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Category Archives: SEC News

SEC Charges Five Physicians With Insider Trading

The SEC charged five physicians with insider trading in the securities of a Michigan based holding company.  According to the complaint, Apparao Mukkamala served as chairman of the board of directors of American Physicians Capital, Inc. (“ACAP.”).  As chairman of the board, he owed a fiduciary duty of trust and confidence to ACAP and its shareholders.

According to the SEC, between March 12, 2010 and July 8, 2010 Mukkamala illegally disclosed material non-public information concerning the anticipated sale of ACAP, to four fellow physicians.  Between April 30 and July 7, 2010, Mukkamala and the other four purchased nearly $2.2 million of ACAP stock based on the non-public confidential information learned by Mukkamala.   On July 8, 2010, after The Doctors Company publicly announced its acquisition of ACAP, Defendants collectively realized more than $623,000 in profits from their illegal trading in ACAP.

Without admitting or denying the SEC allegation, the five physicians consented to the entry of final judgments ordering them to pay more than $1.9 million to settle the SEC’s charges.  The SEC stated, “These physicians made numerous purchases of ACAP shares that were detected as highly unusual when compared to their past trading patterns… [b]oard chairmen and other insiders should never choose greed over duty when possessing confidential information about the companies they serve.”

SEC Freezes Assets of Missing Georgia-Based Investment Adviser

The Honorable Timothy C. Batten Sr. granted the SEC’s request for a temporary restraining order and entered an asset freeze for the benefit of investors against Aubrey Lee Price, PFG, LLC, PFGBI, LLC – the funds he managed – and his affiliated entities.  The SEC alleged that after sending a letter dated June 2012 titled “Confidential Confession for Regulators – PFG, LLC and PFGBI, LLC Summary,” Price went into hiding.  In the 22-page letter, Price admitted that he “falsified statements with false returns” in order to conceal between $20-23 million dollars in investor losses.

According to the complaint, Price raised approximately $40 million from approximately 115 investors, living primarily in Georgia and Florida.  The SEC alleged that Price began his scheme in 2008, selling membership interests in two unregistered investment funds, PFG, LLC and PFGBI, LLC (“the Funds.”)  The funds were managed by Price.  According to PFG’s private placement memorandum, the investment objective was to achieve “positive total returns with low volatility” by investing in a variety of opportunities, including equity securities traded on the U.S. markets.  Instead, Price used investors funds to invest in South America real estate and a troubled South Georgia bank.  Furthermore, PFG’s offering documents stated that investors’ funds would be kept in a custodial account at Goldman Sachs Execution & Clearing, L.P.   Between 2009 and 2011, more than 90% of PFG investor funds, around $36.9 million, were placed in a securities trading account at Goldman Sachs  The account suffered massive trading losses in addition to the frequent wire-transfers to PFG’s operating bank account.  By mid-May 2012, the remaining $480,000 in PFG’s Goldman Sachs account was transferred to PFG’s operating account, at which time the Goldman Sachs trading account was closed.  To conceal the depletion of the fund’s assets, Price created and provided false Goldman Sachs account statements and representation letters to investors and bank regulators, indicating fictitious investment returns.

The SEC filed a complaint in U.S. District Court for the Northern District of Georgia charging him with securities fraud.  The SEC stated, “Price raised nearly $40 million from investors and made woeful financial transactions that he hid from them … [n]ow both the money and Price are missing.”

SEC Charges Bernard Madoff’s Younger Brother with Fraud and False Statements to Regulators

The SEC charged Peter Madoff with fraud, making false statements to regulators, and falsifying books and records, in order to create the illusion that Bernard L. Madoff Investment Securities LLC’s (“BMIS”) had a functioning compliance program in place.  The SEC alleged that Peter Madoff was responsible for creating compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications which were never implemented or performed.  The documents were merely created to paper the file.

According to the complaint, from 1969 through December 11, 2008, Peter created compliance materials for the sole purpose of papering the firm’s files.  Peter’s misconduct was instrumental up until the BMIS’s final collapse, when Bernie Madoff allegedly told Peter that there were insufficient funds to pay investors and recruited Peter to help him decide which family, friends and employees to receive what was left of the clients’ funds.  At the same time, Peter rushed to withdraw approximately $200,000 for himself from BMIS’s bank account.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced that criminal charges were filed against Peter Madoff.  The SEC stated, “Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals … [t]ragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.”  According to the SEC, Peter used these fraudulent proceeds to support a luxurious lifestyle at the expense of BMIS’s clients.

SEC Charges Philip A. Falcone and Harbinger Capital Partners in a Misappropriation Scheme

The SEC charged New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners, LLC, for conduct that included misappropriation of client assets, market manipulation, and betraying clients.  The SEC filed three separate civil actions and opened an administrative proceeding against Falcone and his firm, for a variety of fraud charges.  It is unclear at this time whether investors in Falcone managed hedge funds will be able to initiate FINRA arbitrations against broker-dealers who sold the hedge funds.

