Friday, February 24, 2012

SEC Litigation Releases: Week in Review

by Tim Dulaney, PhD

Federal Court Enters Order Imposing $2.5 Million Civil Penalty Against Investment Adviser Robert Glenn Bard and Vision Specialist Group, LLC., February 23, 2012 (Litigation Release No. 22267)

In July 2009 (Litigation Release No. 21160) the SEC stopped a fraud allegedly being perpetrated by Robert Glen Bard and his firm (Vision Specialist Group, LLC.).  According to the SEC, Bard targeted residents of small rural communities promising high yields on relatively safe investments (such as CDs or Bonds) relying upon his and his family's reputation.  Bard allegedly then turned around and invested the funds in risky assets (such as penny stocks) realizing losses and, at the same time, produced false and misleading account statements for his clients.  Earlier this month, the US District Court for the Middle District of Pennsylvania imposed a $2.5 million civil penalty for Bard's and his firm's actions in this matter.

Jeremy Blackburn and Anthony Banas Sentenced for Defrauding Investors, February 22, 2012 (Litigation Release No. 22266)

Earlier this month, Jeremy Blackburn (formerly Canopy Financial, Inc.'s president and COO) and Anthony Banas (formerly Canopy Financial, Inc.'s CTO) were sentenced to 180 months and 160 months, respectively, for their involvement in the investor fraud facilitated through their now bankrupt healthcare transaction-software company.  According to the release,  "[b]oth men pleaded guilty in late 2010 to one count of wire fraud, admitting they engaged in a fraud scheme that cheated investors of approximately $75 million and also misappropriated more than $18 million from customer accounts intended for health care savings and expenses."

SEC Seeks Court Approval for Plan of Distribution in BISYS Financial Reporting Case, February 22, 2012 (Litigation Release No. 22265)

In May 2007, the SEC filed a civil injunctive action (link opens PDF) alleging that The BISYS Group, Inc. violated "the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934."  As a result of the complaint, the company paid approximately $25 million.  These funds, in combination with those from a related complaint, are now to be distributed to shareholders who held BISYS stock between October 23, 2000 and April 22, 2003 (and suffered a loss on their investment) pending court approval of the distribution plan.

SEC Charges Chairman and Ex-CEO of Puda Coal With Fraud, February 22, 2012 (Litigation Release No. 22264)

On Wednesday, the SEC filed a civil injunctive action (link opens PDF) in the US District Court for the Southern District of New York alleging Ming Zhao (Chairman of Puda Coal, Inc.) and Liping Zhu (former CEO of Puda Coal, Inc.) "with securities fraud for the undisclosed theft of the primary asset of the U.S. public company they controlled."  Zhao allegedly transferred the 90% indirect ownership stake in Shanxi Puda Coal Group Co., Ltd. to himself just weeks before the coal company was to publicly announce a "highly lucrative mandate from the provincial government".  A 49% stake in Shanxi Coal was transferred to a trust set up by CITIC Trust Co., Ltd.  These transfers were neither approved by the board of Puda Coal, Inc. or reported in SEC filings.  Puda Coal, Inc. allegedly "also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in [Shanxi Puda Coal Group Co., Ltd.], Puda’s sole source of revenue."

SEC Charges Individual and Three of his Companies with Running Illegal Ponzi Schemes, February 21, 2012 (Litigation Release No. 22263)

Earlier this week, the SEC filed a complaint (link opens PDF) alleging Steven L. Hamilton, along with three of his companies (Verde Retirement LLC, Verde FX Nevada, LLC, Covenant Capital Partners), had defrauded 23 clients out of over $1.5 million through a series of Ponzi schemes.  Hamilton allegedly collected investor funds under the pretense of investing in real estate loans secured by deeds of trust, CDs or construction projects.  The SEC alleges that Hamilton instead used the funds "to pay his personal living expenses and return capital to investors."

Court Finds Pentagon Capital Management PLC and Lewis Chester Liable for Securities Fraud, February 17, 2012 (Litigation Release No. 22262)

In April 2008 (Litigation Release No. 20516), the SEC filed a complaint alleging that Pentagon Capital Management PLC and its CEO Lewis Chester "orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing."  The SEC alleges that Pentagon Capital management would accept the current day's mutual fund price but actually evaluate the transaction after the market has closed (when the mutual funds had calculated their net asset values) allegedly earning over $60 million in illicit profits.  The district court issued an opinion (link opens PDF) in the matter last week stating that the defendants "intentionally, and egregiously violated the federal securities laws through a scheme of late trading".  Judge Sweet, who presided over the case, found Pentagon Capital Management liable for disgorgement of over $38 million and imposed civil penalties for the same amount.

SEC Charges Oregon-Based Expert Consulting Firm and Owner with Insider Trading in Technology Sector, February 17, 2012 (Litigation Release No. 22261)

The SEC rcently filed a civil injunctive action (link opens PDF) in the US District Court of the Southern District of New York last week alleging John Kinnucan and his expert consulting firm Broadband Research Corporation had facilitated insider trading by disclosing material non-public information.   During 2009 and 2010, hedge funds and investment advisers would hire Kinnucan for supposedly legitimate research concerning technology companies.  Kinnucan would then allegedly disclose material non-public information obtained from well-placed sources within publicly-traded technology companies to his firm's clients.  During this period, the SEC alleges that the "insider trading resulted in profits or avoided losses of nearly $1.6 million" and that Kinnucan "generated hundreds of thousands of dollars in annual revenues for Broadband."

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