SEC Litigation Releases: Week in Review

SEC Shuts Down Mortgage Fund Ponzi-like Scheme,  June 28, 2012, (Litigation Release No. 22406).

According to the complaint (opens to PDF), Small Business Capital Corp. ("SB Capital") and Mark Feathers ("Feathers"), its principal, are operating an “alleged Ponzi-like scheme.” $42 million have been raised by SB Capital and Feathers through selling securities issued by their mortgage investment funds, Investors Prime Fund, LLC and SBC Portfolio Fund, LLC (“Funds”).  The Funds attracted more than 400 investors by promising profits of yielding 7.5 percent or more in annual returns from the mortgage investments. However, Feathers paid investors through Fund profits and other investors. From 2009 to early 2012, more than $6 million was improperly transferred from the Funds to SB Capital to pay expenses. Additionally, in February and March 2012, one Fund was sold to another Fund at an inflated price to generate a “profit.” This “profit” was used to pay SB Capital management fees in excess of $575,000.

The request for a temporary restraining order and asset freeze was granted by the Honorable Edward J. Davila.

SEC Charges Long Island Software Company in Connection with Bribery Scheme,  June 27, 2012, (Litigation Release No. 22405).

The SEC has charged FalconStor Software, Inc., a data storage company, with misleading investors about bribes the Company paid to secure business with J.P. Morgan Chase & Co. Allegedly, from October 2007 through July 2010, the CEO of FalconStor ordered bribes, totaling in $430,000, paid to three executives of JPMorgan Chase Bank, National Association, and their relatives. These bribes included “grants of FalconStor options and restricted stock, direct cash payments, gift cards, payment of golf club fees, and lavish entertainment, including gambling in Macau and Las Vegas casinos.” Additionally, FalconStor secured a contract with JPMC after the improper payments began, and it never disclosed that this contract was due (at least in part) to the bribes given to JPMC’s employees. Furthermore, relatives of two of the executives received restricted stock and options which were not covered by FalconStor’s registered Incentive Stock Plan. The Company failed to accurately record expenses and had no effective internal accounting controls to detect the bribes, thereby violating state law. After confessing involvement with the bribes, the CEO resigned in September 2010. FalconStor will pay a $2.9 million civil penalty in order to settle the case.

SEC Obtains Final Judgments On Consent Against All Defendants in the Mariner Energy Insider Trading Case,  June 27, 2012, (Litigation Release No. 22404).

On June 1, 2012, the Honorable Robert P. Patterson entered final judgments on H. Clayton Peterson, former Mariner Energy, Inc. Director and his tippees Drew Clayton, Drew K. Brownstein, and Big 5 Asset Management, LLC in the insider trading case SEC v. H. Clayton et al. In April 2010 Clayton Peterson learned in confidential board meetings that Apache Corporation was about to acquire Mariner. He then tipped off his son, Drew Peterson, instructing him to purchase Mariner securities for Clayton Peterson’s daughter. Drew Peterson not only used this nonpublic information for his own accounts, but also used it for his family members, his investment clubs and clients, and certain friends, including Brownstein. Drew Peterson’s trading, along with the trading of his tippees, resulted in profits exceeding $200,000. Brownstein used this information to trade shares for himself, his family, and for hedge funds managed by Big 5. In total, Brownstein, along with his family and Big 5, received over $5 million in profits. This week, the SEC has announced that “Clayton Peterson [has been suspended] from appearing or practicing before the SEC as an accountant, and bar[red] Drew Peterson and Brownstein from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.” Also, Clayton Peterson and Drew Peterson are ordered to pay over $200,000, while Brownstein and Big 5 are ordered to pay a nearly $4.5 million. 

SEC Charges Philip A. Falcone and Harbinger Charged with Securities Fraud,  June 27, 2012, (Litigation Release No. 22403).

The SEC has filed charges of fraud against Philip A. Falcone and his advisory firm, Harbinger Capital Partners, LLC, along with Peter A. Jenson, Harbinger’s former COO. Harbert Management Corporation’s affiliates were the managing members of two Harbinger-related entities. The SEC has charged Harbert “as a controlling person in the market manipulation.” In 2009 Falcone used $113.2 million he fraudulently obtained to pay off personal taxes. From 2006 to 2008, Falcone, along with two Harbinger investment managers, manipulated the price and availability of MAAX Holdings, Inc., by creating an illegal “short squeeze.” In 2009, Falcone and Harbinger exempted strategically important investors “from soon-to-be imposed liquidity restrictions – provided that those investors voted to approve restrictions that would temporarily stabilize the decline in Harbinger’s assets under management.” Between April and June 2009, Harbinger also engaged in “short selling securities during a restricted period and then purchasing the same securities in a public offering.” Along with seeking financial penalties and disgorgement of ill-gotten gains, the SEC “seeks…an order barring Falcone from serving as an officer or director of a public company.” Harbert and two related investment entities, HMC-NY and HMC Investors, will pay $1 million in civil penalties. Harbinger will pay over $2 million in penalties.

