CalPacific Equity Group, DBBG Consulting, and DDBO Consulting, for their involvement in a boiler room scam that promoted a company that had new technology that was supposedly going to be used during Super Bowl 2013.

Senior investors and others were pressed into buying stock in Thought Development Inc., which purportedly developed a laser-line system that could create a line on a football field for a first-down marker that would be visible not only on TV but also by officials, players, and live fans. There was no such deal with the Super Bowl.

The scam raised about $1.7 million from over 110 investors who were led to believe that an IPO was about to happen and that their funds would go toward developing the technology. The SEC says that instead, at least half of offering proceeds were paid as commissions and fees to sales agents or kept by these companies.

The defendants have consented to settle the SEC charges. Meantime, two of the people previously charged in the scam, Dean Baker and Daniel Dritsas, have entered into plea deals in criminal cases related to the allegations.

The proposed final judgment in the Harbinger case (PDF)

Read Jenson's Consent (PDF)

The SEC's Complaint in the "Solar Farm" Penny Stock Case (PDF)

SEC Announces Additional Charges in Football-Related Boiler Room Scheme, SEC, July 24, 2014


More Blog Posts:
Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS, Stockbroker Fraud Blog, July 28, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud blog, July 23, 2014

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays
, Institutional Investor Securities Blog, July 30, 2014

June 23, 2014

SEC Chairman Mary Jo White Wants Reforms Made to Bond Market

U.S. Securities and Exchange Commission Chairman Mary Jo White wants significant reforms made to the bond market. Speaking at the Economic Club of New York, White spoke about how trading in these fixed income markets are “highly decentralized.”
She expressed concern that technology was being used in these markets to make this decentralized approach to trading more beneficial for market intermediaries.

According to Reuters, White’s speech is a sign that the SEC is at last making an effort to implement recommendations it made in 2012 about the $3.7 million municipal securities market. The regulator is launching an initiative that would mandate that alternative trading systems and other electronic dealer networks make available to the public their best prices for municipal bonds and corporate bonds. This should give smaller retail investors, and not just certain select parties, pre-trading price data.

White also expressed support for a Municipal Securities Rulemaking Board-drafted measure that would mandate that municipal bond dealers abide by best execution rules. These regulations demand that broker-dealers execute orders for customers at the best price and in the shortest amount of time. The Financial Industry Regulatory Authority and MSRB would handle guidance for how to make best execution happen.

The SEC Chairman also said she supports rules that FINRA and MSRB are completing that would compel dealers to reveal more details about the compensation they receive for “riskless principal transactions.” This type of trade happens when dealers buy securities from customers and sell them right away to other dealers. Customers end up paying a mark-up for the trades that dealers don’t have to tell them is included.

The municipal bond market is currently very fragmented. There is no centralized exchange while there are tens of thousands of issuers.

At Shepherd Smith Edwards and Kantas, LTD LLP, our bond market fraud lawyers help investors to recoup their losses. Please contact our securities law firm today and ask for your free case consultation.

Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise, Bloomberg, June 23, 2014

SEC's White calls for reforms in fixed income markets
, Reuters, June 20, 2014

Mary Jo White of S.E.C. Seeks to Make More Bond Market Data Available, New York Times, June 20, 2014

June 10, 2014

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions

The SEC has submitted an order against Dennis J. Malouf accusing him of investment adviser fraud. The regulator says that he allegedly took trading commissions that he wasn’t entitled to for himself. He was in charge of UASNM’s bond trading operation between 2008 and May 2011. Malouf, who was the CEO of UASNM Inc. is now with M Wealth Management.

According to the Commission, he set up a secret verbal deal with someone at a broker-dealer branch to send him the commissions generated by the broker for bond trades that this person did with Malouf’s firm. The regulator claims that rather than look for the best way to make the bond trades happen, UASNM worked only with the broker-dealer. Over the approximately three-year period, the investment advisory firm made over 200 bond trades through the unnamed branch. This was about $30 million to $40 million in trades every year, for which Malouf obtained about $1.1M in commissions.

In 2011, UASNM fired Malouf, who was a majority owner,because of misconduct allegations. He then sued for wrongful termination and that is when the firm’s attorneys discovered the purported commission deal.

Meantime, the regulator has censured UASNM, which settled for $100,000. It is also paying over $500,000 to over clients who were affected by the additional markups because the investment advisory firm did not look for the best bond prices.

Please contact our investment advisor fraud lawyers today. We help investors get their money back.

SEC files cease-and-desist order against adviser accused of stealing $1.1 million, InvestmentNews, June 10, 2014

UASNM Inc. settles with SEC over alleged commission scheme, BizJournals, June 10, 2014

Read the SEC Order (PDF)


More Blog Posts:
State Senator Reprimanded For Violating the Texas Securities Act, Stockbroker Fraud Blog, May 8, 2014

SEC Charges Total Wealth Management With Securities Fraud, Receiving Undisclosed Kickbacks, Stockbroker Fraud Blog, April 18, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud
, Institutional Investor Securities Blog, June 4, 2014

June 6, 2014

SEC To Tackle High-Speed Trading, Dark Pools With New Initiatives

U.S. Securities and Exchange Commission Chairman Mary Jo White said that the regulator is working on new rules that would target dark pools, high-speed traders, order-routing practices, and trading venues that don’t offer much transparency. Her proposed regulations mark the first time she has spoken about her plans to overhaul equity market structure rules since becoming head of the SEC last year.

Included in White’s proposals are an "anti-disruptive trading" regulation to curb high-frequency traders from making aggressive short-term trades when the market is vulnerable, as well as a strategy to make proprietary trading shops register with the regulators and share their books for inspection. The SEC chairman also said that her team is working on enhancing the way trading firms handle the risks involved with computer algorithms.

To improve oversight over high-speed traders, White wants to shut a loophole that lets trading firms get out of registering with the Financial Industry Regulatory Authority if they trade off traditional exchanges. Also, while noting that it wasn’t the job of the SEC to forbid algorithmic trading, White said that the Commission is trying to determine if there is anything about a computer-driven trading environment that works against the best interests of investors.

She also spoke about the development of a proposed rule that would make dark pools, brokerage internalizers, and other alternative trading venues disclose more about they way that they are run, as well as another proposal that would require brokers to reveal more about how they handle orders for big institutional investors. The latter would potentially decrease conflicts.

White said that the new measures would ideally create greater market fairness and stability, improve transparency and disclosures in the market place, and create markets that are more effective for smaller companies. Requiring greater transparency should hopefully even up the market for institutional investors and retail ones. Currently, retail brokers must report on their order routing practices while institutional investors’ flow patterns tend to be more opaque.

