SEC Fraud Actions

SEC
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The Securities and Exchange Commission (SEC) is the United States agency with primary responsibility for enforcing federal securities laws. The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. The SEC was created a few years after the market crash of 1929 through passage of the Securities Exchange Act of 1934. The SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The federal securities laws, and the SEC’s efforts to enforce them, focus on achieving these goals by: (1) requiring companies offering securities to the public to tell the truth about their businesses, the securities being sold, and the risks involved in investing; and (2) requiring those who sell and trade securities to treat investors fairly and honestly.

In July 2010, in response to the 2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. One important feature of this legislation was the establishment of the SEC whistleblower program. This program encourages those with knowledge of violations of the federal securities laws to share this information with the SEC by providing both monetary rewards and protection against retaliation by employers.

Below are summaries of the most recent enforcement actions litigated by the SEC. If you believe you have information about securities fraud, please click here to contact one of our experienced whistleblower attorneys.

February 14, 2017 - 

The SEC charged California-based penny stock company Terminus Energy, Inc. and four of its corporate officers with misleading investors about the research, development, and profitability of their purported business to manufacture power generation products such as fuel cells.  The SEC alleges that while raising approximately $7.9 million from investors, Terminus and its officers claimed to have a viable prototype capable of being sold and earning revenue.  In fact, Terminus did not have the fuel cell technology or the funding to match their claims.  Rather, the officers were allegedly converting substantial amounts of investor funds to their own use.  According to the SEC’s complaint, the company failed to disclose to investors that Terminus’ operations manager George Doumanis is a convicted felon who went to prison for securities fraud and was secretly acting as an officer of the company despite being barred from participating in penny stock offerings.  In addition, Emanuel Pantelakis served on the Terminus board of directors despite having been permanently barred by the Financial Industry Regulatory Authority.  Also charged are Terminus’ CEO Danny B. Pratte and its former president, director, and legal counsel Joseph L. Pittera.  Terminus also allegedly used unregistered brokers to sell its securities and paid them more than twice as much in commissions as was disclosed to investors in offering documents.  Joseph Alborano is charged with soliciting and selling investments for which he received more than $1 million in commissions.  SEC

February 14, 2017 - 

The SEC announced two enforcement actions involving disclosure violations that deprived investors of material information during battles for corporate control of publicly traded companies.  In one case, the SEC’s order found that Texas-based oil refinery CVR Energy made inadequate disclosures in SEC filings about “success fee” arrangements with two investment banks retained by the company to fend off a hostile takeover bid.  Shareholders were consequently unaware of potential conflicts of interest that stemmed from the fee arrangements, namely that the banks could still earn success fees even if the hostile bidder secured control of the company.  CVR will not pay a penalty due to its remedial acts and extensive cooperation with the investigation.  In the other case, the SEC’s order found that groups of investors failed to properly disclose ownership information during a series of five campaigns to influence or exert control over microcap companies.  Jeffry E. Eberwein and Charles M. Gillman collaborated with mutual fund adviser Heartland Advisors in some of these campaigns.  Others involved Lone Star Value Management, a hedge fund adviser headed by Eberwein, or Boston Avenue Capital, a private fund advised by Gillman.  In each of these campaigns, the groups collectively owned more than five percent and sometimes even more than 10 percent of the companies’ outstanding stock, yet the required ownership filings to disclose that information to the investing public were either incomplete, untimely, or altogether absent.  Eberwein, Gillman, Lone Star, and Heartland will collectively pay penalties of $420,000.  SEC

February 14, 2017 - 

Purported real estate investment manager James P. Toner, Jr. of Scottsdale, Arizona will pay more than $500,000 to settle charges that he pocketed investor money in an investment scheme.  The SEC alleges that Toner siphoned $51,000 from investors who were falsely told that he would personally manage some of the real estate projects in which they were purchasing interests.  The stated purpose of each investor offering was to purchase a residential property in the Phoenix area, renovate the property, and then sell it for a profit.  According to the SEC’s complaint, Toner took $31,000 in undisclosed management fees even though he did not manage any of the offerings, and stole $20,000 directly from an investor.  Without conducting any due diligence, Toner allegedly entrusted the management of the investments to a real estate broker who subsequently squandered investor funds.  According to the SEC’s complaint, the real estate broker was later imprisoned for other crimes.  SEC

