Category Archives: SEC News

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.”

The SEC charged Massachusetts Mutual Life Insurance Company with securities law violations for failing to sufficiently disclose the potential negative effect of a “cap” included on certain annuity products.  According to the SEC Order Instituting Administrative and Cease-and-Desist Proceedings, MassMutual included a “cap” feature in around $2.5 billion of its variable annuities.  From September 2007 to March 2009, MassMutual offered a “Guaranteed Minimum Income Benefit (GMIB)” rider as an optional feature on some of its variable annuity products.  The products’ prospectuses failed to sufficiently explain that once the GMIB value reached a cap, it would no longer earn interest and withdrawals would cause pro-rata reductions to the GMIB value.  The firm’s failure to sufficiently explain the effect of the cap on withdrawals confused sales agents and others.

According to the SEC’s Order, a variable annuity with a GMIB rider reflects two values, the contract value and the GMIB value.  The contract value fluctuates with market performance.  The GMIB value automatically increases on the contract issue date and each contract anniversary thereafter by 5 or 6% (depending on the product.)   MassMutual refered to the annual increases as interest credits.  GMIB riders were advertised to provide “Income Now” and “Income Later” features to investors.  In the Income Now feature, MassMutual GMIB riders have a “dollar-for-dollar” withdrawal characteristic, meaning that the GMIB value will decline only by the dollar amount of any withdrawal, so long as the withdrawal does not exceed the annual interest credit (of5 or 6%, depending on the product.)  In the Income Later feature, MassMutual’s sales literature stated that “[e]ven if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity.”  MassMutual failed to specifically disclose the effect of taking withdrawals after the GMIB value reached the cap, including that: 1) after reaching the cap, MassMutual would no longer apply an interest credit for purposes of taking withdrawals; and that 2) at that point, MassMutual would deem all withdrawals to be excess withdrawals that would reduce the GMIB value in direct proportion to the contract value reduction.  As a result of the improper disclosures, a number of MassMutual sales agents, wholesalers, and at least one annuity specialist at another insurance sales agency did not understand the negative impact the cap feature had on the contracts.

During the GMIB riders offering periods, MassMutual had indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted it to the fact that its disclosures were inadequate.  MassMutual removed the cap after the SEC’s investigation to ensure that no investors would be harmed.  Without admitting or denying the allegations, MassMutual has agreed to settle the charges and pay a $1.625 million penalty.

The SEC charged Fabrizio Neves and Jose Luna, former brokers in Miami, with fraud for overcharging customers approximately $36 million by using undisclosed, excessive fees on structured notes transactions.  The SEC alleged that Neves conducted the scheme while working at LatAm Investments, LLC, a broker-dealer that is no longer in business.  The affected customers were two Brazilian public pension funds, and a Colombian institutional investor.

According to the complaint, from November 2006 to September 2009, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers’ behalf.  Neves, as the funds’ portfolio manager, was authorized to make all trading decisions on the funds’ behalf.  Instead of purchasing structured notes worth approximately $70 million, Neves engaged in a scheme that included trading the notes with one or more accounts in the names of offshore nominee entities that he and Luna controlled, to later buy the same notes at an excessive, baseless mark up price for their customers.  Respondents also altered the structured notes’ term sheets by whiting out or electronically cutting and pasting the markup amounts, over the actual price and trade information, and providing the forged documents to clients.  As a result, the Brazilian funds and the Colombian investor were charged markups as high as 67%, totaling approximately $36 million in overpaid, undisclosed, excessive fees.  Both Neves and Luna enjoyed inflated salaries and commissions stemming from their scheme.

The SEC also instituted an administrative proceeding against LatAm’s former president, Angelica Aguilera, alleging that she failed to reasonably supervise Neves and Luna.  The SEC said, “Neves lined his pockets with millions of dollars by charging customers exorbitant, fraudulent markups…Neves and Luna thought they could hide their scheme and evade regulators by using offshore nominee companies and forged documents, but they thought wrong.”

Without admitting or denying the charges, Luna has agreed to pay disgorgement of $923,704.85, prejudgment interest of $241,643.51, plus a penalty amount to be determined.

The SEC charged Manouchehr Moshayedi, chief executive officer and chairman of the board of directors of STEC, Inc., with insider trading in a secondary offering of STEC shares.  STEC is a California based company that designs, manufactures and markets computer storage devices.   According to the complaint, Moshayedi engaged in an insider trading scheme by making false and misleading representations and omissions in connection with the sale of 9 million shares of STEC stock.

The SEC alleges that during the first half of 2009, STEC’s stock rose more than 800%, as the company reported its increased revenues, sales and margins for its products.  On July 16, 2009, the company also made public its unique supply agreement with its largest customer, EMC Corporation.  The agreement committed EMC to purchase $120 million worth of STEC products in the third and fourth quarters of 2009.  In order to take advantage of the run-up in the stock price, Moshayedi and his brother decided to sell a significant portion of their STEC holdings in a secondary offering.  A few days before the scheduled secondary offering, Moshayedi learned of critical non-public information that was likely to have a negative impact on the stock price.  Instead of calling off the offering and abstaining from selling his shares, Moshayedi engaged in a fraudulent scheme to hide the truth through a secret side deal.

According to the complaint, On August 3, 2009, Moshayedi and his brother each sold 4.5 million shares of their STEC stock, and each received gross proceeds, before expenses, of $133,920,000.  Three months later, after Moshayedi disclosed part of the material, non-public information he possessed when he sold his shares, STEC’s price plummeted 38.9%.  The SEC stated, “Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result.”