Articles Posted in Texas Securities Fraud

After District Court Dismisses Texas Securities Fraud Against Billionaire Mark Cuban, SEC Appeal Can Now Move Forward

Published on: August 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the U.S. District Court for the Northern District of Texas dismissed the Texas securities fraud charges that the Securities and Exchange Commission had filed against billionaire Mark Cuban. The SEC had asked the judge to close the case after deciding not to file an amended complaint against the Dallas Mavericks’ owner. The court’s ruling now makes way for the SEC to consider whether to appeal the decision.

The SEC is accusing Cuban of engaging in insider trading. Cuban found out from the chief executive officer of Mamma.com that the company was going to raise money via a PIPE deal or public entity or a private investment. Cuban, who owned a 6.3% stake (600,000 shares) in the company, verbally said he wouldn’t tell anyone about the PIPE offering and then sold his whole stake in the company right before the PIPE deal became public knowledge. As a result, the SEC says that Cuban prevented himself from losing $750,000 when company’s stock dropped.

The SEC had filed its Texas insider fraud trading lawsuit against Cuban based on the “misappropriation theory.” In United States v. O’Hagan in 1997, the US Supreme Court ruled that a defendant is in violation of the antifraud provisions of the 1934 Securities Exchange Act if he or she “misappropriates” confidential information for trading purposes and breaches the duties of confidentiality and loyalty.

The SEC’s Rule 10b5-2 was put in place in 2000 to clarify what that duty entailed. In Cuban’s case, the duty of confidence or trust exists when a person agrees to keep information confidential.

The district court presiding over the SEC securities fraud lawsuit against Cuban, however, said that the defendant would have misappropriated the information if, in addition to promising to keep what he knew confidential, he had agreed that he wouldn’t trade based on the information that was given to him. However, the judge agreed with the defense that Cuban never promised that he wouldn’t trade. His legal representatives say there was no reason for him to abstain from trading.

Related Web Resources:
SEC Won’t File Amended Complaint Against Mark Cuban, The Wall Street Journal, August 12, 2009
SEC Files Insider Trading Charges Against Mark Cuban, SEC, November 17, 2008
Related Web Resources:
Mamma.com

The SEC Complaint (PDF)

The Mark Cuban Weblog
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Next Financial Ordered to Pay One Million Dollars for Supervisory Deficiencies that Led to Texas Securities Fraud

Published on: August 4, 2009 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says NEXT Financial Group Inc. has agreed to a one million dollar fine for its alleged failure to properly supervise a number of client accounts and over 100 office of supervisory jurisdiction (OSJ) branch managers. The managers are in charge of overseeing sales and trading activities for branches and brokers. As a result of the alleged inadequate supervision, FINRA says that broker misconduct was able to take place, resulting in Texas securities fraud.

FINRA charges that between 1/05 and 11/06, the broker-dealer allowed its OSJ branch managers supervise to themselves. Even when NEXT Financial Group implemented a new Regional Manager supervisory system, FINRA says that this too continued to prove unreasonable for at least another year. Each month, three regional managers who were unable to adequately access client suitability data were in charge of reviewing thousands of transactions.

FINRA mandates that firms appoint at least one principal to set up, maintain, supervise, and enforce “a system of supervisory control policies and procedures.” FINRA says that because of Next Financial’s inadequate procedures and policies, the broker-dealer failed to notice that excessive markdowns and markups on corporate bond trades and the churning of customer accounts were taking place. Investors ended up losing some $768,000, FINRA contends. The funds have been reimbursed.

NEXT Financial Group’s former chief operating officer and chief compliance officer Karen Eyster has agreed to sanctions for failing to fulfill her obligations as a supervisor. FINRA fined her $35,000. She also has to undergo 15 hours of supervisory training and serve a 2-month suspension as a principal.

Also, FINRA says that the broker-dealer’s systems and procedures regarding variable annuity exchanges were unreasonable and did not give enough guidance about what needed to be looked at when making variable annuity exchange recommendations to clients.

