Friday, October 5, 2012

SEC Litigation Releases: Week in Review

SEC Charges Unlicensed Financial Advisor James S. Quay for Defrauding Investors in Atlanta Area, October 4, 2012, (Litigation Release No. 22506)

According to the complaint (opens to PDF), James S. Quay, along with his brother Jeffrey A. Quay, conducted a scheme in which they convinced two elderly women to invest $560,000 into a sham limited partnership called Trinity Charitable Solutions. Quay, who has a history of defrauding the elderly, claimed the funds would be used to operate the program, but the brothers allegedly misused at least $180,000 of the funds for "mortgage payments, lavish restaurant meals, and membership at a massage spa." According to the complaint, Quay never revealed to these women that he is a convicted felon and disbarred attorney and that in the past he received $1.4 million in illicit sales commissions from fraudulent activity. James Quay has agreed to a final judgment which orders him to pay over $2 million in disgorgement, prejudgment interest and penalties. He has also agreed to a penny stock bar and to be barred "from appearing or practicing before the SEC as an attorney or an accountant."  The investigation against Jeffrey Quay remains pending.

SEC Charges San Francisco Investment Adviser and Its Owner for Fraud, October 4, 2012, (Litigation Release No. 22505)

According to the complaint (opens to PDF), hedge fund manager Hausmann-Alain Banet stole $550,000 from a retired schoolteacher who "thought she was investing her retirement savings in Banet's hedge fund." Instead of investing the money, Banet allegedly used it to pay personal and business expenses "including his home mortgage, office rent, and staff salaries." Furthermore, Banet gave the woman phony account statements showing "non-existent investment gains and listing an independent administrator that performed no actual work for the fund." Banet and his firm, Lion Capital Management, have been charged with violating sections of the Securities Act, Exchange Act, and Advisers Act.  Criminal charges have also been announced against Banet.

SEC Charges Chicago-Based Investment Adviser and Its Owners for Fraud, October 3, 2012, (Litigation Release No. 22504)

According to the complaint (opens to PDF), investment adviser GEI Financial Services, Inc. and its owners, Norman Goldstein and Laurie Gatherum, defrauded their advisory clients--"including the GEI Health Care Fund 2001, L.P.--by taking at least $147,000 in excessive fees and capital withdrawals from the Fund since 2009." Goldstein and Gatherum never told investors that "their investment adviser removed performance hurdles...in order to draw additional fees." Furthermore, the complaint alleges that the defendants never told their clients that in 2011 Goldstein was barred from providing investment advisory services in Illinois. Even with this bar, Goldstein "continued to make all investment decisions for GEI Financial's clients and for clients of GEI Management, LLC--an affiliated unregistered adviser owned by Goldstein and Gatherum."

SEC Charges Repeat Violator in South Florida with Fraudulently Offering Investments Tied to Oil Drilling Projects, October 3, 2012, (Litigation Release No. 22503)

According to the complaint (opens to PDF), Joseph Hilton made "misrepresentations to investors while selling limited partnership units in two oil drilling projects through his firm Pacific Northwestern Energy LLC." According to the SEC, Hilton falsely told investors that "Pacific acquired its wells from Exxon Mobil Corp., and he overstated Pacific's experience in the oil and gas industry [as well as] the historical accomplishments of its drillers." Hilton raised nearly $800,000 from these investors and raised an additional $2.5 million from investors through New Horizon publishing Inc., another company he controlled. Hilton allegedly deceived these investors about "his identity, the anticipated returns on the investments, the amount of oil being produced by U.S. Energy's wells, and the existence of natural gas wells." Furthermore, Hilton also operated a "boiler room of sales representatives paid on a commission basis." Hilton changed his name last year from Joseph Yurkin following a final judgment of fraud against him for securities offerings he made through Homeland Communications Corp. The SEC has frozen the assets of Hilton, Pacific, and the two limited partnerships, Rock Castle Drilling Fund LP and Rock Castle Drilling Fund II LP. The SEC seeks disgorgement, prejudgment interest, "financial penalties, and permanent injunctions against Hilton and his entities."

