Friday, March 22, 2013

SEC Litigation Releases: Week in Review

Fake Hedge Fund Manager Sentenced to 40 Months in Prison, March 20, 2013, (Litigation Release No. 22655)

Andrey C. Hicks was sentenced to "40 months in prison in connection with criminal charges...[of] committing wire fraud, attempting to commit wire fraud, and aiding and abetting wire fraud." Hicks was also "ordered to pay $2.3 million in restitution." In 2011, the SEC charged Hicks and his investment advisory firm, Locust Offshore Management, LLC, "with misleading prospective investors about their supposed quantitative hedge fund and diverting investor money to the money manager's personal bank account." The SEC also claimed that Hicks and his firm "made misrepresentations about [Hick's] education, work experience, and the hedge fund's auditor, prime broker/custodian, and corporate status when soliciting individuals to invest in the purported hedge fund, called Locust Offshore Fund, Ltd." Final judgments were entered against Hicks and Locust Offshore Management in 2012 ordering them to pay jointly and severally over $2.5 million in disgorgement and prejudgment interest and over $5 million in civil penalties. Hicks was also barred from associating with "an investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization" and Locust Offshore Management was barred from "acting as an investment adviser."

SEC Settles with Matthew Proudfoot and Laurie Vrvilo in Gold Mining Offering Fraud Case, March 20, 2013, (Litigation Release No. 22654)

Final judgments were entered against Matthew Dale Proudfoot and Laurie Anne Vrvilo for their alleged involvement in "a gold mine investment scheme" in which they "falsely promised investors whopping returns from a gold mining operation while investors' money was actually spent on family cars, jewelry, vacations, and vitamin supplements." The original complaint charged Harry Dean Proudfoot III along with his children, Matthew Proudfoot and Laurie Vrvilo, with raising "$2.7 million from...investors...through 3 Eagles Research & Development LLC." The complaint also charged Dennis Bukantis with selling securities "as an unregistered broker." Matthew and Laurie agreed to a final judgment that includes permanent injunctions, and holds them "jointly and severally liable for the disgorgement of the approximately $2.72 million" plus prejudgment interest. The case is still pending against 3 Eagles, Harry Proudfoot, and Dennis Bukantis.

California Hedge Fund Manager Agrees to $1.8 Million Settlement in Galleon-Related Insider Trading Case, March 20, 2013, (Litigation Release No. 22653)

A final judgment has been entered approving "a $1.8 million settlement between the SEC and hedge fund manager Douglas F. Whitman and his firm Whitman Capital." In its original complaint, the SEC charged Whitman and Whitman Capital with trading on insider information "perpetrated by Raj Rajaratnam of Gallon Management and other hedge fund managers." Whitman was tipped by his neighbor, Roomy Khan (an associate of Rajaratnam's) concerning "details about Polycom Inc.'s fourth quarter 2005 earnings and Google Inc.'s second quarter 2007 earnings." Hedge funds that were managed by Whitman Capital gained over $900,000 in illicit profits. Last August, Whitman was convicted in a parallel criminal case "of two counts of conspiracy to commit securities fraud and two counts of securities fraud," sentenced to two years in prison, and ordered to "pay forfeiture of $935,306, and a $250,000 criminal fine." The final judgment in connection with the SEC's complaint permanently enjoins the defendants from future violations of the Securities Act and Exchange Act and "requires Whitman and Whitman Capital to jointly and severally disgorge $935,306, and orders Whitman to pay a civil penalty in the amount of $935,306." Whitman has also been barred from the securities industry.

Securities and Exchange Commission v., Inc. et al., March 19, 2013, (Litigation Release No. 22651)

The SEC has charged, Inc, its president, Estuardo Benavides, and one of its directors and licensed attorney, Robert B. Cook, "for offering shares in E-Monee to investors under the false pretense that the company owned Mexican bonds worth billions of dollars." According to the complaint, "the Mexican bonds the company owned, in reality, were essentially worthless and there was no valid basis for the claims by Benavides and Cook that E-Monee’s shares would substantially increase in value." The defendants have been charged with violating sections of the Securities Act and the SEC seeks permanent injunctions and civil penalties against them, as well as penny stock bars against Benavides and Cook.
Defendant in SEC Enforcement Action Sentenced to Over Seven Years in Prison and Ordered to Pay Over $3 Million, March 19, 2013, (Litigation Release No. 22652)

