Financial and Investment Fraud

October 20, 2016

Eric Havian Interviewed by Corporate Crime Reporter.  Click here to read more.

September 28, 2016

UBS Financial Services will pay more than $15 million to settle charges that it failed to adequately educate and train its sales force about critical aspects of certain complex financial products it sold to retail investors.  The SEC’s order finds that UBS failed to educate and train UBS registered representatives in connection with the sale of reverse convertible notes (RCNs) so that they could form a reasonable basis to make recommendations.  RCNs are complex securities that feature embedded derivatives whose performance is driven by the concept of implied volatility.  Without adequate education and training, certain registered representatives made unsuitable recommendations in the sale of RCNs to certain retail customers in light of their investment profiles.  UBS sold approximately $548 million in RCNs to more than 8,700 relatively inexperienced retail customers.  SEC

September 26, 2016

Merrill Lynch will pay a $12.5 million penalty for failure to maintain effective trading controls, thus failing to prevent erroneous orders from being sent to the markets and causing mini-flash crashes.  An SEC investigation found that Merrill Lynch caused market disruptions on at least 15 occasions from late 2012 through mid-2014 and violated the Market Access Rule because its internal controls in place to prevent erroneous trading orders were set at levels so high that it rendered them ineffective.  The erroneous orders caused certain stock prices to plummet and then suddenly recover within seconds.  SEC

September 23, 2016

The SEC charged three company executives — Manu Kumaran, founder and former chairman and CEO of startup movie production company Medient Studios and later Moon River Studios, Jake Shapiro, his successor CEO, and Roger Miguel, CEO of a separate successor public company called Fonu2 that also operated under the name Moon River Studios — with defrauding investors in a purported project to construct the largest movie studio in North America at a suburban location outside Savannah, Georgia.  Kumaran and Shapiro allegedly made an assortment of false and misleading statements in press releases and corporate filings, claiming that construction of the “Studioplex” was under way and projecting dates by which the studio would be operational while knowing that they did not have anywhere near sufficient funding to begin building the studio.  In addition, Kumaran, Shapiro, and Miguel allegedly backdated and falsified promissory notes as part of a scheme to issue common stock in exchange for financing.  The StudioPlex never materialized and the company eventually shuttered without releasing a single movie or video game.  But Kumaran and Shaprio nevertheless enriched themselves in the process.  According to the SEC’s complaint, Kumaran spent an average of $1,700 per day of company funds on his globetrotting travel and personal expenses from April 2014 through June 2014 after claiming publicly that he did not draw a salary and all funds were being used to benefit the company.  Shapiro allegedly misappropriated company funds for personal use after becoming CEO and lived in a house worth nearly a million dollars that was paid for by the company.  Three company directors who are not alleged to have participated in the fraud were separately charged with violating federal securities laws by failing to timely report their stock transactions in the company while serving on its board.  Former New York Governor David A. Paterson and music producer Charles A. Koppelman each agreed to pay $25,000 to settle the charges against them.  An administrative proceeding was instituted against Matthew T. Mellon II, a businessman and former chairman of the New York Republican Party Finance Committee.  SEC

September 21, 2016

The SEC announced fraud charges against Sheldon R. Rose, alleging that he created more than a dozen blank check companies, installed friends and family members as figurehead company officers and shareholders allowing him to secretly control the companies and their securities, falsified registration statements and other corporate filings to make it appear that the companies were pursuing real business ventures, and then carrying out reverse mergers by which the securities were sold to enrich Rose and others.  Rose is connected to a scheme halted by the SEC last year.  Rose has agreed to settle the charges.  An administrative law judge will determine monetary sanctions.  SEC

