Investor Lawyers Blog

SEC Modifies Definition of Net Worth Standard for “Accredited Investors” with Final Rule

Published on: December 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has adopted a final rule that revises the net worth standard for “accredited investors.” Although the modified definition went into effect once the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, the SEC still had to adjust its rules to this modification. Per the Dodd-Frank Act’s Section 413(a), the Securities Act of 1933’s definition of “accredited investors” cannot include the value of a primary person’s residence for purposes of determining whether he/she qualifies as one based on possessing a net worth of over $1 million.

The Securities Act states that all sales and offers of securities in the US must be registered unless they are exempt from the criteria. The point of the concept of “accredited investors” is to be able to ID people that can stand the economic risk of investing in a security that is unregistered for an indefinite time frame and, should it come to it, be able to afford losing their entire investment. Because “accredited investors” are usually the only ones that are given the opportunity to invest in private offerings, the opportunity for certain people to invest and the pool of available investors is influenced by whether an investor can be considered an accredited investor.

Before Dodd-Frank, one’s main residence and its fair market value, as well as the indebtedness obtained by the residence, were factored in when calculating net worth to figure out whether or not the individual fulfilled the $1 million threshold. The Act’s Section 413(a), however, took this property out of the equation but only up to the residence’s fair market value when the securities’ sale takes place. This means that if one’s primary residence is “underwater,” it will lower the individual’s net worth according to the amount of indebtedness that goes beyond the fair market value of that person’s primary residence for purposes of determining whether or not that person is an accredited investor. The final rules also include a limited grandfathering provision letting investors that no longer qualify as “accredited investors” because of changes put into effect by Dodd-Frank to be treated as accredited for certain “follow-on” investments.

The final rule will go into effect 60 days after it is published in the Federal register.

Throughout the US, Shepherd, Smith, Edwards, and Kantas, LTD, LLP represents investors who are victims of securities fraud in recovering their losses.

Read the final rule (PDF)

SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act, SEC, December 21, 2011

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FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011
Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011
Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011 Continue Reading ›

SEC Seeks to Impose Tougher Penalties for Securities Fraud

Published on: December 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued a proposal seeking to impose larger penalties on wrongdoers. The proposal comes in the wake of criticism that the agency isn’t doing enough to punish the persons and entities that played a role in the recent credit crisis and calls for:

• Capping fines issued against individuals at $1 million/violation rather than just $150,000.
• Raising penalties against firms from $725,000/action to $10 million.
• Multiplying by three how much the SEC can seek using an alternative formula that calculates the violator’s gains.
• Permission to determine penalties according to how much investors lost because of an alleged misconduct.
• Permission to triple the penalty if the defendant is a repeat offender and has committed securities fraud within the last five years.

The proposal was included in a letter sent to Senator Jack Reed by SEC Chairman Mary Schapiro last month. Reed heads up a subcommittee that oversees the Commission. In her letter, Schapiro said she believed the proposed changes would “substantially” improve the agency’s enforcement program.

The SEC has come under fire for failing to detect a number of major scandals before they blew up, including the Madoff Ponzi scam and the Enron fraud. Recently, US District Judge Jed Rakoff, who rejected the SEC’s proposed $285 million securities settlement with Citigroup, questioned a system that allows wrongdoers to pay a fine, as well as other penalties, without having to admit or deny wrongdoing. Now, the Commission appears to be working hard to rehabilitate its image so that it can be thought of as an effective and credible regulator of the securities industry.

According to Investment News, another way that the SEC may be attempting to re-establish itself is by targeting investment advisers. The Commission has reported filing a record 140 actions against these financial professionals in fiscal 2011, which is a 30% increase from 2010. One reason for this may be that a lot of the actions deal with inadequate paperwork that can easily be identified, which is causing the agency to quickly score a lot of “successes.” This approach to enforcement is likely allowing the SEC to discover small fraud cases before they turn into huge debacles. (If only SEC staffers had requested the appropriate documents related to trades made by Bernard Madoff’s team years ago, his Ponzi scam may have been discovered before the losses sustained by investors ended up hitting $65 million.

The agency’s revitalized efforts are likely prompting some financial firms to work harder on compliance. Investors can only benefit from this.

