Category Archives: SEC News

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 Also, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin’s wife that was undisclosed to his firm.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.

On April 25, 2013, the SEC announced fraud charges against a Spokane Valley, Washington, company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.

The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He preyed upon investors’ sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.

According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states. In e-mails and in periodic e-newsletters that he used to solicit USA Real Estate Fund investors, Peterson said that he was preparing to raise billions of dollars in a second offering of additional “preferred” securities, which he claimed would be “secured” and have 10-year returns of up to 1,300 percent. Peterson claimed that two prominent Wall Street financial firms had partnered with him to bring his offering to market, and that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing. Peterson promised the early investors they would profit massively once the purported future offering was underway.

Peterson’s claims were false. He has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering, the SEC alleges.

The SEC alleges that Peterson used investor money to pay for his rent, food, entertainment, vacations, and a rented Mercedes Benz SUV. He also used investor funds on clothing for friends, luggage for his wife, and expenses at a Las Vegas casino.

The SEC’s complaint charged USA Real Estate Fund and Peterson with violating the anti-fraud provisions of the federal securities laws. The SEC is seeking a court order requiring USA Real Estate Fund and Peterson to return their allegedly ill-gotten gains, with interest, and pay financial penalties. It is also seeking a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme and restraining them from further violations of the securities laws.

On April 16, 2013, the SEC alleged that Jeffrey Stebbins of Mesa, Arizona, and Corbin Jones of Gilbert, Arizona, diverted at least $1.8 million of investor money for their personal use and fraudulently obtained more than $6 million in stock for themselves to the detriment of investors. Typically used in residences, tankless water heaters are generally designed to instantly heat water as it passes through pipes rather than in large containers like traditional water heaters. Stebbins and Jones personally told investors that all of the money they raised would be used to develop the tankless water heater venture. Instead, they diverted nearly 30 percent of the funds they raised to pay unrelated business expenses and support their lavish lifestyles, including the lease of luxury automobiles.

According to the SEC’s complaint filed in U.S. District Court for the District of Arizona, Stebbins and Jones solicited investors for the tankless water heater project during a three-year period by offering securities through a variety of companies. Besides misappropriating $1.8 million for themselves, they fraudulently duped certain shareholders in one of the companies, Noble Systems, to swap their private shares for publicly-traded shares in another company, Noble Innovations. This turned out to be nothing more than a fraudulently orchestrated stock swap enabling Stebbins and Jones to reap more than $6 million worth of Noble Innovations stock at the expense of these shareholders who were left with almost nothing. Stebbins and Jones also deprived early investors in the water heater venture of more than $1 million of Noble Innovations stock that rightfully belonged to them. Throughout much of this time, Stebbins and Jones traded Noble Innovations stock by using 28 accounts in 18 different names with 14 separate brokers to ultimately profit by more than $557,000. Stebbins and Jones never reported their significant holdings in Noble Innovations as they were required to do under the securities laws.

The SEC’s complaint charges Stebbins and Jones with violating the antifraud, broker-dealer registration, and beneficial ownership reporting provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, financial penalties, injunctions, and penny stock bars.

On April 15, 2013, the SEC charged David Miller, a former employee at a Connecticut-based brokerage firm, with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations. David Miller, an institutional sales trader who lives in Rockville Centre, New York, has agreed to a partial settlement of the SEC’s charges.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer’s profit if Apple’s stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

According to the SEC’s complaint, Apple’s stock price decreased after Apple’s earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm’s available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.

Miller is charged with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC’s charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stocks. In the partial settlement, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC’s motion.

On March 12, 2013, the SEC announced charges and an emergency asset freeze against a Redondo Beach, California, resident and his companies for defrauding seniors and other investors in a real estate investment scheme.

The SEC alleged that Alvin R. Brown raised more than $3 million from investors who were falsely promised high profits for investing in his companies that were purportedly funding commercial and residential rental properties in California and other western states. Brown and his companies – First Choice Investment and Advanced Corporate Enterprises (ACorp) – instead used investor funds to make Ponzi-like payments to pre-existing investors, and Brown routinely withdrew cash for personal use. The ACorp website prominently displayed the seals of the SEC and the State of California as well as the NYSE, NASDAQ, and the Better Business Bureau to falsely imply to investors that these investments were endorsed by these organizations. In reality, the investment offerings were not registered with the SEC.

