Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

 

Court Enters Final Judgments Against CEO and Executive Vice President of Company Involved in Pump-And-Dump Scheme Involving Fictitious Buyout Offer, September 25, 2014 (Litigation Release No. 23092)

 

The SEC announced that the US District Court for the District of Massachusetts entered final judgments against Maximilien Arella, CEO, and Ian Morrice, the Executive Vice President, both of Spencer Pharmaceutical Inc. (a microcap pharmaceutical company). Permanent injunctions were imposed on Arella and Morrice, and each are required to pay $50,000 in penalties. The SEC’s complaint, filed in December of 2012, laid out the involvement of Spencer and its senior leadership specifically in a pump-and-dump scheme. A marketing campaign, waged with false information, “significantly pumped up the price of Spencer's stock - at one point causing the price to more than double in two days - and consequently enabled Amyot to dump tens of millions of shares into the market at artificially inflated prices for gross proceeds in excess of $5 million.”

 

Court Imposes Injunctions and Monetary Sanctions of Over $80 Million Against Marlon Quan and His Companies Based On Fraud Verdict, September 25, 2014 (Litigation Release No. 23093)

 

The SEC announced that the US District Court in Minneapolis had, on September 19, issued an Opinion and Order imposing permanent injunctions against Marlon Quan, Acorn Capital Group, LLC, Stewardship Investment Advisors, LLC and ACG II, LLC. In addition, the Court imposed more than $80 million in sanctions against Marlon Quan and the defendants he was in charge of. According to the SEC, Quan “helped to facilitate the massive fraud of Tom Petters by funneling several hundred million dollars of investor money into the Petters Ponzi scheme.” Quan and his firms had promised investors, under false pretenses, that they would be protected by multiple safeguards. They were not.

 

SEC Obtains a TRO and Asset Freeze to Stop an Ongoing Pyramid Scheme, September 23, 2014 (Litigation Release No. 23091)

 

The SEC filed a civil injunctive action against Zhunrize, Inc. and Jeff Pan, Zhunrize’s CEO. The SEC also obtained an order freezing the defendant’s assets. “The Commission alleges that Zhunrize, an Atlanta-based multi-level marketing company, and Pan have been operating a fraudulent pyramid scheme that has raised over $100 million from investors worldwide.” The company’s commission structure is based solely on continual recruitment of new individuals and is unrelated to any tangible product sales. Since 2012, the company has defrauded about 77,000 investors of approximately $105 million. The SEC complaint was filed in the US District Court for the Northern District of Georgia.

               

Final Judgment Entered Against Trendon T. Shavers, A/K/A/ "Pirateat40" - Operator of Bitcoin Ponzi Scheme Ordered to Pay More Than $40 Million in Disgorgement and Penalties, September 22, 2014 (Litigation Release No. 23090)

 

The US District Court in Sherman, Texas entered a final judgment against Trendon T. Shavers and Bitcoin Savings and Trust (BTCST). Starting in 2011, Shavers defrauded investors out of more than 700,000 bitcoins through BTCST. The Court ordered “Shavers and BTCST to pay more than $40 million in disgorgement and prejudgment interest, and orders each Defendant to pay a civil penalty of $150,000.”

 

SEC Charges Brooklyn Man for Facilitating Insider Trading Scheme Via Post-It Notes At Grand Central Terminal, September 22, 2014 (Litigation Release No. 23089)

 

The SEC charged Frank Tamayo with “facilitating a $5.6 million insider trading scheme that typically involved the passing of illegal tips via napkins or post-it notes at Grand Central Terminal. According to the allegations, Tamayo had received nonpublic information regarding impending corporate deals, and subsequently tipped off a stockbroker, Vladimir Eydelman, who used the information to make illegal trades for himself, Tamayo and others. The US Attorney’s Office for the District of New Jersey also announced criminal charges against Tamayo.

 

Former Owner of a Massachusetts-Based Trading Company Sentenced to Nine Years in Prison, September 19, 2014 (Litigation Release No. 23088)

 

The SEC announced that Craig A. Karlis, the former owner of Boston Trading and Research LLC, was sentenced to nine years in prison on September 16 “after pleading guilty to charges that he and his business partner defrauded more than 700 investors out of more than $30 million.” Karlis’ sentence includes an additional three years of supervised release, and requires him to pay $4,378,306 in restitution to the fraud victims. In March, Karlis had plead guilty to nine counts of wire fraud, in addition to other charges. Ahmet Devrim Akyil, Karlis’ business partner, was also charged, but remains a fugitive, believed to be hiding out in Turkey.

Monogram Residential Trust’s Proposed Listing is Further Evidence That Even the Non-Traded REITs Winners Are Losers

The non-traded REIT, Monogram Residential Trust, rebranded from the Behringer Harvard Multifamily REIT I this April, is “exploring a potential listing on a national securities exchange”, Monogram’s CEO Mark Alfieri wrote in a letter to investors last month. Monogram’s managers and senior advisors are optimistic that such a liquidity event will “maximize shareholder value”. They claim that the REIT’s main problem has been a lack of monetization. We disagree. 