According to the SEC, Falcone and Harbinger engaged in a fraudulent scheme to misappropriate $113.2 million from a Harbinger fund in order to pay Falcone’s personal tax obligation.  In 2009 Falcone declined to pursue other financing options to pay his obligation, such as pledging his personal property as collateral for a bank loan, instead Falcone took out a loan from Harbinger Capital Partners Special Situations Fund, L.P.    The transfer of the fund’s assets to Falcone was structured as a loan and concealed from fund investors for approximately five months.  In 2011, after the SEC initiated its investigation, Falcone repaid the loan.

The SEC alleged that in another breach of Defendants’ fiduciary duties to their investors, Falcone and Harbinger implemented a ‘vote buying’ scheme.  In early 2009, following the credit crisis of the previous year, one of Harbinger’s funds experienced a sharp decline in assets under management.  As a result of the investment losses, many investors were seeking to redeem their interests.  Falcone and Harbinger, in an attempt to stabilize the situation, proposed an amendment to impose more stringent redemption restrictions on investors.  The proposed change required investor approval.  To secure consent, Falcone and Harbinger made side deals with certain strategically-important investors, providing those investors with favorable redemption and liquidity terms in return for their favorable vote for the amendment.  Falcone and Harbinger allegedly permitted the preferential investors to withdraw a total of approximately $169 million.  These quid pro quo agreements to buy votes were concealed form fund investors and the fund’s board of directors.

In a separate cease and desist administrative proceeding, the SEC found that between April and June 2009, Harbinger violated anti-manipulation securities laws while engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.  The SEC reached a settlement with Harbinger for unlawful trading.  Without admitting or denying any of the Commission’s findings, Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty of $428,975.

SEC Sues Fund Adviser for Charging Fees for Services not Provided

The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, for allegedly charging a U.S. registered fund for advisory services that it did not provide.  AMC served as a sub-adviser to the Malaysia Fund, Inc. (the Fund), a closed-end fund that invests in Malaysian companies.  The Fund’s principal investment adviser was Morgan Stanley Investment Management, Inc.  The Fund was AMC’s only client.

According to the complaint, between 1996 and 2007, AMC misrepresented to the Fund’s board of directors the services it provided.   AMC’s reports falsely claimed that AMC was providing specific advice, research, and assistance to Morgan Stanley for the benefit of the fund.  Based on this misrepresentation, the board renewed AMC’s contract and approved payment for their fees.  AMC charged the Fund more than $1.8 million in investment advisory fees for advisory services AMC did not provide.  In reality, AMC’s services were limited to providing two monthly reports based on publicly available information that Morgan Stanley did not request or use.

The SEC alleged that AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940.  Moreover, AMC failed to adopt and implement adequate policies, procedures, and controls over its advisory business, contrary to what AMC stated in certification provided to the fund’s board of directors.   In February 2008, AMC’s advisory agreement with the fund was terminated.  Without admitting or denying the allegations, AMC agreed to pay $1.6 million to settle the SEC’s charges.

SEC Halts Real-Estate Based Ponzi Scheme

The SEC obtained a temporary restraining order and asset freeze against Wayne L. Palmer (“Palmer”) and his company National Note of Utah, L.C. (“National Note”), to halt operations of its Ponzi scheme.  At the same time, the SEC filed a complaint against National Note and its managing member and sole owner Wayne L. Palmer, for operating a nationwide real estate-based Ponzi scheme that raised around $100 million.

According to the complaint, Palmer had been in the real-estate and real-estate financing business since 1976.  Since at least 2004, Palmer had raised more than $100 million from over 600 investors in National Note.   Palmer misrepresented that funds were used to buy and sell mortgage notes, underwrite and make loans, or buy and sell real estate.  Palmer promised returns of 12% annually with a minimum investment of $25,000.  Palmer recruited new investors primarily by word of mouth and referrals, as well as through his real-estate speaking engagements.

The SEC alleged that Respondents misrepresented and mislead investors into believing their principal was guaranteed and risk free.  Palmer told investors that National Note had a perfect record, having never missed  principal or interest payments.  Marketing materials provided to investors showed that National Note returns did not fluctuate and stated that investors were guaranteed payment even if property owners missed payment on mortgage loans that the company held.

The SEC stated, “Palmer promised double-digit returns at his real estate seminars, where investors learned the hard way about his lies and deceit.”  The SEC complaint charged National Note and Palmer with violating the anti-fraud and securities registration provisions of U.S. securities laws.  Palmer also faces charges that he operated as an unregistered broker-dealer.

OppenheimerFunds Fined $35 Million for Making Misleading Statements Regarding Two of Its Funds

The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects.  According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds.  The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds.  When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.

The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure.  As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing.  When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal.  These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses.  Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds.  The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice  of assuming substantial leverage through its use of derivatives.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190.  This money will be deposited into a fund for the benefit of investors.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors.  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.