SEC’s Schapiro Asks Congress to Raise Limits on Securities Fines, Bloomberg/Businessweek, November 29, 2011

More Blog Posts:
SEC Files Charges in $27M Washington DC Ponzi Scam, Stockbroker Fraud Blog, November 21, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges, Institutional Investor Securities Blog, December 16, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements, Institutional Investor Securities Blog, November 5, 2011

Bank of New York Mellon To Pay $1.3M To Texas, New York, and Florida Over Auction-Rate Securities Trading Allegations

Published on: December 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Bank of New York Mellon Corp. (BNY) has agreed to pay $1.3 million to the states of Florida, New York, and Texas over allegations that it engaged in the manipulative trading of auction-rate securities. The settlement comes following a joint probe by New York Attorney General Eric Schneiderman, the Florida Office of Financial Regulation, and the Texas State Securities Board over Mellon Financial Markets’ actions as Citizens Property Insurance Corp. of Florida’s intermediary broker in an alleged scam to lower borrowing costs. Citizens Property is run by Florida and it is the largest home insurer in the state.

ARS interest rates are reset at auctions that usually occur at 7-day or 28-day intervals. According to the Texas State Securities Board, investors made $6.7 million less in interest than they would have earned if Citizens Property hadn’t placed bids during its own auctions. Mellon Financial Markets is accused of assisting Citizens Property in manipulating auction-rate securities’ interest rates by making and accepting bids on the latter’s behalf.

In 2008, Citizens Property allegedly asked a Mellon Financial Markets representative to assist it in bidding on its own ARS while hiding this action because broker-dealers in charge of managing the securities would have otherwise turned their bids down. Citizens Property then made bids that were lower than market rates, which caused the auctions to clear at rates below what they would have been. Meantime, Mellon Financial made approximately $300,000 in fees. At least one Mellon Financial broker expressed concern about these trades to a supervisor, who allegedly failed to seek legal advice or talk about these concerns with the MFM’s compliance department.

Following the collapse of the ARS market, one broker-dealer, who suspected that Mellon Financial was making Citizens’ bids, said that orders would no longer be made for a company bidding on its own securities. Yet, according to authorities, traders kept on with this practice until Bank of New York Mellon issued the order to stop. Those involved allegedly knew that bidding for CPIC established lower clearing rates, which would prove “detrimental” to investors holding or bidding on these ARS.

Citizens Property Insurance maintains that it thought its actions were “legally permissible.” The company claims that it was “vigilant” about getting advice from outside legal counsel before taking part in the transactions.

BNY Mellon Capital Markets has said that the alleged misconduct was related to the “isolated conduct” of three persons no longer with the financial firm. Mellon Financial Markets was a separate entity when the alleged bidding scam was happening.

BNY Unit Settles Auction-Rate Case, Wall Street Journal, December 23, 2011
Bank of New York Mellon Settles Auction-Rate Investigation, Bloomberg/Businessweek, December 23, 2011
BNY Mellon to pay $1.3M in Schneiderman suit, Crain’s New York Business, December 22, 2011

More Blog Posts:
Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011
Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011 Continue Reading ›

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge

Published on: December 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A US judge has denied Citigroup’s request that the $54.1M Financial Industry Regulatory Authority arbitration award issued to investors that sustained losses in municipal bond funds be overturned. This is one of the largest securities arbitration awards that a broker-dealer has been ordered to pay individual investors. Brush Creek Capital, retired lawyer Gerald D. Hosier, and investor Jerry Murdock Jr. are the award’s recipients. However, these Claimants are not the only investors to come forward contending that they were told the funds were suitable for investors that wanted to preserve their capital.

The investor losses were related to several leveraged municipal bond arbitrage funds that saw their value significantly drop between 2007 and 2008. Citigroup Global Markets had sold the municipal bond funds through MAT Finance LLC. Proceeds were invested in longer-term muni bunds while borrowing took place at low, short-term rates. The strategy proved to be unsuccessful, resulting in investors losing up to 80% of their money.

According to The Wall Street Journal, when it issued its ruling the arbitration panel appeared to reject three defenses that financial firms usually make:

• The financial crisis, and not the financial firm, is to blame for the losses.
• Sophisticated, rich investors should have known what risks were involved.
• The prospectus had warned in advance that investors could lose everything.

The Claimants alleged fraud, failure to supervise, and unsuitability. They had sought no less than $48 million in compensatory damages, fees, lost-opportunity costs, commission, lawyers’ fees, and interest.

