Friday, September 14, 2012

SEC Litigation Releases: Weekly Review

SEC Charges a Solar Panel Manufacturer and Three of its Former Executives with Defrauding Investors, September 6, 2012, (Litigation Release No. 22475).

The SEC charged Worldwide Energy and Manufacturing USA Inc. (WEMU), a San Francisco based solar panel manufacturer, and WEMU executives Jimmy Wang, Mindy Wang, and Jeffrey Watson with "concealing the transfer of nearly half of the ownership stake in its Chinese subsidiary to three individuals in China who manage the subsidiary."  According to the complaint (pdf), WEMU intended to expand the subsidiary--which represented 77% of WEMU's revenue--using approximately $9 million from US investors.  However, WEMU did not disclose to its board, auditors, or investors that the company had previously signed an agreement to transfer a 49% stake in that subsidiary to its three managers.  All four defendants agreed to settle the charges for a combined $200,000 penalty and permanent officer and director bars.

SEC Shuts Down San Diego-Based Real Estate Investment Fraud Scheme, September 10, 2012, (Litigation Release No. 22476).

The SEC has frozen the assets of Western Financial Planning Corporation (WFPC) and its owner, Louis V. Schooler, alleging that WFPC sold partnership units in real estate investments in Nevada based on misrepresentations of the property's value.  WFPC and Schooler allegedly presented false comparable properties to investors and did not disclose that the partnerships were encumbered by mortgages, then "paid 'hush money' to silence investors who discovered they had been defrauded, allowing the scheme to continue."  WFPC and Schooler "raised approximately $50 million from hundreds of investors nationwide."

ICP Asset Management and Thomas C. Priore Agree to Settle SEC Charges of Defrauding Several Collateralized Debt Obligations, September 10, 2012, (Litigation Release No. 22477).

The SEC had previously alleged (pdf) that Priore and ICP caused the Triaxx CDOs "to lose tens of millions of dollars" by purchasing assets for the CDOs at inflated prices and collecting "advisory fees and undisclosed profits" based on those inflated values.  Disgorgement, prejudgment interest, and penalties for Mr. Priore, ICP Asset Management, and ICP Securities totaled approximately $23 million.  The SEC also withdrew claims against Priore, his wife Lori, and Bertrand Smyers for allegedly transferring assets out of his name upon learning of the SEC's impending charges related to the CDOs.

The Triaxx CDOs were insured by AIG through a credit protection arrangement known as a basis swap, and were acquired by the Federal Reserve in its Maiden Lane III portfolio.  They were recently sold to Bank of America Merrill Lynch.  They have also been the subject of other litigation related to ICP.  ICP and Priore were the subject of a recent NY Times article for using their database of mortgages developed for Triaxx to help investors identify problematic loans.

SEC Charges Massachusetts-Based Corporation and Senior Officers in $26 Million Fraudulent Securities Offering, September 10, 2012, (Litigation Release No. 22478).

According to the complaint (pdf), several officers of Bio Defense Corporation, "which purports to develop, manufacture and sell a machine for combating the use of dangerous biological agents through the mails," were involved in a scheme to sell unregistered securities in the US and abroad from at least 2004 through July 2010.  The SEC alleges that by mid 2008 Bio Defense's primary income was through the sales of these securities, not revenues, and that they made false claims regarding the compensation of employees and officers.  Also, the SEC alleges they used 'boiler room' promotion firms to push the securities on unwitting investors.

SEC Charges Connecticut-Based Broker for Stealing Investor Funds, September 13, 2012, (Litigation Release No. 22479).

The SEC has charged Stephen B. Blankenship and Deer Hill Financial Group, LLC of with misappropriating at least $600,000 from at least 12 customers from 2002 through November 2011.  According to the complaint (pdf), Blankenship misled investors into thinking he would invest their money through Deer Hill, and provided fake account statements to that effect, when in fact he used investor inflows to make "Ponzi-like" payments to other investors and for personal expenses.  The SEC is seeking a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and penalties.

Two Former Officers of Sterling Financial Corp. Subsidiary Sentenced to Lengthy Prison Terms and Ordered to Pay $53 Million in Restitution for Conducting Financial Fraud, September 13, 2012, (Litigation Release No. 22480).

Joseph M. Braas and Michael J. Schlanger were officers of Equipment Finance, LLC (EFI), a wholly-owned subsidiary of Sterling Financial Corp (Sterling).  The SEC had filed a civil action (pdf) against the two in January of 2011, alleging that from February 2002 to April 2007 the two "orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI's commercial loan portfolio from Sterling's senior management and auditors." They allegedly altered documents, manipulated accounts, and fabricated loans to sidestep Sterling's internal controls and independent auditors, and reported false information in quarterly and annual statements to the SEC.  Their actions resulted in Sterling writing off $281 million related to EFI.

Braas and Schlanger were sentenced to 15 and 20 years in federal prison, respectively, followed by five years of supervised release, and ordered to pay $53 million in restitution.  The sentence was handed down by Judge Paul S. Diamond of the US District Court for the Eastern District of Pennsylvania.

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