By agreeing to settle, the broker-dealer and Eyster are not admitting to or denying the charges that FINRA has made against them.

Related Web Resources:
FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures That Led to Churning of Customer Accounts, Excessive Commissions, FINRA, July 22, 2009
NEXT fined $1 million for churning accounts, Chron.com, July 22, 2009 Continue Reading ›

Provident Royalties Faces $485 Million Texas Securities Fraud, Says SEC

Published on: July 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has charged Provident Royalties, LLC, Provident Asset Management LLC, and founders Brendan Coughlin, Paul Melbye, and Henry Harrison with Texas securities fraud over their alleged involvement in a $485 million investment scam. The SEC claims the defendants used the ponzi scheme to defraud thousands of natural gas and oil investors.

According to the SEC civil complaint, Provident allegedly made a series of fraudulent offerings of limited partnership interests and preferred stock from at least June 2006 through January 2009 and persuaded about 7,700 US investors to invest half a billion dollars. The Texas-based firm allegedly promised yearly returns of more than 18% and misrepresented the way the funds were going to be used. The SEC is also accusing broker-dealer Provident Asset Management, LLC of making direct retail securities sales, as well as soliciting unaffiliated retail broker-dealers to submit placement agreements for each offering.

The SEC contends that investors thought that 86% of the funds would be used in gas and oil investments, mineral rights, leases, exploration, and development. While less than 50% of the investors’ funds were actually used to acquire and develop gas and oil exploration, the SEC claims the other funds were used to pay previous investors of Provident Royalties.

Coughlin, Harrison, and Melbye have been charged with orchestrating the ponzi scam. Also named in the SEC complaint are the 21 entities that sold securities to investors.

The SEC is charging the defendants with violating the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and the Securities Act of 1933. The SEC is seeking preliminary and permanent injunctions, a temporary restraining order, financial penalties, and disgorgement of ill-gotten gains in addition to prejudgment interest. An emergency freeze on the assets has been issued and a receiver has been appointed.

Related Web Resources:
SEC Obtains Asset Freeze in $485 Million Nationwide Offering Fraud, SEC, July 7, 2009
Read the SEC Complaint (PDF)
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Texas Securities Fraud Lawsuit Against Former EnergyTec CEO Can Move Forward, Says District Court

Published on: July 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of Texas says it won’t dismiss the securities fraud lawsuit against Frank Cole, the former head of Energytec Inc. The plaintiffs are accusing Cole, Energytec, and others of taking part in a fraudulent oil investment scam that cost investors millions of dollars.

In their securities fraud complaint, the plaintiffs say that Energytec developed 250 “Income Programs” with oil well working interests, in addition “Purchase Agreements” and “Evaluation Reports” for each program. Frank W. Cole Engineering prepared the evaluation reports, which were offered to investors, along with the purchase agreements, in connection with the sale of income program securities.

According to the plaintiffs, the evaluation reports and the purchase agreements contained material misrepresentations. They also claim that there were material omissions in the documents. For example, Energytec failed to disclose that a corporate officer had a prior criminal conviction and did not reveal that monthly payments were in fact advance payments that Energytec would later recoup.

Jomar Oil, the lead plaintiff in the investment fraud case, says Energytec’s Income Program 225 had unregistered brokers who sold securities and that this violated the Connecticut Uniform Securities Act and the Securities Exchange Act. The plaintiffs are accusing Energytech and Cole of lying to investors and filing SEC reports that were misleading.

The Texas court declined Cole’s motion to dismiss the securities fraud lawsuit accusing him of playing a key role in the Ponzi scheme. The judge noted that the plaintiffs had met applicable pleading requirements and had gone beyond pleading ‘positional scienter’ in regards to Cole.