Former IndyMac CEO Agrees to Settle in SEC Litigation, October 1, 2012, (Litigation Release No. 22502)

On September 28, 2012, the Court entered a settled final judgment against IndyMac Bancorp, Inc's former CEO and Chairman, Michael W. Perry. According to the SEC, in 2008 IndyMac and Perry "failed to disclose that IndyMac Bank had only been able to maintain its well-capitalized regulatory status by retroactively including in IndyMac's first quarter capital balance an $18 million capital contribution from IndyMac to IndyMac Bank." The final judgment permanently enjoins Perry from violations of the Securities Act and orders him to pay an $80,000 penalty.

SEC Charges Three for Their Roles in Manipulating the Market for Sunrise Solar Corporation Stock, October 1, 2012, (Litigation Release No. 22501)

According to the complaint (opens to PDF), between July 25, 2008 and May 26, 2009 Sunrise Solar Corporation along with its former CEO, Eddie D. Austin, Jr., and Austin's wife, Carolyn Austin, were involved in a "fraudulent market manipulation scheme." During this time period, Eddie D. Austin "drafted, reviewed, and approved numerous false and misleading press releases that portrayed Sunrise as a thriving business operating in the solar power industry." Additionally, Sunrise allegedly filed, and Austin certified, "two annual reports that failed to disclose Austin's recent bankruptcy filing." Furthermore, Carolyn Austin allegedly received over $170,000 in improper proceeds from receiving and selling "300,000 shares of Sunrise stock in transactions that should have been registered with the Commission." The SEC has charged Sunrise and Eddie D. Austin with violating sections of the Exchange Act and Carolyn Austin with violating sections of the Securities Act. Together, the Austins must pay over $230,000 in disgorgement, prejudgment interest, and penalties. 

SEC Charges Former CFO with Evading Internal Controls to Pay for Unauthorized Travel and Entertainment Expenses, September 28, 2012, (Litigation Release No. 22500)

According to the complaint (opens to PDF), former CFO of Digi International, Inc., Subramanian Krishnan, "engaged in conduct which resulted in the filing of inaccurate reports and accompanying certifications in Digi's annual quarterly reports from March 2005 through May 2010."  Through Krishnan's conduct, corporate funds were used to pay for unauthorized travel and entertainment expenses. The complaint charges Krishnan with "caus[ing] the Company to file inaccurate reports, fail[ing] to enforce Digi's internal controls, demonstrat[ing] a lack of management integrity, fail[ing] to act to reveal inaccurate reports, and wrongly certify[ing] that he evaluated the effectiveness of Digi's internal controls and disclosed they were effective." Krishan has consented to an officer and director bar and to pay a to-be-determined amount of disgorgement, prejudgment interest, and civil penalty.

SEC Obtains Judgments and $12.9 Million in Monetary Relief Against Three Defendants Involved in 23 Corporate Hijackings, September 28, 2012, (Litigation Release No. 22499)

On August 2, 2012, final judgments were entered against Irwin Boock, Jason C. Wong, and Stanton B.J. DeFreitas "for their involvement in hijacking 23 defunct or inactive publicly-traded companies and subsequently making unregistered offers and sales of billions of shares." On March 26, 2010, "the Court entered a default as to Boock and DeFreitas," and imposed permanent injunctions against future violations of the Securities Act and Exchange Act. The Court also imposed a penny stock bar against Boock and DeFreitas, as well as an officer and director bar against Boock. On August 25, 2011, a summary judgment was entered against Wong "finding that the evidence was sufficient to establish that Wong had violated the registration requirements in relation to 12 of the hijacked companies." The August 2nd judgments hold Boock, Wong, and DeFreitas jointly and severally liable to pay over $12.8 million combined in disgorgement, prejudgment interest, and civil penalties. 

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