Friday, October 3, 2014

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

SEC v. Patrick G. Rooney, John R. Rooney, and Positron Corporation, Civil Action No. 9:14-cv-81224-KAM (U.S. District Court for the Southern District of Florida)
October 3, 2014 (Litigation Release No. 23103)
The SEC announced that on September 30, it had filed a civil injunctive action against Positron Corporation, Patrick Rooney, the company’s former CEO and John R. Rooney, a promoter of penny stocks. Positron, a microcap company, as well as Patrick Rooney and John Rooney have been charged with a scheme to manipulate the market in relation to Positron stock. The Commission alleges that “Positron Corporation, Patrick Rooney, and John Rooney, engaged in market manipulation fraud in which they made an inducement payment to a stock promoter who would purchase shares of Positron in the open market ahead of planned press releases to help them manipulate the stock. The SEC alleges that the scheme was designed to generate the appearance of market activity in the company's stock to induce investors to purchase the stock and artificially increase the trading price and volume.”

Former Cleveland-Area Investment Promoter Oscar F. Villarreal Indicted
October 1, 2014 (Litigation Release No. 23102)
Following an SEC Complaint filed on August 26, the US Attorney for the Northern District of Ohio, on September 16, secured a grand jury indictment against Oscar F. Villarreal. Villarreal was charged with “ten counts of wire fraud, seven counts of money laundering, one count of securities fraud, and one count of investment adviser fraud.” According to the SEC, from March 2009 to December 2010, Villarreal masterminded and directed a fraudulent offering, raising $9.2 million from 46 investors. “Villarreal told investors that their money was to be used to make private equity investments in companies in the petroleum, steel, and other industries in Mexico. Villarreal lied to these investors about the success of a previous fund he operated, lied in saying that he used their money to purchase and profitably operate a Mexican pipeline manufacturer, and lied by telling investors that Fund III had ownership interests in several U.S. and Mexican drilling companies. Villarreal instead used $7.4 million of Fund III assets to trade in publicly traded securities in a brokerage account-contrary to his representations to investors-and sustained heavy losses, and also stole $5.8 million for himself. By November 2011, Fund III was essentially insolvent.” The SEC is seeking a permanent injunction, disgorgement and prejudgment interest, in addition to civil penalties.

The Securities and Exchange Commission ("Commission") Announced That On September 24, 2014, George B. Franz III ("Franz") Was Sentenced for His Obstruction of an SEC Investigation and Making False Statements to SEC Staff
September 30, 2014 (Litigation Release No. 23101)
On September 24, the SEC announced that George B. Franz III had been sentenced for obstruction of an SEC investigation as well as for making false statements to the SEC. Franz’s sentence includes three years of probation and a fine of $25,000. In addition, the Court ordered Franz to make a $250,000 payment to the SEC to compensate the Commission for “diversion of investigative resources caused by Franz’s obstructive conduct.” In June of this year, “Franz pleaded guilty to one count of obstruction of an official proceeding, one count of destruction or falsification of records in a federal investigation, and two counts of providing false statements and documents to an agency of the executive branch.” The criminal acts occurred over the course of the Commission’s investigation of Franz and Ruby Corporation. Last September, this investigation ended in an Administrative Proceeding, with the SEC alleging that Franz and Ruby lied to clients regarding account thefts. Franz and Ruby agreed to a settlement in which they paid a $675,000 in civil penalties and $425,000 in disgorgement.

SEC Charges Pennsylvania-Based Registered Representative with Stealing Funds from Customers
September 30, 2014 (Litigation Release No. 23100)
The SEC charged Dennis F. Wright of stealing his client’s funds for personal use and subsequently forging their account statements. The SEC’s complaint alleges that Wright stole funds in excess of $1.5 million from “at least 28 customers”. The US Attorney’s Office for the Middle District of Pennsylvania also announced criminal charges against Wright. For his part, Wright agreed to settle the Commission’s charges and to disgorge the stolen funds. By order of the SEC, Wright will be permanently barred “from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and barring him from participating in any offering of a penny stock.” The SEC investigation was conducted in conjunction with the US Attorney’s Office for the Middle District of Pennsylvania as well as the FBI.

Court Imposes Injunctions and Monetary Sanctions of Nearly $30 Million Against Former CEO and CFO of Electronic Game Card
September 30, 2014 (Litigation Release No. 23099)
The SEC announced that, on September 22, the US District Court for the Southern District of New York had “issued an opinion and order imposing financial sanctions of more than $29.6 million on Lee Cole and Linden Boyne, the former CEO and CFO of Electronic Game Card Inc.” The SEC’s complaint, filed in November 2012, outlined the lengths that Boyne and Cole had gone to to defraud investors. In an effort to attract investment, both defendants told investors that the company “had millions of dollars in annual revenue, millions of dollars in investments, and an off-shore bank account worth more than $10 million. In fact, many of EGMI's purported contracts were phony, the purported investments were actually in related-party entities affiliated with Cole or Boyne, and the bank account did not exist.” At one point, the SEC noted that EGMI’s outstanding common stock was valued around $150 million. After filing for bankruptcy, its stock is now entirely worthless. Cole and Boyne channeled millions of EGMI shares to other entities they controlled, subsequently selling those shares and realizing profits in excess of $12.3 million. “Granting a motion for relief made by the Commission, Judge Sullivan's recent order holds Cole and Boyne jointly and severally liable for disgorgement of $12,345,908.74 plus $2,324,842.25 in prejudgment interest and requires each to pay a civil penalty of $7,500,000.00. Judge Sullivan's order also permanently enjoins Cole and Boyne from violating the securities laws, serving as officers or directors of any public company, and participating in any activities involving the offer of penny stocks.”

