Category Archives: SEC News

On December 12, 2013, the SEC announced that it had charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.

Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.

The SEC’s order instituting settled administrative proceedings found that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans  CDO Ltd. and Norma CDO Ltd.  Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.

According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio … and in return [Magnetar] retain[s] the equity class and we distribute the debt.”  The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

The SEC’s order reflects that Magnetar had a contractual right to object to the inclusion of collateral in the Octans CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that preceded the closing of a CDO.  Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding.  The SEC has also charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.  

The SEC’s order found that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC.  NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO.  The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR.  Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.”  On December 12, 2013, the SEC also announced charges against two managing partners of NIR.

According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates.  As it did in the Octans and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.”  To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades.  Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.

Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2).  The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.  Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.

On December 3, 2013, the SEC announced that it had charged a Miami-based trader with insider trading in the stock of a Chinese company and conducting illegal short sales in the securities of three other companies.

The SEC alleged that Charles Raymond Langston III learned confidential information in advance of a public announcement that significantly decreased the value of AutoChina International’s stock.  Langston was solicited by placement agents to invest in a secondary offering of AutoChina stock.  Despite agreeing to keep information confidential and not trade on it, he promptly sold short 29,000 shares of AutoChina stock in advance of the company’s public announcement that it had completed the secondary offering.  To avoid detection, Langston made the trades through an entity he owned using a different broker and different account than he used to purchase shares in AutoChina’s initial offering.  Langston made $193,108 in illegal profits by trading on the inside information.

The SEC’s complaint filed in federal court in Miami further alleged that Langston and two of his companies, Guarantee Reinsurance and CRL Management, violated Rule 105 of Regulation M, which prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering.  The rule addresses illegal short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.  The SEC alleges that Langston through Guarantee Reinsurance and CRL Management made short sales in advance of separate secondary offerings by Wells Fargo, Mitsubishi UFJ Financial Group, and Alcoa.  He purchased shares in the same offerings.  Langston and his companies’ violations of Rule 105 resulted in unlawful gains of more than $1.3 million. 

According to the SEC’s announcement, Langston has agreed to settle the insider trading charges by paying disgorgement of $193,108, prejudgment interest of $22,204, and a penalty of $193,108.  Langston and the two companies also agreed to be enjoined for the short selling violations with monetary sanctions to be determined by the court at a later date.  Langston neither admits nor denies the allegations that he 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 as well as Rule 105 of Regulation M of the Exchange Act.

On November 20, 2013, the SEC announced charges against two Tampa-area investment advisers accused of committing fraud by failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments despite substantial risks and red flags.  The advisers are also charged with contributing to violations of the “custody rule,” which requires investment advisory firms to establish specific procedures to safeguard and account for client assets. 

The SEC’s Enforcement Division alleged that Gregory J. Adams and Larry C. Grossman solicited and directed clients of their investment firm Sovereign International Asset Management to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo, who the SEC charged in a separate enforcement action last year.  Grossman and Adams failed to inform clients about the conflict of interest in recommending these investments as Battoo was paying them millions of dollars in compensation for steering investors to his funds. 

According to the SEC’s order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams received $1 million in the undisclosed compensation arrangements.  Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients who were often retirees.  However, Battoo’s funds were in fact risky, lacked diversification, and lacked independent administrators and auditors.  Grossman and Adams also failed to investigate – and in some cases wholly disregarded – numerous red flags surrounding Battoo and his funds. 

The SEC’s Enforcement Division alleged that Grossman and Adams aided and abetted Sovereign’s violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity.  Grossman and Adams pooled clients’ money in this bank account before investing it in Battoo’s offshore funds.  Sovereign failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets.

According to the SEC’s order, Grossman and Adams willfully violated Section 17(a)(2) of the Securities Act of 1933, Section 15(a) of the Securities Exchange Act of 1934, and Sections 206(1), 206(2), 206(3) and 207 of the Investment Advisers Act of 1940.  They willfully aided and abetted violations of Section 15(a) of the Exchange Act and Section 206(4) of the Advisers Act and Rules 204-3 and 206(4)-2. 

