Securities Fraud

SEC Charges Against Six Firms For Stock Offering-Related Short Sale Violations Results In Over $2.5M in Sanctions

Published on: October 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against J.P. Morgan Investment Management Inc., War Chest Capital Partners LLC, Harvest Capital Strategies LLC, Omega Advisors, Inc., Auriga Global Investors, Sociedad de Valores, S.A., and, Sabby Management LLC. All six firms settled the enforcement actions, which allege short selling violations ahead of stock offerings. They will collectively pay over $2.5 million in sanctions.

Under rule 105, firms are not allowed to participate in public stock offerings after they’ve sold short the same stock. The prohibition is for five days. To do otherwise could lead to illicit profits for the trader while lowering the offering proceeds for a company via the artificial depression of the market price right before that company puts a price on the stock. The SEC contends that all six firms took part in short selling certain stocks right before buying shares from a broker, underwriter, or dealer that participated in a follow-on public offering.

Per the settlements:

• Auriga Global Investors will pay disgorgement of nearly $437K, a penalty of over $179K, and a prejudgment interest of over $2K.

• War Chest Capital Partners will pay disgorgement of over $169K, prejudgment interest of over $22K, and a penalty of $150K.

• Harvest Capital Strategies will pay over 418K of disgorgement, prejudgment interest of $619, and a $65K penalty.

• Sabby Management will pay disgorgement of over $184K, prejudgment interest of over $2300, and a penalty of over $91,600.

• JPMorgan Investment Management will pay disgorgement of over $662K, prejudgment interest of over $56,700, and a penalty of over $364K.

• Omega Advisors will pay disgorgement of $68K, prejudgment interest of $686K, and a penalty of $65K.

Securities Headlines: Halcyon Cabot Partners is Expelled from Industry by FINRA, Blackstone Settles Disclosure Failure Charges for Nearly $39M, SEC Approves Proposal to Improve Transparency for OTC Equity Securities

Published on: October 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

SEC Case Headlines: New Jersey Fund Manager Faces Charges Over $1.1M Ponzi Scam, $32M Fraud Scam Involving Amber Mining is Halted, and Executives Face Charges for Allegedly Bilking Investor in Stock Fraud

Published on: October 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

NJ Fund Managers Faces SEC Fraud Charges
The Securities and Exchange Commission is charging William J. Wells and his Promitor Capital Management LLC with bilking investors in a $1.1 million Ponzi scam. According to the regulator, Wells falsely misrepresented himself as a registered investment adviser to some investors. However, rather than invest their money in specific stock as he told them he would, Wells and his firm placed most of the funds primarily in risky options that garnered poor results. He then allegedly hid the outcomes using bogus investor account statements that recorded performance figures that were severely inflated.

Wells also allegedly tried to conceal the investment loses by making Ponzi-like payments in which he paid earlier investors using the funds of new investors. By the end of this summer, fund brokerage accounts at Promitor held under $35 while the remainder were sucked dry from the Ponzi-like payment, trading losses, or transferred into Wells’ own bank account.

Meantime, the U.S. Attorney’s Office for the Southern District of New York has filed a parallel criminal action against Wells.

Regulator Files Charges, Obtains Asset Freeze in $32M Amber Mining Scam
The SEC has gotten asset freeze and file fraud charges against Steve Chen and 13 entities based in the state of California. According to the regulator, Chen falsely promised investors they would make money in an investment venture involving amber holdings.
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Florida Investment Adviser is Charged With Securities Fraud

Published on: October 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging investment adviser Arthur F. Jacob and his Innovative Business Solutions LLC with fraud. The regulator claims that the two of them deceived clients from 2009 into 2014 and violated the federal securities laws’ antifraud provisions along with an SEC antifraud rule.

In its order instituting administrative proceedings regarding the purported investment adviser fraud, the SEC Enforcement Division contended that IBS and Jacob misrepresented the profitability and risks of investments he had bought for clients. Rather than disclosing the risks involved in certain exchange-traded funds, Jacob purportedly told clients that his investment approach was safe, presented no or little risk, and would garner predictable earnings. He also is accused of making misstatements to clients regarding their investments’ profitability.