Court Imposes Injunctions and Monetary Sanctions of Nearly $30 Million Against Former CEO and CFO of Electronic Game Card
September 30, 2014 (Litigation Release No. 23098)
On September 25, the SEC filed a civil injunctive action against Wealth Strategy Partners, LC, its principal, Harvey Altholtz, Stevens Resource Group, LLC and its principal, George Stevens. The defendants have been charged with securities fraud involving fraudulent offers and sales of securities in The Stealth Fund, LLLP and The Adamas Fund, LLLP. The funds were controlled by Wealth Strategy and Altholtz, while Stevens Resource and Stevens served as investment advisers for both funds. Taken together, the two funds raised about $30.8 million from more than 143 investors between 2007 and November 2009. According to the SEC, the defendants did not disclose to investors that their assets might be used to “guarantee certain loans that Altholtz's family made to two portfolio companies that Stealth invested in and that his family also made loans to Adamas and Stealth in violation of the funds' operating agreements. The complaint also alleges that Wealth Strategy and Altholtz committed fraud by giving an Altholtz family trust, who was an investor in Adamas, preferential treatment over other investors with regard to redemptions. The complaint further alleges that the defendants made misstatements and omissions in newsletters to investors regarding the financial condition of some of the funds' portfolio companies.” The SEC is seeking permanent injunctions, disgorgement as well as prejudgment interest and civil penalties against all of the defendants. The SEC is also seeking to impose a permanent officer and director bar against Altholtz. Stevens and Stevens Resource have already settled and agreed to a permanent bar.

Court Imposes Injunctions and Monetary Sanctions of Nearly $30 Million Against Former CEO and CFO of Electronic Game Card
September 30, 2014 (Litigation Release No. 23097)
In May of this year, the SEC “filed an emergency action charging Thomas Abdallah, Kenneth Grant, KGTA Petroleum Ltd. ("KGTA"), Mark George, Jeffrey Gainer and Jerry Cicolani with participating in a fraud involving a sham oil trading business, KGTA, that raised over $20 million from investors.” Allegedly, Grant and Abdallah had persuaded potential investors to invest by making many false claims and promises. In reality, KGTA was a sham business, and was being operated as a Ponzi scheme. An escrow safeguard that Grant and Abdallah had promised investors also proved to be entirely false. The US District Court in the Northern District of Ohio “issued a series of Orders granting injunctive relief, freezing assets and other emergency relief as to all of the defendants and relief defendants.” The SEC’s investigation into KGTA and the defendants is slated to continue.

SEC Charges China Valves Technology, Inc. and Three Senior Officers with Fraud
September 29, 2014 (Litigation Release No. 23096)
The SEC’s Cross-Border Working Group, a division that deals largely with companies that have significant foreign operations but are publicly traded in the United States, is proceeding with its latest case, filing a civil injunctive action against China Valves Technology, Inc. in the US District Court for the District of Columbia. The charge alleges that China Valves and its chief officers Fang, Wang and Tang were involved in intentionally “misleading investors about the true nature and price of an acquisition and by mischaracterizing and materially overstating income related to its purchase and reverse engineering of a competitor's product.” The SEC’s investigation will continue.

Securities and Exchange Commission v. Michael B. Ferguson and Transactions Unlimited, Civil Action No. 3:14-cv-04188 (N.D. Cal.)
September 29, 2014 (Litigation Release No. 23095)
The SEC charged Michael B. Ferguson and his company, Transactions Unlimited (formerly DBA ATM Plus), with cheating investors out of more than $12 million in a fraudulent ATM scheme. Beginning in 2005, Ferguson’s scheme was “the hallmark of a Ponzi scheme” according to the Commission. Ferguson was arrested in March of this year and charged with securities fraud, burglary and grand theft by the Santa Clara County District Attorney’s Office. The SEC is seeking “permanent injunctions, return of allegedly ill-gotten gains, and civil penalties.”

Securities and Exchange Commission v. Erick Laszlo Mathe and Ashif Jiwa, Civil Action No. 14-CV-23573-GAYLES/TURNOFF (S.D. FL.)
September 29, 2014 (Litigation Release No. 23094)
The SEC charged Erick Laszlo Mathe, the former CEO of Vision Broadcast Network, and his consultant Ashif Jiwa with “defrauding investors in a purported startup television network and production company by providing false information about its revenues and future prospects.” The Commission alleges that Mathe and Jiwa raised at least $5.7 million from close to 100 investors across the United States. The US Attorney’s Office for the Eastern Distrit of Pennsylvania announced criminal charges against the defendants in parallel to the SEC’s charge. The company in question, Vision Broadcast, is now dissolved.


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