Friday, May 3, 2013

SEC Litigation Releases: Week in Review


Commission Obtains Temporary Restraining Order and Asset Freeze Against Massachusetts Man Who Defrauded Investors of At Least $5.5 Million, May 1, 2013, (Litigation Release No. 22694)

Earlier this week, the SEC obtained an asset freeze and temporary restraining order on Steven Palladino and his MA-based Viking Financial Group, Inc. in which he served as owner, president and vice president at various times.  According to the SEC's complaint (PDF),  Viking Financial Group raised almost $5.5 million from a group of about thirty investors under the pretense that the funds would be used to make short-term loans secured by first interest liens on non-primary residences at high interest rates (in the range of 7-15%).  Instead, the funds were used to pay personal expenses incurred by Palladino and to make Ponzi payments to earlier investors.  In March 2013, following larceny charges by the Suffolk County District Attorney's Office  it became clear that the lending business was a ruse and investors began to demand redemption of the promissory notes issued by Viking Financial Group.  Unable to meet such redemptions, Palladino began to miss the interest payments due to noteholders.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains plus interest as well as civil fines. A hearing for the case is scheduled for later today.


Foreign Trader Agrees to Settle SEC Charges in Nexen Insider Trading Case, May 1, 2013, (Litigation Release No. 22693)

Choo Eng Hong has agreed to pay over $566,000 in disgorgement and financial penalties to settle insider trading charges brought against her by the SEC. Last July, the SEC alleged that "Well Advantage Limited and other unknown traders purchased Nexen stock based on confidential details" about its impending acquisition by CNOOC Ltd. Choo was later identified as one of the unknown traders. Choo has also agreed to permanent enjoinment from future violations of the Exchange Act.

Defendant in SEC Action Sentenced On Related Criminal Charges, Receives 17 Year Sentence, April 30, 2013, (Litigation Release No. 22692)

Arnett L. Waters, principal of broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, was sentenced to 17 years in federal prison for "orchestrating a securities fraud and for defrauding rare coin investment customers." In addition to the 17 year sentence, Waters was also "sentenced to three years of supervised release" and ordered to pay "$9,025,691 in restitution and forfeiture."

In May 2012, the SEC filed an emergency enforcement action against Waters for allegedly defrauding investors and misappropriating their funds. His assets were frozen and he was required "to provide an accounting of all his assets to the Commission." In August 2012, the SEC "filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission." Two days later, the U.S. Attorney "filed a separate criminal contempt action against Waters based on the same allegations." Waters pled guilty to these charges in October 2012. The SEC then barred Waters from the securities industry based on his guilty plea. In addition to its charges of criminal contempt against Waters, the U.S Attorney charged Waters with securities fraud and other violations in October 2012. In November 2012, Waters pled guilty "to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice."

Securities and Exchange Commission v. Adondakis et al., April 30, 2013, (Litigation Release No. 22691)

Level Global Investors LP has agreed to pay over $21.5 million in disgorgement, prejudgment interest, and civil penalties to settle charges that its co-founder and portfolio manager, Anthony Chiasson, along with former analyst, Spyridon "Sam" Adondakis, and six other defendants "engaged in repeated insider trading in the securities of Dell Inc. and Nvidia Corp." The six other defendants included five investment professionals and hedge fund advisory firm Diamondback Capital Management. An order was entered against Level Global that enjoins it from future violations of the Exchange Act and Securities Act.

Previously, Adondakis pled guilty "to parallel criminal charges and agreed to a settlement with the SEC in which he admitted liability for insider trading." The SEC's case against Chiasson, "who was convicted in December 2012 of securities fraud in a parallel criminal proceeding," is still pending.

SEC Charges City of Victorville, Underwriter, and Others with Defrauding Municipal Bond Investors, April 29, 2013, (Litigation Release No. 22690)

According to the complaint (opens to PDF), the City of Victorville, CA, along with its Assistant City Manager and former Director of Economic Development, Keith C. Metzler, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & De Dios (the underwriter of the Airport Authority's bonds) "defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering." KND owner, J. Jeffrey Kinsell, and KND Vice President, Janees L. Williams, were also named in the complaint for allegedly making false and misleading statements about the 2008 bond offering.

