SEC News

SEC Charges Five New York Based Traders with Short Selling Violations

On July 2, 2014, the SEC announced that it had charged five traders for committing short selling violations while trading for themselves and Worldwide Capital Inc., a New York based proprietary firm that earlier this year paid the largest-ever monetary sanction for Rule 105 violations.

Worldwide Capital and its owner Jeffrey W. Lynn agreed to pay $7.2 million to settle SEC charges in March for violating Rule 105, which prohibits the short sale of an equity security during a restricted period and the subsequent purchase of that same security through the offering.

On July 2, 2014 the SEC settled administrative proceedings against Derek W. Bakarich, Carmela Brocco, Tina Lizzio, Steven J. Niemis, and William W. Vowell for violating Rule 105 by selling shares short during the restricted period and purchasing offering shares of the same securities they had shorted. They purchased the offering shares through accounts they opened in their names or names of alter ego corporate entities at large broker-dealers and then executed the short sales of the securities through an account in Worldwide’s name at different, smaller broker-dealers.

Each of the five traders agreed to settle the SEC’s charges and pay a collective total of nearly $750,000.

According to the SEC’s orders, Bakarich, Brocco, Lizzio, Niemis, and Vowell were selected by Lynn to conduct trades for Worldwide Capital, which he created for the purpose of investing and trading his own money. The traders he chose to trade his capital pursued an investment strategy focused primarily on obtaining allocations of new shares of public issuers coming to market through secondary and follow-on public offerings at a discount to the market price of the company’s shares that were already trading publicly. They sold short the shares in those issuers in advance of the offerings, hoping to profit by the difference between the price they paid to acquire the offered shares and the market price on the date of the offering. From approximately August 2009 to March 2012, Bakarich, Brocco, Lizzio, Niemis, and Vowell each violated Rule 105 in connection with at least nine covered offerings. They received ill-gotten gains ranging from approximately $16,000 to more than $200,000.

Each of the five traders agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order. They agreed to disgorge all of their ill-gotten gains plus prejudgment interest and pay an additional penalty equal to 60 percent of the disgorgement amount.

SEC Charges Hedge Fund Advisory Firm and Others in South Florida-Based Scheme to Misuse Investor Proceeds

On June 23, 2014, the SEC announced that they had charged a West Palm Beach, Florida based hedge fund advisory firm and its founder with fraudulently shifting money from one investment to another without informing investors. The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.

The SEC alleged that Weston Capital Asset Management LLC and its founder and president Albert Hallac illegally drained more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc. The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before. Weston Capital’s former general counsel Keith Wellner assisted the activities.

The SEC further alleged that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000 in payments from Swartz IP. Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession. The court will determine monetary sanctions for Weston Capital and Hallac at a later date. Wellner and Jeffrey Hallac each agreed to pay $120,000 in disgorgement.

According to the SEC’s complaint, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately $230 million. One of the funds managed by the firm was Wimbledon Fund SPC, which was segregated into five separate classes of investment portfolios. The Class TT Segregated Portfolio was required to invest all of its investor money in a diversified multi-billion hedge fund called Tewksbury Investment Fund Ltd., that invested in short-term, low risk interest bearing accounts and U.S. Treasury Bills.

The SEC alleged that in violation of its stated investment strategy, Weston Capital and Hallac redeemed TT Portfolio’s entire investment in the Tewksbury hedge fund and transferred the money to Swartz IP. The transaction was not disclosed to investors and Weston Capital and Hallac solicited and received investments for the TT Portfolio during this time while knowing the funds would not be invested in Tewksbury. As soon as Swartz IP received the money transfers, it disbursed the funds primarily to a special purpose entity created to support and finance varying medically related business ventures.

The SEC’s complaint alleged that Weston and Hallac violated federal anti-fraud laws and rules as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Wellner aided and abetted these violations. Without admitting or denying the allegations, Weston Capital, Hallac, and Wellner consented to the entry of a judgment enjoining them from future violations of these provisions.

SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower

On June 16, 2014, the SEC announced that it had charged an Albany, N.Y.-based hedge fund advisory firm with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC. This was the first time the SEC had filed a case under its new authority to bring anti-retaliation enforcement actions. The SEC also charged the firm’s owner with causing the improper principal transactions.

