Friday, March 23, 2012

SEC Litigation Releases: Week in Review (Part II)

By Tim Dulaney, PhD

Due to the high volume of litigation releases from the Securities and Exchange Commission over the past week, we're spreading this week's review over two posts. This is the second of the two posts.


SEC Settles Litigation with Former Veritas Software Corporation Head of Sales, March 22, 2012, (Litigation Release No. 22304)

The US District Court for the Northern District of California entered a settled final judgment against Paul A. Sallaberry -- former head of sales of Veritas Software Corporation.  According to the July 2007 complaint (Litigation Release No. 20178), Sallaberry participated "in a fraudulent scheme by artificially inflating Veritas' publicly reported revenues and earnings through an improper round-trip transaction with America Online, Inc. and by lying to Veritas' independent auditors."  The financial results reported in 2000 through 2002 contained the distortions.  Sallaberry has consented, without admitting or denying the allegations against him, to the final judgment ordering him to pay disgorgement, prejudgment interest and civil penalties amounting to $100,000.

Andrew Franz Allegedly Misappropriates over $1 Million from Ruby Corporation Clients, March 22, 2012, (Litigation Release No. 22303)

The SEC filed a complaint yesterday alleging Andrew Franz orchestrated a fraudulent scheme wherein he misappropriated nearly $900,000 from clients -- who are mostly family members -- of Ruby Corporation through forgery and other fraudulent means.  In addition, the SEC alleges that Franz misappropriated an additional $172,000 by stealing fees payable to Ruby.  Franz subsequently returned the majority of the misappropriated funds "to Ruby disguised as client fees to conceal the firm’s dwindling client base and revenues."  The US District Court of the Northern District of Ohio has frozen all assets under Franz's control and the SEC's investigation is ongoing.

Court Orders Purported Hedge Fund Manager and Principal to Pay Over $7.5 Million, March 22, 2012, (Litigation Release No. 22302)

The US District Court for the District of Massachusetts entered final judgments by default against Andrey C. Hicks and Locust Offshore Management, LLC as a result of an October 2011 SEC complaint (Litigation Release No. 22141).  Locust and Hicks allegedly mislead investors concerning information that includes Hicks' background, education, the fund's auditor, custodian and location of incorporation and "divert[ed] over $2.7 million of investor money to Hicks’ personal bank accounts."  Hicks and Locust are jointly and severally liable for fines and penalties amounting to over $2.5 million and individual civil penalties for each amounting to over $2.5 million.

SEC Charges Bay Area Investment Adviser for Defrauding Investors with Bogus Audit Report, March 21, 2012, (Litigation Release No. 22301)

Earlier this month, the SEC charged James Michael Murray with defrauding investors by distributing a phony audit report.  Beginning in 2008, Murray raised more than $4.5 million from investors in funds including Market Neutral Trading, LLC (MNT).  Murray allegedly provided investors with an audit report prepared by a supposedly independent firm: Jones, Moore & Associates (JMA).  The firm turned out to be a shell company created and controlled by Murray with several employees (including the two named principals) completely fabricated.  Murray allegedly went so far as to call brokerage firms "firms falsely claiming to be the principal identified on most JMA documents."  The JMA audit report allegedly overstated MNT's gains, income, member capital and total assets.

Federal Jury Convicts Brian Hollnagel and BCI Aircraft Leasing, Inc. on Seven Criminal Counts, March 20, 2012, (Litigation Release No. 22300)

In August 2007, the SEC filed a civil injunctive action alleging that between 1998 and 2007, Brian Hollnagel and BCI Aircraft Leasing, Inc. orchestrated a fraudulent scheme wherein they raised more than $82 million from over 100 investors.  The defendants allegedly "commingled investor funds, used investor funds to pay other investors, and failed to use investor funds as represented."  Both Hollnagel -- owner, president and CEO of BCI Aircraft Leasing, Inc. -- and BCI "were each convicted of six counts of wire fraud and one count of obstruction of justice."

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