The FINRA arbitration panel awarded $21.6 million in compensatory damages, plus 8% per annum, to Hosier, $3.9 million in compensatory damages, plus 8% per annum, to Murdock, Jr, and $8.4 million in compensatory damages, plus 8% per annum, to Brush Creek Capital LLC.

All Claimants were also awarded $3 million in lawyers’ fees, $17 million in punitive damages, $33,500 in expert witness fees, $13,168 in court reporter expenses, and $600 for the Claimant’s filing fee.

Following the FINRA ruling, Citigroup contended that the arbitration panel had ignored the law when arriving at the award. The brokerage firm also claimed that investors could not have depended on verbal statements that the financial firm had expressed about purchases because the clients had acknowledged through signed agreements that they could lose everything they invested. By denying Citigroup’s request to throw out the arbitration award, Judge Christine Arguello, however, said that the court found Citigroup’s “argument wholly unpersuasive.”

A Crack in Wall Street’s Defenses, New York Times, April 24, 2011

Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT / ASTA Case, Municipal Bond, April 12, 2011

Citigroup loses suit to overturn $54-million ruling, Reuters, December 22, 2011

More Blog Posts:
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Former-Chicago Bears Wide Receiver Willie Gault Sued by SEC for Securities Scam Involving the Alleged Inflation of Stock Prices

Published on: December 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is suing former NFL football player Will Gault for securities fraud. According to US regulators, he and several others participated in a fraud scam that involved inflating the stock price of Heart Tronics, which is a heart-monitoring device company. Other defendants in the Commission’s case include lawyer Mitchell Stein, Heart Tronics Co-CEO J. Rowland Perkins, and Stein’s driver Martin B. Carter. Investors were bilked of nearly $8 million.

Per the SEC’s complaint, between 2006 and 2008 Heart Tronics repeatedly announced that millions of dollars in (bogus) sales orders for its heart-monitoring devices had been placed. To garner investor confidence, Gault was appointed company president and Co-CEO.

Meantime, Stein, who hired promoters to promote the company’s stock online, allegedly made secret trades. The Commission says he used investors’ money to pay for private jets, a number of homes, and exotic motor vehicles.

Stein is also a defendant in a parallel criminal case filed by the US justice department. In the indictment against him, prosecutors charged him with putting out press releases promoting the fake sales, conspiring to obstruct the SEC probe, and taking part in a financial scam to artificially increase Heart Tronic’s stock price through bogus orders from nonexistent clients.

The Commission says that Perkins and Gault hardly ever asked Stein about his actions, as well as failed to fulfill their fiduciary duties. Gault and Stein are accused of defrauding one investor, in particular, who made a substantial investment in the heart-monitoring device company. That investor’s money ended up in Gault’s personal brokerage account.

The SEC is accusing Carter and Stein of generating false documents to support false disclosures that were made to the public. This included sending a letter from a fictitious client in order to deceive auditors, management, and disclosure counsel, as well as sending products to a friend of Carter’s to make it seem as if an actual device was delivered.

The SEC is seeking a permanent bar against Stein, Gault, and Perkins that would prevent them from serving as corporate officers. They also want them to pay financial penalties and give back ill-gotten gains.

Gault was a former University of Tennessee football player who played for the Chicago Bears for 11 seasons. He also belonged to the US Olympic team that boycotted the Summer Games in Moscow in 1980.

Securities Fraud
If you are an investor that was defrauded by people who took advantage of you and took the money for their own personal use and gain, you may have grounds for a securities fraud case.

Ex-NFL Star Willie Gault Sued by SEC in Stock-Pumping Fraud, BusinessWeek, December 23, 2011
SEC Charges California Company, Co-CEOs, and Attorney in Series of Fraudulent Schemes Pumping Company Stock, SEC, December 20, 2011
Read the SEC Complaint (PDF)

More Blog Posts:
Three Investment Advisers Charged with Massachusetts Securities Fraud, Stockbroker Fraud Blog, December 16, 2011
Colorado Securities Fraud: Universal Consulting Resources LLC and Owner Richard Dalton to Pay $15.8M to Settle SEC Lawsuit Over Ponzi Scam, Stockbroker Fraud Blog, December 9, 2011
Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges, Institutional Investor Securities Blog, December 16, 2011 Continue Reading ›

Barclays Capital Ordered by FINRA to Pay $3M Fine For Alleged Subprime Mortgage Securitization-Related Misrepresentations

Published on: December 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says that Barclays Capital Inc. will pay $3 million over charges of inadequate supervision related to the residential subprime mortgage securitizations and the misrepresentation of delinquency data. The SRO claims that between 3/07 and 10/10, Barclays misrepresented three RMBS’s historical delinquency rates.