February 14, 2017 - 

Morgan Stanley Smith Barney will pay an $8 million penalty and admit wrongdoing to settle charges related to single inverse ETF investments it recommended to advisory clients.  The SEC’s order finds that Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs.  Among the order’s findings, Morgan Stanley failed to obtain from several hundred clients a signed client disclosure notice, which stated that single inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session unless used as part of a hedging strategy.  Morgan Stanley solicited clients to purchase single inverse ETFs in retirement and other accounts, the securities were held long-term, and many clients experienced losses.  The SEC’s order further found that Morgan Stanley failed to follow through on another key policy and procedure requiring a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client.  Finally, the SEC’s order found that Morgan Stanley failed to monitor the single ETF positions on an on-going basis and did not ensure that certain financial advisers completed single inverse ETF training.  SEC

February 13, 2017 - 

New York-based brokerage firm Sidoti & Company LLC will pay a $100,000 penalty to settle charges of compliance and trading surveillance failures.  Federal securities laws require firms to enforce policies and procedures to prevent the misuse of material, nonpublic information to which their employees routinely have access.  Sidoti’s hedge fund, by design, invested in issuers covered by Sidoti’s research department and, additionally, some of the issuers for which Sidoti provided investment banking services.  Yet, according to the SEC’s order, for a period of more than eight months, from November 3, 2014 (when the hedge fund commenced trading) until July 10, 2015, Sidoti had no written policies or procedures in place to prevent the misuse of material, nonpublic information by its founder and CEO or any other associated persons that had the authority to or otherwise participated in making investment decisions for the hedge fund.  SEC

February 10, 2017 - 

The SEC announced fraud charges against Shaohua (Michael) Yin for allegedly reaping more than $29 million in illegal profits based on insider trading in advance of the announcement of Comcast Corp.’s acquisition of DreamWorks Animation SKG in April 2016.  The SEC also obtained an emergency court order freezing brokerage accounts alleged to contain these profits.  The SEC alleges that in the weeks leading up to the announcement, Yin amassed more than $56 million of DreamWorks stock in the U.S. brokerage accounts of five Chinese nationals, including his elderly parents.  DreamWorks stock price rose 47.3% once the acquisition was announced.  Yin, a partner at Summitview Capital Management Ltd., a Hong Kong-based private equity firm, allegedly did not trade in DreamWorks stock through his own account but instead traded through five accounts from addresses in Beijing and Palo Alto and on a computer that was also used to access Yin’s email accounts.  SEC

February 7, 2017 - 

Private equity adviser Scott M. Landress will pay $1.25 million and has agreed to be permanently barred from the securities industry to settle charges that he improperly withdrew fees from two private equity funds he managed.  The SEC’s order finds that Landress formed the funds to invest in real estate with underlying investments in properties throughout the UK.  His investment advisory firm SLRA Inc. earned management fees based on the net asset value of the underlying investments.  SLRA’s fees shrank and its management costs increased as real estate property values fell during the financial crisis.  The funds’ limited partners declined several requests by Landress for additional compensation to cover the shortfall.  According to the SEC’s order, in 2014, Landress directed SLRA to withdraw 16.25 million pounds from the funds, purportedly as payment for several years of services provided by an affiliate.  SLRA and Landress did not disclose the related-party transaction and the resulting conflict of interest until after the money had been withdrawn.  According to the SEC’s order, Landress and SLRA returned the withdrawn service fees to the funds after the SEC began its investigation.  SEC

February 3, 2017 - 

The SEC charged investment adviser Barry Connell with stealing approximately $5 million from client accounts by initiating unauthorized wire transfers and issuing checks to third parties to cover personal expenses.  The SEC alleges that Connell, who worked in the New Jersey office of a major financial institution, conducted more than 100 unauthorized transactions by using falsified authorization forms misrepresenting that he received verbal requests from the clients.  Connell allegedly used money from client accounts to rent a home in suburban Las Vegas and pay for a country club membership and private jet service.  SEC