Jacob and his Florida-based firm are not registered as an investment adviser with the regulator or any state. He is accused of telling clients that registration was not mandatory and of hiding his disciplinary history. For example, Jacob was disbarred from being an attorney because he misappropriated client moneys and engaged in other misconduct, including make false statements while under oath and to the Bar Counsel, submitting false tax returns for a client, charging unreasonable fees, and violating a court order.
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UBS Puerto Rico To Pay the SEC $15M Over Closed-End Bond Fund Sales

Published on: September 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. of Puerto Rico (UBS PR) has consented to pay $15 million to resolve the Securities and Exchange Commission’s claims related to the brokerage firm’s supervision of the sale of its closed-end Puerto Rico bond funds (CEFs). The SEC contends that UBS PR did not properly supervise ex-broker Jose Ramirez, who is accused of increasing his compensation by at least $2.8 million when he allegedly had customers improperly borrow funds to invest in Puerto Rico bond funds. UBS fired Ramirez last year.

The funds came from UBS Bank USA, which is a bank affiliated with UBS PR. Under bank and UBS rule, the funds from UBS Bank are not allowed to be used to carry or purchase securities. According to the SEC, not only was using the funds from the Bank a violation, investors were placed at risk of losses while Ramirez profited. The SEC has filed a separate complaint against the ex-UBS broker.

The regulator claims that Ramirez misled customers about how safe the CEFs were, as well as misrepresented the risks involved. He purportedly lied to his branch manager when he was asked about suspect transactions.

To avoid getting caught, Ramirez allegedly told customers to move money from their credit line to an external bank account before placing the funds into their brokerage account at UBS PR and then buying the CEFs. The CEFs, which were heavily invested in Puerto Rico bonds, dropped in value when the Puerto Rican bond market started to decline in the Fall of 2013. Customers then had a choice of either paying down part of the loans or risk liquidation of their investments.

The $15 million settlement will be put into a fund for investors who sustained losses when the funds dropped in value. The Commission’s order instituting a settled administrative proceeding claims that UBS PR did not have the systems and procedures to prevent or detect the misconduct that Ramirez was engaging in. Even though UBS PR was allegedly apprised at least twice that customers of Ramirez might be violating the loan policy, the brokerage firm’s policies did not provide for reasonable follow up. UBS PR also purportedly lacked a system to make sure that credit line proceeds that were moved out of firm accounts were not used to buy securities.
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Father and Sons Charged in $20M Stock Scam

Published on: September 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging a father, three sons, and two other men with bilking people who invested money in Gerova Financial Group. The regulator’s complaint names John Galanis, his sons Derek, Jason, and Jared, Gerova president Gary T. Hurst, and investment adviser Gavin Hamels. John has been a defendant in SEC enforcement actions numerous times over the last four decades. Jason faced SEC charges in 2007.

The SEC contends that Jason and Hirst came up with a securities scam in 2010 to secretly issue $72M of unrestricted shares to a friend in Kosovo. The Galanis’ are accused of redirecting the proceeds from the sales of those shares from the friend’s brokerage accounts and wiring the money to themselves and others. This resulted in about $20 million in illicit profits.

Jason is accused of bribing Hamels to buy stock in Gerovia to help stabilize its price as shares went into liquidation. Hamels is accused of buying the stock for clients according to arrangements made with Jared about prices, times, and how much to buy. He allegedly did not tell clients about Jason’s bribe.

The SEC is charging all of the men with federal securities laws and securities registration violations. It is charging Hamels with investment adviser fraud. Meantime, prosecutors in New York have put out a parallel action filing criminal charges against the six men, as well as Ymer Shahini, who was the family friend in Kosovo.
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SEC Headlines: Regulator Settles Private Equity Fund Fraud Case for $6.8M, Accuses R.T. Jones of Not implementing Cybersecurity Measures, and Files A Securities Case Over Stock Manipulation

Published on: September 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Men Accused of $6.8M Private Equity Fund Fraud Allegedly Bilked Friends and Family
The Securities and Exchange Commission has settled charges with two men and their unregistered investment advisory firm for allegedly bilking investors in a private equity fund. Under the agreement, William B. Fretz, John P. Freeman, and their Covenant Capital Management Partners, L.P. will owe the regulator about $6.8 million. Any money collected will go to investors that were defrauded.

According to the SEC order instituting administrative proceedings over the alleged private equity fund fraud, the two men, their firm, and Covenant Partners, L.P., which is the fund they managed, sold partnership interests in the fund to friends and family. However, instead of investing the money, they used the cash for themselves and their other business.

Fritz and Freeman are accused of taking more than $1 million and placing it with their brokerage firm, Keystone Equities Group L.P., which was failing. They also purportedly paid close to $600,000 in performance fees they didn’t make and used assets from the fund to pay back personal obligations.

