SEC Enforcement

Securities Cases: Petrobras Will Pay $2.95B in Class Action Case, Ex-Och Ziff Hedge Fund Executive is Indicted Over Investment Scam, and Former Banker is Accused of Defrauding Excel Bank of Millions of Dollars

Published on: January 6, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Och Ziff Hedge Fund Executive Indicted in NY Over Alleged Africa Investment Fraud
A grand jury in Brooklyn, NY has indicted Michael Cohen, the ex-head of Och Ziff Capital Management’s European operations on fraud, conspiracy, and other criminal charges. According to prosecutors, Cohen hid a conflict of interest involving a mining company investment and defrauded an institutional client.

The ex-Och Ziff hedge fund executive and his former company are accused of making representations to a UK foundation that then agreed to invest up to $200M in a joint African venture in 2008. Cohen, who allegedly used the joint venture fund to purchase stock from someone who had borrowed money from him for a yacht, is accused of failing to disclose his own stake in the investment. Meantime, the person whom, CNBC reports, owed Cohen money, allegedly used funds from the stock purchase to pay him back $4M.

Cohen is accused of trying to conceal the investment scam by generating a bogus letter and making statements to the SEC, IRS, and FBI that were “materially false.”

Ex-ConvergEx Group Executive Accused of Defrauding Charities and Retirement Funds Settles Fraud Charges for $975K

Published on: January 3, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Group announced that Khaled Bassily, the ex-head of ConvergEx Groups’ transition management business, has settled institutional investor fraud charges accusing him of taking part in a scam to hide from certain clients, which included religious organizations, retirement funds, and charities, that they were paying substantially more than they thought for trading orders. Bassily, who agreed to pay more than $988K in disgorgement, prejudgment interest, plus a civil penalty, settled the case without denying or admitting to the charges.

The regulator brought the case against him in 2016. According to its complaint, over five years, Basily hid from transition management customers that their brokerage orders were being directed to an offshore affiliate where concealed charges were put into the price that they paid for selling and purchasing securities. These secret charges were an add on and frequently much higher than the commissions that customers paid for their orders. For example, stated the SEC’s complaint, one customer who paid $699K in commissions also paid $9.6M in these hidden fees.

Meantime, Bassily allegedly engaged in deceptive practices, including “false and misleading statements” to customers, working with traders to maximize theses hidden charges, and taking steps to hide these unauthorized charges from customers.

SEC Accuses Broker of Giving Some Customers Preferential IPO Access in Exchange for Over $1M in Kickbacks

Published on: January 2, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed a case accusing broker Brian Hirsch of illegally receiving over $1M in secret kickbacks in return for giving some customers favored access to “lucrative” initial public offerings. The regulators said that these customers made money because of the special treatment. Meantime, prosecutors in New Jersey have filed a parallel criminal case against Hirsch.

According to the SEC, Hirsch, who worked at two broker-dealers, disregarded policies and procedures and made “long-running” deals with specific customers, granted them bigger allocations of some of the public offerings that the firms were marketing. Advisor Hub reports that these two brokerage firms were Barclays Capital (BARC) and Stifel (SF).

As part of the deal, contends the regulator, a customer named Joseph Spera and another customer paid Hirsch cash kickbacks that were equivalent to a percentage of the trading profits they made for the offering stock allocated to them. Hirsch is accused of giving the two customers “preferential access to hundreds of IPOS and secondary public offerings.” These customers purportedly would usually sell their stock quickly so that they could make a “substantial profit.” This was at the expense of the firms’ other customers and the interests of issuers in raising funds from long-term investors.

Multimillion-Dollar Investment Adviser Fraud Cases Target Widows, Older Investors, and Other Retail Investors

Published on: December 28, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Two Investment Advisers Accused of $20M Investor Scam
The US Securities and Exchange Commission has filed civil charges against investment advisors Ronald A. Fossum and Alonzo Cahoon. They are accused defrauding retail investors in an unregistered securities scam. According to the regulator, from about 3/2011 to 6/2016, Fossum raised over $20M from more than 100 investors via securities offerings in investment funds under his control or ownership, including the:

Accelerated Asset Group, LLC
Turnkey Investment Fund, LLC
Smart Money Secured Income Fund, LLC

Fossum is accused of misappropriated hundreds of thousands of dollars of investors’ money to pay his own expenses, including living in a home owned by one of the fund’s free of rent. He also allegedly used investor funds to pay for international travel and federal taxes.

Houston Technology Company is Accused of $28M Texas Securities Fraud

Published on: December 26, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed fraud charge against Behavioral Recognition Systems, Inc. and its former CEO Ray C. Davis. According to the Commission, the Houston-based technology company, and Davis solicited over $28M from hundreds of investors, diverting over $7.8M to the latter’s personal use.

Between 1/2013 and 7/2015, investors targeted in the alleged Texas securities scam were solicited for funds and their involvement in seven equity securities offerings. “Material misrepresentations and misleading statements” were allegedly made to them about: how investor proceeds would be used, executive compensation, operating costs, and related party transactions.

The regulator’s complaint, claims that Behavioral Recognition Systems and Davis lied more than once in order to get investors to give them their money. Offering documents claimed that investor money would go toward “working capital,” “growth, “mezzanine funding,” and “general corporate purposes” for Behavioral Recognition Systems. Instead, contends the SEC, Davis used shell companies under his control to divert about $11M of investor money for his own use–$7.8M of that money was allegedly diverted during the period at issue. Bogus invoices from the shell companies for services purportedly rendered were then generated to conceal the fraud.
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Woodbridge Group and Owner Accused of $1.2B Ponzi Scam that Targeted Over 8,400 Investors, Including Senior Investors

Published on: December 21, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed financial fraud charges against the Woodbridge Group of Companies, LLC and its owner Robert H. Shapiro. The Woodbridge Group is comprised of unregistered investment companies. According to the regulator, Woodbridge and Shapiro ran a $1.2B Ponzi Scam that bilked over 8,400 investors, many of whom where older investors. At least 2,600 investors collectively spent close to $400M that came from their IRAs.