Related Web Resources:
Ex-CEO Loses Bid to Exit Energytec Ponzi Suit, Securities Law 360, July 13, 2009
Judge Allows Suit Over Alleged Energytec Scam, Courthouse News Service, July 13, 2009 Continue Reading ›

Texas Securities Fraud: A Houston Attorney and a Texas A & M Professor Charged with Investment Fraud

Published on: June 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission and the Commodity Futures Trading Commission are accusing Houston attorney and accountant Daniel Petroski and Texas A & M Professor Robert Watson of using forged bank records to engage in investor fraud. On May 21, the US District Court for the Southern District of Texas froze the assets of the two men and of two firms associated with the alleged misconduct.

According to the two agencies, Petroski and Watson raised over $19 million from about 65 investors, while claiming they would use a foreign-currency trading software, “Alpha One,” that they said belonged to their company, Private FX Global One Ltd. Watson’s “deal clearing company, “36 Holdings,” was also to participate in the investing.

The SEC and the CFTC contend that the two men engaged in misrepresentation when they made it appear as if their foreign exchange trading business never had a losing month, achieved a yearly return of over 23%, and that their venture had millions of dollars in Swiss and US bank accounts. The two agencies are also accusing the two men of generating bogus records for investigators, including records indicating that 36 Holdings had an account with Deutsche Bank where Global One earned over $2 million this year by trading foreign currencies. In fact, 36 Holdings does not have a Deutsche Bank account.

In addition, the SEC’s complaint accuses the two men of putting, at maximum, 33% of their proceeds in a Swiss bank before transferring some $5 million to a Houston bank-even though they told investors that the amount of foreign currency and other assets was closer to 80%. The defendants are also accused of giving their own employees bogus Swiss bank statements and making false claims that 36 Holdings had nearly $70 million deposited there.

The SEC accuses the defendants of violating the Securities and Exchange Act of 1934’s Section 10(b), Rule 10b-5 thereunder, and the Securities and Exchange Commission Act of 1933’s Section 17(a). The CFTC and the SEC are seeking a preliminary injunction, final judgment from permanent enjoinment of future violations, disgorgement with interest, and fines.

Texas Securities Fraud: Court Grants SEC’s Request to Freeze Defendants’ Assets Following $40 Million Investment Scam

Published on: May 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of Texas has issued an order granting the Securities and Exchange Commission’s request for an asset freeze against Excel Lease Fund, Inc. and its owner, Benny L. Judah. Both are accused of being involved in a $40 million Texas securities fraud scheme that affected hundreds of investors.

In the consent order, the defendants did not admit to or deny the SEC’s allegations. Judah, a Texas business person, also agreed to an injunction barring him and any of his entities from issuing securities. He has control over 78 Texas businesses and plays a leadership role in almost 50 of them.

The SEC says that beginning January 2006, the defendants made a high-yield debenture offering to investors, while telling them that their money would go toward a number of “legitimate business” uses, including helping to retire a series of earlier debentures. The agency contends that Judah actually used the funds for non-Excel business purposes, as well as for his personal use. Investigators say at least $5 million of the funds may have been lost through day trading.

In addition, the SEC is accusing the defendants of overstating by at least 30% the value of assets behind the debentures, neglecting to disclose about $20 million in related-party loans to other Judah-owned companies, and overstating Excel’s assets through the use of some $15 million in bogus lease contracts. The SEC wants to obtain permanent injunctions, fines, and disgorgement against the defendants.

Over the years, our Texas securities fraud lawyers have helped many investment fraud victims recoup their losses.

Related Web Resources:
Benny L. Judah and Excel Lease Fund, Inc., SEC.gov, April 21, 2009
Feds freeze assets of Lubbock businessman Benny Judah, NewsChannel11, April 22, 2009
Read the SEC Complaint (PDF)
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Texas Securities Fraud: Ex-Dallas Football Player Charged with Alleged Involvement in $24 Million Investment Scheme

Published on: May 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, in U.S. District Court for the Northern District of Texas, ex-Dallas Cowboys football player Michael Kiselak and three other defendants were charge for their alleged involvement in a $24 million investment fraud scheme. The US Securities and Exchange Commission is suing the defendants, which include Kiselak, who is now a money manager, his Texas-based investment firm Kiselak Capital Group LLC, Jeffrey Sykes, and Gemstar Capital Group Inc, a venture capital company.