On October 29, 2013, an Administrative Law Judge dismissed proceedings against two UBS employees against whom the SEC brought Cease-and-Desist Proceedings.  The SEC’s claims were based upon alleged federal securities law violations in connection with closed-end funds created and marketed by UBS.  All of the closed-end funds invested in Puerto Rico municipal debt.  Ironically, the 13 day hearing and post-hearing briefing ended March 15, 2013, five months before the collapse of the closed-end funds that were at issue in the case.  Between August and September 2013, these closed-end funds collapsed, realizing the fears that formed the basis of the SEC’s contentions.  Fortunately for UBS’s clients, the Administrative Law Judge’s opinion left a valuable breadcrumb trail detailing the material information that UBS failed to disclose to its clients, and at times, its own employees.  Equally important is that the breadcrumb trail reveals some information that was available to UBS employees, which information should have been passed on to firm clients. 

The UBS Puerto Rico Closed End Funds were, effectively, hot potatoes.  For those unlucky enough to still be holding the hot potatoes in August and September 2013, they at least have FINRA arbitration as an available tool to help them recover their losses. 

On October 2, 2013, the SEC announced that it had sanctioned an Omaha, Nebraska based investment advisory firm and its owner for failing to seek the most beneficial terms reasonably available when investing in mutual fund shares for three funds that they managed. 

An SEC investigation found that Manarin Investment Counsel Ltd. and Roland R. Manarin violated their obligation to seek what is known as “best execution” by consistently selecting higher cost mutual fund shares for the three fund clients even though cheaper shares in the same mutual funds were available.  As a result, the clients paid avoidable fees on their mutual fund holdings, which were passed through to a brokerage firm owned by Manarin in a practice inconsistent with the disclosures they made to investors.  The brokerage firm is also charged with violations.

Manarin and his firms agreed to pay more than $1 million to settle the charges.

According to the SEC’s order instituting settled administrative proceedings, Manarin Investment Counsel provided investment advice to a mutual fund called Lifetime Achievement Fund (LAF) as well as two private funds known as Pyramid I Limited Partnership and Pyramid II Limited Partnership.  As “funds-of-funds” they invested their assets principally in the shares of various mutual funds. 

The SEC’s order found that from 2000 to 2010, Manarin and his investment advisory firm caused these fund clients to invest in “Class A” mutual fund shares when they were eligible to own lower-cost “institutional” shares in the same mutual funds.  Because they owned “Class A” shares, the clients paid ongoing 12b-1 fees on their mutual fund holdings for distribution and shareholder services.  Such fees often could have been avoided had Manarin and his firm purchased institutional shares on the clients’ behalf.  Instead, the unnecessary fees were passed through to Manarin’s broker-dealer Manarin Securities Corp.  Although Manarin’s brokerage firm eventually refunded 12b-1 fees paid by LAF, it did not refund fees to the Pyramid funds.  From June 2000 to October 2010, Manarin Securities Corp. received approximately $685,000 in 12b-1 fees from mutual funds in which the Pyramid funds could have purchased institutional shares.

According to the SEC, by failing to seek best execution when selecting among available mutual fund share classes, Manarin and his investment advisory firm violated their fiduciary duty as investment advisers under Section 206(2) of the Investment Advisers Act of 1940.  Because their ongoing practice was inconsistent with disclosures in LAF’s registration statement and the offering memoranda for the two Pyramid funds, the order finds that Manarin and his investment advisory firm violated Section 206(4) of the Advisers Act and Rule 206(4)-8.  The SEC’s order also finds that Manarin violated Section 34(b) of the Investment Company Act of 1940, and that he and both firms violated Section 17(a)(2) of the Securities Act of 1933.  The SEC’s order further finds that Manarin’s brokerage firm charged commissions to LAF that exceeded the usual and customary amounts charged by broker-dealers for transactions in shares of exchange-traded funds – in violation of Section 17(e)(2)(A) of the Investment Company Act. 

Manarin and his brokerage firm agreed to pay disgorgement of $685,006.90 and prejudgment interest of $267,741.72.  Manarin agreed to pay a $100,000 penalty.  Without admitting or denying the SEC’s findings, Manarin and his firms also consented to censures and cease-and-desist orders. 

On September 30, 2013, the SEC announced that it had charged a woman living in South Florida with defrauding investors in a Ponzi scheme and affinity fraud that targeted the local Colombian-American community and involved purported investments in immigration bail bonds.

The SEC alleged that Jenny E. Coplan told investors that her company, Immigration General Services operated through an investment broker that would invest the funds she raised in immigration bail bonds and turn a profit.  Coplan promised interest payments ranging from 60 to 108 percent annually.  She also assured investors that their money was safe because it was insured by the Federal Deposit Insurance Corporation (FDIC).  However, Coplan never placed investor funds with any investment broker, and their money was never FDIC insured.  Instead, she paid supposed profits to earlier investors using funds from newer investors in classic Ponzi fashion, and she stole approximately $878,000 of investor money for her own personal use.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Florida also announced on September 30, 2013 criminal charges against Coplan.