The civil fraud charges include other alleged federal securities law violations. The SEC also announced an asset freeze to keep more investor funds from dissipating. The regulator wants restoration of allegedly ill-gotten gains plus interest, as well as financial penalties.

Senior Financial Fraud

The Commission’s complaint accused Woodbridge and its owner of defrauding seniors using a “sham” business model that involved selling investments in unregistered Woodbridge funds. The company presented its main business as giving loans to third-party commercial property owners that were paying 11-15% in yearly interest for “’hard money’ short-term financing.” In fact, claims the SEC, the property owners were not third-parties but were companies belonging to Shapiro. Not only that but they had no income streams and never paid interest on these supposed loans. Woodbridge and Shapiro are said to have used investor money to buy nearly 200 commercial and residential properties in California and Colorado.

SEC Suspends Trading in The Crypto Company After 2700% Rise in Its Stock Price

Published on: December 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has placed a temporary halt on trading in The Crypto Company (CRCQ) stock until January 3, 2018. The company’s stock has just seen a 2,700 percent rise in price. It recently agreed to purchase a German cryptocurrency data platform called Coin Tracking E. K.

Citing concerns regarding “accuracy and adequacy,” the SEC expressed concerns about the quality of information that was given to investors. The regulator also is looking into whether “potentially manipulative transactions” involving the stock took place last month.

The Crypto Co. provides digital assets, consulting services, and technologies to the “blockchain and cryptocurrency markets.” It doesn’t sell cryptocurrencies or other digital-type monies. The Crypto Co.’s stock price, at $3.50 a share in late September, rose to $575 earlier this week. As a result, The Crypto Co.’s stock value is now over $11B—that’s more than the market worth of some of the most renowned companies in the US, including Macy’s.

SEC Cases: Biopharmaceutical Company Accused of Not Disclosing Executives’ Perks, Therapist Allegedly Insider Traded In Zulily Stock, and Immigration Lawyer Faces Claims of EB-5 Investment Fraud

Published on: December 14, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Provectus Accused of Disclosure and Accounting Controls Violations Related to Executive Perks
The US Securities and Exchange Commission has filed civil charges against the biopharmaceutical company Provectus. According to the regulator, the Tennessee-based company committed violations related to disclosures and accounting controls. Among the alleged failures was that Provectus did not properly report that its then-CFO and former CEO made millions of dollars in perks as compensation.

The SEC contends that Provectus did not have “sufficient controls” in place regarding the reporting and disclosure of entertainment and travel expenses of executives. Ex-CEO Dr. H. Craig Dees is accused of using fabricated, limited or “non-existent expense documentation” for millions of dollars of benefits of which investors were not informed. Then-CFO Peter R. Culpepper is accused of receiving more than $199K in undisclosed and unauthorized benefits and perks.

The Commission has filed a separate securities fraud case against Dees. Not only did he allegedly get $3.2M in reimbursements and cash for business travel that he didn’t go on, but also, he is accused of hiding these perks, which personal expenses, including restaurant tips and cosmetic surgery for women friends.

Securities Fraud: FINRA Bars Two Ex-Wells Fargo Brokers Over Unsuitable Securities Sales, Pennsylvania-Registered Representative is Accused of $2.35M Ponzi Scam, and Digital Display Ad Company Allegedly Stole Over $2M from Retail Investors

Published on: December 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Wells Fargo Brokers Barred Over Unsuitable Energy Securities Sales
The Financial Industry Regulatory Authority has barred brokers Charles Lynch and Charles Frieda for making unsuitable recommendations to investors, resulting in substantial financial losses to the latter. Lynch and Frieda are former Wells Fargo (WFC) representatives who were based in Southern California. Both Lynch and Frida were fired from the firm. Previous to working at Wells Fargo, both men worked at Citigroup (C) and Morgan Stanley (MS).

According to the self-regulatory organization, between 11/12 and 10/15, the former brokers recommended an investment strategy revolving around certain speculative energy stocks to over 50 customers. These securities were volatile. Because investors became very concentrated in these energy securities, they were placed at risk of substantial losses.

FINRA contends that the two brokers did not do a proper job of making sure these investments were suitable for the customers to whom they were recommending these securities.

Westport Capital Markets LLC is Accused of Undisclosed Markups as Investors Lose Over $1M

Published on: December 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed civil charges against Westport Capital Markets LLC and principal Christopher E. McClure. The Connecticut-based, dually registered brokerage firm and investment adviser and its principal are accused of defrauding clients, costing them over $1M in losses.

According to the regulator’s securities fraud complaint, the investment advisory firm and McClure invested clients’ money in risky securities on numerous occasions, resulting in hundreds of thousands of dollars in undisclosed mark-ups that went to Westport even as the clients lost more than $1M. The broker-dealer would allegedly buy securities from underwriters at a reduced rate and later re-sell them to its own clients at the full public offering price while keeping the difference.

Westport and McClure are accused of making false and misleading representations to clients about the compensation that the financial firm received from their accounts. Also, the brokerage firm is accused of receiving 12b-1 fees, which are mutual fund distribution fees, when clients’ money was placed in certain mutual fund share classes and again not telling clients about these fees. The SEC said that the fees created a conflict. McClure and Westport allegedly invested clients in mutual fund shares that charged these fees even when less expensive shares that didn’t carry the fees could have been purchased instead.