Friday, November 23, 2012

SEC Litigation Releases: Week in Review

Brian Stoker Found Not Liable, November 21, 2012, (Litigation Release No. 22541)

On July 31, 2012, the United States District Court for the Southern District of New York found Brian H. Stoker, former Citigroup Global Markets Inc. employee, "not liable for violations of the Federal securities laws related to the issuance of a $1 billion collateralized debt obligation (CDO) called Class V Funding III." The SEC did not appeal the verdict, and "the time for appeal has expired." The SEC filed its suit against Stoker in October of 2011, alleging that "Stoker was the Citigroup employee primarily responsible for structuring the Class V III transaction." The SEC alleged that Citigroup  "structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO" but then did not "disclose to investors the role that it played in the asset selection process or the short position that it took." The SEC continues to pursue its appeal in the "District Court’s denial of the proposed settlement with Citigroup in the related matter of Securities and Exchange Commission v. Citigroup Global Markets Inc."

District Court Dismisses Action Against Edward S. Steffelin, November 21, 2012, (Litigation Release No. 22540)

On November 16, 2012 the District Court approved a stipulation between the SEC and Edward S. Steffelin, which "dismiss[ed] with prejudice charges against Edward S. Steffelin for his role in the Squared CDO 2007-1 transaction." Furthermore, the stipulation "expressly provided that it was not intended and shall not be deemed an admission by either party of the merit or lack of merit of the claims and/or defenses asserted by either party."

SEC v. CR Intrinsic Investors, LLC, November 20, 2012, (Litigation Release No. 22539)

The SEC charged hedge fund advisory firm CR Intrinsic Investors LLC and its former portfolio manager, Mathew Martoma, along with a medical consultant, Dr. Sidney Gilman, "for their roles in a $276 million insider trading scheme involving a clinical trial" for bapineuzumab, "an Alzheimer's drug being jointly developed by [the] two pharmaceutical companies" Elan Corporation and Wyeth. Allegedly, Dr. Gilman "tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008." In response, Martoma allegedly "caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week." According to the SEC, Martoma "received a $9.3 million bonus at the end of 2008 - a significant portion of which was attributable to the illegal profits" that came from this scheme. Furthermore, Dr. Gilman was paid over $100,000 "for his consultations with Martoma and others at the hedge fund advisory firms" and he "received approximately $79,000 from Elan for his consultations concerning [bapineuzumab] in 2007 and 2008." The U.S. Attorney's Office for the Southern District of New York "announced criminal charges against Martoma and a non-prosecution agreement with Dr. Gilman" in a parallel action.

Court Fines CEO Christopher Metcalf $50,000 and Imposes a Penny Stock Bar and Officer and Director Bar Against Him, November 20, 2012, (Litigation Release No. 22538)

A final judgment was entered on November 14, 2012 against Christopher Metcalf, former President and CEO of Pantera Petroleum, Inc., for his participation along with stock promoter Bozidar "Bob" Vukovich in "a fraudulent broker-bribery scheme designed to manipulate the market for Pantera common stock." The order imposed a $50,000 penalty as well as penny stock bar and officer and director bar against Metcalf. In a partial judgment previously entered against him, Metcalf was permanently enjoined from violating various sections of the Securities Act and the Exchange Act.

SEC Charges Michigan Businessman Defrauded Investors in Real Estate Investment Scheme, November 20, 2012, (Litigation Release No. 22537)

According to the complaint (opens to PDF), Joel I. Wilson "defrauded investors who bought unregistered securities offered by his company, Diversified Group Partnership Management, LLC, and sold through his brokerage firm, W R Rice Financial Services, Inc." From 2009 to 2012, Wilson raised around $6.7 million from investors claiming that "he would invest their money in real estate that would yield returns of 9.9% per year." According to the SEC, Wilson in fact used these funds to "to make unsecured loans to his real estate business...[and] diverted $582,000 of investor money to pay personal expenses." Furthermore, the SEC alleges that Wilson "raised additional funds for his real estate business through stock sales for another of his companies, American Realty Funds Corporation." American Realty allegedly made misrepresentations and omissions  in reports it has filed with the SEC and has failed to file "its annual report on Form 10-K for the fiscal year ended June 30, 2012...and its quarterly report on Form 10-Q for the quarter ended September 30." The SEC has issued an order suspending the trading of American Realty Stock.

