Friday, April 13, 2012

SEC Litigation Releases: Week in Review (Part II)

By Tim Dulaney, PhD

Due to the high volume of SEC litigation releases over the previous week, we are summarizing the releases in two parts.  This is the second of the two parts.

SEC Charges Ephren J. Taylor, II with Operating a Ponzi Scheme, April 13, 2012, (Litigation Release No. 22330)

The SEC charged Ephren J. Taylor, II, City Capital Corporation and Wendy Connor (Former COO of City Capital) for their roles in a Ponzi scheme that targeted investors in church congregations.  The SEC alleges that "Taylor assured investors he had a long track record of success, that investor funds would be used to support businesses in economically disadvantaged areas and a portion of profits would go to charity."  The SEC alleges that the funds were in fact used to finance personal expenses and fund the operations of City Capital Corporation with "no meaningful amounts of investor money were ever sent to charities."  The SEC is seeking penalties as well as officer and director bars against Taylor and Connor.

Robert Stinson, Jr. Sentenced to 33 Years in Prison and Ordered to Pay $14 Million in Restitution for Orchestrating Multimillion Dollar Ponzi Scheme, April 11, 2012, (Litigation Release No. 22329)

The US District Court for the Eastern District of Pennsylvania sentenced Robert Stinson, Jr. to 33 years in federal prison and ordered him to pay more than $14 million in restitution for the numerous acts he committed related to a multimillion dollar Ponzi scheme that defrauded hunderds of investors.  Rather than investing the funds as Stinson represented, Stinson misappropriated the funds for personal use and used new investor funds to pay old investors.  For more information, see the June 2010 release (Litigation Release No. 21584).

Default Judgment Entered Against David E. Howard II, Flatiron Capital Partners, LLC, and Flatiron Systems, LLC, April 11, 2012, (Litigation Release No. 22328)

The US District Court for the Central District of California entered a final judgment against David E. Howard II, Flatiron Capital Partners, LLC, and Flatiron Systems, LLC for a scheme in which investors lost over $3 million through misrepresentation and misappropriation.  Howard and Flatiron Systems are jointly and severally liable for over $1 million while Howard and Flatiron Captial Partners are jointly and severally liable for over $500,000.  In addition, Howard was ordered to pay a civil penalty of nearly $400,000.

Glencoe, Illinois Resident Kenneth A. Dachman Ordered to Pay Over $2 Million for Misappropriation and Offering Fraud, April 11, 2012, (Litigation Release No. 22327)

The US District Court for the Northern District of Illinois entered a final judgment by default against Kenneth A. Dachman over the charges brought by the SEC alleging Dachman had misrepresented "how investor funds would be used and his academic and business backgrounds."  Dachman misappropriated nearly $2 million of investor funds for personal use that included vacations, collectibles and personal expenses.  Dachman has been ordered to pay over $2 million in disgorgement and prejudgment interest.

SEC Charges China-Based Company and Others with Stock Manipulation, April 11, 2012, (Litigation Release No. 22326)

The SEC recently filed a complaint in the US District Court of Massachusetts alleging AutoChina International Limited and several investors participated in a stock manipulation scheme to create the appearance of liquidity in AutoChina's stock.  The fraudulent trades that included matched orders and wash trades occurred hundreds of times over a period of several months.  Prior to the scheme, the average daily trading volume for AutoChina stock was approximately 18,000 shares while during the scheme this number increased to nearly 140,000 shares.  The fraudulent trades allegedly accounted for as much as 70% of the trading volume.  The SEC is seeking disgorgement, prejudgment interest, civil penalties and officer or director-bars.

SEC Obtains Final Judgments on Consent against Diamondback Capital Management LLC, April 10, 2012, (Litigation Release No. 22325)

The SEC announced earlier this week that the US District Court for the Southern District of New York entered a final judgment against Diamondback Capital Management, LLC -- a hedge fund advisory firm -- requiring it to pay just over $6 million in disgorgement and prejudgment interest as well as a civil penalty of $3 million.  The final judgment stems from an earlier SEC complaint in which an analyst at Diamondback passed material non-public information to a Diamondback portfolio manager concerning quarterly earnings reports of Dell and Nvidia.  The information was then used to garner millions in illicit profits for Diamondback.

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