Per industry rules, financial firms have to give investors certain performance information for securities that they issue. FINRA says that Barclay’s Capital misrepresented the historical delinquency rates for the RMBS between March 2007 and December 2010. This inaccurate data was published on the company’s website, which impacted how investors were able to evaluate other securitizations.

Historical delinquency rates, which provide historical performance information for previous securitizations with mortgage loans, are key in helping an investor determine and RMBS’s value and whether mortgage holders’ inability to make loan payments could disrupt future returns. The inaccurate information that was posted on the Barclay’s Capital website was referred to as historical delinquency rates in five subsequent residential subprime mortgage securitizations and had errors that were key enough to impact investors.

According to FINRA Enforcement Chief Brad Bennett, Barclay lacked a system that could ensure that delinquency data that was published was accurate.

Barclays has settled the case. However, the financial firm is not denying or admitting to the charges.

It was just earlier this year that FINRA fined Merrill Lynch $3 Million and Credit Suisse Securities $4.5 Million over misrepresentations involving RMBS. Both financial firms settled the allegations without denying or admitting to the charges.

According to the SRO, in 2006, 21 RMBS’s historical delinquency rates were misrepresented by Credit Suisse. The financial firm allegedly knew that this information was not accurate yet failed to adequately look into the mistakes, tell clients about the errors, or correct the information, which was published on its we site. The delinquency errors for six of the 21 securitizations were enough to impact the way investors were able to evaluate subsequent securitizations. Credit Suisse also allegedly did not define or name the methodology that was applied in determining the mortgage delinquencies in five other subprime securitizations. (Disclosing which method was issued is required because there are different standards for determining delinquencies.)

Regarding the charges against Merrill Lynch, the SRO claims 61 of the financial firm’s subprime RMBS had historical delinquency rates that were misrepresented. However, upon discovering the mistakes, Merrill Lynch published the correct data online. In eight cases, the delinquencies impacted investors’ ability to assess subsequent securitizations.

FINRA Fines Barclays Capital $3 Million for Misrepresentations Related to Subprime Securitizations, FINRA, December 22, 2011

Finra Fines Credit Suisse, Bank of America Over RMBS Errors, Bloomberg, May 26, 2011

More Blog Posts:
Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities, Institutional Investor Securities Blog, December 17, 2011

Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investor Securities Blog, July 22, 2011

Wells Fargo-Sponsored Survey Finds that Sense of Security About Retiring Doesn’t Necessarily Come with Affluence

Published on: December 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to a recent Wells Fargo & Co-sponsored survey, 23% of the 800 Americans with at $100,000 in investable assets who participated reported that they don’t feel confident that they will have enough money saved by the time they retire. 75% said they felt sure that they would have enough. The ones most likely to feel confident are the ones with a written a financial plan, trust that the stock market will take care of their investments, are married, have at least $250,000 in investable assets, and/or are male. Those who felt unsure about their finances for when they retire included those who are single, female, belong to the 40-59 age group, and/or have under $250,000 in investable assets.

Some of the Other Findings from the Survey:
• 48% of those in the 25 to 49 age range want to keep working during their retirement years.
• More men (42%) than women (34%) wanted to keep working even after hitting retirement age.
• Approximately three-quarters of those that are currently working believe that having a specific amount of money matters more than what age they are when they retire.
• Women without a written financial plan and/or with investable assets of over $100,000 but under $250,000 are more likely to believe that they won’t have enough money when they retire regardless of what they do now.
• Nearly 2 in 5 Affluent Americans feel like they should significantly reduce their spending now to save up for retirement • One-third of those surveyed worry that they won’t be able to leave their children an inheritance because their savings will have to go toward their retirement • Four in 10 prefer to enjoy life now rather than worry: These people are usually already retired (54%), seniors belonging to 60-75 age group (51%), Democrats (47%), and parents with kids that are already legal adults (44%)
• Parents with kids under 18 (71%), adults belonging to the 40-49 age group (62%), women (65%), and seniors age 50-59 (64%) are the ones most likely to worry about what will happen when they retire.