Former investment advisor, Gary J. Martel, was sentenced to "eighty-seven months imprisonment plus three years of supervised release, and pay restitution in the amount of $3,274,031.41." Martel previously pled guilty to "three counts of mail fraud and to wire fraud." Last June, the SEC charged Martel, "who conducted business under the names Martel Financial Group and MFG Funding," with having investors invest in fictitious bonds and investment pools, and using investors' funds for purposes other than he promised "including making payments to earlier investors." The SEC barred Martel from the securities industry and a final judgment was entered against him ordering him to pay over $7.21 million in disgorgement, prejudgment interest, and civil penalties.

Securities and Exchange Commission v. Sigma Capital Management, LLC et al., March 19, 2013, (Litigation Release No. 22650)

According to the complaint (opens to PDF), Sigma Capital Management along with "several hedge fund managers and analysts including Jon Horvath, a former analyst at Sigma Capital," were involved in an insider trading scheme regarding the quarterly earnings of Dell and Nvidia Corporation. The complaint alleges that Sigma Capital gained $6.425 million in illicit profits from the insider trading. Sigma Capital has agreed to pay almost $14 million in disgorgement, prejudgment interest, and penalties to settle the charges. The SEC has named two affiliated hedge funds, Sigma Capital Associates and S.A.C. Select Fund, as relief defendants.

Massachusetts Federal Court Enters Judgments Against Two Defendants Charged in Investment Frauds, March 19, 2013, (Litigation Release No. 22649)

According to the complaint (opens to PDF), 211 Ventures, LLC "purported to offer direct investments in fraudulent and non-existent trading programs, promising high returns and guarantees against loss" and Anderson "offered investors fictitious trading programs through an entity called E-Trust, based on gold or precious metals, medium term notes, or other assets, and received investor funds that he used for his personal gain." The defendants have been ordered to pay over $2.3 million combined in disgorgement, prejudgment interest, and civil penalties, and are permanently enjoined from future violations of the securities laws. The SEC's complaint also charged 211 Ventures' owners, Diane Glatfelter and Robert Rice, and K2 Unlimited, Inc. "of which Glatfelter is sole shareholder." The action against these three defendants remains pending.

SEC Obtains Asset Freeze Against Massachusetts-Based Investment Adviser Stealing Money from Clients, March 19, 2013, (Litigation Release No. 22648)

According to the complaint (opens to PDF), Gregg D. Caplitz and Insight Onsite Strategic Management "raised at least $1.1 million from clients that was used for purposes other than investing in the hedge fund they purported to manage." Investor funds were instead transferred to "Rosalind Herman, his friend who works at the firm. Investor funds also were transferred to her sons Brad and Brian Herman, daughter-in-law Charlene Herman, and a company called Knew Finance Experts." Investor funds were then used to pay personal expenses. An asset freezewas granted against Caplitz and Insight Onsite Strategic Management. The SEC has charged the defendants with violating various sections of the securities laws and seeks permanent injunction, disgorgement, prejudgment interest, and penalties. The SEC named the four Hermans and Knew Finance Experts as relief defendants and seeks disgorgement and prejudgment interest against them.

Securities and Exchange Commission v. CR Intrinsic Investors, LLC et al., March 18, 2013, (Litigation Release No. 22647)

According to the complaint (opens to PDF), CR Intrinsic Investors engaged in insider trading "involving a clinical trial for an Alzheimer's drug being jointly developed by" Elan Corporation and Wyeth. One of CR Intrinsic's portfolio managers, Mathew Martoma, "illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who was selected by the pharmaceutical present the final drug trial results to the public." In an amended complaint, the SEC added "investment advisory firm S.A.C. Capital Advisors, LLC and hedge funds CR Intrinsic Investments, LLC, S.A.C. Capital Associates, LLC, S.A.C. International Equities, LLC, and S.A.C. Select Fund, LLC as relief defendants." CR Intrinsic has agreed to pay over $600 million in disgorgement, prejudgment interest, and penalties to settle the charges. "The settlement filed in federal court in Manhattan is the largest ever in an insider trading case."

