Author Archives: David Weintraub

On August 12, 2013, the SEC announced the latest charges in a joint law enforcement crackdown on penny stock schemes with ties to the Florida region.

The SEC charged two microcap companies, their CEOs, and one penny stock promoter for spearheading illegal kickback schemes.  Also charged were two other microcap companies, their CEOs, and four other promoters with arranging the payment of bribes to hype the companies in which they had a stake in order to create a false sense of market activity and illegally generate stock sales.

The SEC worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation’s Miami Division to uncover the penny stock schemes.  Parallel criminal charges were also announced against the same nine individuals facing SEC charges.

According to the complaint, one of the schemes involved an arrangement to pay an undisclosed kickback to a pension fund manager in exchange for the fund’s purchase of restricted shares of stock in the company.  Two other schemes involved agreements to pay undisclosed kickbacks to hedge fund principals in return for their funds’ purchase of restricted shares.

The SEC’s complaints alleged that the companies, officers, and promoters violated Section 17(a)(1) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and/or 10b-5(c).  The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions.  The SEC is also seeking penny stock bars against each of the officers and promoters, and certain officer-and-director bars.

On August 6, 2013, the SEC obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area.  The former Marine masqueraded as a successful trader to defraud fellow veterans, current military, and others.

The SEC alleged that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and high-end nightclubs. In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent.

According to the SEC’s complaint filed in Chicago, Cohn targeted mostly unsophisticated investors and solicited friends, family members, and fellow veterans.  Cohn controlled a so-called charity called the Veterans Financial Education Network (VFEN) that purported to teach veterans how to understand and manage their money.

The SEC alleged that Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

According to the SEC, Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.

The SEC’s complaint charged Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.  It was unclear whether the customers initiated any type of securities arbitration proceeding.

On August 2, 2013, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release.  The SEC also charged his friend who illegally traded along with him.

In a complaint unsealed July 31, 2013 in U.S. District Court for the District of Connecticut, the SEC alleged that Chad McGinnis purchased Green Mountain Coffee securities – typically out-of-the-money options – shortly before earnings announcements were made.  McGinnis also tipped his longtime friend and business associate Sergey Pugach, who illegally traded in his own account and his mother’s trading account.  Together, McGinnis and Pugach garnered $7 million in illegal profits by using inside information to correctly predict the reaction of Green Mountain Coffee’s stock price to 12 of the past 13 quarterly earnings announcements since 2010.

The SEC alleged that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored.  He also had access to other employees’ e-mail accounts.  Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.

According to the SEC’s complaint, McGinnis lives in Morrisville, VT, and Pugach lives in Hamden, CT.  Despite living in different states, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service.  They communicated frequently around earnings announcements, but infrequently otherwise.  Around trading times, they exchanged numerous phone calls and text messages not only on their own phones, but also using cell phones belonging to their spouses.

The SEC’s complaint alleged that McGinnis and Pugach violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Pugach’s mother Bella Pugach is named as a relief defendant in the SEC’s complaint for the purpose of recovering ill-gotten gains in her trading account.

On July, 23, 2013, the SEC charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, a virtual currency traded on online exchanges for conventional currencies like the U.S. dollar or used to purchase goods or services online. 

The SEC alleged that Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.”  Shavers raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold.  Today the value of 700,000 Bitcoin exceeds $60 million.

According to the SEC’s complaint, Shavers promised investors up to 7 percent weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities.  In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments.  Shavers also diverted investors’ Bitcoin for day trading in his account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses.

The SEC alleged that Shavers sold BTCST investments over the Internet to investors in such states as Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina, and Pennsylvania.  Shavers posted general solicitations on a website dedicated to Bitcoin discussions, and he misled investors with such false assurances about his investment opportunity as “It’s growing, it’s growing!” and “I have yet to come close to taking a loss on any deal,” and “risk is almost 0.”  Contrary to the representations made to investors, BTCST was not in the business of buying and selling Bitcoin at all.

The SEC’s complaint charged Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws, specifically Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.  The SEC is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

On July 17, 2013, the SEC obtained a $13.9 million penalty against former Goldman Sachs board member Rajat K. Gupta for illegally tipping corporate secrets to former hedge fund manager Raj Rajaratnam.  Gupta also is permanently barred from serving as an officer or director of a public company.

The SEC previously obtained a record $92.8 million penalty against Rajaratnam for prior insider trading charges.

In the complaint filed in late 2011, the SEC alleged that Gupta disclosed confidential information to Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs as well as nonpublic details about Goldman Sachs’ financial results for the second and fourth quarters of 2008.

In addition to imposing the financial penalty, the order issued by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York enjoins Gupta from future violations of the securities laws, and permanently bars him from acting as an officer or director of a public company and from associating with any broker, dealer, or investment adviser.

In a parallel criminal case arising out of the same facts, the SEC provided significant assistance to the U.S. Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Gupta, who was found guilty on June 15, 2012, of one count of conspiracy to commit securities fraud and three counts of securities fraud.  Following the jury verdict, Gupta was sentenced on Oct. 24, 2012, to a term of imprisonment of two years followed by one year of supervised release, and ordered to pay a $5 million criminal fine.