Friday, October 10, 2014

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

SEC Obtains Final Judgment Against Paul T. Mannion, Jr., Andrew S. Reckles, Pef Advisors LLC, and Pef Advisors Ltd.
October 8, 2014 (Litigation Release No. 23108 )
The SEC announced that on September 29, 2014, the US District Court for the Northern District of Georgia entered a final judgment against Paul T. Mannion, JR., Andrew S. Reckles, PEF Advisors LLC and PEF Advisors Ltd. The Court found that Mannion and Reckles, co-owners of both PEF Advisors entities, had violated Section 206(2) of the Investment Advisers Act by “personally exercising stock warrants that belonged to the Palisades Master Fund, L.P. (Fund), a hedge fund client defendants advised.” Mannion and Reckles have each been ordered to pay a $75,000 penalty, have been permanently barred from association with any “broker, dealer, investment adviser, municipal securities dealer, or transfer agent, prohibited each of them from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter” and are barred from participating in the promotion or sales of penny stocks.

Massachusetts-based Penny Stock Promoter Ordered to Pay Over $700,000 in SEC Fraud Case
October 8, 2014 (Litigation Release No. 23107 )
The Commission announced that the US District Court for the District of Massachusetts had entered a final judgment against Geoffrey J. Eiten on October 7. An action was initially filed by the SEC in December 2011, charging that Eiten and his company, National Financial Communications Inc, had “made material misrepresentations and omissions in penny stock publications they issued.” The final judgment orders Eiten to pay $727,029 ($605,262 in disgorgement, $71,767 prejudgment interest and $50,000 in civil penalties). Eiten is also barred from promoting or engaging in the sales of penny stocks.

SEC Shuts Down $123 Million Atm Ponzi Scheme in California
October 8, 2014 (Litigation Release No. 23106 )
Charges were announced today against Nationwide Automated Systems, the company’s owner Joel Barry Gillis and Edward Wishner, a senior officer. The case was unsealed on October 7 by the federal court in Los Angeles. The SEC has obtained an emergency court order, freezing the defendant’s assets. In what the Commission alleges was a classic Ponzi scheme, funds in excess of $123 million were raised by NAS. Gillis and Wishner told investors that “they could purchase ATMs from NAS and then lease them back in return for “rent” of 50 cents per ATM transaction. Investors were guaranteed an investment return of at least 20 percent per year in these sale-and-leaseback agreements. However, the vast majority of NAS’s revenue is from new investor funds, and this money is being used to pay the promised returns owed to earlier investors. NAS does not actually own most of the ATMs it claims to operate, a fact unknown to investors who were contractually forbidden in their agreements from contacting the locations where their ATMs were supposedly located.” In fact, the SEC noted that, while NAS had claimed to operate somewhere in the range of 31,000 ATMs, it actually only owned about 235 ATMs.

Court Imposes Injunctions and Monetary Sanctions of Over $350 Million Against Nikolai Battoo and His Companies
October 6, 2014 (Litigation Release No. 23104 )
The SEC announced that on September 30, the US District Court for the Northern District of Illinois had issued an Order and Final Judgment against Nikolai Battoo, BC Capital Group S.A., and BC Capital Group Limited. The latter two defendants were companies under the control of Mr. Battoo. Battoo and his companies were ordered to pay $290,129,196.86 in disgorgement and prejudgment interest. In addition, Battoo and his companies were ordered to pay a $68 million civil penalty. Judge Edmond E. Chang, who presided over the case, wrote that the high penalty was justified due to “the sheer enormity of the fraud, both in dollar figure and number of investors. There must be a substantial penalty both to punish the Battoo Defendants, and to deter others from committing fraud on this scale.” According to the SEC, Battoo managed hedge funds that defrauded investors “by claiming to achieve exceptional risk-adjusted returns while concealing huge losses suffered by his asset management operation and his misappropriation of investor funds to pay for his flamboyant lifestyle.” After funneling about $49 million from investors into his own accounts, Battoo, starting in 2008, distributed false account statements to investors to cover up the theft.

SEC Files Subpoena Enforcement Action Against John Puglisi, Progressive Capital Solutions LLC, and Others
October 6, 2014 (Litigation Release No. 23105 )
The SEC announced that it had filed a subpoena enforcement action in the US District Court for the Eastern District of Pennsylvania against defendants John Puglisi and Progressive Capital Solutions LLC. The litigation, brought by CMS Life Insurance Opportunity Fund LP and CNF II Partners alleges that Puglisi and Progressive Capital Solutions “had been stealing the investments and selling them for their own benefit”. The subpoena enforcement action was required because the defendants had not complied with previously issued administrative subpoenas.

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