Financial and Investment Fraud

April 12, 2017

California announced that it has joined a multistate settlement with Western Union, which resolves an investigation that focused on complaints by consumers who used the financial institution’s wire transfer service to inadvertently send money to third parties involved in schemes to defraud consumers. Western Union has agreed to pay $586 million to provide refunds to victims through a related, but separate, agreement with the Federal Trade Commission and U.S. Department of Justice filed in January. Under the terms of the federal settlement, California consumers who made a wire transfer through Western Union between January 1, 2004 and January 19, 2017 may be eligible for more than $65 million in refunds. CA

March 16, 2017

New York announced that Lawrence D. Rosenbaum, 65, of Albany, was sentenced on multiple crimes in connection with a sweeping indictment charging him with fraudulently soliciting over $1 million from numerous investors in a securities fraud scheme between 2006 and 2012. Rosenbaum is an insurance broker who owned and operated Rosenbaum Financial Services in Albany for decades. In approximately 2001, Rosenbaum formed a limited liability company, Saratoga Cheese Company LLC, which he claimed would develop a halal and kosher cheese plant in the Capital Region, using local dairy products and a cheese coagulator that he had learned about when he was an exchange student in Germany decades earlier. In 2006, Rosenbaum reformed this entity as Saratoga Cheese Corporation, with the stated purpose of developing a cheese manufacturing facility in Cayuga County. Also according to prosecutors, between April 2006 and October 2012, Rosenbaum solicited over $1 million in private investments in Saratoga Cheese Corporation and its related entities by promising investors substantial returns and shares of stock in his corporations. Rosenbaum then used his various corporate entities as personal bank accounts, diverting over $600,000 to himself by writing checks payable to himself, transferring funds to other accounts, and making numerous cash withdrawals, including withdrawals in both the Albany area and in Costa Rica. NY

March 3, 2017

New Jersey announced that eight people were indicted on first-degree charges of conspiracy, racketeering and money laundering for allegedly defrauding 26 investors of more than $7 million through two successive scams involving sales of bogus investments. After the first scam, two defendants – George Bussanich Sr. and George Bussanich Jr. – agreed to pay $5.5 million, including $4 million in investor restitution, to settle a suit filed by the New Jersey Bureau of Securities, but they then allegedly proceeded to defraud 15 of the same investors in a second scam. It is alleged that, as in the first scheme, the defendants never actually invested the funds from the investors as promised. The investors received monthly “returns,” paid out of the original principal investment, which gave them the impression that the investments were legitimate and were profiting. The defendants would simply move money from one account to another and then disburse a fraction of the funds back to the investors as a “return.” NJ

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 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