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges.

According to the SEC’s order instituting a settled administrative proceeding, Weir conducted transactions between Paradigm and a broker-dealer that she also owned while trading on behalf of a hedge fund client. Such principal transactions pose conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent. Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction.

A Commission rule adopted in 2011 under the Dodd-Frank Act authorized the SEC to bring enforcement actions based on retaliation against whistleblowers who report potential securities law violations to the agency. The SEC’s order found that after Paradigm learned that the firm’s head trader had reported potential misconduct to the SEC, the firm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation.

According to the SEC’s order, Paradigm’s head trader reported trading activity revealing that Paradigm engaged in prohibited principal transactions with affiliated broker-dealer C.L. King & Associates while trading on behalf of hedge fund client PCM Partners L.P. II. The SEC’s subsequent investigation found that Paradigm engaged in the trading strategy from at least 2009 to 2011 to reduce the tax liability of the firm’s hedge fund investors. As part of that strategy, Weir directed Paradigm’s traders to sell securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King. The realized losses were used to offset the hedge fund’s realized gains. Paradigm engaged in at least 83 principal transactions by selling 47 securities positions from the hedge fund to C.L. King and then repurchasing 36 of those positions for the hedge fund.

According to the SEC’s order, since Weir had a conflicted role as owner of the brokerage firm in addition to advising the PCM Partners hedge fund, merely providing written disclosure to her as the hedge fund’s general partner and obtaining her consent was insufficient. Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve each of the principal transactions on behalf of the hedge fund.

The SEC’s order found that the conflicts committee itself, however, was conflicted. The committee consisted of two people: Paradigm’s chief financial officer and chief compliance officer – who each essentially reported to Weir. Furthermore, Paradigm’s CFO also served as C.L. King’s CFO, which placed him in a conflict. Specifically, there was a negative impact on C.L. King’s net capital each time the broker-dealer purchased securities from the hedge fund. The CFO’s obligation to monitor C.L. King’s net capital requirement was in conflict with his obligation to act in the best interests of the hedge fund as a member of the conflicts committee.

According to the SEC’s order, because the conflicts committee was conflicted, Paradigm failed to provide effective written disclosure to its hedge fund client and failed effectively to obtain the hedge fund’s consent prior to the completion of each principal transaction. The SEC’s order also finds that Paradigm’s Form ADV was materially misleading for failing to disclose the CFO’s conflict as a member of the conflicts committee.

“Paradigm’s use of a conflicted committee denied its hedge fund client the effective disclosure and consent to which it was entitled,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Advisers to pooled investment vehicles need to ensure that any mechanism developed to address conflicts in principal transactions actually mitigates those conflicts.”

According to the SEC’s order, Paradigm’s former head trader made a whistleblower submission to the SEC that revealed the principal transactions between Paradigm and C.L. King. After learning that he had reported potential violations to the SEC, Paradigm immediately engaged in a series of retaliatory actions. Paradigm removed him from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.

Paradigm and Weir consented to the entry of the order finding that Paradigm violated Section 21F(h) of the Securities Exchange Act of 1934 and Sections 206(3) and 207 of the Investment Advisers Act of 1940. The order finds that Weir caused Paradigm’s violations of Section 206(3) of the Advisers Act. They each agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings in the order. Paradigm and Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000. Paradigm also agreed to retain an independent compliance consultant.

SEC Charges Chicago-Based Investment Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme

On May 29, 2014, the SEC announced fraud charges and an asset freeze against a Chicago-based investment fund manager accused of stealing money he raised from investors to pay personal and business expenses.

The SEC alleged that Neal V. Goyal told investors that the private funds he managed would invest in securities following a “long-short” trading strategy. However, Goyal actually did little trading and simply operated a Ponzi scheme that used new investor funds to pay redemptions to existing investors and fund his own lavish lifestyle. Goyal concealed the poor results of the few investments he did make by sending investors phony account statements that grossly overstated the performance of the funds.