According to the SEC’s complaint, Coplan solicited investors through personal conversations over the phone and in person, and many of her targets were Colombian-Americans and Colombians living in Florida.  She raised approximately $4 million from more than 90 investors in Florida, California, Georgia, Texas, Canada, and Colombia.

The SEC alleged that Coplan created fictitious investor statements that she disseminated to hide her misuse of the money and lead investors to believe their investments were growing.  Furthermore, Coplan e-mailed one investor two purported FDIC statements reflecting insured balances of $107,000 and $250,000, lulling the investor to think the investment was safe.  When her scheme began to unravel in 2011, Coplan blamed the purported investment broker for the delay in interest payments to investors, telling them the broker held the investors’ funds to cover deficiencies because Coplan had failed to meet certain monthly investment quotas.  Even though Immigration General Services had virtually no funds in its bank accounts and was unable to honor investors’ increasing redemption requests, Coplan tried in late 2011 to create a false appearance that the company was back to business as usual.  She issued non-sufficient fund checks to investors purporting to be their monthly profits.  Through her continued misstatements, Coplan was able to raise another $578,000 from new investors before the scheme collapsed entirely.

The SEC’s complaint against Coplan, who lives in Tamarac, Florida, seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctions.

On September 23, 2013, the SEC announced that it had filed charges against 10 former brokers at an Albany, N.Y.-based firm at the center of a $125 million investment scheme for which the co-owners have received jail sentences.

The SEC filed an emergency action in 2010 to halt the scheme at McGinn Smith & Co. and freeze the assets of the firm and its owners Timothy M. McGinn and David L. Smith, who were later charged criminally by the U.S. Attorney’s Office for the Northern District of New York and found guilty.

The SEC’s Enforcement Division alleged that 10 brokers who recommended the unregistered investment products involved in the scheme made material misrepresentations and omissions to their customers.  The registered representatives ignored red flags that should have led them to conduct more due diligence into the securities they were recommending to their customers.

The SEC’s order named 10 former McGinn Smith brokers in the administrative proceeding:

• Donald J. Anthony, Jr. of Loudonville, N.Y. 
• Frank H. Chiappone of Clifton Park, NY. 
• Richard D. Feldmann of Delmar, N.Y.
• William P. Gamello of Rexford, N.Y. 
• Andrew G. Guzzetti of Saratoga Springs, N.Y.
• William F. Lex of Phoenixville, Pa.
• Thomas E. Livingston of Slingerlands, N.Y. 
• Brian T. Mayer of Princeton, N.J. 
• Philip S. Rabinovich of Roslyn, N.Y. 
• Ryan C. Rogers of East Northport, N.Y. 

According to the SEC’s order, the scheme victimized approximately 750 investors and led to $80 million in investor losses.  Guzzetti was the managing director of McGinn Smith’s private client group from 2004 to 2009, and he supervised brokers who recommended the firm’s offerings.  The SEC’s Enforcement Division alleged that despite his knowledge of serious red flags, Guzzetti failed to take any action to investigate the offerings and instead encouraged the brokers to sell the notes to McGinn Smith customers.

The SEC’s Enforcement Division alleged that the other nine brokers charged in the administrative proceeding should have conducted a searching inquiry prior to recommending the products to their customers.  The brokers continued to sell McGinn Smith notes even after being told that customers placed in some of the firm’s offerings could only be redeemed if a replacement customer was found.  That was contrary to the offering documents.  In January 2008, the brokers learned that four earlier offerings that raised almost $90 million had defaulted, yet they failed to conduct any inquiry into subsequent offerings and continued to recommend McGinn Smith notes.

The SEC’s order alleged that the misconduct of Anthony, Chiappone, Feldmann, Gamello, Lex, Livingston, Mayer, Rabinovich, and Rogers resulted in violations of 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 Rule 10b-5.  The order alleged that Guzzetti failed to reasonably supervise the nine brokers, giving rise to liability under Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4).

The SEC’s civil case continues against the firm as well as McGinn and Smith, who were sentenced to 15 and 10 years imprisonment respectively in the criminal case. 

On September 23, 2013, the SEC charged TD Bank and a former executive with violating securities laws in connection with a massive South Florida-based Ponzi scheme conducted by Scott Rothstein, who is now serving a 50-year prison sentence.