Unfortunately, there appears to a nationwide rise in investment fraud targeting baby boomers, many who are just (or on the verge of) retiring. The Wall Street Journal reports that many of these older investors found themselves placing their money in high-risk bets to compensate for the losses they suffered during the recently financial crisis.

There are approximately 77 million baby boomers currently live in the US. Of the 3,475 enforcement actions involving fraud in 2010, 1,241 affected investors were 50 years of age or older. According to securities regulators, this number is expected to hit a record figure this year. Enforcement actions involved free-lunch seminars, variable annuities, or the misuse of professional credentials. Common types of senior investment fraud included Ponzi scams, self-directed IRA’s containing bogus investments in gold, real estate, and oil wells, and promissory notes.

Our elder financial fraud lawyers at Shepherd Smith Edwards and Kantas, LLP represent seniors throughout the US. We know the toll that losing your savings can take on you and your family.
Retirement Fears Jump the Wealth Gap to Strike Many Affluent Americans, Wells Fargo Retirement Study Finds, Wells Fargo, December 14, 2011
Boomers Wearing Bull’s-Eyes, Wall Street Journal, December 14, 2011

More Blog Posts:
Well Fargo Advisers to Pay $2 Million to Settle Claims that Broker Sold Unsuitable Reverse Convertible Securities to Seniors, Stockbroker Fraud Blog, December 17, 2011
Texas Securities Fraud Over Sale of Allegedly Bogus Annuities to Elderly Seniors, Stockbroker Fraud Blog, December 14, 2011
LPL Financial Ordered to Pay $100K for Lack of Adequate Oversight that Resulted in Unsuitable Investments for Clients, Stockbroker Fraud Blog, November 29, 2011 Continue Reading ›

Bank of America to Pay $335M to Countrywide Financial Corp. Borrowers Over Allegedly Discriminating Lending Practices

Published on: December 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. has agreed to a record $335 million settlement to pay back Countrywide Financial Corp. borrowers who were billed more for loans because of their nationality and race, while creditworthiness and other objective criteria took a back seat. All borrowers that were discriminated against qualified to receive mortgage loans under Countrywide’s own underwriting standards.

The settlement is larger than any past fair-lending settlements (totaling $30M) that the US Justice Department has been able to obtain to date. Countrywide was acquired by Bank of America in 2008.

According to the Justice Department, Countrywide charged higher fees and interest rates to over 200,000 Hispanic and black borrowers while directing minorities to more costly subprime mortgages despite the fact that they qualified for prime loans. Meantime, the latter were given to non-Hispanic white borrowers who had similar credit profiles.

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts

Published on: December 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In its latest effort to help investors that lost money in the $7 billion Stanford Financial Group Ponzi scam recoup their losses, the Securities and Exchange Commission is suing the Securities Investor Protection Corporation. Both have been in disagreement over whether Stanford investors qualify for protection against SIPC rules, which are supposed to back brokerage firm client accounts against failure and cover investors for up to $500,000 in losses.

The SEC has said that this coverage should apply to Stanford investors because not only was broker-dealer Stanford Group Company a part of Stanford Financial, but also clients had to set up brokerage accounts to buy the certificate of deposits that their money was placed in. Upon purchase of their CD’s, they were given papers noting that the transaction was SIPC-covered. However, the SIPC, which is not in charge of regulating brokerage firms, contends that because clients’ money was placed in supposedly safe CDs sold by Stanford Financial, investors do not get to avail of this protection.

Now the Commission is seeking a court order that would compel the investor protection corporation to start liquidating Stanford Group Company. This filing is a key step in allowing customers to start getting their money back.

The SEC claims that it is solely authorized to decide whether SIPC should get involved. This is the first time the Commission has pulled rank to force the SIPC to take specific action. If the court grant’s the SEC’s order, SPIC plans to appeal.

Federal authorities seized Stanford Financial in 2009. R. Allen Stanford is accused of running the Ponzi scam and using the money belonging more than 21,000 clients to fund his expensive lifestyle. Investors were promised improbable interest rates that were supposedly spurred by a unique investment strategy.

