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SEC Enforcement Actions

The Securities and Exchange Commission (SEC) is the United States agency with primary responsibility for enforcing federal securities laws. Whistleblowers with knowledge of violations of the federal securities laws can submit a claim to the SEC under the SEC Whistleblower Reward Program, and may be eligible to receive  monetary rewards and protection against retaliation by employers.

Below are summaries of recent SEC settlements or successful prosecutions. If you believe you have information about fraud which could give  rise to an SEC enforcement action and claim under the SEC Whistleblower Reward Program, please contact us to speak with one of our experienced whistleblower attorneys.

June 24, 2016

The SEC charged four companies and eight individuals in connection with an $80 million oil and gas fraud orchestrated by Chris Faulkner, a Dallas man who calls himself the “Frack Master” for his purported expertise in hydraulic fracturing.  The SEC charged Faulkner, CEO of Breitling Energy Corporation (BECC), with disseminating false and misleading offering materials, misappropriating millions of dollars of investor funds, and attempting to manipulate BECC’s stock.  According to the SEC’s complaint, Faulkner started the scheme through privately-held Breitling Oil and Gas Corporation (BOG), which offered and sold turnkey oil and gas working interests.  Faulker ran most of BOG’s operations while co-owners Parker Hallam and Michael Miller oversaw the sales process.  The SEC alleges that BOG’s offering materials contained false statements and omissions about Faulkner’s experience, estimates for drilling costs, how investor funds would be used, and baseless production projections prepared by a geologist whose affiliation with BOG was undisclosed.  The scheme evolved to include BOG’s successor, BECG, a reporting company with shares traded on OTC Link, and two affiliated companies Crude Energy LLC and later Patriot Energy Inc.  Faulkner allegedly established Crude and Patriot to deceive investors through offerings similar to those conducted by BOG.  The SEC alleges that BOG, Crude, and Patriot raised more than $80 million from investors as part of these deceptive offerings.  The SEC further alleges that Faulkner misappropriated at least $30 million of investor funds for personal expenses including lavish meals and entertainment, international travel, cars, jewelry, gentlemen’s clubs, and personal escorts.  In the midst of this fraud, Faulkner engaged in a scheme to manipulate the price of BECC’s stock by placing trades at the end of the day to “mark the close” of the stock.  SEC

June 23, 2016

Merrill Lynch will pay $10 million to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.  According to the SEC’s order, the offering materials emphasized that the notes were subject to a 2% sales commission and .75% annual fee.  Due to the impact of these costs over the five-year term of the notes, the volatility index would need to increase by 5.93% from its starting value in order for investors to earn back their original investment on the maturity date.  But the offering materials failed to adequately disclose a third cost included in the index known as the “execution factor” that imposed a cost of 1.5% of the index value each quarter.  The notes were issued by Merrill Lynch’s parent company Bank of America Corporation and Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements.  The SEC’s order finds that Merrill Lynch did not have in place effective policies or procedures to ensure its personnel drafted and approved disclosures that adequately disclosed the impact of the execution factor.  SEC

June 23, 2016

Merrill Lynch will pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.  An SEC investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account.  Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.  The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities.  Had Merrill Lynch failed in the midst of these trades, the firms’ customers would have been exposed to a massive shortfall in the reserve account.  In addition, according to the SEC’s order, Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid-for customer securities be held in lien-free accounts and shielded from claims by third parties should the firm collapse.  In addition to the Customer Protection Rule violations, Merrill Lynch violated Exchange Act 21F-17 by using language in severance agreements that operated to impede employees from voluntarily providing information to the SEC.  SEC

June 22, 2016

The SEC obtained an emergency court order to freeze the assets of Idris Dayo Mustapha, a UK resident charged with intruding into the online brokerage accounts of U.S. investors to make unauthorized stock trades that allowed him to profit on trades in his own account.  The SEC’s complaint alleges that in April and May of 2016, Mustapha hacked into numerous accounts of U.S. customers of broker-dealers in and outside the U.S, placed stock trades without the customers’ knowledge, and then traded in the same stocks through his brokerage account.  SEC

