Articles Posted in Uncategorized

According to prosecutors, criminal charges have been brought against 14 people over their alleged involvement in a $14.7M investment scam that primarily targeted older investors. The US Attorney’s office alleges that between 1/2014 and 1/2017 the defendants and others sought to defraud the investors and prospective investors of certain companies by attempting to artificially manipulate the volume and price when shares were traded.

The group allegedly hid that they were behind the rigging of these companies’ shares through a pump-and-dump boiler room scam. They are accused of manipulating share trading pattens while aggressively soliciting senior citizens by phone to try and persuade them to buy the shares.

When their targets showed a willingness to buy the stock being solicited to them, the boiler room employees would allegedly pressure them to buy, sometime even charging them subscriptions so that they could receive future stock recommendations. Investors were not notified that the employees and others they conspired with had sold their own shares in these companies.
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Former Stifel, Nicolaus Broker is Accused of Variable Annuity Violations
The Financial Industry Regulatory Authority has suspended an ex-Stifel, Nicolaus (SF) broker for four months over variable annuity transactions that he purportedly inappropriately recommended to certain investors. At the time of the alleged variable annuity fraud, James Keith Cox worked with Sterne, Agee & Leach. Stifel Financial later acquired that firm.

According to the regulator, Cox recommended a number of VA transactions even though there was no reasonable grounds for thinking they were appropriate for the investors. In addition to the suspension, Cox will disgorge the $25,460 he was paid in commissions.

FINRA Bars California Man From Industry Over $100M in Undisclosed EB-5 Investment Sales
A FINRA hearing panels has barred a California-based registered representative for taking part in private securities transactions involving $100M in EB-5 Investments that he failed to disclose to his employer financial firm. Jim Seol sold the EB-5 investments through his business Western Regional Center Incorporated.

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A district court judge has sentenced Navin Shankar Subramaniam Xavier, formerly the CEO of Essex Holdings Inc., to 15 years behind bars because of his involvement in two fraud scams. Xavier pleaded guilty to two wire fraud counts in January.

He ran Essex Holdings from 9/2010 through 5/2014, raising over $30M from almost 100 investors who bought promissory notes that were supposedly for investments in shipping, sugar transportation, and iron ore mining in Latin America. Xavier used forged paperwork, including a bogus financial statement. He promised return rates to get prospective customers to participate. He used most of the funds for his and his wife’s expenses, including luxury cars and jewelry, cosmetic surgery, and wedding bills. He also used newer investors’ funds to pay earlier investors until the Ponzi scam failed. According to evidence brought to court, investors lost more than $29M.

In a separate fraud, Xavier used the company to secure $1.2M in payments and about $1.5M of commercial real estate from the South Carolina Coordinating Council for Economic Development (SCCCED). These were supposed to go toward developing an industrial property into a rice packaging facility and a diaper plant. Documents submitted in court indicate that the defendant gave the SCCCED fake financial documentation so the contract would go to him. He also provided other fake financial paperwork, including bogus contractor invoices, so he would get paid. He again used a chunk of the funds for his own living expenses.

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Shepherd Smith Edwards and Kantas, LLP (“SSEK”) is pleased to announce that a Financial Industry Regulatory Authority (“FINRA”) arbitration panel has awarded an SSEK client a net of almost $9 million for his losses in Puerto Rico bonds and Puerto Rico Bond Funds. SSEK client, Dr. Luiz Romero Lopez, won his securities arbitration claim against UBS Puerto Rico with the FINRA panel awarding him a net of almost $8 million in compensatory damages and an additional $1 million in punitive damages.

According to the FINRA arbitration panel, UBS exhibited “extreme recklessness and indifference” to the consequences of abuses in its “non-purpose” loan program in Puerto Rico. The panel accused UBS of either purposely using a “non-purpose” loan to be “recycled” in a manner that violates Regulation U or doing so with “reckless” indifference to the consequences that could arise from such abusive loans.

The FINRA arbitration panel found that the loan created “additional excessive leverage.” Because of this, when the market dropped in 2013, the Claimant lost more money than if his funds had been more suitably invested with “less leverage.”