The agency has been assessing equity market structure reforms for the last few years, especially in the wake of the 2010 flash crash when the Dow Jones Industrial Average dropped 700 points before rebounding abruptly. Although high-speed trading tactics weren’t directly blamed for that event, much discourse about this type of trading has occurred since. In particular, the Regulation National Market System (REG NMS) was blamed for excessively fragmenting the market to such a degree high-speed trading occurred.

Meantime, some dark pools appear to be opting for greater transparency on their own. These private, lightly regulated venues are where sellers and buyers can trade under more anonymity than on stock exchanges. Along with internalizers, which are firms that make trades for retail brokerages, dark pools make up close to 40% of stock trading.

While critics of dark pools have said this type of off-exchange trading damages the market’s ability to price securities accurately because sell and buy orders aren’t published, their supporters have said that they give large institutional investors a chance to trade without altering the price as much as if their orders were shown on an exchange.

On Monday, Credit Suisse Group AG (CS) and Goldman Sachs Group Inc. (GS), which are two of the biggest opaque trading venue operators, made available documents that explain the way their venues work. Their disclosures arrived the same day that FINRA made available to the public data about the volume of share trades that are made on dark pools.

SEC Chairman Targets Dark Pools, High-Speed Trading, The Wall Street Journal, June 6, 2014

Finra makes dark pool data available for free, Credit Suisse leads in first week, FierceFinanceIT, June 3, 2014

FINRA Makes Dark Pool Data Available Free to the Investing Public,
FINRA, June 2, 2014


More Blog Posts:
SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud, Institutional Investor Securities Blog, June 4, 2014

Second Circuit Overturns Judge's Decision to Block Citigroup's $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014

May 27, 2014

SEC Files Charges in Penny Stock Scams

The U.S. Securities and Exchange Commission has filed charges in a number of penny stock scams involving microcap companies, promoters, and officers. As of March 22, the regulator had charged 25 companies and 48 individuals in probes that originated out of its regional office in Miami. The agency has been working with the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida to expose the financial fraud. Many of those charged by the SEC are also contending with criminal charges.

Two of those facing SEC charges are stock promoters Stephen C. Bauer and Kevin McKnight of Boca Raton. They are accused of market manipulation fraud involving Environmental Infrastructure Holdings Corp.’s (EIHC) penny stock. According to the regulator, they made it seem as if there was market interest EIHC to get investors to buy the stock, which artificially raised trading volume and price.

Also named in an SEC complaint is Richard A. Altmare from Boca Raton for market manipulation involving Sunset Brands Inc. (SSBN) stock. In an unrelated penny stock case, the SEC is charging Jeffrey M. Berkowitz, who is from Jupiter, Florida with participating in a market manipulation scheme, this one over Face Up Entertainment Group (FUEG) stock.

Another man accused of market manipulation-related charges is New Yorker Eric S. Brown. The claims against him involve DAM Holdings Inc. (DAMH) and International Development & Environmental Holdings Corp. (IDEH) stock. Meantime, the SEC is accusing Urban AG Corp. (AQUM), a Massachusetts-based company, and its CEO and President, Billy V. Ray Jr. of Cumming, Ga., of scheming to make an undisclosed kickback payment to a hedge fund manger in return for the fund’s purchase of restricted shares in the company’s stock. Ray also is accused of taking part in another kickback scheme in which he made an inducement payment to stock promoter Wade Clark. The SEC says that Clark took part in an insider trading scam involving Ray.

Penny Stock Scams
Penny stock scams typically involve attempts to inflate share prices to make it seem as if the market demand for a stock is great. Once interest is generated and stock demand and the price goes up, scammers will dump their shares at the inflated price, which is also known as “pump and dump.” While penny stocks legitimately do have high potential for growth and profit, they have become a favorite for scammers.

Many fraudsters have started to promote their scheme via “pitch” spam emails. According to a report recently issued by security company Trustwave, spam messages promoting penny stocks made up 16% of unwanted email. That’s a significant rise from comprising less than 1% of unwanted email in 2012. Promoters send out emails promoting a stock as an amazing deal that is expected to garner astronomical profits and encourage people to buy in as soon as possible.

Shepherd Smith Edwards Kantas, LTD LLP is a securities law firm. We represent investors who have suffered losses where financial fraud was involved.

Huge surge in spam emails pitching penny stocks, Marketwatch, May 27, 2014

SEC Announces Latest Charges in Joint Law Enforcement Effort Uncovering Penny Stock Schemes, SEC, May 22, 2014


More Blog Posts:
SEC Investigates Merrill Lynch & Charles Schwab Over Allegations of Failures that Allowed Mexican Drug Cartels to Launder Money, Stockbroker Fraud Blog, May 22, 2014

SEC Judge Bans Money Manager For Misleading Morningstar and the Public, Institutional Investor Securities Blog, May 27, 2014

SEC Warns About Investment Scams Involving Marijuana, Stockbroker Fraud Blog, May 24, 2014

May 24, 2014

SEC Warns About Investment Scams Involving Marijuana

The U.S. Securities and Exchange Commission has put out a an investor alert warning about possible fraud involving microcap companies claiming they are involved in the marijuana industry. Scammers are using the latest growth in the pot industry to get investors to fork over their money in exchange for supposed high returns.

Already, the SEC has suspended five companies for allegedly committing this fraud, including Fusion Pharm Inc., which claims to make a professional cultivation system for cannabis cultivators to use. The Denver-based company was suspended because, according to the regulator, there are doubts about the accuracy of statements it made about assets, financial statements, revenues, financial condition, and business transactions. Other companies in which trading was suspended include: Cannabusiness Group Inc., GrowLife Inc., Petrotech Oil and Gas, and Advanced Cannabis Solutions Inc. Two of the companies were also suspended because of possibly illegal activity, including market manipulation and unlawful securities sales.

According to federal securities laws, the Commission can suspended trading in a stock for 10 days and prohibit a brokerage firm from soliciting investors to sell or buy the stuck until reporting requirements are fulfilled. Unfortunately, it is not uncommon for fraudsters to exploit the latest product, innovation, growth industry, or technology. Marijuana-related companies are typically not required to report to the SEC, which means investors usually have limited access to the kind of information they can get about management, products, services, and finances. This can make it easier for scammers to spread bogus information about a company, allowing them to profit.

Marijuana-Related Investments
According to an SEC alert, marijuana-related investments can be sold in unregistered offerings and may take various forms, such as penny stocks and microcap stocks. Microcap stocks are issued by the smallest companies and their stock price is usually low. Penny stocks are stocks with the lowest prices.