According to the SEC’s complaint unsealed in U.S. District Court for the Central District of California, Brown particularly targeted an elderly investor suffering from a stroke and dementia. After the investor made a $30,000 initial investment, his daughter advised ACorp to stop contacting her father because she had power of attorney, but Brown nonetheless e-mailed him forms to close his brokerage account and move the money to an IRA account that would then invest in ACorp. The investor’s daughter replied to Brown again to remind him that she had power of attorney and he should cease-and-desist from contacting her father. But ACorp eventually succeeded in circumventing the daughter to get the investor’s signature as well as an additional $45,000 investment. The investor’s daughter requested the return of her father’s money, but it was never returned.

The SEC alleged  that Brown and First Choice lured investors beginning in January 2011 by falsely promising 10 percent annual returns and a planned initial public offering (IPO) at the end of 2012 that would net investors 150 percent of their original investment. They touted Brown’s management experience but failed to disclose to investors that he had twice filed for personal bankruptcy. Brown also falsely stated that ACorp’s assets guaranteed the investments and misled investors into believing their money was safe and secure.

The Commission’s complaint alleged that Brown, ACorp, and First Choice violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and seeks preliminary and permanent injunctions, appointment of a permanent receiver, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties, against each of them.

The SEC banned Barry Ziskin from the securities industry for failing to follow the investment objectives of a stock mutual fund managed by his firm, which ultimately lead to the fund’s liquidation in December 2010.  Respondent Ziskin is the founder, president and sole control person of TFM, a New York corporation based in Mesa, Arizona.  According to the SEC’s investigation, TFM managed the Z Seven Fund, Inc. or (“ZSF”), a mutual fund whose prospectus described it as a stock fund seeking long-term capital appreciation.

According to the SEC’s Order Instituting Administrative and Cease-and-Resist Proceedings, beginning in September 2009, ZSF invested in put options for speculative purposes contrary to the fund’s stated investment policy.  TFM and Ziskin misled investors by misrepresenting in a shareholder report that the options trading was for hedging purposes.  Over the course of fifteen months, Ziskin’s strategy caused $3.7 million in losses.  By deviating from ZSF’s fundamental investment policy, Respondents breached their fiduciary duty to ZSF.

The SEC said, “Mutual fund advisers who deviate from their funds investment strategy and keep investors in the dark will be held accountable for their fraudulent actions.”  Given Respondents’ financial condition and additional evidence, it was determined that TFM and Ziskin are unable to pay a civil penalty.

The SEC charged Claudio Osorio, a former Ernst & Young Entrepreneur of the year Award winner, with fraud.  The SEC also charged Mr. Osorio’s company, InnoVida Holdings LLC, and Craig Toll, a certified public accountant, who served as InnoVida’s CFO.  Claudio Osorio used InnoVida to allegedly raise approximately $16.8 million from at least five investors by offering and selling securities in the form of units and loan instruments in InnoVida.  Mr. Osorio illegally used more than $8 million in investor funds to pay the mortgage on his Miami home, a loan for his Maserati automobile, a Colorado mountain retreat home, and country club dues.   To persuade investors, Mr. Osorio, with the help of Mr. Toll, allegedly produced false pro forma financial statements that portrayed the company as having millions of dollars more in cash and equity than it actually did.

According to the Complaint, InnoVida’s purported business was the manufacturing of housing materials to withstand fires and hurricanes.  Between March 2007 and March 2010, Mr. Osorio lured investors into InnoVida to privately finance the Company’s business.  Defendants made material misrepresentations and omissions regarding InnoVida’s financial condition.  Mr. Osorio made misrepresentations relating to (1) InnoVida’s share prices; (2) his personal investment in the Company; (3) a buyout agreement; and (4) the use of investor funds.  The Complaint alleged that between April 2009 and January 2010, Mr. Toll created baseless pro forma financial statements which falsely portrayed InnoVida as a cash-rich company.  For instance, the Company’s statements showed InnoVida’s cash and cash equivalents ranging from $35 million to $39 million, when in reality the Company’s bank accounts held less than $185,000 and approximately $2 million, respectively.  Osorio and Toll used the false financial statements to lure new investors and solicit additional contributions from existing investors.  To legitimize InnoVida, Mr. Osorio assembled a high-profile board of directors for the Company, including a former governor of Florida, a lobbyist, and a major real estate developer.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Florida charged Mr. Osorio and Mr. Toll criminally.  The SEC’s Complaint seeks disgorgement, financial penalties, and injunctive relief against InnoVida, Mr. Osorio, and Mr. Toll, as well as an order barring Mr. Osorio and Mr. Toll from serving as officers or directors of a public company.

