Financial and Investment Fraud

January 9, 2017

Connecticut-based investment advisor John W. Rafal will pay more than $575,000 to settle charges that he defrauded a client and then compounded his scheme by attempting to mislead SEC investigators while lying to other clients about the status of the SEC’s investigation. According to the SEC’s order, Rafal secretly paid a lawyer, Peter D. Hershman, to refer one of his clients to Essex Financial Services, an investment advisory firm founded by Rafal. Rafal failed to disclose the referral fee arrangement and instead disguised the payments as payments for legal services purportedly provided by Hershman’s firm. After other Essex officers discovered and stopped Rafal’s payment arrangement, he continued to pay Hershman using other accounts he controlled. The SEC’s order further found that while the SEC’s investigation was on-going, Rafal sent numerous emails to Essex clients falsely stating that the SEC had “fully investigated all matters” and “issued a ‘no action’ letter completely exonerating” him and Essex. Finally, Rafal tried to throw SEC investigators off track by concealing the additional payments he made to Hershman and testifying that Hershman had returned all money paid to him. The U.S. Attorney’s Office for the District of Massachusetts announced a criminal case against Rafal for obstructing the proceedings of a federal agency. Hershman will pay more than $90,000 to settle charges against him related to the payment scheme. Essex will pay more than $180,000 in disgorgement and interest to settle charges related to Rafal’s conduct. SEC

January 9, 2017

The SEC brought fraud charges against Gregory T. Dean and Donald J. Fowler, two New York-based brokers, for using an “in-and-out” trading strategy to generate hefty commissions for themselves despite the fact that the strategy was unsuitable for their customers. The SEC’s complaint alleges that Dean and Fowler did not conduct reasonable diligence to determine whether their investment strategy, which involved frequent buying and selling of securities, could deliver even a minimal profit to their customers. Their strategy, which generally involved selling securities within a week or two of purchase, and charging customers a fee for each transaction, allegedly resulted in substantial losses for at least 27 customers. The SEC also issued an Investor Alert warning about excessive trading and “churning” that can occur in brokerage accounts. SEC

January 13, 2017

The Department of Justice, 21 states, and the District of Columbia reached a nearly $864 million settlement agreement with Moody’s Investors Service Inc., Moody’s Analytics Inc., and their parent, Moody’s Corporation to resolve allegations arising from Moody’s role in providing credit ratings for Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDO), contributing to the worst financial crisis since the Great Depression. According to the government, "Moody’s failed to adhere to its own credit rating standards and fell short on its pledge of transparency in the run-up to the Great Recession [and] . . . used a more lenient standard than it had itself published." The settlement includes a $437.5 million federal civil penalty, which is the second largest payment of this type ever made to the federal government by a ratings agency. DOJ

December 28, 2016

Florida-based businessman Jason Adam Ogden has agreed to pay more than $1.2 million to settle charges that he misused investor funds intended to create U.S. jobs through the EB-5 Immigrant Investor Program.  The SEC alleged that Ogden, the CEO of a pair of smoothie and frozen yogurt franchises called Juiceblendz and Yoblendz, formed AJN Investments LLC to conduct an investment offering in conjunction with the EB-5 program which provides foreign investors a path to permanent residency when their investments create at least 10 jobs for American workers.  Investors were allegedly told that their money would help build and operate Juiceblendz and Yoblendz stores in strip malls and create a sufficient amount of jobs for them to qualify for an EB-5 visa and ultimately a green card.  But, according to the SEC’s complaint, Ogden changed his business model midstream without updating the offering materials, and focused on developing kiosks in sports arenas and university campuses rather than following through the construction of full-size stores.  Not only did this result in smaller-than-promised returns for investors, it also jeopardized their EB-5 program status because kiosks don’t stimulate the same job creation as full-size stores and construction projects.  The SEC further alleged that Ogden improperly siphoned off more than $1 million in investor funds for his personal use, making undisclosed cash transfers to his bank account.  SEC

December 27, 2016

The SEC charged California-based attorney Emilio Francisco with defrauding investors seeking to participate in the EB-5 immigrant investor program.  The SEC alleges that Francisco raised $72 million from investors in China, solicited through his marketing firm PDC Capital, to invest in EB-5 projects that included opening Caffe Primo restaurants, developing assisted living facilities, and renovating a production facility for environmentally friendly agriculture and cleaning products.  According to the SEC’s complaint, Francisco and PDC Capital diverted investor funds from one project to another and outright stole at least $9.6 million that was used to finance Francisco’s own business and luxury lifestyle.  SEC