Freeman, Fretz, and CCMP consented to settle charges accusing them of willfully violating federal securities laws and SEC anti-fraud laws. However, they are not denying or admitting to the SEC fraud charges.

Investment Adviser R.T. Jones Capital Settles SEC Charges Related to Cybersecurity
R.T. Jones Capital Equities Management has settled SEC charges accusing it of not putting into placed required cyber security procedures and policies prior to a breach that compromised the personal identifiable (PII) information of thousands of its clients. Without denying or admitting to the findings, the investment adviser agreed to pay a $75,000 penalty and consented to cease and desist from future violations of the Securities Act of 1933’s Rule 30(a) of Regulation S-P.

According to an SEC probe, R.T. Jones violated federal securities laws’ “safeguard rule.” The rule mandates that registered investment advisers put into place written procedures and policies that are designed in a manner reasonable enough that they protect customers’ information and records from security threats. The regulator said that for four years R.T. Jones did not adopt any such policies.
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SEC Files Fraud Charges in $18M Arizona Securities Scam that Bilked 225 Investors

Published on: September 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging James Hinkelday, Jason Mogler, Brian Buckley, Casimer Polanchek, and James Stevens with bilking millions of dollars from investors. The regulators claims that the Arizona residents misappropriated about 97% of $18 million from 225 investors who thought their money was being used to acquire and develop beachfront property in Mexico, run recycling facilities, and buy foreclosed residential properties to resell. The men are accused of making Ponzi-like payments to investors who threatened to sue them.

In its complaint, the SEC says that the men-none of whom were registered with the agency to sell investments-solicited prospective investors via magazine, radio, and Internet ads, along with cold calls, marketing materials, and investor presentations. Polanchek purportedly looked for investors at cruises, bars, and self-help seminars. The men also were involved in The Investment Roadshow, which is an Arizona radio program that instructed listeners on how to use self-direct IRAs to put money in their companies. Prospective investors were guided to a website where they could schedule appointments and join seminars to find out more about the investment opportunities.
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Another RIA/Financial Radio Show Host Charged with Securities Fraud

Published on: September 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Bennett Group Financial Services founder and host of the radio show “Financial Myth Busting” with allegedly inflating her investment adviser firm’s assets under management, as well as its investment returns, to try to gain more clients.

Dawn J. Bennett is accused of claiming that the Washington-based firm had over $2 billion in assets even though it never oversaw more than $407 million. She made the inflated claim multiple times on her radio show. She also purportedly said that the Bennett Group’s investment returns were among the top 1% globally. The SEC said that these bragged about returns came from a model portfolio and did not represent any real customer returns.

At one point Bennett was number five on Barron’s “Top 100 Women Financial Advisors” list and number two on the DC “2011 Top Advisors” because of her alleged misstatements. She touted these rankings to potential customers.

In the regulator’s complaint, the Commission said that from at least 2009 to early 2011 Bennett and her investment adviser firm made material misstatements and omissions to try to bring in more clients. They also allegedly made other misstatements to attempt to conceal their fraud.
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SEC Moves to Stop Financial Fraud That Bilked Over 100 Investors Of Over $14 Million

Published on: September 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed fraud charges and obtained an asset freeze against three individuals accused of stealing investor money. According to the regulator, David Kayatta, Paul Ricky Mata, and Mario Pincheira raised over $14M from over 100 investors for two unregistered funds. The money was supposed to be placed in real estate.

The SEC’s complaint noted that on a website run by Mata, the alleged fraudsters advertised an “Indestructible Wealth Bootcamp” and promised said wealth when, in truth, both funds never made a profit. Online videos on the website and YouTube marketed this investment seminar and another one titled “Finances God’s Way.” Retirees were encouraged to sell their securities holdings and get involved in the unregistered funds.

The complaint states that Mata is an ex-licensed securities professional with a lengthy disciplinary record that he hid from investors. He and Kaytata allegedly promised guaranteed returns for one fund even though a state regulator had sanctioned them for making such promises. The two men are accused of diluting the investments in the other fund by bringing in new investors while making false assurances to current investors that the two funds were doing well. Pincheira, Kayata, and Matta purportedly charged dinners, entertainment, travel, and other expenses on Pincheira’s credit card and paid off the balances with investor money. Monthly balances on the card were often above $40,000.

Unfortunately, new technologies are making it easier for fraudsters to reach more investors. Well-edited videos and legitimate looking ads can make scammers appear as if they are experienced and qualified to offer financial advice when they are not. At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud lawyers are here to help investors who have sustained losses because of financial scams.
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