Former Executive of Massachusetts-Based Company Found Guilty of Securities Fraud, November 20, 2012, (Litigation Release No. 22536)

Former CFO and CEO of LocatePlus Holdings Corporation, James Fields, was found guilty "on twenty nine criminal charges, including securities fraud, false statements to company auditors, false statements and false certifications in SEC filings, aggravated identity theft and money laundering." Fields was charged in November 2010 along with former LocatePlus CEO Jon Latorella "with conspiracy to commit securities fraud for their role in a scheme to fraudulently inflate revenue at LocatePlus as well as a scheme to manipulate the stock of another company." Earlier this year, Latorella was found guilty and "sentenced to 60 months imprisonment in the criminal case, to be followed by three years of supervised release, and the payment of restitution to be determined at a later hearing." In July of this year, LocatePlus agreed to settle charges "it engaged in securities fraud from 2005 through 2007 by misleading investors about its funding and revenue" by consenting to "an administrative order which prevents it from selling its securities in the public market." Sentencing for Fields is scheduled for February 14, 2013.

SEC Charges Ring of High School Buddies with Insider Trading in Health Care Stocks, November 19, 2012, (Litigation Release No. 22535)

According to the complaint (opens to PDF), from 2007 to 2009 "three health care company employees and four others in a New Jersey-based insider trading ring of various high school friends generat[ed] $1.7 million in illegal profits and kickbacks by trading in advance of 11 public announcements involving mergers, a drug approval application, and quarterly earnings of pharmaceutical companies and medical technology firms." The alleged tippers in the scheme are John Lazorchak, Celgene Corporation's director of financial reporting, Mark S. Cupo, Sanofi S.A.'s director of accounting and reporting, and Mark D. Foldy, a marketing employee of Stryker Corporation. According to the SEC, the primary traders in the scheme are Cupo's friend Michael Castelli and Castelli's high school friend, Lawrence Grum. In addition, Lazorchak's high school friends Michael T. Pendolino and James N. Deprado also allegedly traded on the non-public information. By using a middleman between the insiders and traders, the defendants allegedly hoped to avoid detection. Grum reassured Cupo that their scheme could avoid detection, stating, “At the end of the day, the SEC’s got to pick their battle because they have a limited number of people and huge numbers of investors to go after.”

SEC Charges New York-Based Fraudster Who Spent Investor Funds on Drugs and Gambling, November 19, 2012, (Litigation Release No. 22534)

According to the complaint (opens to PDF), Stephen A. Colangelo, Jr. raised over $3 million for four start-up companies, Brickell Fund LLC, Hedge Community LLC, Start a Hedge Fund LLC, and Under the Radar SEO LLC, by misleading investors about his professional and educational background as well as his past achievements as an investor. In addition, three investors gave him over $1 million to invest on their behalf as their investment adviser. Colangelo falsely told investors that he had studied finance at Nyack College from 1986 to 1989 when in fact he has not even graduated high school. He allegedly hid past criminal activities from potential investors and "siphoned off at least $1 million in investor funds to pay such unauthorized personal expenses as his federal income taxes, illegal narcotics, gambling, cigars, and travel for him and his family." In a parallel action, criminal charges have also been announced against Colangelo.

SEC Charges J.P. Morgan Securities LLC with Misleading Investors in RMBS Offerings, November 16, 2012, (Litigation Release No. 22533)

On November 16, 2012, the SEC charged J.P. Morgan Securities LLC and affiliated entities "with misleading investors in offerings of residential mortgage-backed securities (RMBS)." According to the SEC, JP Morgan "misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter." For the $1.8 billion RMBS offering that occurred in December 2006, JP Morgan represented that four loans "(.04 percent of the total loans collateralizing the transaction) were delinquent by 30 to 59 days," when in fact JP Morgan "actually had information showing that more than 620 loans (above 7 percent of the total loans collateralizing the transaction) were, and had been, 30 to 59 days delinquent, and the four loans represented as being 30 to 59 days delinquent were in fact 60 to 89 days delinquent." JP Morgan and J.P. Morgan Acceptance Corporation I settled the charges by agreeing to pay $74.5 million in disgorgement, prejudgment interest, and penalties.  JP Morgan; EMC Mortgage, LLC; Bear Stearns Asset Backed Securities I, LLC; Structured Asset Mortgage Investments II, Inc.; and SACO I, Inc.agreed to pay over $222 million in disgorgement, prejudgment interest, and penalties. The SEC will distribute these funds to harmed investors through two Fair Funds.

Court Enters Final Judgment by Consent Against SEC Defendant Bruce Grossman, November 16, 2012, (Litigation Release No. 22532)

A final judgment was entered against Bruce Grossman on November 13, 2012, for his alleged involvement with Jonathan Curshen in "a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Industrial Biotechnology Corp." The final judgment permanently enjoins Grossman from violating sections of the Securities Act and the Exchange Act, "orders Grossman liable for disgorgement of $76,000," and "bars Grossman from participating in an offering of penny stock."

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