Investor Fraud

Financial Sherpa Accused of Cherry Picking

Published on: September 2, 2019 | by Shepherd Smith Edwards & Kantas, LLP

In a settlement reached with the US Securities and Exchange Commission (SEC), Financial Sherpa and its principal James L. Beyersdorf will pay more than $232K of disgorgement, over $15K of prejudgment interest, and a $188K penalty for allegedly defrauding investment advisory clients by engaging in a cherry picking scam. The regulator contends that Beyersdorf allocated a disproportionate amount of option trades that were profitable to himself and his wife while distributing the unprofitable ones to the firm and his clients. Beyersdorf oversaw some $6.7M in assets for 13 individual investors.

According to the SEC, he purchased options in the firm’s omnibus trading account during the morning, distributing the trades later in the day. The regulator claims that because of the allegedly illegal trading, over six months– from October 2017 and April 2018– Beyersdorf and his wife ended up with a net positive one-day return of more than 45% on the options trades that were sent to their accounts. Meantime, the negative one-day return for the firm’s individual clients that received the unprofitable trades was also 45%. The Commission said that the odds of the “disparate performance” occurring by chance was under one-in-a million.

Also, while the registered investment advisory’s strategy for the majority of its clients involved placing about 90% of each of their assets in exchange-traded funds (ETFs) and 10% in short term options trading, the account of Beyersdorf’s wife traded nearly exclusively in options and did not hold any ETF positions.

Ex-Merrill Lynch Investment Adviser Accused of Stealing $1.7M

Published on: August 27, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Marcus Boggs, a former Merrill Lynch investment adviser, is now facing US Securities and Exchange Commission (SEC) charges accusing him of using $1.7M of client monies to pay his own credit card bills. According to the regulator, Boggs, who was a Chicago-based RIA, illegally transferred funds from the accounts of three retail advisory clients on more than 200 occasions.

The firm fired him after finding out about the alleged misconduct, which would have taken place between 2016 and December 2018. Boggs was a registered investment adviser (RIA) with Merrill for 12 years, which was the entire time that he worked in the securities industry.

His job was to offer investment advice to clients, and Boggs didn’t have the authority or permission to liquidate the assets or trade in his alleged victims’ accounts. However, he allegedly went on to sell securities in said accounts and directly take money out of them for his own use.

Former Broker Pleads Guilty in Castleberry Financial Fraud

Published on: August 26, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Scott P. Strochak, an ex-broker, has pleaded guilty to criminal charges related to his involvement in the $3.8M Castleberry Financial Services Fraud. He is also now facing parallel civil fraud charges brought by the US Securities and Exchange Commission (SEC).

Prosecutors charged Strochak, who was the Director of Alternative Investments and a Senior EVP at Castleberry Financial Services Group, and two other firm executives earlier this year over the scam, which promised 8-12% yearly returns on bond-like investments while touting a robust business that was handling hundreds of millions of dollars in capital and had over 300 investors. The fraud raised almost $3.8M from at least 17 investors.

According to the SEC, Strochak, former Castleberry CEO Norman Strell, and ex-President T. Johnathan Turner made misrepresentations to prospective investors, including that its investments were insured and bonded by top insurers like Chubb Group and CNA Financial Group. They allegedly continued to make these representations even after some investors complained that they never received evidence of said insurance.

Commonwealth Accused of Not Disclosing Revenue Deal to Clients

Published on: August 16, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission (SEC) is accusing Commonwealth Equity Services, also known as Commonwealth Financial Network, of not notifying clients that it had material conflicts of interest involving certain investments. This purportedly allowed the investment adviser and brokerage firm to earn more than $100M in revenue sharing involving certain mutual funds.

The SEC contends that since at least 2007, Commonwealth had a deal with National Financial Services and a Fidelity Investments affiliate that the majority of its Preferred Portfolio Service advisory clients were obligated to utilize when trading in their accounts. As part of the agreement, clients have to choose National Financial Services as its clearing broker for their investment accounts.

Whenever these advisory clients would invest in specific mutual fund shares, Commonwealth received a portion of the money that certain mutual fund companies paid National Financial Services to make trades on the platform. Also as part of the deal between National Finance Services and Commonwealth is that the clearing broker would share recurring mutual fund fees with the investment adviser. This was determined by the latter’s client assets that were invested in specific mutual fund share classes that didn’t charge a transaction fee.

Two Former Brokers Sentenced in Multimillion-Dollar Ponzi Frauds

Published on: August 13, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Dawn Bennett, an ex-financial advisor and broker, is sentenced to 20 years in prison for operating a $20M Ponzi scam that involved 46 investors. She also must pay $14.5M in restitution and forfeit another $14M.