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Eight People Implicated in $39M Penny Stock Fraud Get Prison Sentences, Must Pay Restitution
In Ohio, eight people were sentenced to prison terms ranging from almost two years to a dozen years for their involvement in a penny stock scam that caused investors to suffer $39M in losses. One of the defendants, Zirk de Maison, received the 12-year sentence. He was ordered to pay $39.1M in restitution. The other defendants also were ordered to pay restitution in lower amounts.

According to prosecutors, the defendants conspired to bilk investors and potential ones in a number of public issuers. They did this by putting out millions of shares and artificially controlling the price and volume of the shares that were traded. This was accomplished through undisclosed commissions paid to brokers, boiler room operators, and promoters who got investors to invest, as well as through the fraudulent concealment of ownership interests in the companies in which the funds were invested.

In some instances, brokers and ex-brokers were paid illegal kickbacks of sometimes up to 50%. Clients were not told of these payments. The co-conspirators used most of investors’ money to enrich themselves. Some of the defendants were boiler room owners.

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The US Securities and Exchange Commission is charging two brokers with securities fraud. The regulator claims that Donald J. Fowler and Gregory T. Dean fraudulently employed an in-and-out trading strategy that was not suitable for customers so that they could make more in commissions. Because of their actions, 27 customers alleged lost substantial amounts of money. Fowler and Dean are accused of violating the Securities Act of 1933 and the Securities Exchange Act of 1934, and Rule 10-B5.The Commission said that they examine trading patterns involving over two dozen of the brokers’ customer accounts.

The SEC contends that the two men did not engage in any due diligence to figure out whether their investment strategy could help customers obtain even the smallest profit. With their strategy, they engaged in the frequent purchase and sale of securities, which would both take place within a two-week or shorter timeframe. They charged customers a commission for every transaction. Meantime, Fowler and Dean were the only ones who had a chance of making a profit.

SEC Warns Investors to Look Out for Excessive Trading, Churning

Along with its announcement of this securities case, the SEC put out an Investor Alert cautioning the public about churning and excessive trading. In its alert, the regulator warned about red flags that may be signs of these types of fraud, including trading that a customer did not authorize, which is known as unauthorized trading, trading that happens more often than seems reasonable for a customer’s investment objectives and/or the level of risk that the portfolio can handle, and suspicious and/or unusually high fees.

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The U.S. Securities and Exchange Commission has filed promissory note fraud charges against Onix Capital and it owner Albert Chang-Rajii.  The Miami-based asset management company and Chang are accused of bilking investors who put their money into promissory notes and start-ups, as well as of falsely portraying the Chilean national as an award-winning multi-millionaire “angel” investor who had graduated from Stanford University’a business school.

According to the regulator’s complaint, Chang and Onix Capital sold over $5.7M in promissory notes that they falsely claimed he had guaranteed and told investors that the notes themselves  “guaranteed” yearly returns of 12-19%. They also raised over $1.7M that Chang was supposed to invest in companies like Square, Snapchat and Uber.

The SEC said that, in truth, Onix Capital’s investment revenue was “non-existent” and Chang did not have the professional or educational background that he touted.  The Commission alleges that rather than use the funds as promised, the money went to Chang and to pay other investors.

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The Financial Industry Regulatory Authority announced that UBS Financial Services and its Puerto Rico subsidiary (UBS) must collectively pay three investors $750,000 in damages for losses they sustained from investing in UBS’s proprietary Puerto Rico closed-end bond funds and Puerto Rico bonds. The claimants are Jenny Robles Adorno, Desarrollos Jarra SE, and Jose A. Rivera.

The investors accused UBS of recklessness, fraud, and negligence. They sought compensatory damages, punitive damages, and reimbursement of commissions that they said were unlawful. In San Juan, the FINRA arbitration panel awarded Rivera $562,500, Robles $30,000 and Jarra $157,500. UBS said it was “disappointed” with the panel’s decision to award any damages to the claimants.