The Commission wants investors to know that if they are thinking about investing in a company that is involved in the marijuana industry, the company could be at risk of prosecution. Federal law currently makes it illegal to dispense, make, or distribute marijuana, and a lot of states have similar laws. However, 20 states and D.C. have made certain marijuana-related activity illegal.

The Financial Industry Regulatory issued its own alert about marijuana stock scams earlier this year. The self-regulatory organization said signs of a possible fraud involving a marijuana-related company might include: Text, email, or fax invites to webinars, tweets, and infomercials. Marijuana investment fraudsters typically promising big returns, while falsely touting a past history of success, to create a huge demand for a stock. Then, in pump and dump fashion, once their share prices and volumes hit their highest levels, scammers sell their shares and make a profit.

Please contact our securities fraud lawyers if you think your investment losses may be a result of investment fraud.

Investor Alert: Marijuana-Related Investments, Investor Alert, May 16, 2014

Read the SEC Trading Suspension Order Against Fusion Pharm (PDF)

Investor Alert: Marijuana Stock Scams


More Blog Posts:
Insider Trading Headlines: Principal of Wynnefield Capital Now On Trial, Ex-Vitamin Company Board Member Settles His Case, and Clinical Drug Trial Doctors Face Charges Related to New Cancer Drug, Stockbroker Fraud Blog, May 23, 2014

SEC Focuses More Attention On Accounting Fraud, Variable Annuities, & Market-Maker Risk, Stockbroker Fraud Blog, June 26, 2013

R.P. Martin To Pay $2.2M in Libor Rigging, Institutional Investor Securities Blog, May 22, 2014

May 23, 2014

Insider Trading Headlines: Principal of Wynnefield Capital Now On Trial, Ex-Vitamin Company Board Member Settles His Case, and Clinical Drug Trial Doctors Face Charges Related to New Cancer Drug

Wynnefield Capital Inc. Principal On Trial in SEC Insider Trading Case
Nelson Obus, the principal of Wynnefield Capital Inc., is accused of engaging in insider trading to make his hedge fund $1.3 million. The U.S. Securities and Exchange Commission says that he confessed twice that he received a tip that SunSource Inc. was going to be put up for sale. One of the confessions was purportedly to the CEO of SunSource.

In 2001, SunSource announced it was going to be bought by Allied Capital Corp. It’s stock price then doubled. Obus, who had purchased stock in the company, made $1.3 million.

The regulator is also suing ex-GE capital undewriter Brad Strickland and Peter Black, an ex-analyst for Winnyefield. The agency believes Strickland gave Black the tip. The latter then sent the information to Obus. They’ve denied any wrongdoing.

The insider trading case, which the SEC brought in 2006, was initially thrown out by US District Judge George Daniels. A federal appeals court revived the securities case in 2012. Now, Judge Daniels is once again presiding over the case.

The Commission wants to ban the defendants from working as public company directors and officers. It is also seeking penalties.


Ex-NBTY Inc. Board Member and Relatives Settles Insider Trading Charges for Over $500,000
Glenn Cohen, a board member of vitamin company NBTY Inc., has settled SEC charges accusing him of insider trading along with other family members. According to the Commission, Cohen gave his three brothers, Craig Cohen, Steven Cohen, and Marc Cohen, and Laurie Topal the confidential data that NBTY Inc. was working on the terms of its sale by The Carlyle Group. They made illicit profits of $175,000 and are settling for over $500,000.

Aside from the financial penalties, Glenn Cohen is barred from taking on the role of director or officer in a public company. By settling, the Cohens and Topal are not denying or admitting to the SEC charges.


Clinical Trial Doctors Involved In Testing of New Cancer Drug Are Accused of Insider Trading
Dr. Franklin M. Chu and Dr. Daniel J. Lam are now facing insider trading charges accusing them of illegally trading on the knowledge that the Food and Drug Administration had stopped clinical trials of Capesaris, the prostate cancer drug that GTx Inc. was developing. The SEC believes that when the share price dropped by more than 36%, doctors avoided substantial losses because they'd sold their stocks in GTx.

Lam and Chu have agreed to settle the SEC charges, which also accuse them of making over $45,000 in illicit profits. They will collectively pay $116,864.


SEC Charges Two Clinical Drug Trial Doctors With Insider Trading, SEC.gov, May 19, 2014

Read the SEC Complaint Against the Cohens and Topal (PDF)

Wynnefield’s Obus Traded on Inside Tip, SEC Says in Trial, Bloomberg/Businessweek, May 20, 2014


More Blog Posts:
Insider Trading Roundup: Lawson Software Founders Pay $5.8M to Settle SEC Allegations, Three Sales Managers Face SEC Charges, and Kentucky Mayor Will Turn Over Illicit Profits, Stockbroker Fraud Blog, May 16, 2014

Former Morgan Stanley Broker and Two Others Allegedly Ran $5.6M Insider Trading Scam, Swallowed The Information, Stockbroker Fraud Blog, March 19, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link, Institutional Investor Securities Blog, April 1, 2014

April 30, 2014

SEC Files Fraud Charges Against American Pension Services and Its Founder Over $22M Investor Losses

The Securities and Exchange Commission has filed charges against American Pension Services Inc., a third-party administrator of retirement plans based in Utah and its founder Curtis L. DeYoung. The regulator says that they caused clients to lose about $22 million in risky investments involving certain business ventures. American Pension Services is now under receivership.

The securities scam allegedly goes back at least to 2005. Customers with retirement accounts containing non-traditional assets usually not found via IRA custodians, such as traditional (401)K retirement plans, were targeted. The Commission says that APS and DeYoung solicited customers to set up self-directed IRA accounts with third party administrator. DeYoung purportedly said this was “genuine self-direction” for investors seeking other options besides stocks, mutual funds, and bonds.

These clients had to fill out IRS Form 5305-A, which say that a third-party administrator doesn’t have discretionary authority over assets and it is up to the depositor to direct the assets’ investments. Although clients’ funds were kept at a bank in two master trust accounts, the complaint claims that APS controlled the money and mixed clients’ money together.

Even though APS was not allowed to direct client trades, DeYoung is said to have used letters with forged signatures that gave him permission to invest for clients. The SEC believes that clients were sent inaccurate account statements in 2012 and 2013, and some were told that at the end of 2012 master trust accounts contained $45.9 million when really that balance was at around $23.8 million. (In 2013, account statements noted that these accounts held $57.3 million when really they contained $22.7 million.) Client fees were calculated according to the inflated figures in customer account statements.