February 2, 2017 - 

The SEC charged Connecticut-based investment advisory business Sentinel Growth Fund Management and its founder Mark J. Varacchi with misrepresenting to investors that money deposited with the firm would be allocated to up-and-coming hedge fund managers for investment purposes.  Instead, according to the SEC’s complaint, Varacchi and Sentinel did not transfer all the money as promised, co-mingled investor assets, and manipulated account activity, account balances, and investment returns as part of a scheme to siphon away investor funds.  Varacchi and his firm allegedly stole at least $3.95 million from investors, including more than $1 million to settle litigation brought by Varacchi’s prior employer.  SEC

January 27, 2017 - 

The SEC announced fraud charges against Joseph Meli and Matthew Harriton, two New York City men accused of running a Ponzi scheme with money raised from investors to fund businesses purportedly created to purchase and resell tickets to high-demand shows such as Adele concerts and the Broadway musical Hamilton.  The SEC alleges that Meli and Harriton misrepresented to investors that all of their money would be pooled to buy large blocks of tickets that would be resold at a profit to produce high returns for investors.  The bulk of investor funds were allegedly used for other undisclosed purposes, namely making Ponzi payments to prior investors using money from new investors.  Meli and Harriton also allegedly diverted almost $2 million for such personal expenses as jewelry, private school, camp tuition, and casino payments.  According to the SEC’s complaint, the scheme went so far as to misrepresent that an agreement was in place with the producer of Hamilton to purchase 35,000 tickets to the musical.  Investor money was supposedly paying part of that cost with the return on the investment promised within eight months.  The SEC alleges no such agreement or purchase ever happened.  Meli and Harriton allegedly raised more than $81 million from at least 125 investors in 13 states.  The SEC brough charges against Meli and Harriton along with their four purported ticket reselling businesses: Advance Entertainment, Advance Entertainment II, 875 Holdings, and 127 HoldingsSEC

January 26, 2017 - 

Citigroup Global Markets will pay $18.3 million to settle charges that it overbilled investment advisory clients and misplaced client contracts.  The SEC’s order finds that at least 60,000 advisory clients were overcharged approximately $18 million in authorized fees because Citigroup failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories, and other documents.  Citigroup also improperly collected fees during time periods when clients suspended their accounts.  The billing errors occurred during a 15-year period, and the affected clients have since been reimbursed.  The SEC’s order further found that Citigroup could not locate approximately 83,000 advisory contracts for accounts opened from 1990 to 2012.  Without the contracts, Citigroup could not properly validate whether the fee rates negotiated by clients when accounts were opened were the same advisory fee rates being billed.  It is estimated that Citigroup received approximately $3.2 million in excess fees from advisory clients whose contracts were lost.  SEC

January 26, 2017 - 

The SEC charged two former executives at Och-Ziff Capital Management Group with being the driving forces behind a far-reaching bribery scheme that violated the Foreign Corrupt Practices Act (FCPA).  The SEC’s complaint alleges that Michael L. Cohen, former head of Och-Ziff’s European office, and Vanja Baros, an investment executive on Africa-related deals, caused tens of millions of dollars in bribes to be paid to high-level government officials in Africa.  Their alleged misconduct induced the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds.  Cohen and Baros also allegedly directed illicit efforts to secure mining deals to benefit Och-Ziff by directing bribes to corruptly influence government officials in Chad, Niger, Guinea, and the Democratic Republic of the Congo.  SEC

January 25, 2017 - 

The SEC announced administrative proceedings against New York-based brokerage firm Windsor Street Capital and its former anti-money laundering officer John D. Telfer.  The SEC alleges that the firm, formerly Meyers Associates L.P. failed to file Suspicious Activity Reports (SARs) for $24.8 million in suspicious transactions, including those occurring in accounts controlled by microcap stock financiers Raymond H. Barton and William G. Goode who were separately charged by the SEC with conducting a pump-and-dump scheme.  The SEC alleges that Windsor and Telfer should have known about the suspicious circumstances behind many transactions occurring in customer accounts.  Customers like Barton and Goode allegedly deposited large blocks of penny stocks, liquidated them typically amid substantial promotional activity, and then transferred the proceeds away from the firm.  The SEC further alleges that the shares deposited by Barton and Goode could not be sold legally because no registration statement was in effect and no registration exemption was available.  Rather than conduct a reasonable inquiry into the deposits, Windsor allegedly accepted claims of exemption at face value.  The SEC separately filed a complaint in federal court against Barton and Goode along with Matthew C. Briggs, Kenneth Manzo, and Justin Sindelman.  The complaint alleges that they participated in a pump-and-dump scheme that acquired shares of dormant shell companies supposedly in the dietary supplement business, falsely touted news and products stemming from those companies, and dumped the shares on the market for investors to purchase at inflated prices.  Barton, Goode, Briggs, and Manzo will pay almost $8.8 million collectively to settle the charges brought against them.  SEC

