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On June 10, 2013, the SEC charged the leader of a Detroit-based investment adviser for stealing nearly $3.1 million from the pension fund that the firm manages for the city’s police officers and firefighters so he could buy two strip malls in California. The SEC charged four other top officials at the firm for helping him try to cover up the theft.

The SEC alleged that Chauncey C. Mayfield, who is the founder, president, and CEO of MayfieldGentry Realty Advisors, took the money from the Police and Fire Retirement System of the City of Detroit without obtaining permission. He used it to purchase the shopping properties and title them in the name of a MayfieldGentry affiliate. Other executives at MayfieldGentry gradually became aware that Mayfield had siphoned money away from their biggest client. Rather than come clean about the theft and risk losing the sizeable business the firm received from the pension fund, MayfieldGentry officials instead devised a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. Their plan ultimately failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund.

Mayfield and his firm agreed to settle the charges by paying back the stolen amount.

The other MayfieldGentry executives charged in the SEC’s complaint are chief financial officer Blair D. Ackman, chief operating officer Marsha Bass, chief investment officer W. Emery Matthew, and chief compliance officer and general counsel Alicia M. Diaz.

The SEC’s complaint filed in federal court in Detroit, alleged that Mayfield took the money from a trust account for the pension fund in 2008. The stolen money could have provided a year of benefits for more than 100 retired police officers, firefighters, and surviving spouses and children. Shortly thereafter, Mayfield told Ackman about the misappropriation, and by May 2011 the other principals at MayfieldGentry were aware of the misdeed. They proceeded to hide the theft by affirmatively misleading the pension fund.

According to the SEC’s complaint, MayfieldGentry and its executives continued to cover up the theft until they finally informed the pension fund on the evening before the SEC filed a complaint against Mayfield and his firm in May 2012 for their participation in a “pay-to-play” scheme involving the former mayor and treasurer of Detroit. Upon learning of the theft, the pension fund promptly terminated its relationship with MayfieldGentry.

The SEC’s complaint alleged that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Ackman, Bass, Matthews, and Diaz aided and abetted those violations. Mayfield and his firm agreed to pay disgorgement in the amount of $3,076,365.88 and be permanently enjoined from violating Sections 206(1) and 206(2) of the Advisers Act. They neither admit nor deny the allegations in the settlement, which is subject to court approval. In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

On June 6, 2013, the SEC announced an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week’s announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.

The SEC alleged that Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers LLC. Rungruangnavarat allegedly made these purchases based on material, nonpublic information about the potential acquisition, and among his possible sources is a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield. After profiting from his timely and aggressive trading, Rungruangnavarat sought to withdraw more than $3 million from his account on June 3.

According to the SEC’s complaint filed under seal in the U.S. District Court for the Northern District of Illinois, Smithfield publicly announced on May 29 that Shuanghui agreed to acquire the company for $4.7 billion, which would represent the largest-ever acquisition of a U.S. company by a Chinese buyer. Smithfield, which is headquartered in Smithfield, Va., is the world’s largest pork producer and processor. Following the announcement, Smithfield stock opened nearly 25 percent higher than the previous day’s closing price.

The SEC obtained the emergency court order late on June 5, 2013 on an ex parte basis. The order froze the proceeds of Rungruangnavarat’s securities purchases, granted expedited discovery, and prohibited Rungruangnavarat from destroying evidence.

The SEC’s complaint alleged that Rungruangnavarat violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction.

On June 5, 2013, the SEC charged a microcap company that was ensnared in an SEC trading suspension proactively targeting questionable penny stocks, and also charged the CEO who illicitly profited from selling his shares while investors were unaware of the company’s financial struggles.

The SEC alleged that Laidlaw Energy Group and its CEO Michael B. Bartoszek sold more than two billion shares of Laidlaw’s common stock in 35 issuances to three commonly controlled purchasers at deep discounts from the market price. Laidlaw did not register this stock offering with the SEC, and no exemptions from registration were applicable. Bartoszek knew that the purchasers were dumping the shares into the market usually within days or weeks of the purchases to make hundreds of thousands of dollars in profits. Laidlaw’s $1.2 million in proceeds from these transactions was essentially the sole source of funds for the company’s operations during most of its existence. Laidlaw, which is based in New York City, purports to be a developer of facilities that generate electricity from wood biomass.