Meantime, customer funds were placed in risky business ventures involving friends of DeYoung. Even after a friend defaulted on promissory notes that DeYoung is said to have recommended to investors, he allegedly kept referring APS clients and their money to that person until a year ago. He also caused customers to think that their investments were profitable. DeYoung is accused of giving his friend the cash, which was issued to clients as bogus principal payments and interest.

Some of these business ventures failed or went bankrupt, allegedly causing APS clients to suffer losses. Among the investments are entities that are currently subject of SEC enforcement cases. SEC Salt Lake Regional Office director Karen Martinez, because of the alleged misconduct, the retirement security for thousands of investors was “jeopardized.”

If you are a senior investor, a retiree, or another customer who sustained losses because of the negligence of your investment representative, contact our securities lawyers today. Your initial case assessment is free.

Read the SEC Complaint (PDF)

SEC hits American Pension Services and its founder with fraud charges, Investment News, April 30, 2014


More Blog Posts:
Charles Schwab’s Barring of Customers from Joining Class Actions Violated FINRA Rules, Says Board of Governors, Stockbroker Fraud Blog, April 25, 2014

Ex-Sentinel CEO is Convicted of $500M Fraud, Stockbroker Fraud Blog, April 25, 2014

Institutional Investors Sue BP for Securities Fraud
, Stockbroker Fraud Blog, April 21, 2014

April 18, 2014

SEC Charges Total Wealth Management With Securities Fraud, Receiving Undisclosed Kickbacks

The Securities and Exchange Commission has filed a financial fraud case against Total Wealth Management Inc., an investment advisory firm based in Southern California. The regulator is accusing the firm of getting undisclosed kickbacks over investments recommended to clients. It is also alleging breach of fiduciary duty.

According to the SEC’s complaint, Total Wealth placed about 75% of 481 client accounts into Altus Funds, which is a family of proprietary funds. The investment advisory firm has a revenue-sharing deal that allows them to get kickbacks. The regulator says this was a conflict of interest because customers did not know about the agreement.

The Wall Street Journal reports that according to the SEC, Altus invested 92% of all its investments—$32 million—in funds that had revenue sharing deals with Total Wealth. The agency says that clients likely wouldn’t have put their money with Total Wealth if they had known that the majority of the Altus funds were paying the firm.

The Commission is accusing Total Wealth Management CEO Jacob Cooper, co-founder David Shoemaker, and chief compliance officer Nathan McNamee with setting up business entities to hide the undisclosed payments. While revenue sharing isn’t necessary illegal, they become a problem if they are concealed on purpose. Cooper is also accused of misleading investors about just how much due diligence it conducted on Altus Funds’ investments.

The SEC contends that Cooper and Total Wealth violated federal securities laws’ antifraud provisions, while Shoemaker and McNamee purportedly aided and abetted or violated the provisions. Other charges include custody rule and Form ADV disclosure rule violations. The Commission wants the allegedly ill-gotten gains given back, the imposition of a financial penalty, interest, and remedial relief.

Investment advisers have a duty to act in the best interests of a client. Failure to do that may result in losses for an investor and in some cases intentional gains for the adviser or his firm. If you think your investment losses are a result of your financial adviser breaching its duty to you, please contact our investment fraud law firm today.

Read the SEC Order (PDF)


More Blog Posts:
SEC Says Investment Advisors Can Publish Third-Party Endorsements Online, Stockbroker Fraud Blog, April 1, 2014

SEC Reveals Plans to Examine Never-Before-Inspected RIAs, Stockbroker Fraud Blog, February 24, 2014

SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations, Institutional Investor Securities Blog, October 30, 2013

April 17, 2014

SEC Files Securities Charges Against Massachusetts Company Over Pyramid Scam that Primarily Targeted Immigrants

The US Securities and Exchange Commission has filed fraud charges against TelexFree Inc. and TelexFree LLC over an alleged Pyramid scam that targeted immigrants—those from Brazil and the Dominican Republic, in particular. The agency sought and was able to obtain an asset freeze, securing millions of dollars.

Also facing charges are a number of TelexFree officers and promoters and several other entities as relief defendants. The Investors involved are located in Massachusetts and 20 other US states.

According to the SEC, the two entities made it appear as if they were operating a multilevel marketing company that sold phone service using VoIP technology when in fact this was a Pyramid scheme. The defendants sold securities as “memberships” along with the promise of 200% or greater yearly returns to people who promoted TelexFree via ad placements and participated in new member recruitment. $300 million was raised.

The Commission notes that the actual Internet phone services revenue for TelexFree was $1.3 million. Meantime, investors were promised $1.1 billion.

Earlier investors were paid “revenue” that was actually the money from newer investors. Meantime, at least $30 million in investor funds was moved from TelexFree operating accounts to accounts under the control of affiliates of Telexfree or individuals who are now defendants.


Pyramid Scam
In this type of fraud, participants make their money from getting new joiners to sign up. The premise is easy money for doing nothing besides getting others to also put in money.

Fraudsters will work to make their scam appear legitimate, pretending they have real products that they are selling and that this they are running a real multi-level marketing program. These schemes ultimately collapse when the promoter can’t bring in any more money or new investors.

Signs that the MLM program you are thinking of joining is a pyramid scam (From the SEC website):

• There is no actual product or service.
• The promise of high returns within a short time frame.
• Compensation or passive income is offered for doing hardly anything.
• There is no proven revenue from retail sales.
There is a buy-in fee
• The commission structure is a complex one
• Member recruitment is a primary focus of the business.

Contact our securities lawyers if you suspect that you were the victim of a Pyramid scam, a Ponzi scheme, Affinity fraud, or some other type of securities fraud.

Read the SEC Complaint (PDF)

Pyramid Schemes, SEC


More Blog Posts:
Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam, Stockbroker Fraud Blog, March 4, 2014

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Fraud, Institutional Investor Securities Blog, October 17, 2013

SEC Stops Former Marine’s Hedge Fund Fraud That Targeted Military Folk, Stockbroker Fraud Blog, August 12, 2013

March 20, 2014

SEC Fraud Charges Filed in $1.9M Microcap Stock Scalping Scam

The Securities and Exchange Commission has filed securities fraud charges against the promoter behind affiliated microcap stock promotion websites. The regulator us accusing John Babikian of using PennyStocksUniverse.com and AwesomePennyStocks.com to engage in “scalping” which is a type of securities fraud. The SEC has also obtained an emergency asset freeze.

According to the Commission, the websites, knowing collectively as “ABS,” sent out e-mails to about 700,000 people on February 23, 2012 and recommended that they invest in America West Resources Inc. (AWSRQ), which is a penny stock. However, the e-mails did not disclose that Babikian was the holder of over 1.4 million of the stock shares, which he had positioned and was going to sell right away via a Swiss bank.