According to the SEC’s complaint filed in federal court in Chicago, Goyal raised more than $11.4 million in the last several years for investments in four private funds that he managed and controlled. Goyal’s investment strategy lost money from the outset, but he hid those losses from investors through the Ponzi payments and phony account statements. Meanwhile, Goyal misused investor funds to make down-payments and pay the mortgages on two homes he purchased. He also siphoned away investor money to invest in a Chicago tavern, fund two children’s clothing boutiques that his wife operates in Chicago, and purchase artwork and lavish furniture.

The SEC’s complaint filed on May 28th charged Goyal and two investment advisers that he owned and controlled with violating the antifraud provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5, and Investment Advisers Act of 1940. The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Goyal, Blue Horizon Asset Management, and Caldera Advisors. The SEC named another Goyal-controlled entity Caldera Investment Group as a relief defendant in its complaint for the purpose of recovering any investor funds it received.

At the SEC’s request, Judge Rebecca R. Pallmeyer issued a permanent injunction and asset freeze on May 28th against Goyal and his firms, who consented to the order without admitting or denying the allegations in the SEC’s complaint. Under the court’s order, monetary remedies will be decided at a later date.

SEC Charges Stockbroker and Law Firm Managing Clerk in $5.6 Million Insider Trading Scheme

On March 19, 2014, the SEC announced that they had charged a stockbroker and a managing clerk at a law firm with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.

The SEC alleged that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, who worked at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and later at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.

According to the SEC’s complaint, the insider trading scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks. When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt. Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked. As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius. Eydelman expressed similar concern about Sirius’ struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm. The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a “thank you” for the information. Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro’s behalf based on confidential information that he planned to pass him in the future.

Also according to the SEC’s complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction. Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired. Metro also conveyed the approximate price of the transaction and the approximate announcement date. The middleman then communicated to Eydelman that they should meet. Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction. Eydelman watched the middleman chew or eat the tip to destroy the evidence. Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.

The SEC alleged that Eydelman then returned to his office and typically gathered research about the target company. He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.

According to the SEC’s complaint, Eydelman also traded on inside information in the accounts of more than 50 of his brokerage customers. Eydelman earned substantial commissions as a result of this trading, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme. The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading in advance of at least two transactions.

The SEC’s complaint charged Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933. The complaint is seeking a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.

 

SEC Announces Charges Against Brokers, Adviser, and Others Involved in Variable Annuities Scheme to Profit From Terminally Ill

On March 13, 2014, the SEC announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.

Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement. Common features are a death benefit paid to the annuity’s beneficiary (typically a spouse or child) if the annuitant dies, and a bonus credit that the annuity issuer adds to the contract value based on a specified percentage of purchase payments. The SEC Enforcement Division alleged that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit these benefits. He recruited others to help him obtain personal health and identifying information of terminally ill patients in southern California and Chicago. Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout. Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains. When the annuitants died, the investors collected death benefit payouts.

The SEC Enforcement Division alleged that Horowitz enlisted another broker, Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities. They falsified various broker-dealer forms used by firms to conduct investment suitability reviews. As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold. Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.

Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme. Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme. A combined total of more than $4.5 million will be paid in the settlements. The SEC’s litigation continues against Horowitz and Cohen.

According to the SEC’s orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008. Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem “Mark” Berger of Chicago for identifying terminally ill patients to be used as annuitants. Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly. Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz.

According to the SEC’s orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme. Searching for a large source of financing, he began pitching his scheme to institutional investors. A pooled investment vehicle and its adviser BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees. Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal. Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme. Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years. Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts. BDL Group received more than $1.5 million in proceeds from its investment in the annuities.

The order against Horowitz and Cohen alleged that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act’s books-and-records provisions. Horowitz also acted as an unregistered broker.

SEC Charges Wall Street Investment Banker With Insider Trading in Former Girlfriend’s Account to Pay Child Support

On February 21, 2014, the SEC announced an emergency action against a New York City-based investment banker charged with insider trading for nearly $1 million in illicit profits.

