Archive

March 27, 2017

The SEC announced fraud charges and an emergency asset freeze against LottoNet Operating Corp, its CEO David Gray, and its top sales agent Joseph A. Vitale.  The SEC’s complaint alleges that the defendants misrepresented to investors that their money would be used to develop and market LottoNet and that sales agents did not receive commissions.  In fact, at least 35 percent of investor proceeds were allegedly paid to boiler room sales agents in the form of commissions, and LottoNet allegedly siphoned investor funds for personal spending on clothing, wedding-related expenses, and strip clubs.  The SEC complaint further alleges that Vitale, who personally raised at least $1.4 million from investors, used the alias Donovan Kelly in an apparent attempt to hide form investors that he is permanently barred by FINRA. SEC

March 9, 2017

California-based marijuana “consulting” company Medbox and its founder Vincent Mehdizadeh will pay $12 million to settle allegations of falsely touting “record” revenue numbers to investors and claiming to be a “leader” in the marijuana industry while some of the company’s earnings came from sham transactions with a secret affiliate.  According to the SEC’s complaint, Medbox claimed to sell vending machines capable of dispensing marijuana on the basis of biometric identification.  The SEC alleges that Mehdizadeh created a shell company called New-Age Investment Consulting, installed his then-fiancé, Yocelin Legaspi, as its CEO, and caused it to carry out illegal stock sales and used the proceeds from those sales to boost Medbox’s revenue.  Medbox allegedly issued press releases headlining the phony revenues as record earnings to legitimize itself as a viable commercial operation when in fact nearly 90 percent of the company’s revenue in the first quarter of 2014 stemmed from sham transactions with New-Age.  The SEC also charged Medbox’s then-CEO Bruce Bednick with being complicit in the scheme and personally profiting.  The SEC also charged New-Age and Legaspi with unlawfully selling unregistered securities.  The SEC’s litigation against Bedrick, Legaspi, and New-Age continues. SEC

April 4, 2017

A Kansas-based insurance company has agreed to pay more than $2.8 million to settle allegations that it used deceptive and unlawful practices to sell health insurance to Massachusetts consumers. The settlement will provide more than $2.3 million to consumers. According to the complaint, Unified Life Insurance Company (ULIC) sold health insurance to Massachusetts consumers that was not authorized for sale and engaged in a host of deceptive practices, such as claiming its insurance included services that it did not cover. According to the AG’s complaint, ULIC also excluded Massachusetts consumers from coverage based upon their health status or preexisting conditions, and failed to cover basic health services – such as behavioral health services, maternity services, preventive services for women and children, and other essential benefits required by Massachusetts law. The coverage at issue was sold across state lines and was issued through a third-party association. MA

March 29, 2017

A major subprime auto loan funder in Massachusetts, Santander Consumer USA Holdings Inc. (Santander), will pay $22 million for its role in facilitating unfair, high-rate auto loans for thousands of Massachusetts car buyers. The AG’s investigation, handled jointly with the Delaware Attorney General’s Office, revealed that Santander allegedly funded auto loans without having a reasonable basis to believe that the borrowers could afford them. In fact, Santander predicted that many of the loans would default, and allegedly knew that the reported incomes, which were used to support the loan applications submitted to the company by car dealers, were incorrect and often inflated. Car loans to consumers with poor credit, known as subprime auto loans, are often made through contracts signed at the car dealership, but the loans are funded by non-dealer financial institutions, like Santander. As part of the funding process, many financial entities resell or repackage the loans, passing them along to third parties. Money obtained from this process is then used to fund more subprime loans. MA

March 27, 2017

Davisco Foods International, Inc. was ordered to pay a $150,000 penalty for acting as a futures commission merchant without registering with the CFTC. The CFTC Order found that between May 2011 and October 2014, Davisco accepted orders from its milk suppliers for the purchase and sale of CME Class III Milk futures contracts and executed those orders on behalf of the suppliers in its own trading accounts. CFTC

March 23, 2017

New Jersey announced that the manager of a now-defunct Bergen County used car dealership was sentenced to 10 years in prison for his role as “point man” in a bank financing scam that netted $1.4 million in fraudulent loans for luxury cars. Hector Marquez, the general manager of D.I.B Leasing in Teterboro, was also ordered to pay $110,370 in restitution under the sentence handed down yesterday by Superior Court Judge Susan Steele in Bergen County. Marquez, 44, of Monroe, pleaded guilty in July to first-degree money laundering and second-degree misconduct by a corporate official in the dealership case. He also pleaded guilty to second-degree insurance fraud in a separate indictment involving a $139,000 Bentley purchased at his dealership and later torched and reported stolen to an insurance company. He was sentenced to 10 years in prison for that case and will serve both sentences concurrently. Last week, the dealership’s finance manager, Paul Russo, 52, of Scotch Plains, was sentenced to six years in prison and ordered to pay $150,267 in restitution by Superior Court Judge Steele. In July 2015, Russo pleaded guilty to second-degree money laundering and second-degree misconduct by a corporate official in the dealership case. NJ

March 21, 2017

Neil Pecker and his company Vision Financial Partners, LLC were ordered to pay more than $6.5 million in restitution and civil monetary penalties for fraudulent solicitation and misappropriation in connection with off-exchange binary options. The order was issued by Judge James I. Cohn of the U.S. District Court for the Southern District of Florida. Pecker and Vision Financial Partners were found to have fraudulently solicited approximately $3 million from members of the public to trade off-exchange binary options. CFTC

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

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