Because of the emails, there was a huge increase in the share price of America West’s stock and trading value. Babikian used this to get rid of the stock during the last 90 minutes of the trading day and raked in over $1.9M.

Over 7.8 million in shares of America West stock were traded that day as the share price hit a record high. Prior to that the stock was thinly traded and low priced. The SEC says that without the emails, Babikian would have only been able to sell over a few thousands shares and at a much lower price.

Scalping
Scalping is when a financial adviser or stockbroker recommends a security to an investor and then sells the security right after to make a profit. The financial gain occurs because so many investors have raised the price with the purchases they made.

If you think you were the victim of securities fraud related to scalping or another type of financial scheme, contact our securities lawyers today.

SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme, SEC, March 13, 2014

The SEC Complaint (PDF)

March 12, 2014

Jefferies LLC Settles SEC Charges for $25 Million

Broker-dealer and investment bank Jefferies LLC (JEF) has consented to pay $25 million to settle Securities and Exchange Commission charges that it did not properly supervise traders at its mortgage-backed securities desk. These same staffers purportedly lied to investors about pricing.

The regulator contends that Jefferies did not give its supervisors what they needed to properly oversee trading activity on the MBS desk and that these managers neglected to find out what bond traders were telling customers about pricing information in terms of what the bank paid for certain securities. This inaccurate information was misleading to investors, who were not made aware of exactly how much the firm profited from in the trading.

While Jefferies’ policy makes supervisors look at electronic conversations of salespeople and traders so any misleading or false information given to customers would be detected, the SEC says that the policy was not effected in a manner that price misrepresentations were identified. The supervisory failures are said to have taken place between 2009 and 2011.

Jefferies also is accused of not looking over conversations between customers and traders that took place on Bloomberg terminals. The SEC Enforcement Division’s director, Andrew J. Ceresney, says that proper supervision by Jefferies could have caught a lot of the misstatements made by employees.

As part of the securities fraud settlement, Jefferies will pay customers over $11 million (a combination of firm profits and ill-gotten gains). It will also pay a $4.2 million penalty and $9.8 million for its nonprosecution deal reached with the U.S. Attorney's Office for the District of Connecticut over a parallel action.

It was last year that the SEC charged ex-Jefferies Managing Director Jesse Litvak with securities fraud. Litvak is accused of bilking customers that he sold MBS to so he could make additional money for the brokerage firm. Investors lost about $2 billion as a result.

Earlier this month, Litvak was convicted by a federal jury on multiple criminal counts, including securities fraud, and fraud related to the Troubled Asset Relief Program. He is currently the only person charged with fraud involving the Public-Private Investment Program, which used billions of dollars from TARP to get more people to invest in mortgage-backed securities. Meantime, civil and criminal authorities are now investigating whether others Jefferies Group traders also defrauded investors over mortgage-bond prices.

Please contact our MBS fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP today. Our securities law firm represents investors with claims against brokerage firms, investment banks, investment advisers, brokers, and other industry members. The best way to maximize the chances of recovering your investment losses is to work with an experienced securities lawyer that knows how to do the job right. Your initial case consultation with us is a free, no obligation session.

The SEC Order (PDF)

SEC Charges Jefferies LLC With Failing to Supervise Its Mortgage-Backed Securities Desk During Financial Crisis, SEC, March 12, 2014

U.S. Probes More Jefferies Traders Over Mortgage Pricing, Bloomberg, March 12, 2014

More Blog Posts:
Ex-Jefferies Trader Found Guilty in Securities Fraud Case Over Bond Prices, Stockbroker Fraud Blog, March 8, 2014

Puerto Rico Senate Votes to Sell $3.5B in Bonds
, Stockbroker Fraud Blog, February 28, 2014

SEC Investigates Whether Currency Traders Distorted ETF and Options Prices, Manipulated Currency Markets, Institutional Investor Securities Blog, March 12, 2014

February 27, 2014

SEC Staff Sold Shares Before Enforcement Actions in Securities Cases Were Made Public, Reports Study

Bloomberg is reporting that according to a new study, US Securities and Exchange Commissioner employees who own stock in companies that the agency is investigating are more likely than other investors to sell their shares in the months prior to the regulator’s announcement of an enforcement action. Shivaram Rajgopal, an Emery University accounting professor, and one of the study’s co-authors, said that there appears to be a suspect pattern of behavior going on even though the findings are not proof of misconduct.

Rajgopal and co-author Roger M. White, a Georgia State University doctoral student, obtained records from the SEC through a request they made under the Freedom of Information Act. Unfortunately, because individuals weren’t named, it was impossible to figure out whether the agency employees who traded were in jobs that might have given them insider knowledge about a pending action, and whether the action could lower stock prices, or if money was lost or made in the transactions.

Beginning August 2010, SEC ethics rules have forbidden employees from selling or buying shares in companies that are under investigation. They also have to get permission before trading, cannot trade in any financial firm that the SEC directly regulates, and they generally must hold any stock that they buy for six months before selling.

White and Rajgopal looked at 7,200 recorded trades from 2009, the year when most of the Commission’s employees were required to start notifiying the agency about their trades and investments, through 2011. Per the SEC data they obtained, Commission employees with shares in JPMorgan Chase & Co. (JPM), General Electric Co. (GE), Citigroup Inc. (C), Bank of America Corp. (BAC), and Johnson & Johnson made 87 trades in shares in the three months prior to the SEC announcing that the companies had agreed to settle enforcement claims.

As an example, prior to the SEC’s announcement that Bank of America would pay $150 million in 2010 to resolve securities claims that it misled shareholders about losses and bonuses while Merrill Lynch (MER) was acquired, over 70% of SEC employee trades were sell orders. Rajgopal noted that while some of the sales may have been done to comply with ethics rules regarding prohibited stocks, the timing was questionable.

The co-authors, offering a broader analysis of all the trades, noted that profits typically didn’t come from selecting stocks but were from excess returns, which seemed to be a result of selling shares that later dropped in value in relation to the wider market. Rajgopal and White say that this could mean that SEC employees may have sold shares belonging to companies they knew were under investigation even if the probe had not yet been made public.

Our securities fraud lawyers represent investors that have sustained losses. Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of clients get their money back.