The SEC alleged that while working on Wall Street, Frank “Perk” Hixon Jr. regularly logged into the brokerage account of Destiny “Nicole” Robinson, the mother of his young child. He executed trades based on confidential information he obtained on the job, sometimes within minutes of learning it. Illegal trades also were made in his father’s brokerage account. When his firm confronted him about the trading conducted in these accounts, Hixon Jr. pretended not to recognize the names of his father or his child’s mother. However, text messages between Hixon Jr. and Robinson suggest he was generating the illegal proceeds in lieu of formal child support payments.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Hixon Jr.

A federal judge granted the SEC’s request and issued an emergency order freezing Robinson’s brokerage account, which the SEC alleges contains the majority of proceeds from Hixon Jr.’s illegal trading with a balance of approximately $1.2 million.

According to the SEC’s complaint, Hixon Jr. illegally tipped or traded in the securities of three public companies. He traded ahead of several major announcements by his client Westway Group in 2011 and 2012. He traded based on nonpublic information he learned about potential client Titanium Metals Corporation ahead of its merger announcement in November 2012. And Hixon even illegally traded in the securities of his own firm Evercore Partners prior to its announcement of record earnings in January 2013. Hixon Jr. generated illegal insider trading profits of at least $950,000.

In addition, when Hixon Jr.’s employer asked him in 2013 whether he knew anything about suspicious trading in accounts belonging to Destiny Robinson and his father Frank P. Hixon Sr., who lives in suburban Atlanta, Hixon Jr. denied recognizing either name. When later confronted with information that he did in fact know these individuals, Hixon Jr. continued his false claims, saying he didn’t know Robinson as “Destiny” and asserting in a sworn declaration that when approached he didn’t recognize the name of the city where his father lived for more than 25 years. Hixon Jr. was subsequently terminated by his employer.

The SEC’s complaint alleged that Hixon Jr. violated the antifraud provisions of the Securities Exchange Act of 1934. In addition to the asset freeze, the complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. Hixon Sr. and Robinson have been named as relief defendants for the purposes of recovering the illegal trading profits held in their accounts.

 

SEC Charges Three California Residents Behind Movie Investment Scam

On February 20, 2013, the SEC announced that it had charged three California residents with defrauding investors in a purported multi-million dollar movie project that would supposedly star well-known actors and generate exorbitant investment returns.

The SEC alleged that Los Angeles-based attorney Samuel Braslau was the architect of the fraudulent scheme that raised money through a boiler room operation spearheaded by Rand Chortkoff of California.  High-pressure salespeople including Stuart Rawitt persuaded more than 60 investors nationwide to invest a total of $1.8 million in the movie first titled Marcel and later changed to The Smuggler.  Investors were falsely told that actors ranging from Donald Sutherland to Jean-Claude Van Damme would appear in the movie when in fact they were never even approached.  Instead of using investor funds for movie production expenses as promised, Braslau, Chortkoff, and Rawitt have spent most of the money among themselves.  The investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against Braslau, Chortkoff, and Rawitt. 

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Braslau set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds from investors for the movie project.  In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II.  Shortly thereafter, Mutual Entertainment began raising money from investors through a boiler room operation that Chortkoff operated out of Van Nuys, Calif.  

The SEC alleged that Braslau, Chortkoff, and Rawitt claimed that 63.5 percent of the funds raised from investors would be used for “production expenses.”  However, very little if any money was actually spent on movie expenses as they instead used the vast majority of investor funds to pay sales commissions and phony “consulting” fees to themselves and other salespeople.  Rawitt made numerous false claims to investors about the movie project.  For instance, he flaunted a baseless projected return on investment of about 300 percent.  He falsely depicted that they were just shy of reaching a $7.5 million fundraising goal and the movie was set to begin shooting in summer 2013.  He instilled the belief that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz. 

According to the SEC’s complaint, Rawitt was the subject of a prior SEC enforcement action in 2009, when he was charged for his involvement in an oil-and-gas scheme.

The SEC’s complaint alleged that Braslau, Chortkoff, and Rawitt violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint further alleged that Chortkoff and Rawitt violated Section 15(a) of the Exchange Act, and Rawitt violated Section 15(b)(6)(B) of the Exchange Act.  The SEC is seeking financial penalties and permanent injunctions against Braslau, Chortkoff, and Rawitt.