Former Mercury Interactive General Counsel Settles Suit Alleging Stock Options Backdating and Other Misconduct, March 15, 2013, (Litigation Release No. 22646)

The SEC settled charges with Susan Skaer, former "General Counsel and Secretary of Mercury Interactive Corporation," that arose "from an alleged scheme to backdate stock option grants and from other alleged misconduct." Along with other senior Mecury officers, Skaer allegedly perpetrated a scheme "to award Mercury executives and other employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense." Skaer agreed to a final judgment that enjoins her from future violations of the securities laws and orders her to pay over $850,000 in disgorgement and penalties. She has also been suspended from appearing or practicing before the Commission as an attorney. "The settlement with Skaer, if approved, will conclude the litigation."

SEC Charges San Diego Lawyers and Others in an International Market Manipulation Scheme, March 15, 2013, (Litigation Release No. 22645)

According to the complaint (opens to PDF), "stock promoters John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton, and their associates, used false and misleading promotions to pump up trading in the stock'" of Pacific Blue Energy Corporation and Tradeshow Marketing Company Ltd. "and made millions when they secretly dumped their own shares." The promoters used two websites they controlled, Skymark Research and Emerging Stock Report, to send investors "false and misleading emails about the companies." They also used "'boiler room' sales calls to tout the stocks, falsely claiming that the recommendations were based on independent research by Skymark and Emerging Stock Report." According to the SEC, attorneys Luis Carrillo and Wade Huettel "helped the promoters conceal their ownership interests in the companies, drafted misleading public filings, and provided misleading legal opinions." Their law firm, Carrillo Huettel LLP in turn received "proceeds of stock sales in the form of a sham 'loan.'" Furthmore, the SEC claims that "Gibraltar Global Securities, a Bahamian broker-dealer, provided false affidavits and misleading statements that allowed Benjamin Kirk to secretly sell shares of the companies he was promoting." Warren Davis, Gibraltar's president, allegedly signed "misleading representations on behalf of Gibraltar." According to the complaint, "Tradeshow president Luniel de Beer, who served as chairman of Pacific Blue, received more than $330,000 in secret kickbacks for his part in the scheme." de Beer and Pacific Blue President Joel Franklin, also allegedly made "misleading representations and facilitated the promoters' stock sales."
All defendants have been charged with violating various provisions of the securities laws and the SEC seeks disgorgement and prejudgment interest from all the defendants, and penny stock and officer and director bars against Carrillo, Huettel, de Beer, John Kirk, Benjamin Kirk, Boyle, and Hinton. "The SEC also seeks civil monetary penalties from Carrillo Huettel LLP, Carrillo, Huettel, and de Beer."

Court Enters Final Judgment Against Defendants, March 14, 2013, (Litigation Release No. 22633a)

Final judgments were entered against J.C. Reed & Company and Barron A. Mathis. According to the SEC's 2008 complaint, "John C. Reed, the founder of JC Parent and JC Advisory, and Mathis facilitated the offer and sale of more than $11 million of JC Parent stock in unregistered transactions." The defendants also allegedly made false and misleading statements to investors and "JC Advisory used JC Parent’s inflated stock values to falsely report assets under management as JC Advisory’s basis for registration with the Commission and on reports filed with the Commission." The final judgment holds Mathis and JC Parent liable for over $30.8 million combined in disgorgement, prejudgment interest, and civil penalties. Mathis has also been enjoined from future violations of the securities laws.

SEC Charges Edmund E. Wilson and Walter L. Ross with Violations of the Federal Securities Laws, March 14, 2013, (Litigation Release No. 22644)

According to the complaint (opens to PDF), Edmund E. Wilson and Walter L. Ross "raised approximately $11 million from at least 60 investors through the fraudulent and unregistered sale of securities in Fountain Group." Investors' funds were then transferred to "other entities [Wilson] owned and controlled where the funds were spent on expenses related to those businesses" and Wilson's personal expenses. The SEC has charged Wilson and Ross with violating sections of the Securities Act and Exchange Act and seeks "a permanent injunction as well as disgorgement, prejudgment interest and a civil penalty from Wilson and Ross."

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