Financial and Investment Fraud

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

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 Holdings.  SEC

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 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

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 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 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