The transactions allegedly made by Laidlaw diluted the value of shares previously purchased by common investors in the market who were not told about the huge blocks of cheap stock Laidlaw was selling. Investors also were not aware that Laidlaw relied on these transactions to fund its operations entirely. The SEC suspended trading in Laidlaw stock in June 2011.

According to the SEC’s complaint filed in federal court in Manhattan, Bartoszek violated insider trading laws when he personally sold more than 100 million shares of Laidlaw common stock from December 2009 to June 2011, and he made more than $318,000 in profits. Bartoszek was in possession of material, non-public information while making these trades on the basis of his insider knowledge about Laidlaw’s poor financial condition, the illegal fire sale of more 80 percent of Laidlaw’s stock, and adverse developments about Laidlaw’s business prospects. As a result of the volume of Bartoszek’s sales and the lack of current, publicly available information about the company, these sales also violated the registration requirements of the federal securities laws.

The SEC further alleged that Laidlaw and Bartoszek made subsequent false statements about the ownership of Laidlaw shares in SEC filings to register certain common stock following the trading suspension. Laidlaw and Bartoszek misled investors to believe that the purchasers of the two billion unregistered shares had acquired them to hold as an investment in the company. The filings falsely represented that these purchasers were the current “beneficial owner” of more than 80 percent of Laidlaw’s common stock, an assertion that only could have been true if the purchasers had not sold any of their Laidlaw stock. In fact, as Laidlaw and Bartoszek knew, the purchasers had long ago dumped all of the stock.

The SEC’s complaint charged Laidlaw and Bartoszek with violations of Sections 5(a) and 5(c) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaint also charged Bartoszek with violations of Section 17(a) of the Securities Act and secondary liability under Sections 20(a) and 20(e) of the Exchange Act for Laidlaw’s violation of Section 10(b) of the Exchange Act and Rule 10b-5. The SEC is seeking disgorgement plus prejudgment interest, financial penalties, and injunctive relief, and penny stock and officer and director bars against Bartoszek.

On June 3, 2013, the SEC announced the second-largest trading suspension in agency history as it continued its “Operation Shell Expel” crackdown against the manipulation of microcap shell companies that are ripe for fraud as they lay dormant in the over-the-counter market.

The SEC suspended trading in the securities of 61 empty shell companies that are delinquent in their public filings and seemingly no longer in business based on an analysis by the SEC’s Microcap Fraud Working Group. Since microcap companies are thinly-traded, once they become dormant they have great potential to be hijacked by fraudsters who falsely hype the stock to portray it as a thriving company and coerce investors into “pump-and-dump” schemes.

In this latest review of microcap stocks nationwide using enhanced intelligence technology in the Enforcement Division’s Office of Market Intelligence, the SEC identified these clearly dormant shell companies in at least 17 states and one foreign country. By suspending trading in these companies, they’re obligated to provide updated financial information to prove they’re still operational, essentially rendering them useless to scam artists now that they are no longer flying under the radar.

Pump-and-dump schemes are among the most common types of fraud involving empty shell companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. They purchase the stock at a low price before pumping the stock price higher by creating the appearance of market activity and drawing investor interest. They dump the stock for significant profit by selling it into the market at the higher price once investors have bought in.

Through its Operation Shell Expel initiative, the SEC suspended trading in a record 379 companies in a single day last year before they could be manipulated for fraudulent activity to harm investors.

On May 24, 2013, the SEC announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock’s price.

The SEC alleged that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife’s accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife’s accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife’s accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife’s accounts from SEC examiners.

According to the SEC’s complaint filed in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin was the trader primarily responsible for managing price exposures related to client orders for equity trades.

The filed complaint states that Bergin realized at least $1.7 million in profits in his wife’s accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife’s account ahead of clients’ trades. Also, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin’s wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.

In order to halt Bergin’s ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and his wife.

On May 16, 2013, the SEC charged a father and son and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations.

The SEC alleged that Charles J. Dushek and his son Charles S. Dushek placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). Lisle, Illinois-based CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day, and often several days, by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.

The illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security, according to the SEC. It alleged that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.

The SEC’s complaint charged the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.