According to the SEC, Kiselak, acting on behalf of KCG, obtained about $24 million from 14 investors. However, the SEC says that the former professional football player misrepresented the way the funds would be invested, promised inflated returns, and failed to tell investors that his company would receive a 35% performance fees on any profits from trades. The SEC is also accusing Kiselak of telling investors that his company made a 2.25% month profit trading Treasury bills when he actually invested more than 90% of their funds in Gemstar.

KCG reportedly gave the SEC a brokerage statement showing that as of the end of March 2009, Gemstar had more than $23 million in segregated accounts that it was holding for KCG. The SEC contends, however, that the actual amount was closer to $20 million, and the funds had not been segregated to benefit KCG’s investors. The SEC now says that as of May 9, the amount in the account is about $19 million. As of May 12, KCG reportedly could not account for approximately $7 million of the investors’ funds.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and the appointment of a receiver to take charge of both firms’ assets. Judge John McBryde has frozen the defendants’ assets and granted a temporary restraining order.

Now a registered broker, Kiselak was a Dallas Cowboys football player from 1998 to 2000.

Related Web Resources:
Ex-Dallas Cowboy Defrauded Fund Investors, SEC, Bloomberg.com, May 12, 2009
SEC sues former Dallas Cowboys player Michael Kiselak and his financial firm, WFAA, May 12, 2009 Continue Reading ›

SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit

Published on: May 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Court of Appeals for the Fifth Circuit is affirming the Securities Exchange Commission’s enforcement action against Southwest Securities broker Scott Gann who is accused of engaging in market timing activities that violated certain funds’ restrictions. The 5th circuit’s decision affirms a lower court’s ruling in favor of the SEC.

In 2002, Scott Gann and George Fasciano, both employees of Southwest Securities Inc, designed a plan for Haidar Capital Management and Capital Advisor that would allow them to trade mutual funds by engaging in market timing. The two men agreed to share the commissions.

The court says the two men studied the fund companies’ rules and requirements regarding market timing and that everyone involved was aware that the trades would have to take place “under the radar” so block notices wouldn’t be sent to them. The two men then opened up 21 accounts for nine HCM affiliates-each one had the same investors.

Trading for HCM started on Feb 10, 2003. SWS was issued a block notice 15 days later. Fasciano and Gun then switched the identifier number that was being used so they could keep trading.

They made 2,500 trades over a seven-month period in 56 companies mutual funds. They were sent 69 block notices.Their trades had an aggregate value of $650 million. Gann made about $56,640.67.

The SEC filed its enforcement action against the two men in 2005 and contended that the trades violated Section 10(b). Without admitting to wrongdoing, Fasciano settled.

The district court found that Gann had made material misstatements with the intent to deceive and had violated Section 10(b) and Rule 10b-5. The court ordered Gann to disgorge his profits from the HCM trades and pay a penalty of $50,000. The court also further enjoined him from future violations. This was affirmed by the appeals court.

In the 5th Circuit Court, Judge Jacques Wiener Jr. said that Gann failed to make a factual showing to show that the district court clearly made a mistake when it ruled in favor of the SEC and found that Gann violated the 1934 Securities Exchange Act Section 10(b).

While the court notes that market timing is not against the law, there are a number of mutual fund companies that do not allow this type of activity. Brokers who engage in market timing will occasionally get “block notices” from funds to let them know that they’ve gone against the fund’s restrictions, as well as bar certain accounts controlled by the broker from future trades.

Magistrate Judge Tells Texas Court that Citigroup Global Markets Holding Inc. Should Not Be Denied Arbitration Award for Unpaid Promissory Note

Published on: April 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US District Court for the Western District of Texas should confirm an arbitration award for brokerage firm Citigroup Global Markets Holding Inc. against a former employee who failed to pay his promissory note-so says magistrate judge Nancy Stein Nowak.