The SEC alleged that TD Bank and its then-regional vice president Frank A. Spinosa defrauded investors by producing a series of misleading documents and making false statements about accounts that Rothstein held at the bank and used to perpetuate his scheme.  Spinosa falsely represented to several investors that TD Bank had restricted the movement of the funds in these accounts when, in fact, Rothstein could transfer investor money however he desired.  Spinosa also orally assured investors that certain accounts held balances totaling millions of dollars, but each account actually held zero to $100.

TD Bank agreed to settle the SEC’s charges in an administrative proceeding and pay $15 million.  The SEC filed a complaint against Spinosa in U.S. District Court for the Southern District of Florida.

According to the SEC’s order and complaint, Rothstein claimed to represent plaintiffs who had reached purported legal settlements that were confidential and payable over time by large corporate defendants.  He claimed that the purported plaintiffs were willing to sell their periodic payments to investors at a discount in exchange for one lump-sum payment.  The legal settlements were fake and the plaintiffs and defendants were not real.  Rothstein told investors that the purported defendants had deposited the entire settlement amounts into attorney trust accounts.  Rothstein opened 22 such accounts at Commerce Bank and TD Bank (the two merged in 2008) from November 2007 to October 2009. 

The SEC alleged that as Rothstein’s scheme began to unravel in the fall of 2009, Spinosa made false statements to investors about the safety of their investments that enabled Rothstein to continue raising funds for the scheme.  Spinosa executed so-called “lock letters” from TD Bank purporting to irrevocably restrict Rothstein’s trust accounts.  Under these conditions, TD Bank could only distribute funds in the accounts to the investor’s bank account designated in the lock letter.  However, the representations were purely false as Spinosa did not apply any procedures to block the accounts or implement any system to restrict Rothstein from moving money out of the trust accounts.  Spinosa also misrepresented to Rothstein’s investors that the lock letters were commonplace at TD Bank when, in fact, they were never previously used by the bank.  In fact, when Spinosa instructed his assistant to prepare the letters on TD Bank letterhead, she questioned whether it was even permissible because she had never seen such a letter before.  Spinosa confirmed that she should prepare the letter for his signature anyway.  Later, a vice president and branch manager who reported to Spinosa noted to him shortly after the first lock letter went out in August 2009 that the “lock” instructions put onto an account would have no practical effect because Rothstein could still transfer the money without bank officials being alerted.  Spinosa dismissed those concerns.

The SEC further alleged that Spinosa provided false assurances to two different groups of investors that certain trust accounts held the multi-million dollar balances claimed by Rothstein.  On Aug. 17, 2009, Spinosa participated in a conference call with Rothstein and representatives of an investor group who asked how much money was in a particular account.  Spinosa responded that it held $22 million – the amount the investor was expecting to hear.  Spinosa had full access to the account information to know the actual account balance was no more than $100.  The following month, Spinosa met with the same group after it made additional investments with Rothstein, and falsely assured the investors that their money was safe because the provisions of the lock letter restricted the movement of their money.  Also in September 2009, a different investor group bought a purported $20 million settlement from Rothstein, and one of the investor group’s representatives obtained a TD Bank deposit slip that indicated a $0 balance as of that morning for the account that purportedly held the investor’s $20 million.  Rothstein falsely stated that the funds were indeed in the account, but the funds would not appear “available” on the deposit slip because they were in TD Bank’s “federal wire queue.”  Rothstein and representatives from the investor group met with Spinosa on Sept. 14, 2009, and Spinosa falsely represented that the $20 million did not appear as available funds for the same reason provided by Rothstein.  Spinosa falsely represented that the lock letter restricted the movement of their money.  In reality, TD Bank was not holding the money in such a queue, and the account didn’t contain the $20 million.

TD Bank consented to the entry of an administrative order finding that it violated Sections 17(a)(2) and (3) of the Securities Act of 1933.  Without admitting or denying the SEC’s findings, TD Bank agreed to pay $15 million and cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.

The SEC’s complaint against Spinosa charged him with violating Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.  Spinosa also is charged with aiding and abetting Scott Rothstein’s violations of Section 10(b) of the Exchange Act and Rule 10b-5.  The complaint is seeking disgorgement plus prejudgment interest, financial penalties, and a permanent injunction.

On September 9, 2013, the SEC announced that they had charged a Miami-based attorney and other perpetrators of a prime bank investment scheme that promised exorbitant returns from a purported international trading program.