June 21, 2016

Massachusetts-based medical device manufacturer Analogic Corp. and its wholly-owned Danish subsidiary, BK Medical ApS, will pay nearly $15 million to settle parallel civil and criminal actions involving Foreign Corrupt Practices Act violations.  An SEC investigation found that BK Medical engaged in hundreds of sham transactions with distributors that funneled about $20 million to third parties, including individuals in Russia and apparent shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles.  According to the SEC’s order, from at least 2001 through 2011, at the direction of its distributors, BK Medical participated in hundreds of highly suspicious transactions that posed a significant risk of bribery or other improper conduct, such as embezzlement or tax evasion.  SEC

June 21, 2016

Former President of UNO Charter School Network Inc. and CEO of United Neighborhood Organization of Chicago, Juan Rangel, will pay $10,000 to settle charges related to his role in a misleading $37.5 million bond offering to build three charter schools.  The SEC alleged that Rangel negligently approved and signed a bond offering statement that omitted the charter schools’ multi-million-dollar contracts with two brothers of UNO’s COO – conflicted transactions that could have threatened UNO’s ability to repay bond investors.  According to the SEC’s complaint, in 2010 and 2011, UNO entered into grant agreement with the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three charter schools.  Rangel signed the agreements, which required UNO to certify that no conflict of interest existed and to immediately notify IDCEO in writing if any conflicts subsequently arose.  The complaint alleges that UNO breached the agreement when, at Rangel’s direction, it contracted with its COO’s brothers, agreeing to pay $11 million to one brother’s window company and $1.9 million to another brother for construction services.  UNO did not notify IDCEO in writing about either transaction and its offering statement disclosed only the smaller contract.  The offering statement also did not disclose that by breaching its agreement with IDCEO, the agency could seek to recover the grants, requiring UNO to liquidate its charter schools to repay them, losing the assets it depended on to repay bond investors.  SEC

June 21, 2016

The SEC has filed charges and obtained an asset freeze against investment adviser Ash Narayan for allegedly siphoning millions of dollars from accounts he managed for professional athletes and investing them in The Ticket Reserve, a struggling online sports and entertainment ticket business on whose board he served.  The SEC’s complaint alleges that Narayan transferred $33 million from clients’ accounts to The Ticket Reserve, typically without their knowledge or consent and often using forged or unauthorized signatures.  Narayan received nearly $2 million in hidden compensation from the company, most of it directly traceable to funds stolen from his clients.  According to the SEC’s complaint, The Ticket Reserve also made Ponzi-like payments to existing investors using money from the new investors.  The SEC also charged The Ticket Reserve CEO Richard Harmon and COO John Kaptrosky with participating in the scheme by making undisclosed finder’s fee to payments to Narayan out of his clients’ funds and approving and executing Ponzi-like payments.  SEC

June 16, 2016

The SEC announced charges against Christopher Salis, former global vice president at SAP America, for receiving thousands of dollars in kickbacks for tipping Douglas Miller in advance of SAP’s impending acquisition of Concur Technologies.  Miller then tipped his brother, Edward Miller, and mutual friend, Barrett Biehl, as they rushed to open online brokerage accounts and make risky, short-term trades in Concur call options so they could profit substantially when the deal was publicly announced.  The SEC has also linked Salis and Douglas Miller to suspicious trades in 2007 that were made in advance of a tender for a company called Business Objects where Salis worked at the time.  SEC

June 16, 2016

Private fund administrator Apex Fund Services (US) Inc. will pay more than $350,000 to settle charges it failed to heed red flags and correct faulty accounting by two clients. SEC investigations found that Apex missed or ignored clear indications of fraud while contracted to keep records and prepare financial statements and investor account statements for funds managed by ClearPath Wealth Management and EquityStar Capital Management, both of which have since been charged with fraud by the SEC.  SEC

June 15, 2016

The SEC charged hedge fund manager Christopher Plaford with trading on inside information received from Sanjay Valvani regarding anticipated drug approvals and from a former CMS official about impending cuts to Medicare reimbursement for certain home health services.  Plaford allegedly made $300,000 by trading based on insider information in hedge funds he managed.  Separately, the SEC charged Stefan Lumiere and Plaford with falsely inflating the value of securities held by a hedge fund managed by their firm.  Over an 18-month period, Lumiere used sham broker quotes to mismark as many as 28 securities per month, surreptitiously passing along his desired prices to brokers via his personal cell phone or a flash drive delivered by courier.  The fund consequently reported artificially inflated returns and monthly net asset values and paid out more than $5.9 million in inflated management and performance fees to its investment adviser.  SEC
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