January 25, 2017 - 

Massachusetts-based investment adviser Michael J. Breton will be banned from the securities industry after the SEC uncovered an illegal cherry-picking scheme through its data analysis used to detect suspicious trading patterns.  The SEC filed charges in federal district court against Breton and his firm Strategic Capital Management, alleging they defrauded clients out of approximately $1.3 million.  Breton allegedly placed trades through a master brokerage account and then allocated profitable trades to himself while placing unprofitable trades into the client accounts.  The SEC’s Market Abuse Unit’s analysis of Breton’s trading showed that he defrauded at least 30 clients during a six-year period.  SEC

January 24, 2017 - 

Morgan Stanley Smith Barney and Citigroup Global Markets will pay $2.96 million each to settle charges that they made false and misleading statements about a foreign exchange trading program sold to investors.  According to the SEC’s orders, Citigroup held a 49% ownership interest in Morgan Stanley at the time, and registered representatives at both firms were pitching a foreign exchange trading program known as “CitiFX Alpha” to Morgan Stanley customers from August 2010 to July 2011.  The SEC’s orders finds that their written and verbal presentations were based on the program’s past performance and risk metrics, and they failed to adequately disclose that investors could be placed into the program using substantially more leverage than advertised and markups would be charged on each trade.  The undisclosed leverage and markups caused investors to suffer significant losses.  SEC

January 23, 2017 - 

Shipping conglomerate Overseas Shipholding Group (OSG) and its former CFO Myles R. Itkin will pay $5 million and $75,000 respectively for to settle charges that they failed to recognize hundreds of millions in tax liabilities in OSG’s financial statements.  According to the SEC’s order, OSG’s credit agreements from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary Overseas International Group Inc. (OIN) and another subsidiary Overseas Bulk Ships (OBS) jointly and severally liable for OSG’s debt.  The provision triggered current income tax liability under Section 956 of the Internal Revenue Service Code which addresses “investments in United States property” for amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available under the credit agreements.  During this period, OSG and Itkin, who participated in the negotiation of the credit agreements and signed them, failed to recognize OSG’s tax liability despite significant indicia that the structure of its credit agreements in effect made OIN a guarantor under the agreements and could trigger tax consequences, including tax memos from outside counsel and communications with the banks during the negotiation phase of the credit agreements.   As a result of the misconduct, OSG materially understated its income tax liabilities by approximately $512 million (17% of its total liabilities).  In November 2012, following discovery of the tax liabilities, OSG filed for bankruptcy protection.  SEC

January 23, 2017 - 

The SEC announced fraud charges and an emergency asset freeze obtained against Dwayne Edwards, a South Carolina businessman accused of siphoning funds he raised from investors for the stated purpose of purchasing or renovating senior housing facilities.  The SEC alleges that Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings.  The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama.  From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.  The SEC’s company also charges Edwards’ former business partner Todd Barker who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.  SEC

January 23, 2017 - 

The SEC announced an award of more than $7 million split among three whistleblowers who helped the SEC prosecute an investment scheme.  One whistleblower provided information that was a primary impetus for the start of the SEC’s investigation.  That whistleblower will receive more than $4 million.  Two other whistleblowers jointly provided new information during the SEC’s investigation that significantly contributed to the success of the SEC’s enforcement action.  Those two whistleblowers will split more than $3 million.  SEC

January 19, 2017 - 

Seattle-based financial services company HoneStreet Inc. will pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.  HomeStreet’s treasurer Darrell van Amen will pay a $20,000 penalty to settle charges that he caused the accounting violations.  According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure.  The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ration falls outside a certain range.  The SEC’s order finds that in certain instances from 2011 to 2014, van Armen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results, based on altered inputs, were provided to HomeStreet’s accounting department, resulting in inaccurate accounting entries.  The SEC’s order further found that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.”  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments.  SEC