December 21, 2016

The SEC brought charges against Noris Chamroonrat of Bangkok, Thailand and Adam L. Plumer of Las Vegas for running a phony day-trading firm and pocketing more than $1.4 million in deposits from hundreds of investors in over 30 countries.  The SEC alleges that Chamroonrat recruited Plumer to help him lure investors to day-trade through an unregistered brokerage firm called Nonko Trading with promises of generous leverage, low trading commissions, and low minimum deposit requirements.  According to the SEC’s complaint, rather than using a live securities trading platform, Nonko Trading provided certain investors with training accounts that merely simulated the placement and execution of trade orders.  When these investors sent funds to Nonko Trading and proceeded to place trade orders, the orders were never actually routed to the markets.  The SEC alleges that investor money was instead used to fund Chamroonrat’s personal expenses, pay Plumer and other associates, and make Ponzi-like payments to investors who asked to close out their accounts.  The SEC alleges that the scheme deliberately targeted investors who were inexperienced and more likely to place unprofitable trades, making them less likely to ask to withdraw funds from their accounts.  SEC

December 21, 2016

The SEC announced fraud charges against Navnoor Kang, the former Director of Fixed Income for the New York State Common Retirement Fund, and Greg Schonhorn and Deborah Kelly, registered representatives of two different broker-dealers.  According to the SEC’s complaint, Schonhorn and Kelly orchestrated a pay-to-play scheme in which Kang steered billions of dollars in pension business to certain firms in exchange for luxury gifts, lavish vacations, and tens of thousands of dollars spent on hotel rooms, restaurants, cocaine, and prostitutes.  SEC

December 19, 2016

The SEC charged Mark Nordlicht, founder of hedge fund firm Platinum Partners, and two of Platinum’s flagship hedge fund advisory firms, Platinum Management (NY) LLC and Platinum Credit Management LP, with conducting a fraudulent scheme to inflate asset values and illicitly move investor money to cover losses and liquidity problems.  SEC examiners uncovered suspicious activity during an examination of the firms and referred it to SEC enforcement staff for further investigation.  The SEC’s complaint alleges that Nordlicht and the Platinum funds overstated the value of an oil company that was among their largest assets, and concealed a growing liquidity crisis by transferring money between the funds, making preferential redemptions to favored investors, and using misrepresentations to attract new investors to the struggling funds.  The SEC’s complaint further alleges that Nordlicht schemed with colleagues and Jeffrey Shulse, CFO of Black Elk Energy, Platinum’s other major oil investment, to divert almost $100 million from Black Elk Energy to help boost the Platinum funds.  Others charged in the SEC’s complaint include Shulse, David Levy (Platinum Owner and Co-Chief Investment Officer), Daniel Small (former Managing Director and Portfolio Manager of certain Platinum funds), Uri Landesman (former Managing General Partner of certain Platinum funds), Joseph Mann (employee of Platinum’s Investor Relations Department), and Joseph SanFilippo (CFO of a Platinum hedge fund).  Funds managed by Platinum Management are currently in a liquidation proceeding in the Cayman Islands.  SEC

December 1, 2016

Investment management firm Pacific Investment Management Company (PIMCO) will retain an independent compliance consultant and pay nearly $20 million to settle SEC charges that it misled investors about the performance of one of its first actively managed exchange-traded funds (ETFs) and failed to accurately value certain fund securities.  According to the SEC’s order, PIMCO’s Total Return ETF attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012.  The initial performance was attributable to buying smaller-sized bonds known as “odd lots” as part of a strategy to help bolster performance out of the gate.  But in monthly and annual reports to investors, PIMCO provided misleading reasons for the ETF’s early success and failed to disclose that the resulting performance from the odd lot strategy was not sustainable as the fund grew in size.  The SEC’s order also finds that PIMCO’s odd lot strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares.  PIMCO valued these bonds using prices provided by a third-party pricing vendor for round lots, which are larger-sized bonds compared to odd lots.  PIMCO blindly relied on these prices without any reasonable basis to believe they accurately reflected what the fund would receive if it sold the odd lots.  As a result, PIMCO overstated its net asset value almost every day for four months.  SEC  

December 1, 2016

The SEC announced fraud charges and an asset freeze against Miami Beach-based asset management company Onix Capital LLC and its owner Alberto Chang-Rajii, a Chilean national who fled the U.S. after reports of his fraud began to surface in March 2016.  The SEC alleges that Chang and Onix Capital defrauded investors in Onix promissory notes that “guaranteed” annual returns of 12 to 19 percent and bilked others who were told their funds would be invested in promising start-ups.  According to the SEC’s complaint, Chang and Onix Capital sold more than $5.7 million in Onix promissory notes that they falsely claimed were guaranteed by Chang, and raised more than $1.7 million that Chang promised to invest in companies such as Uber, Snapchat, and Square.  Instead, the SEC alleges that investor funds were diverted to Chang and used to pay other investors.  SEC