SEC Approves Revised Definition of Sophisticated Municipal Market Professional

The SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) revised definition of a Sophisticated Municipal Market Professional, or SMMP, to include individuals and other investors with assets of at least $50 million.  Previously, SMMPs were limited to entities with at least $100 million invested in municipal securities.

The MSRB states that the new definition will maintain consistency with Financial Industry Regulatory Authority (“FINRA”) rules.  Pursuant to new Rule 2111, a FINRA member’s customer-specific suitability obligation to an institutional customer will be considered satisfied if the member has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies.  Members’ suitability obligations are not satisfied unless an investor “affirmatively indicates” independent judgment in evaluating recommendations.  The MSRB noted that investors have greater access to municipal market information, including disclosures, transaction data, market statistics, and educational material offered for free on its EMMA system, compared to 2002, when the initial definition was originated.  The Restated SMMP Notice and FINRA Rule 2111 will become effective on July 9, 2012.

According to the MSRB, SMMPs are experienced municipal bond investors who do not require the same protection as other investors.  The new definition exempts dealers from requirements to make certain disclosures to institutional customers that they must make to other investors.  The revised Notice states that a SMMP can be a customer with an “institutional account” which can include individuals, corporations, partnerships and trusts with total net assets of at least $50 million.  The assets do not need to be in municipal securities.  However, the dealer must have “a reasonable basis to believe [institutional investors are] capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities.”  The MSRB clarifies that when determining a “reasonable basis,” dealers should consider “the amount and type of municipal securities owned or under management by the institutional customer,” and that an SMMP must “affirmatively indicate,“ orally or in writing, to a dealer that they are exercising independent judgment in evaluating recommendations.

SEC Charges Investment Advisor with Running a Ponzi Scheme

The SEC charged John A. Geringer, a California investment advisor, who ran a private investment fund in a Ponzi-like manner.  According to the SEC, since 2005 Geringer raised over $60 million by misrepresenting the performance strategy of the GLR Growth Fund, L.P.  Geringer used false and misleading marketing materials to deceive investors into believing that his fund was successful when it was actually losing money.  To conceal his misrepresentations, Geringer used the money he raised from new investors to pay back earlier investors.

The SEC alleged that Geringer created and distributed marketing materials suggesting that the fund was able to achieve annual returns between 17 and 25 percent from 2001 to 2011, when in reality the fund was created in 2003 and experienced losses throughout.  Geringer claimed that in 2008, in the midst of the financial crisis that caused the S&P 500 to decrease almost 38.5%, the GLR fund had an annual return of nearly 24%.  Geringer deceived investors by falsifying documents such as brokerage account statements and year-end summaries, and misrepresenting the fund’s asset allocation.

The SEC stated, “Geringer painted the picture of a successful fund weathering America’s financial crisis through a diversified, conservative investment strategy… [t]he reality, however, was the complete opposite.  Geringer lost millions of dollars in the market, tied up remaining investor funds in a pair of illiquid private companies, and lied about it in phony account statements.”

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Geringer’s investors.  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.

SEC Charges Two South Florida Men Who Provided Investors to Scott Rothstein’s Ponzi Scheme

The SEC charged George G. Levin and Frank J. Preve with inducing investors to purchase fraudulent legal settlements from now-convicted Ponzi schemer, Scott Rothstein.   The SEC alleged that from July 2008 to October 2009, Levin and Preve raised more than $157 million from 173 investors to fund the Ponzi scheme, becoming Rothstein’s largest source of capital.   The Rothstein Ponzi Scheme, one of South-Florida’s largest ever, began in 2005 with Rothstein offering others the opportunity to purchase legal settlements at a discount.  Rothstein falsely claimed to represent plaintiffs who had reached confidential settlements in different actions and were willing to assign their structured-settlement payments from Rothstein, Rosenfeldt and Adler trust accounts in exchange for a discounted, immediate cash payment.  In reality, there were never any legal settlements and the plaintiffs and defendants did not exist.

According to the SEC, after personally investing more than $1.7 million in Rothstein’s settlements, Levin used one of his dormant legal entities, Banyon 1030-32 to offer investors promissory notes with the stated purpose of purchasing discounted legal settlements from Rothstein.  Preve handled the paperwork related to these purchases.  Levin and Preve marketed the notes to investors as a minimal risk investment promising large returns.  Levin and Preve distributed to investors offering materials which stated that Banyon 1030-32 had procedural safeguards to ensure the safety of the investments.  Despite their representations, Preve often purchased settlements from Rothstein prior to receiving confirmation that the settlement funds had been wired into an RRA trust account.

The SEC stated, “Levin and Preve fueled Rothstein’s Ponzi Scheme with the false sense of security they gave investors.”  Scott Rothstein is currently serving a 50-year prison sentence.  In a joint statement, attorneys for Levin and Preve said that their clients were “two of the biggest victims of the Rothstein Ponzi scheme.”  They noted that Levin was “the person who first” reported Rothstein’s suspected crime to authorities in October 2009.  The defense attorneys added that Levin and Preve have been “cooperating with the SEC” since December 2009, including testifying and providing documents