Study Finds SEC Staff Sold Shares Before Cases Made Public, Bloomberg, February 27, 2014


Freedom of Information Act

Securities and Exchange Commission

More Blog Posts:
SEC Restructures Trial Unit in an Effort to Decrease Courtroom Losses, Stockbroker Fraud Blog, February 13, 2014

SEC Stops Texas Securities Scam Involving Oil and Gas Investments, Stockbroker Fraud Blog, January 6, 2014

SEC Accuses Private Equity Manager of $9M Securities Fraud, Institutional Investor Securities Blog, January 30, 2014

February 21, 2014

SEC Charges Investment Banker in $950K Insider Trading Scam Involving Child Support Payments

The Securities and Exchange Commission has put out an emergency action against Frank “Perk” Hixon Jr., an investment banker based in New York. Hixon Jr. is charged with insider trading that garnered him $950,000 in illicit profits that he purportedly used in lieu of making child support payments to the mother of his son.

According to the regulator, Hixon Jr. regularly went into Destiny “Nicole” Robinson’s account and made trades using confidential information that he got from his job. Illegal trades or tips in three public companies’ securities were involved, including trading using nonpublic data about Titanium Metals Corporation before its merger announcement, trading prior to a number of big announcements by Westway Group, and trading in his firm Evercore Partners’ securities before record earnings were made public in early 2013. Hixon Jr. also allegedly made illegal trades in his dad’s brokerage account.

However, when asked by his employer about the suspicious trading in both accounts, Hixon Jr. denied that he knew either his father or Robinson. He even swore in a declaration that he didn’t recognize the name of the city where his father had been residing for over a quarter of a century. Hixon Jr. has since been fired.

Now, a federal judge is granting the SEC’s request for an emergency order to freeze the brokerage account under Robinson’s name. The SEC is accusing Hixon Jr. of violating the Securities and Exchange Act of 1934’s antifraud provisions. The agency wants permanent injunction, disgorgement, and financial penalties. Meantime, the US Attorney’s Office for the Southern District of New York has filed a criminal case against Hixon Jr.

Our broker fraud lawyers represent investors who have lost money because of the misconduct of others. Call Shepherd Smith Edwards and Kantas, LTD LLP today.

SEC Charges Wall Street Investment Banker With Insider Trading in Former Girlfriend’s Account to Pay Child Support, SEC, February 21, 2014

Read the SEC Complaint (PDF)


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Mixed Securities Verdict Reached in SEC Case Against Texas-Based Life Partners Holdings, Stockbroker Fraud Blog, February 19, 2014

Judge Reject’s AIG’s Bid to Delay $8.5B Billion Mortgage Backed-Securities Settlement with Bank of America Corp. “Hostage”, Institutional Investor Securities Blog, February 21, 2014

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog, October 17, 2013

February 13, 2014

SEC Restructures Trial Unit in an Effort to Decrease Courtroom Losses

In the wake of recent losses in the courtroom, the Securities and Exchange Commission is changing up the way it gets ready for trial. The Wall Street Journal says that SEC Chairwoman Mary Jo White has retooled the agency’s trial unit. One of the reasons for the restructuring is so litigators and investigators can work more closely together.

The SEC’s victory rate has been dropping. The agency won just 55% of trials in the last four months, which a definite decline compared to the last three years when it had been winning over 75% of the time. Since October, however, juries and judges have ruled in favor of 10 out of 25 persons and firms in securities litigation against the SEC, and the government lost 5 of 11 trials. This is a definite downswing from the 12 months prior when just 5 of 34 defendants beat the regulator. Although the cases that the regulator lost were filed before White took over the helm, defense lawyers believe that the Commission’s current losing trend will compel more people to go up against it instead of settling.

The Commission’s trial unit has now been split into four groups so that this more closely mirrors the work of enforcement officials when they probe cases. Senior officials are also conducting practice openings for trials.

Some attorneys also believe that in the wake of the bigger sanctions the SEC may want for certain deals, the regulator may find it harder to convince certain individuals and firms to settle. Now that some defendants will only be able to settle if they admit to certain violations, a move that could result in even more lawsuits, this will likely compel some to go to court instead.

One high profile securities case that the SEC recently lost, and which certainly garnered a lot of attention, was the insider trading case against Mark Cuban, who owns the Dallas Mavericks. A federal jury turned down the agency’s claims that the billionaire took part in this illegal activity when he sold a stake in an Internet company to avoid losing $750,000. Jury members found that the information Cuban used wasn’t confidential and that he never promised not to trade on the data. That said, high-profile cases have not been the SEC’s only losses. In January, a jury rejected insider trading charges involving a railroad worker and his children.

After the worker deduced that a merger involving his employer was likely to happen, members of his family purchased call options and they profited approximately $1 billion. The Commission had tried to show that the employee engaged in insider trading even though he was never told about the deal. (He had guessed that one was pending because of the number of tours taking place at work.)

The regulator also has had challenges in court over accounting fraud cases, including one accusing two ex-water treatment company executives of inflating revenue and misleading an external auditor. A federal judge rejected the financial fraud charges against them.

Please contact our securities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP today. We represent investors in court and in arbitration and have helped thousands recover lost investments via settlements and litigation.

SEC Takes Steps to Stem Courtroom Defeats, The Wall Street Journal, February 13, 2014

S.E.C.’s Losing Streak in Court Puts Agency in Spotlight, NY Times, February 10, 2014

SEC Loses as Mark Cuban Triumphs in Insider-Trading Trial, Bloomberg, October 17, 2013


More Blog Posts:
SEC Stops Texas Securities Scam Involving Oil and Gas Investments, Stockbroker Fraud Blog, January 6, 2014

SEC Goes After Alleged Ponzi Scammers, Stockbroker Fraud Blog, November 15, 2013

SEC Accuses Private Equity Manager of $9M Securities Fraud, Institutional Investor Securities Blog, January 30, 2014

January 6, 2014

SEC Stops Texas Securities Scam Involving Oil and Gas Investments

The Securities and Exchange Commission has filed securities charges and ordered an asset freeze against Janniece S. Kaelin and Robert A. Helms, who are both accused of running a Texas-based Ponzi scam involving purported investments in oil and gas projects. The regulator contends that Kaelin and Helms misled investors about their industry experience, even as they raised close to $18 million for what was supposed to be royalty interests in oil and gas. The SEC says that the two of them used most of the money to run a Ponzi scam and pay for business costs and personal spending.

Per the Commission’s complaint, Helms and Kaelin started offering investments through Vendetta Royalty Partners in 2011. They brought in at least 80 investors from numerous states.

In offering documents, they promised that over 99% of investment proceeds would be used to obtain a solid portfolio filled with oil and gas royalty interests. Instead, claims the regulator, the Kaelin and Helms put in only 10% of this money in the projects. The result was very small returns.