SEC Charges Manhattan-Based Private Equity Manager With Stealing $9 Million in Investor Funds

On January 30, 2014, the SEC announced that they had charged a Manhattan-based private equity manager and his firm with stealing $9 million from investors in their private equity fund.

The SEC has obtained an emergency court order to freeze the assets of Lawrence E. Penn III and his firm Camelot Acquisitions Secondary Opportunities Management as well as another individual and three entities involved in the theft of investor funds.

The SEC alleged that Penn and his longtime acquaintance Altura S. Ewers concocted a sham due diligence arrangement where Penn used fund assets to pay fake fees to a front company controlled by Ewers. Instead of conducting any due diligence in connection with potential investments by Penn’s fund, Ewers’ company Ssecurion promptly kicked the money back to companies and accounts controlled by Penn so he could secretly spend investor funds for other purposes. For example, Penn paid hefty commissions to third parties to secure investments from pension funds. Penn also rented luxury office space and used the funds to project the false image that Camelot was a thriving international private equity operation.

According to the SEC’s complaint, Penn tapped into a network of public pension funds, high net worth individuals, and overseas investors to raise assets for his private equity fund Camelot Acquisitions Secondary Opportunities LP, which he started in early 2010. Penn eventually secured capital commitments of approximately $120 million. The fund is currently invested in growth-stage private companies that are seeking to go public.

The SEC alleged that Penn has diverted approximately $9.3 million in investor assets to Ssecurion. With the assistance of Ewers, who lives in San Francisco, Penn repeatedly misled the fund’s auditors about the nature and purpose of the due diligence fees. However, the scam began to unravel in 2013 when Camelot’s auditors became increasingly skeptical about the fees. In their haste to cover their tracks, Penn and Ewers brazenly lied to the auditors and forged documents as recently as July 2013, pretending the files were generated by Ssecurion.

The SEC’s complaint charged Penn, two Camelot entities, Ewers, and Ssecurion with violating the antifraud, books and records, and registration application provisions of the federal securities laws. The complaint is seeking final judgments that would require them to disgorge ill-gotten gains with interest, pay financial penalties, and be barred from future violations of the antifraud provisions of the securities laws. The SEC’s complaint also charged another company owned by Ewers – A Bighouse Photography and Film Studio LLC – as a relief defendant for the purposes of recovering investor funds it allegedly obtained in the scheme.

 

SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme

On December 20, 2013, the SEC aannounced charges against a woman and her stepson for their involvement in a North Carolina-based Ponzi and pyramid scheme that the agency shut down last year.

The SEC alleged that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions.  While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits.  Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.

Wright-Olivares and Olivares agreed to settle the SEC’s charges.  In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina today announced criminal charges against the pair.

Pyramid schemes are a type of investment scam often pitched as a legitimate business opportunity in the form of multi-level marketing programs. According to the SEC’s complaint filed in federal court in Charlotte, N.C., the ZeekRewards scheme raised more than $850 million from approximately one million investors worldwide.

The SEC alleged that Wright-Olivares served as the chief operating officer for much of the existence of ZeekRewards.  Wright-Olivares helped develop the program and its key features, marketed it to investors, and managed some of its operations.  She also helped design and implement features that concealed the fraud.  Olivares managed the electronic operations that tracked all investments and managed payouts to investors.  Together, Wright-Olivares and Olivares helped perpetuate the illusion of a successful retail business.

The SEC’s complaint charged Wright-Olivares with violating the registration and antifraud provisions of Sections 5 and 17 of the Securities Act, and Section 10 of the Exchange Act and Rule 10b-5.  The complaint charged Olivares with violating Section 17 of the Securities Act and Section 10 of the Exchange Act and Rule 10b-5.  To settle the SEC’s charges, Wright-Olivares agreed to pay at least $8,184,064.94 and Olivares agreed to pay at least $3,272,934.58 – amounts that represent the entirety of their ill-gotten gains plus prejudgment interest.  Payments will be made as part of the parallel criminal proceeding in which additional financial penalties could be imposed in a restitution order.

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