Securities Fraud

December 3, 2015

The SEC announced fraud charges against three Chicago-based traders, twin brothers Behruz and Shahryar Afshar and their friend and former broker Richard Kenny, for circumventing market structure rules through a pair of options trading schemes.  Options exchange rules provide that a non-broker-dealer that places more than 390 orders in options per day (on average) during any month will be designated as a “professional” for the next quarter.  This designation applies to all accounts beneficially owned by a trader.  The SEC alleges that despite far exceeding this threshold in every quarter between October 2010 and December 2012, the Afshar brothers were able to trade as non-professionals, thus obtaining execution priority and lower fees, by alternating their trading between accounts and falsely representing the ownership of their accounts.  The SEC also alleges that the defendants engaged in a “spoofing” scheme in which they placed non-bona fide orders to take advantage of a “maker-taker” program offered by an options exchange to encourage liquidity.  SEC

December 2, 2015

National audit firm Grant Thorton will pay $4.5 million to settle charges it ignored red flags and fraud risks while conducting deficient audits for publicly-traded Assisted Living Concepts (a senior housing provider) and Broadwind Energy (an alternative energy company) — both of which themselves faced SEC enforcement actions for improper accounting and other violations.  Grant Thorton’s deficient audits spanned from 2009 to 2011.  The SEC’s investigation found that Grant Thorton repeatedly violated professional standards and their inaction allowed the companies to make numerous false and misleading public filings.  SEC

December 1, 2015

The SEC charged “Bitcoin mining” companies GAW Miners andZenMiner, and their founder, Homero Joshua Garza, with conducting a Ponzi scheme to defraud investors.  Bitcoin “mining” means to apply computer power to complex equations that verify a group of transactions in a virtual currency.  The first computer to solve an equation is awarded new units of the virtual currency.  The SEC’s complaint alleges that Garza, through GAW Miners and Zen Miners, purported to offer shares of a digital Bitcoin mining operation.  In reality, the companies did not own enough computer power for the mining it promised to conduct.  Therefore, most investors paid for a share of computing power that never existed.  Returns paid to some investors came from proceeds generated from sales to other investors.  SEC

November 30, 2015

Standard Bank will pay $4.2 million to settle SEC charges that it failed to disclose certain payments made in connection with debt issued by the Government of Tanzania in 2013.  The bank acted as a lead manager for the offering but failed to disclose that its affiliate, Stanbic Bank Tanzania Limited, would pay $6 million of the proceeds of the $600 million offering to a private Tanzanian firm that performed no substantive role in the transaction.  A representative of the Government of Tanzania was a director of the private firm and the offering was not finalized until Standard and Stanbic agreed to pay the firm a percentage of the proceeds of the offering.  The payment is part of a global coordinated settlement with the United Kingdom’s Serious Fraud Office under which Standard Bank will pay a total of $36.9 million.  SEC

November 24, 2015

Political intelligence firm, Marwood Group Research LLC, will pay a $375,000 penalty for failing to properly inform compliance officers about instances in which analysts obtained potential material nonpublic information from government employees.  According to the SEC’s order, in 2010, Marwood analysts sought and received information about policy issues or pending regulatory approvals before the Centers for Medicare and Medicaid Services (CMS) and the Food and Drug Administration (FDA).  Without bringing this information to the compliance department to be vetted for any material nonpublic information, Marwood drafted research notes based in part on this information and distributed them directly to clients who could have used any material nonpublic information contained therein to inform securities trading decisions.  SEC

November 20, 2015

The SEC announced fraud charges and an asset freeze obtained against Atlanta-based business man Christopher Brogdon, accused of misusing investor funds to purchase and renovate senior living facilities.  The SEC alleges that Brogdon amassed nearly $190 million through dozens of municipal bond offerings and private placement offerings in which investors supposedly earned interest from revenues generated by the nursing home, assisted living facilities, or retirement community project supported by their investment.  But Brogdon commingled the accounts instead of using the funds to finance the project described in the disclosure documents for each offering.  From the commingled accounts, he diverted investor money to other business ventures and personal expenses.  SEC

November 19, 2015

The SEC obtained a court order freezing the assets of Lin Zhong and her company EB5 Asset Manager LLC.  The SEC alleges that Zhong and EB5 raised at least $8.5 million for use in job-creating real estate development projects, but they diverted nearly $1 million to purchase a boat, a BMW, and a Mercedes among other improper personal uses of investor funds.  SEC

November 19, 2015

Investment firm Sands Brothers Asset Management LLC and its founders and former chief compliance officer will pay over $1 million to settle charges of violating the custody rule which requires firms to obtain independent verification of assets when they can access or control client money or securities.  Sands Brothers was in trouble twice before with the SEC — in 2010 for violating the custody rule and in 2014 for belatedly providing investors audited financial statements of its private funds.  SEC

November 17, 2015

The SEC announced fraud charges against several alleged perpetrators behind a $78 million pump-and-dump scheme involving the stock of Jammin’ Java, a company that operates as Marley Coffee and uses trademarks of late reggae artist Bob Marley to sell coffee products.  The SEC alleges that Jammin Java’s former CEO Shane Whittle orchestrated the scheme with three others who live abroad and operate entities offshore.  Whittle utilized a reverse merger to secretly gain control of millions of Jammin Java shares, and he spread the stock to the offshore entities controlled by Wayne Weaver of the UK and Canada, Michael Sun of India, and René Berlinger of Switzerland.  The shares were later dumped on the unsuspecting public after the stock price soared following fraudulent promotional campaigns.  SEC

November 16, 2015

Investment management firm Virtus Investment Advisers agreed to pay $16.5 million to settle charges that it misled mutual fund investors through advertisements containing false historical performance data about AlphaSector, a major exchange-traded fund (ETF) portfolio strategy.  Virtus publicized a substantially overstated performance track record received from F-Squared, a sub-adviser it had hired for mutual funds and other clients following the AlphaSector strategy.  Virtus accepted F-Squared’s historical performance misrepresentations at face value and ignored red flags that called these claims into question.  During the period in which Virtus used the false and misleading advertisements, its AlphaSector funds’ assets under management grew from $191 million at the end of 2009 to $11.5 billion by 2013.  SEC