Nowak argued before the Texas court that even if “equitable reasons” exist for why stockbroker Ernest Elam shouldn’t pay the brokerage firm the money he owes for the note, the arbitrator’s decision must still be upheld because the former Citigroup broker failed to provide a reason for why he shouldn’t pay that falls under the Federal Arbitration Act.

Last July, the arbitration panel found in favor of Smith Barney and Elam was told to pay the investment firm $193,484.28, $15,768.70 in legal fees, and 5% interest per annum for any balance that is not paid. In turn, Elam asked for the award to be vacated because he claims that:

• The promissory note was a forgivable lone.
• He was misled about repayment requirements.
• Smith Barney sought repayment because the broker’s departure caused the branch manager’s end of the year bonus to go down.
• Smith Barney benefits financially from commissions through Elam’s previous clients.

According to Nowak, Citigroup Global Markets Holdings Inc. and Citigroup Global Markets Inc. (as Smith Barney) had asked for confirmation of the award against Elam for the 2004 note he defaulted on in the original principal amount of $270,878. The magistrate judge says that according to the FAA, an arbitration award can only be vacated if:

• The award was obtained through fraud, corruption, or undue measures.
• The arbitrators were at least partially corrupt or engaged in misconduct or went beyond the scope of their powers.

Therefore, Novak contends that the district court cannot vacate the award and should grant Smith Barney’s motion.
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Texas Court Freezes Assets of Weizhen Tang After SEC Accuses Him of Operating Multi-Million Dollar Ponzi Scam Targeting Chinese-American Investors

Published on: April 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

This month, the U.S. District Court for the Northern District of Texas put forth an order freezing the assets of Weizhen Tang, his hedge fund Oversea Chinese Fund LP, a number of related entities, and an investment adviser. The move comes after the Securities and Exchange Commission accused Tang and the fund of running a multi-million dollar Ponzi scam. Tang calls himself the “Chinese Warren Buffet.” The federal judge in Dallas has appointed a receiver to take charge of Tang’s assets.

According to the SEC, Tang raised somewhere between $50 million to $75 million, procuring the funds from over 200 investors. Chinese-American investors were reportedly his primary targets.

The commission says that Tang has been running his hedge fund as a Ponzi scheme for at least a few years and that he allegedly told investors that he posted false profits on their account statements to cover up the significant trading losses and bring in new investors while using money from new investors to return principle and pay at least $8 million in bogus profits to other investors.

The SEC is charging Tang, Oversea Chinese Fund LP, WinWin Capital Management LLC, J.O.R. & Associates LLC, Weizhen Tang Corp. WinWin Capital LP, and Weizhen Tang & Associates Inc. Named as relief defendants are Tang entities Bluejay Investment LLC, and WinWin Capital Partners LP. The Commission is seeking a final judgment, permanent enjoinment from future violations, emergency and interim relief, payment of financial penalties, disgorgement of ill gotten-gains, and prejudgment interest.

The commission says that Tang offered and sold limited partnership interests in WinWin Capital Partners to raise capital for the hedge fund. The SEC says that as of March 10, WinWin Capital Partners had raised nearly $17.3 million in principal investments from about 75 US investors.

On his Web site, however, Tang recently posted a blog saying that he was not running a Ponzi scam. The 50-year-old Toronto hedge fund manager has also been accused by the Ontario Securities Commission of investment fraud and cheating investors in China and Canada.

Related Web Resources:
SEC Halts On-Going Multi-Million Dollar Ponzi Scheme and Affinity Fraud Involving Investments in a Canadian-Based Hedge Fund, SEC, April 6, 2009 SEC sues Toronto’s ‘Chinese Warren Buffett’, Financial Post, April 14, 2009
Weizhen Tang: The Chinese Warren Buffet Accused Of Ponzi Scheme, The Huffington Post, April 14, 2009
Read the SEC Complaint (PDF)
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