According to the SEC, in 2008 the Airport Authority issued bonds to "refinance part of the debt incurred to construct...hangars, and other projects." The SEC alleges that "the principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount." This allowed the Airport Authority to issue more bonds and raise more funds "than it otherwise would have." Furthermore, "the SEC's investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority." Kinsell and KND Affliates took the $2.7 million through unauthorized fees for overseeing construction and then "managing" the hangars. "The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates' books and records."

The SEC has charged the defendants with violating various provisions of the securities laws and seeks payment of disgorgement, prejudgment interest, and financial penalties, as well as permanent injunctions against all of the defendants. In addition, the SEC seeks "the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND."

District Court Enters Judgment of Permanent Injunction and Other Relief Against Defendant Innovida Holdings LLC, April 26, 2013, (Litigation Release No. 22689)

A Judgment of Permanent Injunction by consent was entered against InnoVida Holdings, LLC based on SEC charges that InnoVida, Claudio E. Osorio and Craig Toll violated the antifraud provisions of the federal securities laws. The judgment enjoins InnoVida from future violations of the Exchange Act and Securities Act and also orders it to "disgorge any ill-gotten gains with pre-judgment interest and to pay a civil penalty, with the amounts to be determined at a later date upon a motion of the Commission."

Remaining Claims Dismissed in Litigation with AOL Time Warner Executives, April 26, 2013, (Litigation Release No. 22688)

The court ordered "the entry of a stipulation of dismissal by plaintiff Securities and Exchange Commission of all remaining claims against Mark Wovsaniker, in SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker." Wovsaniker, former AOL Time Warner Inc. Senior Vice President for Accounting Policy, was charged with participating in "an effort by which AOL Time Warner overstated its online advertising revenue."

District Court Enters Permanent Injunction Against Defendants Joseph Hilton, F/K/a Joseph Yurkin and New Horizon Publishing Inc, April 26, 2013, (Litigation Release No. 22687)

Judgments of Permanent Injunction by consent were entered against Joseph Hilton, f/k/a Joseph Yurkin and New Horizon Publishing Inc. for their alleged violations of various provisions of the securities laws. The order enjoins them from future violations of the securities laws and orders Hilton to "to comply with the broker-dealer bar the Commission previously issued against him" as well as orders New Horizon to pay disgorgement, prejudgment interest, and a civil penalty to be determined at a later date.

Court Finds Brokerage Firm and Two Former Executives Liable for Over $2.74 Million in a Fraudulent Misappropriation Case, April 26, 2013, (Litigation Release No. 22686)

New York's federal court found "Joshua Constantin and Windham Securities, Inc. jointly and severally liable for over $2.49 million" and Windham's former managing director, Brian Solomon "liable for over $249,000 in disgorgement, pre-judgment interest, and civil penalties." According to the SEC's 2011 complaint, Constantin, Windham, and Solomon made false claims to "investors about the intended use of the investors' funds and about Windham's investment expertise and past returns...misappropriat[ing] the investors' funds and then provid[ing] false assurances to the investors to cover up their fraud." The court found relief defendants "Constantin Resource Group, Inc. and Domestic Applications Corp. jointly and severally liable with Constantin and Windham for over $760,000 and $532,000, respectively, of disgorgement and pre-judgment interest."

SEC Seeks to Halt Scheme Raising Investor Funds Under Guise of Jobs Act, April 25, 2013, (Litigation Release No. 22685)

According to the complaint (opens to PDF), Daniel F. Peterson and his company USA Real Estate Fund 1 falsely "promised investors that they could reap spectacular returns from an upcoming offering in a 'secured' product backed by prominent financial firms." He allegedly claimed the 2012 JOBS Act "would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors." The SEC claims that Peterson "preyed upon investors' sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State's economic recovery." Peterson claimed to investors that he had partnered with two prominent Wall Street financial firms and "that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing."

In reality, Peterson allegedly "has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering." The complaint states that Peterson used investor funds for personal expenses, including "to pay for his rent, food, entertainment, vacations, and a rented Mercedes Benz SUV." The SEC has charged Peterson and USA Fund with violating various sections of the Securities Act and Exchange Act and seeks disgorgement and financial penalties "as well as a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme, and restraining them from further violations of the securities laws."

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