The SEC charged JP Morgan Securities and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS).  Without admitting or denying the allegations, JP Morgan agreed to pay $296.9 million, and Credit Suisse $120 million to settle their respective charges.  The SEC stated that RMBS and related mortgage products were “ground zero in the financial crisis…misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed.”

According to the Complaint, JP Morgan’s December 2006 prospectus supplement for the $1.8 billion RMBS offering included materially false and misleading statements about the loans that provided collateral for the transaction.  Federal securities laws require the disclosure of delinquency information related to assets that are used as collateral for an asset-backed securities offering.  The loans were the primary source of funds that provided investors the ability to earn interest and obtain repayment of their principal.  JP Morgan represented that only 4 loans or .04 percent of the loans collateralizing the transaction were delinquent.  However, the firm actually had information that demonstrated that more than 620 loans, around 7% of the loans that were part of the transaction, were delinquent.  JP Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans.   Additionally, JP Morgan was charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans.  Normally, loan originators are contractually required to buy back loans that are delinquent within the first months after issuing.  Instead, Bear Stearns frequently negotiated discounted cash settlements with loan originators in lieu of the buy back.  The loans were already owned by the RMBS trusts and Bear Stearns failed to disclose the settlements to the trust or the investors, who owned the loans.  For most loans covered by bulk settlements, the firm collected money from originators but failed to pay anything to the trusts.  Bear Stearns’ proceeds from this bulk settlement practice were at least $137.8 million.

According to the SEC’s order instituting a settled administrative proceeding against Credit Suisse, the firm was involved in two separate practices relating to residential mortgage-backed securities (“RMBS”.)  First, between 2005 and 2010 Credit Suisse entered into a number of financial settlements with loan originators relating to early defaulting loans it had already sold to securitization trusts and kept the proceeds without notifying or compensating the RMBS trusts that owned the loans.  The firm failed to comply with offering documents provisions that required it to repurchase the early defaulting loans.  Credit Suisse also failed to disclose this practice to its RMBS investors.  The firm, through this practice, improperly obtained around $55,747,769.  The SEC’s investigation found that in late 2006, in its efforts to market and sell approximately $1.9 billion of subprime mortgages, Credit Suisse made misleading statements about a key investor protection known as the “First Payment Default” or “FPD” covenant, which required the mortgage loan originator to repurchase or substitute loans that missed payments shortly before or after they were securitized.  Furthermore, the company stated that it “enforced” the FPD convenant in order to “mitigate the effect” of fraudulent mortgages, and that its interests were aligned with investors’.  Notwithstanding this provision, the firm did not ensure the removal of all such loans and mislead investors by falsely claiming that all FPDs were removed from its RMBS.  As a result, investors sustained losses of approximately $1,056,561 on the loans that improperly remained in the RMBS trusts.

The SEC charged BP p.l.c. with securities fraud relating to the April 20, 2010 explosion of the Deepwater Horizon oil rig.  The charges involved BP’s public filings with the Commission that were also made available to investors, wherein the company made fraudulent public statements significantly understating the flow rate at which oil was spilling into the Gulf of Mexico.  According to the Complaint, on April 29 and 30, and May 4, 2010, BP stated that the flow rate estimates were “up to 5,000 barrels of oil per day” or that 5,000 b.o.p.d. was the current estimate, despite having knowledge of higher internal data, estimates and calculations.

The SEC’s complaint further alleged that BP executives made several public statements in May 2010 supporting the 5,000 b.o.p.d. flow rate estimate, and criticizing higher estimates despite internal evidence showing flow rates well in excess of 5,000 b.o.p.d.  On August 2, 2010, a group of governmental and academic experts declared a final official flow rate estimate of 52,700 to 62,200 b.o.p.d.  Notwithstanding the new findings, BP never corrected or updated its material misrepresentations and omissions about the flow rate.  BP’s failure to disclose the existence of higher estimates caused investors to be misinformed about the consequences and the degree of liability BP faced relating to the spill.  The amount of oil spilled would inform any consideration of the costs of offshore and onshore spill response, claims for natural resource damage under the Oil Pollution Act, as well as other potential liability arising from claims, lawsuits, and enforcement actions related to the explosion and the sinking of the Deepwater Horizon.

BP agreed to settle the SEC’s charges by paying the third-largest penalty in agency’s history at $525 million.  The SEC plans to establish a Fair Fund funded by the penalty to provide harmed investors with compensation for losses they sustained in the fraud.  The SEC stated, “[t]he oil spill was catastrophic for the environment, but by hiding its severity BP also harmed another constituency – its own shareholders and the investing public who are entitled to transparency, accuracy, and completeness of company information, particularly in times of crisis.”