The Commission is taking issue with the offering documents, saying they were fraudulent and misleading and misrepresented Helms and Kaelin’s experience in the oil and gas industry. The agency also says that the two of them did not disclose that there was litigation against them and their companies or that Vendetta Royalty Partners was running behind on its credit line. (The company later defaulted.)

The regulators says that Kaelin and Helms ordered Vendetta Royalty Partners to make about $5.9 million in partnership income distributions to investors. New investors’ funds were used to make distributions to investors who had put their money in earlier.

The SEC complaint is also charging individuals Deven Sellers and Roland Barrera with illegally selling these investments (hey weren’t registered with the SEC) and misleading investors about the referral fees and sales commissions they would receive. Although they claimed that the fees would be small, each of them was paid over $200,000 for just one of the investments.

Now, the court has issued a temporary restraining order to prevent the defendants from committing more violations, as well as frozen their assets, forbidden any document destruction, and mandated for proper accounting. The SEC wants disgorgement of ill-gotten gains in addition to penalties and prejudgment interests and permanent injunctions.

Please contact our Texas securities fraud law firm if you suspect that your investment losses are do to misconduct, negligence, or fraud.

Oil and Gas Fraud
The SEC recently noted while oil and gas fraud has been a problem for a long time, with reports of new finds in Texas and North Dakota, the number of related securities fraud cases are going up. The government agency is now filing about 20 oil and gas fraud cases annually.

SEC Stops Texas Securities Scam Involving Oil and Gas Investments, SEC, December 6, 2013

Read the SEC Complaint (PDF)

SEC's Investor Alert (PDF)

Investment fraud is booming along with oil and gas drilling, SEC says, Dallas News, January 4, 2014


More Blog Posts:
Ex-NFL Running Back Ricky Williams Files $6M Texas Securities Fraud Case Against His Financial Adviser, Stockbroker Fraud Blog, December 18, 2013

Texas Securities Fraud: SEC Accuses Two Houston-Based Advisory Firms of Making Thousands of Transactions That Clients Didn’t Know About, Stockbroker Fraud Blog, November 27, 2013

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog, October 17, 2013

November 15, 2013

SEC Goes After Alleged Ponzi Scammers

The Securities and Exchange Commission is pursuing securities fraud charges against Wendy Ko and Yin Nan Wang and certain entities over their alleged involvement in a Ponzi-like scam. The regulator is asking for an asset freeze against Velocity Investment Group, its managed funds, and Rockwell Realty Management, Inc. These entities are controlled by Wang and Ko.

The SEC claims that the two of them offered and sold over $150 million securities as unsecured promissory notes through Velocity and its unregistered investment funds. The offerings promised a substantial investment return rate. That said, to fulfill these interest obligations the funds needed to make returns higher than the market average.
Wang purportedly ordered that an accountant be given financial information that included material overstatements of fund receivables. He also is accused of publishing false financial data on a website.

The Commission says that Ko and Wang took newer investors’ money to pay back older investors and made transactions between Rockwell and the funds to hide the securities fraud. The two of them are accused of violating the Securities Act Section 17(a), Exchange Act Section 10(b), and Rule 10b-5.

In another unrelated Ponzi scam, the SEC got an asset freeze against companies in the US and New Zealand accused of soliciting bogus investment opportunities. The emergency action was to stop Christopher A. T. Pedras, his companies, and associates from raising more funds from US investors.

The agency says that Pedras and his partners raised at least $5.6 million from over 50 US investors through a fraudulent offering involving the Maxum Gold Trade Program and the FMP Renal Program. Pedras purportedly told investors that Maxum Gold was an intermediary between global banks so they could trade unspecified financial instruments. Pedras said that Maxum Gold would move part of the profits earned from this to investors.

The SEC says that when payments to investors by Maxum Gold were delayed in 2012, Pedras told them it was because New Zealand regulators were conducting an audit and also that there had been technical difficulties. He then started pushing the FMP Renal Program, in which investors could buy supposedly premium/preferred shares by moving in their Maxum Gold Trade Program investments.

The Commission says that half of the money Pedras and the other parties raised was used in a Ponzi-like manner to pay off older investors. Some of the funds went towards commissions, while Pedras misappropriate about $1.2 million for his own spending and certain business matters.

Pedras and his associates are charged with violating sections of the Securities Act and the Exchange Act.

Ponzi Scams
This type of fraud usually involves the fraudsters using new investor money to pay existing investors their supposed “returns.” New investors are usually solicited, promise that they are getting involved in a venture with low risk and high returns. Ponzi scams eventually fail when it becomes too hard to bring in new investors or when too many investors seek to cash out because the “earnings” run out.

SEC Obtains Asset Freeze in California-Based Real Estate Investment Scheme, SEC, November 1, 2013

SEC Halts Ponzi Scheme Involving New Zealand Companies, SEC


More Blog Posts:
Two Investors’ Securities Fraud Lawsuit Against SEC Over Stanford Ponzi Scam is Dismissed, Stockbroker Fraud Blog, August 16, 2013

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog, October 17, 2013

SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors
, Stockbroker Fraud BLog, February 6, 2013

November 11, 2013

Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Andrew J. Bowden, next year the regulator intends to examine about 4,000 registered investment advisors who have never been visited by its inspectors before. Bowden said that the agency will target about 50% of firms that have yet to be examined. Some of these investment advisers have been registered for over three years.

Of the close to 11,000 advisers that the SEC oversees, nearly 40% have never undergone inspection by the regulator. Still, some are questioning whether Bowden’s office even has the resources to perform all these inspection.

In InvestmentNews, Ascendant Compliance Management partner Keith Marks lists the compliance issues that these yet to be inspected RIAs should deal with now so that they are ready should the agency come knocking:

Form ADV disclosures, other documents: The SEC will want detailed outlines and information regarding firm procedures and policies and facts. Examiners will ask for Form ADV disclosures and other documents.

Technology controls: Expect examiners to check for adequate risk controls and technology testing. SEC director Bowden has said that compliance issues involving technology is expected to be a big issue in 2014.

Marketing: Examiners may consider marketing materials and investment performance disclosures that contain superlatives that are “seemingly innocuous” to be deficiencies.

Personal securities trading: The SEC will want to know about the holdings and personal securities transactions of certain employees. Examiners want to make sure that advisers are abiding by federal rules and have a written code of ethics.

Custody rules: Advisers that hold client funds have to meet certain requirements for choosing a proper custodian and recordkeeping. SEC examiners will likely consider any custody violation as an indicator of possible fraud.

The interview: Marks said that a common question that examiners will ask is “what are your biggest concerns?” He noted that while it is important to respond honestly, during an interview with examiners the interviewee should try to keep the conversation focused on issues that are already being proactively handled.

