Monthly Archives: May 2020

On May 22^nd, 2020, the Securities and Exchange Commission issued a press release detailing a Ponzi scheme designed to target the elderly. The SEC filed an emergency action and subsequently obtained a temporary restraining order and asset freeze against Paul Horton Smith Sr. and his various companies, which he used to organize the scheme. Smith Sr., according to the SEC’s complaint, offered and sold securities through his company Northstar Communications LLC.

Smith Sr. allegedly used his other companies to sponsor events, such as financial workshops and free-meal seminars, at which he would promise investors, often elderly people, guaranteed annual interest payments of anywhere from three percent to ten and a half percent if they invested in so-called private annuity contracts.” However, Smith Sr. did not invest the funds he raised in any securities. Instead, he would use those funds to pay returns to previous investors. This is a classic Ponzi scheme.

Smith Sr. and his entities stand accused of raising over $5.6 million from at least thirty-five investors and then paying $5.2 million to those investors in the form of interest payments or principal reward. He and his companies have been charged with violating the antifraud provisions of the federal securities laws. The complaint seeks civil penalties, injunctions, and the return of ill-gotten gains plus interest.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

On May 18, 2020 the Securities and Exchange Commission sued three Texas residents who used deceptive offering materials and promotional videos to sell $2.7 million in fraudulent oil and gas investments.  Defendants Paul R. Montgomery, Jr., Michael D. Fisher, and James H. Willingham, Jr. were charged after the SEC found that approximately 15 investors lost about $2.7 million by investing in joint venture interests in two oil and gas projects.  Defendants lured investors with, among other things, promises of 32% investment returns, as well as representations about Montgomery’s expertise and qualification in the oil and gas exploration industry.

The complaint alleges Defendants never drilled or reworked a single well for the projects.  Defendants misrepresented and/or omitted numerous material facts to investors that were fundamental to the nature and risks of the investment offerings.  Defendants distributed written offering materials in which they promised to use investor funds only for specified purposes, instead they misappropriated investor funds, spending hundreds of thousands of dollars for a number of uses not permitted in the offering documents, such as undisclosed commissions, and payments to Montgomery and Willingham.   In the end, investors suffered a complete loss of their funds.

In the interest of protecting the public from any further fraudulent activity and harm, the SEC brought this action against Defendants.  The Commission charged Montgomery and Fisher with aiding and abetting Willingham’s violations of the charged anti-fraud provisions.  Additionally, the SEC is seeking disgorgement of ill-gotten gains plus interest, civil penalties, and injunctive relief.  Willingham has agreed to be enjoined against future violations of the charged provisions, and to pay disgorgement, prejudgment interest, and civil penalty, the amounts of which will be determined by the court upon a motion filed by the SEC.

On May 12, 2020 the SEC announced that Morgan Stanley Smith Barney (MSSB) has agreed to settled charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  It also agreed to pay a $5 million penalty that will be distributed to harmed investors.

The SEC issued a Cease and Desist Order in reference to MSSB’s marketing and client communications associated with the services rendered and costs incurred in MSSB’ retail wrap fee programs, which to some clients were misleading.  Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.  According to the investigation, from at least October 2012 until June 2017,  MSSB marketed its wrap fee account as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure; giving the impression that wrap fee clients were not likely to incur additional trade execution costs.  However, the Order alleges that MSSB had knowledge that some of its managers routinely directed wrap fee clients’ trades to third party broker-dealers for execution, which in turn resulted in additional transaction fees, these costs were embedded into the price of the security and not separately disclosed to clients.   Consequently, MSSB clients were unaware that they regularly paid execution costs in addition to MSSB’s wrap fee and in some instances, they incurred in transaction-based charges.  As a result, certain MSSB clients lacked complete and accurate information needed to assess the value of the services received in exchange for the wrap fee paid to MSSB and the costs associated with their accounts.

Without admitting or denying the SEC findings, Morgan Stanley Smith Barney consented to the SEC’s Order, which finds that the firm violated provisions of the Investment Advisers Act of 1940, imposes a $5 million penalty, and includes a censure and a cease-and-desist order.  The order also creates a Fair Fund to distribute the penalty paid by MSSB to harmed investors.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

On May 11, 2020 the US District Court for the Southern District of Florida entered final judgments against Neil Burkholz and Frank Bianco for knowingly operating a Ponzi scheme.  Neil Burkholz, age 82, is a resident of Boca Raton, Florida.  He is the founder and co-CEO of Palm Management, and co-Founder and Manager of Shore Management.  Frank Bianco, age 70, is a resident of Pembroke Pines, Florida.   He is co-CEO of Palm Management, and co-Founder and Manager of Shore Management.  Both Defendants opened bank and brokerage accounts for the entities and their investment funds.  They are the only signatories on the bank accounts, and they exercised exclusive trading authority over the brokerage accounts.

The alleged fraudulent investment scheme raised more than $6 million from at least 55 investors, many of whom are senior citizens.  According to the complaint, to solicit and retain investors, Defendants falsely represented that they were advisers and fiduciaries who would profitably manage investor assets, when in reality, through at least two investment management companies, Defendants knowingly misappropriated investor assets by diverting them to pay other investors and by transferring funds to themselves and their spouses.    The SEC’s complaint alleged that Burkholz, Bianco, and their companies: Palm Financial Management and Shore Management Systems, solicited investors by falsely representing that their proprietary options trading strategies were highly profitable.  In effect, per the complaint, the defendants invested less than half of investor funds and those investments resulted in near-total losses.  Additionally, they misappropriated the remaining funds by using them to repay other investors and by transferring approximately $880,000 of investor funds to Burkholz, Bianco, and their spouses for personal use.  To conceal their misappropriation and trading losses, Defendants delivered false reports to investors giving the false impression they were generating positive returns.  In sum, Defendants were managing and operating a Ponzi scheme.

Without admitting or denying the allegations in the SEC Complaint, Burkholz and Bianco consented to the entry of a final judgement permanently enjoining them from violating antifraud provisions of the Securities Exchange Act and ordered them to disgorge $873,577 combined, and $1,841,650 in civil penalties.  Further, Bianco’s wife Suzanne Bianco, who the SEC named as a relief defendant, consented to the entry of a final judgment ordering her to disgorge$49,751 on a joint and several basis with Bianco, representing the amount of investor funds Bianco paid her, plus prejudgment interest.  Additionally, the Court ordered over $1.2 million in disgorgement and prejudgment interest against Palm Management and Shore Management.   After the SEC receives approval from the Court, it plans to establish a fair fund to distribute money received from defendants to harmed investors.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.