Many of Bennett’s victims were retirees who heard about her because she hosted a radio show. In 2018, Bennett was convicted by a jury on federal charges of conspiracy, bank fraud, securities fraud, wire fraud, and making false statements on a loan application.

According to evidence given at trial, Bennett solicited investors for her online clothing business DJB Holdings, LLC, also known as DJBennett.com, touting a 15% yearly interest rate through promissory and convertible notes.

Ex-Wells Fargo Broker and Advisor Are Accused of Misconduct

Published on: August 9, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) has taken action against two former Wells Fargo (WFC) representatives. Ex-broker Michael Garris has been suspended for a year after the self-regulatory organization found that he made 26 unauthorized trades in the account of a client who he knew had died.

Garris was fired by Wells Fargo over a year ago. According to FINRA, he made more than $9K in commissions from the unauthorized transactions in late 2017, several months after the client’s nephew had notified him of the death. Garris failed to tell the brokerage firm of the client’s passing.

Wells Fargo has since refunded the commissions that Garris made from the transactions, reversed the transactions that were not authorized, and placed the account back to its former positions from before the customer died.

Kristofor R. Behn, Fieldstone Financial Management Face Fraud Charges

Published on: July 12, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Kristofor R. Behn and his Fieldstone Financial Management are now facing US Securities and Exchange Commission (SEC) charges accusing them of defrauding retail investors. Behn and the firm, which was a registered investment adviser until March, recommended that their clients invest in Aequitas Management LLC-issued securities. In 2016, Aequitas and four of its affiliates were accused of defrauding over 1500 investors of around $350M–although that figure could be as high as around $600M.

The Commission contends that between 2014 and early 2016, Behn and Fieldstone advised about 40 individuals to invest over $7M in Aequitas securities, while failing to disclose that the company had given Fieldstone a $2M credit line and a $1.5M loan. Both were reasons for him and his firm to recommend the investments to clients seeing as, per the terms:

If $25M of the assets of Fieldstone’s clients went into Aequitas securities, then Behn could pay back the loan by “converting the debt into an equity interest” in Fieldstone, with the interest belonging to Aequitas.

Recent SEC Cases Involves Market Rigging

Published on: June 19, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Investors in Alleged $2.3M Prime Bank Fraud Were Promised Huge Profits

In the US Securities and Exchange Commission’s (SEC) prime bank investment fraud case against Elizabeth Oharriz of Florida and Peter Baker of Georgia, the regulator is accusing the two of them and their companies of stealing more than $2.2M from investors. The Commission contends that Oharriz and Baker sold fake prime bank instruments from supposedly known banks while promising investors “astronomical profits.” The regulator’s complaint said that they also were also told that if these instruments could not be obtained, then their advance payments would be returned to them.

Instead, claims the SEC, Oharriz and Baker allegedly used investors’ money for their own personal spending or sent the funds to third parties. Meantime, investors were given bogus bank instruments along with accompanying documents.

Investors Defrauded in Alleged $1.4M Prime Bank Fraud

Published on: May 30, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission (SEC) has filed fraud charges against David Sims and Mario Procopio accusing them of running a $1.4M prime bank scam that defrauded 13 investors. ALC Holdings, LLC, Sims Equities, Inc., and El Cether-elyown, which are companies that they control, are also defendants in the investor fraud scam. This is not the first time that the SEC has charged Sims in relation to alleged fraud.

The regulator contends that the two men mostly found their investors through referrals given to them by associates and friends. Between 4/2014 and 5/2017, Sims and Procopio allegedly told those whom they solicited, usually by phone, that their investments would go into “prime bank” financial instruments that would make returns of 1200-40,000% percent.

Procopio and Sims falsely touted “special access” to trading platforms that they claimed also were used by rich investors, corporations, and governments to purchase huge amounts of currency, usually $500M to $1B, at a reduced rate from different banks. The notes could then supposedly be sold for an up to 30% profit.

Fund Manager LJM Partners Sues Over Volatility Losses

Published on: May 15, 2019 | by Shepherd Smith Edwards & Kantas, LLP

LJM Partners is suing a number of unnamed parties after losing hundreds of millions of dollars during a major incident of stock market volatility early last year now known as “Vol-magedon.” The Chicago-based fund manager and commodity trading advisor (CTA) claims that these losses are what forced it to go out of business.

LJM had backed complex derivatives, which plunged in value after the largest ever one-day jump in the VIX volatility index in February 2018. The fund manager later gave back what was left of clients’ funds and shuttered its operations.

While LJM held $812M in assets at the start of that month, by the end of February, that figure had dwindled to $14M. One of its affiliates, which operated the LJM Preservation and Growth Fund—a mutual fund for retail investors—lost half its value due to the VIX volatility index jump. The fund then went on to lose the rest of its value as it unwound its holdings.