September 16, 2016

An SEC investigation found that William J. Sears and his brother-in-law Scott M. Dittman recorded and trumpeted revenues for purported sales of “Pharm Pods” — containers used for growing marijuana sold by their company Fusion Pharm Inc. — which was really just money “round-tripped” from illegal stock sales by hidden affiliates.  An SEC investigation found that Sears orchestrated the scheme while Dittman served as the CEO and sole officer of Fusion Pharm.  They hired Cliffe R. Bodden to help them create fraudulent corporate documents that enabled Fusion Pharm to issue common stock to three other companies controlled by Sears, who then illegally sold the restricted stock into the market for $12.2 million in profits while hiding the companies’ connection to Fusion Pharm.  Sears then transferred some of his illegal proceeds back to Fusion Pharm so the money could be falsely reported as revenue and the company issued press releases and financial reports that misled investors to believe the revenue came from sales of PharmPods.  Sears, Dittman, Bodden, Fusion Pharm, and Sears’ three other companies agreed to settle the SEC’s charges with monetary sanctions to be determined at a later date.  SEC

September 13, 2016

Self-proclaimed “stock trading whiz kid” Manuel E. Jesus and his stock newsletter company Wealthpire Inc. will pay nearly $1.5 million to settle charges they defrauded subscribers through false statements and misrepresentations.  According to the SEC’s complaint, Jesus and his newsletter company used advertising materials and websites touting Jesus as “the untutored prodigy of stock investing” under the alias Manny Backus.  He boasted of a “skyscraping” IQ and claimed to have made millions of dollars before “deciding to help other investors” by starting an alert service that let traders copy his every trading move.  But according to SEC allegations, from at least January 2012 through September 2014, Backus was not trading in the same stocks recommended by his services as he claimed.  In addition, he wasn’t the one making all the recommendations.  For instance, the SEC alleges that Robert C. Joiner was paid by Wealthpire to make all of the stock picks for one alert service without any guidance from Backus on how to choose them.  SEC

September 13, 2016

Portuguese-based telecommunications company  Portugal Telecom SGPS S.A., now known as Pharol SGPS S.A., will pay a $1.25 million penalty for its failure to properly disclose the nature and extent of credit risk involved in its investments in debt instruments issued by companies of Portuguese conglomerate Grupo Espirito Santo.  An SEC investigation found that Portugal Telecom’s 2013 financial statements had multiple disclosure failures.  As a result of these failures, Portugal Telecom’s investors were unable to form an overall picture of the risks arising from the company’s investment in Grupo Espirito Santo debt instruments, investments that constituted 82% of Portugal Telecom’s short-term investments.  SEC

September 9, 2016

A subsidiary of Oklahoma-based BOK Financial Corporation will pay more than $1.6 million to settle charges that it concealed numerous problems and red flags from investors in municipal bond offerings to purchase and renovate senior living facilities.  The SEC also filed a complaint in federal court against a former vice president at BOK, Marrien Neilson, who allegedly was chiefly responsible for the failures of the bank’s corporate trust department while overseeing what turned out to be fraudulent bond offerings managed by Christopher F. Brogdon.  According to the SEC’s order, BOK failed in its gatekeeper role as indenture trustee and dissemination agent for Brogdon’s bond offerings.  BOK and Neilson became aware that Brogdon was withdrawing money from reserve funds for the bond offerings and failing to replenish them and that he had failed to file annual financial statements for the offerings.  BOK and Neilson also knew that the nursing home facilities serving as collateral for one of the offerings had been closed for years.  But Neilson allegedly warned others that disclosing these issues could impair future business and fees from Brogdon, upset bondholders, and cause regulatory issues for bond underwriters.  Therefore, BOK did not inform bondholders as required.  SEC

September 8, 2016

SEC investigations found that St. Petersburg, Florida-based Raymond James & Associates and Milwaukee-based Robert W. Baird & Co. failed to establish policies and procedures necessary to determine the amount of commissions their clients were being charged when sub-advisers “traded away” with a broker-dealer outside the client’s wrap fee program.  As a result, the firms’ financial advisors were unable to provide information to their clients about the magnitude of these costs and failed to consider these costs when determining whether the sub-advisers or the wrap fee programs were suitable for clients.  Certain clients were not even aware that they were paying additional costs beyond the single wrap fee they paid for bundled investment services.  Raymond James will pay a $600,000 penalty to settle the charges against it.  Baird will pay a $250,000 penalty.  SEC