This week, a hearing to determine whether R. Allen Stanford is fit to stand trial is scheduled to take place. The SEC has sued R. Allen Stanford for securities fraud and he is charged with 23 criminal counts of wrongdoing. Although he remains in federal custody, his criminal trial was delayed to allow him to go into detox for his addiction to anti-anxiety meds and anti-depressants.

One of his defense attorneys claims that the medications and a traumatic brain injury that he sustained when he was beaten in jail have caused him to develop amnesia. Meantime, prosecutors are expected to argue that Stanford is pretending that he severe memory loss.

Allen Stanford’s Move to Trial or Treatment Argued in Court, SF Gate, December 20, 2011
SEC, SIPC ready to rumble over Ponzi payouts, Investment News, December 20, 2011
S.E.C. Files Suit to Recoup Losses in Stanford Case, New York TImes, December 12, 2011

More Blog Posts:
Texas Securities Fraud: Unregistered Adviser Confesses to Selling Almost $400K in Promissory Notes and Investments Despite Cease and Desist Order, Stockbroker Fraud Blog, December 5, 2011
Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal, Stockbroker Fraud Blog, December 2, 2011
Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011 Continue Reading ›

Daniel “Rudy” Ruettiger Faces SEC Charges Over Pump-and-Dump Scam Involving Sports Drink Company

Published on: December 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

18 years after he was immortalized in the movie “Rudy,” Daniel Ruettiger and 12 others now face Securities and Exchange Commission charges. They are accused of misleading investor to get them to purchase stock in Ruettiger’s sports drink company Rudy Nutrition. Their alleged pump-and-dump scam resulted in over $11 million in illicit profits.

To settle the SEC securities charges, Ruettiger has consented to pay $382,866, while 10 of the others agreed to final judgments. By settling, they are not admitting to or denying any wrongdoing.

Per the SEC’s complaint, although Ruettiger’s sports drink company manufactured the drink called Rudy, Rudy Nutrition was actually a way for Ruettiger’s and his alleged co-conspirators to run their financial scheme. The Commission says that penny stock promoter Stephen DeCesare, who was brought in to turn Ruettiger’s company into a publicly traded one, was the main organizer of the pump stock scam. After Rudy Nutrition was given the ticker symbol RUNU, DeCesare and disbarred California attorney Kevin Quinn arranged for nominee entities to get three billion RUNU shares. The entities sold nearly one billion of them to investors through the public market. Other penny stock promoters then joined forces with DeCesare to engage in manipulative trading and fraudulent touting.

The SEC says that promoters involved in the pump-and-dump scam took part in manipulative trading so that Rudy Nutrition’s stock price would artificially inflate. Meantime, investors who were allegedly given misleading statements and false information through press releases about the company, as well as via promotional materials, were sold unregistered shares.

The misleading statements and bogus information were sent to millions via mailers, online chat rooms, and videos posted on the Internet. In less than four week, RUNU was trading 3 million shares (up from 720 shares). Within 14 days RUNU’s stock price went from a quarter to $1.05.

In September 2008, the SEC suspended trading because RUNU was delinquent with its periodic filings. This brought the pump-and-dump scam (the alleged fraudsters were conspiring to put out another two billion shares that they would dump at the end of the month) to a halt. The Commission took back Rudy Nutrition securities’ registration in November 2008.

Other participants slapped with SEC charges:
• Rocky Brandonisio, Rudy Nutrition President • Stephen DeCesare, penny stock promoter • Kevin Quinn, attorney and business consultant • Kevin Kaplan, Rudy Nutrition CFO • Pawl Dynkowski, stock promoter • Mehmet Mustafoglu, Rudy Nutrition consultant • Gregg Mulholland, stock promoter • Joseph Padilla, ex-registered representative at Scottsdale Capital Advisors and stock promoter • Andrea Ritchie, registered representative with Scottsdale Capital Advisers • Gary Yocom, registered representative with Thomas Anthony and Associates • Angelo Panetta, stock promoter • Chad Smanjak, stock promoter
Pump-and-Dump Scams
Usually involves stocks that are promoted and then sold when the price goes up enough due to a rise in interest because of the endorsement. This allows those involved in running the pump and dump scheme to make a significant short-term profit.

SEC Complaint (PDF)

More Blog Posts:
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud Blog, March 23, 2011
Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities, Stockbroker Fraud Blog, February 19, 2011
Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011 Continue Reading ›