January 18, 2017 - 

New York-based marketing company MDC Partners will pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its former CEO and separately violated non-GAAP financial measure disclosure rules.  The SEC’s order finds that MDC Partners disclosed an annual $500,000 perquisite allowance for its CEO but failed to disclose additional personal benefits the company paid on his behalf, such as private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care, and personal travel expenses.  The CEO later resigned and returned $11.285 million worth of perks, personal expense reimbursements, and other items of value improperly received from 2009 to 2014.  The SEC’s order also found improper use of non-GAAP measures.  According to the SEC’s order, MDC Partners presented a metric called “organic revenue growth” that represented the company’s revenue growth excluding the effects of acquisitions and foreign exchange impacts.  But from the second quarter of 2012 to year end 2013, MDC Partners incorporated a third reconciling item into its calculation without informing investors.  This resulted in higher “organic revenue growth” results.  The SEC also found that MDC Partners failed to give GAAP metrics equal or greater prominence to non-GAAP metrics in its earnings releases.  SEC

January 18, 2017 - 

General Motors will pay a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.  When loss contingencies such as a potential vehicle recall arise, accounting guidance requires companies like General Motors to assess the likelihood of whether the potential recall will occur, and provide an estimate of the associated loss or range of loss or otherwise provide a statement that such an estimate cannot be made.  The SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand.  Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.  SEC

January 18, 2017 - 

Texas-based medical device company Orthofix International will admit wrongdoing and pay more than $14 million to settle charges that it improperly booked revenue in certain instances and made improper payments to doctors at government-owned hospitals in Brazil to increase sales.  According to the SEC’s order, Orthofix improperly recorded certain revenue as soon as a product was shipped despite contingencies requiring certain events to occur in order to receive payment in the transaction.  In other instances, Orthofix immediately recorded revenue when it had provided customers with significant extensions of time to make payments.  The accounting failures caused the company to materially misstate certain financial statements from at least 2011 to the first quarter of 2013.  Four former Orthofix executives will pay penalties to settle cases related to these accounting failures.  A separate SEC order found that Orthofix violated the Foreign Corrupt Practices ACT (FCPA) when its subsidiary in Brazil schemed to use high discounts and make improper payments through third-party commercial representatives and distributors to induce doctors under government employment to use Orthofix’s products.  Orthofix will pay a $8.25 million penalty to resolve the accounting violations and more than $6 million in disgorgement and penalties to settle the FCPA charges.  SEC

January 17, 2017 - 

The SEC announced fraud charges against Thomas M. Henderson, an Oakland, California-based businessman accused of misusing money he raised from investors through the EB-5 immigrant investor program.  The SEC alleges that Henderson and his company San Francisco Regional Center LLC falsely claimed to investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses Henderson created, including a nursing facility, call centers, and a dairy operation.  But according to the SEC’s complaint, Henderson jeopardized investors’ residency prospects and combined the $100 million he raised from investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects.  Henderson also allegedly improperly used $7.6 million of investor money to pay overseas marketing agents, and shuffled millions of dollars along the EB-5 business to obscure his fraudulent scheme.  SEC

January 17, 2017 - 

Allergan Inc. will pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.  The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.  SEC

January 17, 2017 - 

Ten investment advisory firms will pay penalties of $35,000 to $100,000 each to settle charges that they violated the SEC’s investment adviser pay-to-play rule by receiving compensation from public pension funds within two years after campaign contributions were made by the firms’ associates.  Investment advisers are subject to a two-year timeout from providing compensatory advisory services either directly to a government client or through a pooled investment vehicle after political contributions were made to a candidate who could influence the investment adviser selection process for a public pension fund or appoint someone with such influence.  The SEC’s order found that these 10 firms violated the two-year timeout by accepting fees from city or state pension funds after their associates made campaign contributions to elected officials or political candidates with the potential to wield influence over those pension funds.  The 10 firms and the penalties paid by each are as follows: Adams Capital Management ($45,000), Aisling Capital ($70,456), Alta Communications ($35,000), Commonwealth Venture Management Corporation ($75,000), Cypress Advisors ($35,000), FFL Partners ($75,000), Lime Rock Management ($75,000), NGN Capital ($100,000), Pershing Square Capital Management ($75,000), and The Banc Funds Company ($75,000).  SEC