SEC Sues Fund Adviser for Fees Charged in Breach of Duty Under the Investment Company Act,  June 27, 2012, (Litigation Release No. 22402).

This week the SEC sued AMMB Consultant Sendirian Berhad (AMC). From 1996 to 2007, AMC, a unit of AMMB Holdings Berhad, allegedly misrepresented its services, collecting fees for advisory services which it did not provide. According to the SEC, AMC has violated the Investment Company Act of 1940 in regards to compensation. Each year, AMC submitted a report that falsely claimed AMC provided advice, research, and assistance to its principal investment adviser, Morgan Stanley Investment Management, Inc. In actuality, AMC only provided two monthly reports that MSIM did not request or use. AMC has agreed to disgorge $1.3 million of its advisory fees and pay a $250,000 penalty. 

 SEC Charges Founder of Equity Research Firm with Insider Trading,  June 27, 2012, (Litigation Release No. 22401). 

According to the complaint (opens to PDF), Tai Nguyen, owner of the equity research firm Insight Research, has been charged with insider trading involving “expert networks.” From 2006 through 2009, Nguyen allegedly traded in the securities of Abaxis, Inc. based on information he received from a close relative employed at the Company. Not only did he trade for himself, but Nguyen also gave the inside information to hedge fund clients of Insight Research, Barai Capital Management, and Sonar Capital Management. He reaped approximately $145,000 in illicit trading profits during this time frame.  The hedge fund managers of Barai Capital Management and Sonar Capital Management reaped over $7.2 million in illicit gains. The SEC seeks “a final judgment ordering [Nguyen] to disgorge his ill-gotten gains, with interest, and pay financial penalties, and permanently barring him from future violations.”

  

SEC Charges Owner of Two New Jersey-Based Firms in Stock Lending Scheme,  June 25, 2012, (Litigation Release No. 22400).

According to this complaint (opens to PDF), Ayuda Equity Funding, LLC and AmeriFund Capital Holdings, LLC, along with owner Manuel M. Bello, reaped over $3.2 million of illegal gains from “loans to public company officers and directors who put up stock as collateral.” Ayuda and AmeriFund sold these shares before or shortly after making the loans, despite written and oral assurance that the stock would not be sold if the borrowers did not default on their loans. Bello and the firms agreed to return $3.2 million of the gains, and Bello agreed “to pay a $500,000 penalty and be permanently barred from the securities industry.” 

SEC Charged Former Broker in Orlando, Fla., With Defrauding Investors In an Astrology-based Ponzi Scheme,  June 25, 2012, (Litigation Release No. 22399). 

According to the complaint (opens to PDF), Gurudeo “Buddy” Persaud convinced family and friends, among others, to invest in his firm, White Elephant Trading Company LLC. From July 2007 through January, Persaud raised over $1 million, by falsely guaranteeing their money’s security and high returns from 6 to 18 percent and he neglected to disclose that his trading strategy was based on astrology. He used investors’ money to pay other investors, while losing $400,000 of investor funds through his trading. Additionally, he used at least $415,000 to pay for his own expenses. To hide his trading losses, Persaud created false account statements. The SEC “seeks disgorgement of ill-gotten gains, financial penalties and permanent injunctive relief against Persaud to enjoin him from future violations.”

Court Approves SEC Settlements with Two Former Bear Stearns Hedge Fund Portfolio Managers; SEC Bars Managers from Regulated Industries,  June 25, 2012, (Litigation Release No. 22398).  

According to the complaint (opens to PDF), “Bear Stearns funds collapsed in June 2007 after taking highly leveraged positions in structured securities based largely on subprime mortgage-backed securities.” In April 2007, Ralph R. Cioffi, senior portfiolio manager, and Matthew M. Tannin, portfolio manager and chief operating officer for the funds, misrepresented the full extent of fund investment in securities backed by subprime mortgages. Furthermore, Cioffi misrepresented investor redemption request levels. He neglected to disclose his personal investment in Enhanced Leverage Fund to investors. Tannin also misled investors into thinking he was going to add to his own investment in the Enhanced Leverage Fund. Cioffi and Tannin are ordered to pay $800,000 and $250,000 in penalties, respectively.

Court Finds Bay Area Hedge Fund Manager in Civil Contempt for Failing to Pay More Than $12 Million in Disgorgement to Defrauded Investors,  June 25, 2012, (Litigation Release No. 22397).   

Lawrence R. Goldfarb and Baystar Capital Management, LLC failed to pay or show reasonable attempt to pay disgorgement as a result of a Final Judgment entered against them last March. At the time, Goldfarb and Baystar agreed to pay over $12 million in disgorgement within a year of the entry. In total, they have only paid $80,000 in disgorgement. The Court has approved “the appointment of a receiver over defendants’ assets and reaffirmed its prior order limiting Goldfarb’s monthly spending.”