Prime bank schemes lured investors to participate in a sham international investing opportunity with phony promises of exclusivity and enormous profits.  The SEC alleged that attorney Bernard H. Butts, Jr. acted as an escrow agent to enable Fotios Geivelis, Jr. and his purported financial services firm Worldwide Funding III Limited, to defraud approximately 45 investors out of more than $3.5 million they invested in a trading program that did not actually exist.  Geivelis, who lives in Tampa and used the alias “Frank Anastasio” with investors, touted returns of 6.6 million Euros (approximately $8.7 million converted to U.S. dollars)  within 15 to 45 business days on an initial investment of $60,000 to $90,000 in U.S. dollars.  Geivelis and Butts allegedly assured investors that their funds would remain with Butts in an escrow account until Worldwide Funding acquired the bank instruments necessary to generate the promised returns.  Butts instead had been doling out investor funds almost as soon as they were received to enrich himself, sales agents, and Geivelis, who had been spending the money on such personal expenses as travel and gambling.

The SEC’s complaint, filed under seal on August 29 in federal court in Miami, also charged three sales agents who Geivelis and Butts paid to sell interests in the scheme: Douglas J. Anisky of Delray Beach, Florida, James Baggs of Lake Forest, California, and Sidney Banner of Delray Beach, Florida.  The court granted the SEC’s request for an asset freeze on August 30, and the case was unsealed late Friday, September 6th.

According to the SEC’s complaint, investors were lured through the Internet, telephone, and personal contact with promises of extraordinary profits.  Investors were told their $60,000 to $90,000 investment would pay for bank charges to lease a standby letter of credit (SBLC) in the amount of 10 million Euros from a banking group in Europe.  The SBLCs were to be used to acquire loans, and the funds from the loans were to be placed in a securities trading program.  Investors were promised that after their initial profit of at least 6.6 million Euro within 15 to 45 business days, the securities trading program would generate a weekly return of approximately 14 percent for 40 to 42 weeks.

The SEC alleged that investors were falsely promised that their money was being deposited into Butts’ attorney trust account, and Butts would not release the funds until he received proof from the receiving bank that a $10 million Euro SBLC had been deposited into the securities trading program to generate profits for investors.  Contrary to these representations by Butts, Geivelis, and the sales agents, no SBLC acquisitions ever occurred, no loans were obtained, and no promised returns were earned in a trading program or paid to investors. Investors were not told that instead of using the funds to obtain SBLCs, Butts and Geivelis each took approximately 45 percent and paid approximately 10 percent to the sales agents.

The SEC’s complaint charged all defendants with violations of the antifraud and securities registration provisions of the federal securities laws.  The complaint also charged Butts, Geivelis, Anisky, Banner, Express Commercial Capital, and Baggs with violations of the broker-dealer registration provisions of the federal securities laws.  The SEC is seeking disgorgement of ill-gotten gains, financial penalties, and permanent injunctions.  The SEC’s complaint named several relief defendants: Butts’ law firm, his wife Margaret A. Hering, and Butts Holding Corporation as well as two other companies with ties to Geivelis (Global Worldwide Funding Ventures) and Anisky (PW Consulting Group).  The complaint named relief defendants for the purposes of recovering any ill-gotten assets from the fraud that may be in their possession.

On September 3, 2013, the SEC announced that it had charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.

The SEC alleged that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme.  Free-riding occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two investment funds that he created.  He allegedly had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.

The SEC further alleged that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein allegedly never invested this money, instead converting it for his personal use without their knowledge.

According to the SEC’s complaint, Feldstein and the two purported investment funds – Mara Capital Management LLC and Vita Health of America LLC – traded through a type of account that brokerage firms offer to customers with the understanding that the customer has sufficient assets held with a third-party custodial bank to cover the cost of the trades.  Feldstein and the funds never disclosed to three broker-dealers that they were simply gambling with the brokerage firms’ money.  Their plan was to refuse to issue instructions to settle the trades, and stick the broker-dealers with the unprofitable positions.  The free-riding scheme allegedly began in September 2008 and continued until February 2009.

The SEC alleged that Feldstein shifted his fraudulent conduct to individual investors later in 2009.  He induced investors to give him money they typically had saved for their retirement or their children’s education.  Feldstein raised approximately $450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company.  The investor funds were typically deposited into Feldstein’s personal bank account or the bank account of an entity that he owned so he could spend their money on his personal expenses.

The SEC’s complaint charged Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management LLC is charged as a relief defendant.  It was unclear from the SEC announcement whether customers have initiated FINRA arbitrations, or any other type of securities arbitration.