Friday, July 20, 2012

SEC Litigation Releases: Week in Review

SEC Obtains Final Judgment in Case Involving Ponzi Scheme and Promotion of China Voice Holding Corp.,  July 19, 2012, (Litigation Release No. 22418).

A final judgment was entered against Ilya Drapkin on July 6, 2012, which permanently enjoins him from violating various sections of the Securities Act and ordered Drapkin, along with his companies, MG TK Corp. and SMI Chips, to pay over $5.8 million in disgorgement and penalties. This amount represents "profits gained by Drapkin, MG TK, and SMI Chips from a Ponzi scheme run by China Voice's former CFO, David Ronald Allen, and other associates." The SEC filed a complaint in April 2011, alleging that China Voice, Allen, and former Ceo and President William F. Burbank IV  misled investors about China Voice's financial condition and business prospects. China Voice shareholders Drapkin and Gerald Patera were charged by the SEC with "financing stock promotion campaigns regarding China Voice." Daivd Ronald Allen, Alex Dowlatshahi and Chistopher Mills, were also charged with launching a Ponzi scheme that tried to raise at least $8.6 million from investors.

Mizuho to Pay $127.5 Million to Settle SEC Charges of Misleading Investors in CDO July 19, 2012, (Litigation Release No. 22417).

The SEC has charged Mizuho Securities USA Inc. and three of its employees with "misleading investors in a collateralized debt obligation...by using 'dummy assets' to inflate the deal's credit ratings." In 2007, Mizuho structured and marketed Delphinus CDO 2007-1, which was backed by subprime bonds. Alexander Rekeda headed the group that structured Delphinus, Xavier Capdepon modeled the transaction, and Gwen Snorteland was the transaction manager "responsible for structuring and closing Delphinus." By July 17, 2007 all of the collateral assets had been purchased for Delphinus. On July 18, Standard & Poor's announced changes to its CDO rating criteria. Mizuho realized that the Delphinus transaction, which was scheduled to close on July 19, would not meet the new criteria. "To enable Delphinus to close anyway, the Mizuho employees e-mailed multiple alternative portfolios to S&P that contained dummy assets that were superior in credit quality to the assets that had been actually acquired for the CDO." The SEC has also charged Delaware Asset Advisers, which served as the collateral manager for Delphinus and Wei (Alex) Wei, who was the DAA portfolio manager for Delphinus. Mizuho has consented to a final judgment that permanently enjoins it from violating various provisions of the Securities Act, and requires it to pay $127.5 million in disgorgement and penalties. Rekeda and Capdepon have "each agreed to pay a $125,000 penalty." A decision has yet to be reached on whether or not Snorteland will face a penalty.  Delaware Asset Advisers has agreed to pay over $4.8 milllion in disgorgement and penalties. 

SEC Charges Family-Run Business Promising Investors Stake in Purported $11 Billion Gold Mine July 17, 2012, (Litigation Release No. 22416).

According to the complaint (opens to PDF), between September 2009 and October 2011, Harry Dean Proudfoot III along with his son, Matthew Dale Proudfoot, and his daughter, Laurie Anne Vrvilo, raised $2.7 million from about 140 investors in 23 different states. The family raised these funds through their company 3 Eagles Research & Development LLC by telling investors the company would extract more than $11 billion worth of gold from gravel pits in central Ohio. Investors were promised they could earn 35 times their initial investment. The family sold investors "royalty units" which supposedly were used to purchase mining equipment and conduct mining operations.The family hired an unregistered securities broker, Dennis Ashley Bukantis, to sell the royalty units. In reality, 3 Eagles did not have rights to most of the property it claimed to be mining for gold. Instead of using investor funds for mining, the family used the funds for personal expenses, including $80,000 on automobiles, $235,000 in personal travel and more than $30,000 annually for vitamins and nutritional supplements.  Bukantis is also being charged with the Proudfoots in the Commission's complaint. The complaint "seeks permanent injunctions, disgorgement with prejudgment interest and civil monetary penalties."

Former Chief Investment Officer and Portfolio Manager for the Schwab YieldPlus Fund Agrees to Settle Charges July 16, 2012, (Litigation Release No. 22415).

Kimon P. Daifotis, former lead portfolio manager for the Schwab YieldPlus Fund (related SLCG research), has agreed to settle litigation the SEC filed against him January 11, 2011. Daifotis, who was also the Chief Investment Officer for Fixed Income for Charles Schwab Investment Management, a Senior Vice President at Charles Schwab & Co., Inc., and an officer of Schwab Investments, has agreed to pay $325,000 in penalty and disgorgement. Additionally, he would be enjoined from future violations of certain provisions of the federal securities laws and would be barred from the securities industry, with the right to apply for reentry after three years. In its 2011 complaint, the SEC charged Daifotis with misleading investors about the risks of the YieldPlus Fund, as well as misleading investors about the large redemptions YieldPlus experienced in August 2007.

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