We have analyzed all of Monogram’s SEC filings and applied the gross proceeds, distributions, and other cash flows to a liquid, low cost benchmark using the same methodology we have used previously. Including all $162 million in distributions, we found that investors would have been $629.5 million better off had they invested these funds in the benchmark. Once again, liquid, low cost traded REIT funds are a superior investment when compared to illiquid, fee-laden non-traded REITs.

Using Vanguard’s liquid, diversified mutual fund of traded REITs (ticker: VGSIX) as a benchmark, we plotted the values of the accumulating net investments in both Monogram and Vanguard. The figure below shows our estimate of the value that investors in Monogram would have had if they had instead been invested in Vanguard. The orange dots represent stated Monogram valuations.

 

As of August 12 (Monogram’s most recent SEC filing) the REIT was valued at $1.76 billion. On the same date, the accumulated money invested by Monogram’s investors would have been worth close to $2.4 billion if they had been made in Vanguard’s traded REIT index.

                                                 

We have written extensively on the dangers of non-traded REITs in the past, and we do not believe that Monogram’s performance sets it apart. Investors would be well-advised to stay away from non-traded REITs, including Monogram Residential Trust.

 

 

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

 

SEC Charges Eight for Roles in Widespread Pump-And-Dump Scheme Involving California-Based Microcap Company, September 18, 2014 (Litigation Release No. 23087)

Charges were filed against eight individuals cooperating in what the SEC alleges is a “pump-and-dump scheme involving a penny stock company…that has repeatedly changed its name and purported line of business over the past several years.” The SEC named Izak Zirk de Maison and Angelique de Maison as the key organizers of the scheme, and obtained an emergency court order to freeze the de Maison's assets, as well as the assets of the other six individuals that the de Maisons brought into the enterprise. The SEC’s investigation is slated to continue in conjunction with investigations by the US Attorney’s Office for the Northern District of Ohio, the FBI’s Cleveland Division and FINRA. The US Attorney and the FBI announced criminal charges against Zirk de Maison on September 18 as well.

 

SEC Charges It Employee At Law Firm with Insider Trading Ahead of Merger Announcements, September 18, 2014 (Litigation Release No. 23086)

 

Insider trading charges were filed against Dimitry Braverman, a senior IT worker at Wilson Sonsini Goodrich & Rosati. According to the SEC, Braverman “had access to nonpublic information in the firm's client-related databases and garnered more than $300,000 in illicit profits by trading in advance of merger announcements.” The US Attorney’s Office for the Southern District of New York announced parallel criminal charges against Braverman. The SEC investigation will continue in conjunction with the US Attorney, the FBI, FINRA and Options Regulatory Surveillance Authority.

 

SEC Obtains Asset Freeze Against Company in Turks and Caicos Islands Behind South Florida-Based Ponzi Scheme, September 16, 2014 (Litigation Release No. 23085)

 

The SEC obtained an emergency asset freeze against Abatement Corp. Holding Company Limited, a company based in Turks and Caicos Islands. The SEC alleges that Abatement Corp. and its late principal Joseph Laurer “falsely promised investors safe, guaranteed returns while engaging in an offering fraud and Ponzi scheme from November 2004 until Laurer's death on May 15, 2014.” The SEC also named Laurer’s widow Brenda Davis and International Balanced Fund, another company run by Laurer, as relief defendants, due to their receipt of investor funds. Allegations include the complaint that Abatement Corp. defrauded about 50 investors in South Florida of more than $4.6 million. The SEC is in the process of litigation, and is working with FINRA as well as the Turks and Caicos Islands Financial Services Commission.

 

 

Court Orders Joseph D. Stilwell to Testify in Response to SEC Investigative Subpoena, September 16, 2014 (Litigation Release No. 23084)

After filing an application to enforce its investigative subpoena on August 13, the SEC announced that the US District Court for the Southern District of New York had entered an order requiring Joseph D. Stilwell to testify. The SEC is investigating whether Stilwell’s company, Stilwell Value, LLC, violated anti-fraud securities laws. The Commission is still in the process of conducting a fact-finding inquiry and has not made any allegations of misconduct thus far.

 

 

SEC Charges Ddbo Consulting, Inc., Calpacific Equity Group, LLC, and Principals with Fraud and Registration Violations, September 18, 2014 (Litigation Release No. 23083)

                                                                                                                                                  

Civil actions were filed in the US District Court “against individuals and companies behind a boiler room scheme that hyped a company whose new technology was purportedly to be used in the Super Bowl.” This action followed a previous SEC charge against the operators of the scheme, which revolved around pressuring investors to purchase stock in Thought Development Inc. (TDI). The four executives in question, who operate DDBO Consulting, Inc., DBBG Consulting, Inc. and CalPacific Equity Group, LLC, promised investors that TDI’s initial public offering was imminent, although this did not turn out to be the case. More than 110 investors purchased about $1.7 million in TDI shares. In addition to charging the companies, the SEC charged Dean R. Baker, Daniel R. Baker, Bret A. Grove and Demosthenes Dristas, all of whom agreed to settle. The US Attorney’s Office for the Central District of California has announced criminal charges against Daniel Baker and Demosthenes Dristas.