Our investment adviser fraud law firm represents individual and institutional investors throughout the country.

6 ways to bullet proof your practice from the SEC, Investment News, November 1, 2013

Office of Compliance Inspections and Examinations, SEC

Office of Compliance Inspections and Examinations Investment Adviser Examinations: Core Initial Request for Information, SEC


More Blog Posts:
ICE CEO Says US Equity Markets Lets Traders Advantage of Small Investors, Stockbroker Fraud Blog, November 7, 2013

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?, Stockbroker Fraud Blog, November 6, 2013

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle, Institutional Investor Securities Blog, October 28, 2013

September 18, 2013

Imperial Petroleum Charged by SEC with Defrauding Investors

The Securities and Exchange Commission is charging Imperial Petroleum and a number of its executives and suppliers with involvement in an alleged renewable fuel production scheme. The complaint names the Indiana-based company, its CEO Jeffrey Wilson, three ex-owners of E-Biofuels, and New Jersey-located companies Cima Green LLC, Caravan Trading LLC, and CIMA Energy Group, as well as their operators.

The SEC is accusing them of presenting themselves to investors as a legitimate biodiesel production business while concealing the illegal activity that was going on, which was the source of 99% of the revenue. Imperial Petroleum bought E-Biofuels as a subsidiary in 2010, and the Commission said that the latter’s owners falsely presented that they were making renewable fuel from raw agricultural products. This let E-Biofuels receive government incentives based on such representations when, actually, contends the regulator, E-Biofuels had middlemen purchase finished biodiesel while making these buys appear on bogus invoices as raw feedstock for producing biodiesel. Imperial Petroleum’s subsidiary later would sell the biodiesel that was bought for up to double what it paid.

The regulator believes that Wilson discovered that E-Biofuels wasn’t making biodiesel from raw matter, he let the fraud continue and Imperial’s yearly revenue rose from $1 million to over $100 million. Meantime, its stock price flew upward as investors were falsely told that E-Biofuels was engaged in environmentally friendly biodiesel production.

In its securities complaint, the SEC alleges that:

• Imperial made false statements in its yearly reports for fiscal years 2011 and 2010 the E-Biofuels made and sold over 28 million biodiesel gallons between 5/24/2010 – 7/31/2011. This was the same period that over 99% of Imperial’s revenues was from E-Biofuels.

• The scam resulted in over $50 million gross illicit profits.

• Between 11/09 and 1/12 E-Biofuels set up over 52 million bogus renewable energy credits and fraudulent tax credits worth $35 million.

• Investors and auditors were never notified about Imperial’s illegal business model.

• Despite discovering that E-Biofuels wasn’t operating as described in its 2010 yearly report, Wilson allegedly certified and signed the 10k filling’s accuracy.

• He also is accused of falsely portraying the company when communicating directly with prospective investors.

• E-Biofuels’ business was almost totally unsustainable and not legal.


After the scam was uncovered, Imperial’s stock price dropped to under 10 cents a share. The market loss was about $60 million.

The SEC wants financial penalties, ill-gotten gains’ disgorgement, and permanent injunctions against future violations of securities laws.

Also taking action is the U.S. Attorney’s Office for the Southern District of Indiana. Today, a federal magistrate judge unsealed the indictment against Wilson, who is charged with two counts of securities fraud, wrongful certifications as a corporate officer, and making false statements (including statements submitted in a filing to the SEC).

SEC Charges Indiana-Based Company and Executives for Defrauding Investors in Renewable Fuel Production Scheme, SEC, September 18, 2013

Read the SEC Complaint (PDF)


More Blog Posts:

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice, Stockbroker Fraud Blog, September 17, 2013

Many Financial Fraud Victims Don’t See It Coming, Says Survey, Stockbroker Fraud Blog, September 7, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

September 2, 2013

SEC Votes to Amend Broker-Dealer Financial Responsibility Rules

By unanimous decision, the Securities and Exchange Commission has agreed to amendments to the Securities Exchange Act or 1934’s rules regarding customer protection, net capital, notification, and record books for broker-dealers. The regulator is seeking to enhance protections for investors and prevent business practices that are not sound.

Under The Act, broker-dealers have to satisfy certain financial requirements so that customers are protected in the event of the firm’s financial failure. The Act offers safeguards so that customer funds and securities being held by a broker are protected.

The Customer Protections Rule
Also referred to as Rule 15c3-3, the Customer Protections Rule doesn’t let broker-dealers use customer cash and securities to fund their own business. The rule mandates that customers’ cash and securities be kept separate. Significant revisions include: mandating that broker-dealers keep up customer securities and funds so there is a new segregated reserve fund designated for broker-dealer account holders, putting restrictions on cash bank accounts to keep up a reserve for protecting customer cash under the rule (not including cash deposits at bank affiliates; also placing limits on cash at non-affiliated banks to a figure no larger than 15% of the equity capital of the bank), and establishing customer notice, disclosure, and affirmative consent requirements for new accounts for programs where client cash in a securities account gets “swept” to a bank deposit product or a money market.

Books and Records Rules
Rules 17a-3 and 17a-4 obligate broker-dealers to keep up and specific business records to help the firm account for activities, which also helps securities regulators when they are checking for compliance. The main change to the rule: Large broker-dealers will have to document credit, market, and liquidity risk management controls.

The Net Capital Rule
Also know as Rule 15c3-1, this rule ensures that a brokerage firm always has for every dollar of liability over a dollar of assets that are highly liquid. Key changes include making a broker-dealer adjust its net worth when determining net capital by having them include liabilities that are third party assumed if the firm cannot show that the party can pay the liabilities, requiring that they subtract the excess of any deductible amount above the amount allowed by SRO rules allow from net capital, and clarifying that any brokerage firm that becomes “insolvent” has to stop conducting securities business.

The Notification Rule
Rule 17a-11 mandates that a broker-dealer notify securities regulators when certain events happen, such as its net capital fall under the required minimum. The major amendment to this rule is new notice requirements for when a broker-dealer’s securities lending and repurchase activities go behind a certain threshold. A brokerage firm also will have the option of reporting repurchase and stock loan activities to its DEA monthly.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities law firm that represents broker fraud investors throughout the US.

SEC Adopts Amendments to Financial Responsibility Rules for Broker-Dealers, SEC, July 31, 2013

Securities and Exchange Act of 1934


More Blog Posts:

FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

Sonoma County Files Securities Lawsuit Over Libor Banking Debacle, Institutional Investor Securities Blog, July 2, 2013