This is not the first Puerto Rico bond fraud arbitration case in which UBS has been ordered to pay investors. Just this March, the firm had to pay over $470,000 to three investors who said their accounts were over-concentrated in the same Puerto Rico focused investments. The claimants in that case alleged negligent supervision and fraud. Similarly, UBS was ordered to pay a former television executive over $1,400,000 in the fall of 2015 for over-concentrating the former customer in UBS’s proprietary funds and misrepresenting the risks of those investments.

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The White House has appointed seven people to the Fiscal Control Board tasked with helping Puerto Rico deal with its $70B of debt. The appointees, named by President Obama, include: Jose Ramon Gonzalez (Federal Home Loan Bank of NY CEO/President), Arthur Gonzalez (Ex-bankruptcy Judge), Ana Matosantos (Ex-California Dept. of Finance Director), Carlos Garcia (Ex-Puerto Rico Government Development Bank president and CEO/Founder of BayBoston Managers LLC), Jose Carrion III (Puerto Rico insurance executive), Andrew Biggs (Scholar) and David Skeel (University of Pennsylvania Law Professor). Three of these board member are Democrats, four are Republicans. The eighth member of the board is Puerto Rico’s governor Alejandro Garcia Padilla. He is an automatic member because of his position but does not have a vote.

The creation of the federal control board was part of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The legislation was passed by the U.S. Congress to help the U.S. territory with its financial woes. Puerto Rico has been defaulting on its debt payments that have been due. Just last week, the Government Development Bank of Puerto did not pay almost $10 million of interest that was due on it outstanding bonds. According to a recent report by the ReFund America Project, which has been investigating the U.S. territory’s debt, approximately $1.6 billion of the island’s debt are the fees earned by Wall Street firms, such as Citigroup (C), UBS (UBS), Barclays Capital (BARC), and Goldman Sachs (GS). Even worse, the ReFund America Project said that about $323 million of the money paid to Wall Street firms was for “scoop and toss” deals involving UBS as the main underwriter.

The report also stated that close to half of the $134 million in debt Puerto Rico and its public corporations have issued over the last 16 years is refunding debt. Puerto Rico’s financials purportedly show that the territory had been putting out new refunding bonds to pay back bonds that had been issued earlier. The use of refunding bonds to delay current debt payments for later is what is involved in “scoop and toss” financing.

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UBS Puerto Rico clients have reported over the last few days the receipt of unsolicited settlement offers from UBS Puerto Rico for losses in customer accounts. The letters, which appear to be dated August 20, 2015 and are from Roberto Fortuno, Managing Director of the UBS San Juan Complex, offer small amounts for losses. The letters appear to be a part of last year’s UBS settlement with the Puerto Rico Office of the Commissioner of Financial Institutions, whereby UBS Puerto Rico was ordered to pay some customers for losses in UBS’s proprietary closed-end bond funds. As a part of that settlement, UBS Puerto Rico was ordered to identify similar customers and also offer to pay them as well.

While an unsolicited offer from UBS may seem like good news, we at Shepherd, Smith, Edwards & Kantas caution any customers who receive such a letter to consult an attorney before signing anything. The letters indicate that an agreement to take the money will require customers to come to UBS’s offices in San Juan or Ponce and sign a release. Such releases are typically very broad and may result in customers losing rights that have nothing to do with the losses in the closed-end funds. Moreover, our experience with UBS in these cases is that UBS’s opinion of losses is very different than most clients. As a result, anyone who receives such a letter should contact counsel to make sure they have representation. According to the letters our firm has reviewed, the offers are only open for 30 days, so time is of the essence.

The attorneys at Shepherd, Smith, Edwards & Kantas have over 100 years of combined experience in securities law and the securities business. We represent clients all over the globe in investment losses. In particular, our Puerto Rico team has been working with dozens of clients for almost two years in these cases. If you receive a letter from UBS or have lost money in Puerto Rico investments with UBS, Banco Popular, Santander or any other firm on the island, please call us for a no cost, no obligation consultation about your rights.

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