Category Archives: SEC News

On July 12, 2013, the SEC announced an emergency asset freeze against an unregistered money manager and his companies in Plano, Texas, who are charged with defrauding investors in a foreign currency exchange trading scheme.

The forex market is a large and generally liquid financial market in which the risk of loss for individual investors can be substantial. The SEC has previously warned individual investors about the risks involved with forex trading.

The SEC alleged that Kevin G. White raised more than $7.1 million from investors by touting a sophisticated low-risk forex trading strategy yielding astronomical returns. He advertised his purported “25-year Wall Street career.” In reality, the forex trading has incurred losses of investor funds, and White actually spent only six years as a licensed securities professional in Houston before being barred by the New York Stock Exchange two decades ago. White also lied about his education. Meanwhile, White has siphoned away more than $1.7 million of investor money to pay personal expenses, finance expensive trips, and fund other unrelated and undisclosed businesses and investments.

The Commodity Futures Trading Commission (CFTC) also announced on July 12^th parallel charges against White and his companies.

According to the SEC’s complaint that was unsealed in the U.S. District Court of the Eastern District of Texas, White raised investor money through two entities that he owns and controls: KGW Capital Management and Revelation Forex Fund. KGW Capital purports to be “one of the world’s leading private investment firms.”

The SEC alleged that White and his companies used websites, press releases, and presentations to prospective investors to solicit funds. White and his companies told investors that Revelation Forex was a $1 billion hedge fund that had achieved total returns of more than 393 percent since its January 2009 inception, and earned a compound annual rate of return of more than 36 percent. Marketing materials provided to prospective investors boasted that an initial investment of $250,000 in Revelation Forex in January 2009 would have grown to $983,111 by May 2013.

According to the SEC’s complaint, all of the claims were false. While White and KGW Capital tout a track record for the fund that began in January 2009, Revelation Forex did not actually receive investor funds or begin forex trading until September 2011. The fund has since incurred realized trading losses of more than $550,000 plus approximately $1,419,600 in unrealized losses through May 31, 2013. Meanwhile, bank records reveal that White has taken more than $1.7 million for himself, KGW Capital, and two of his other businesses, including approximately $248,600 in investor funds from Revelation Forex to fund an unrelated and undisclosed propane business and $97,000 on another business entitled KGW Real Estate. The SEC’s complaint named both of these companies as relief defendants for the purpose of seeking disgorgement of investor funds in their possession.

The court has granted the SEC’s request for an asset freeze and temporary restraining order against White, KGW Capital, Revelation Forex, and RFF GP LLC, which is the general partner of Revelation Forex. A hearing has been scheduled for July 18, 2013, on the SEC’s motion for a preliminary injunction.

The SEC’s complaint alleged that White, KGW Capital, Revelation Forex, and RFF 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. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties as well as preliminary and permanent injunctions.

On July 3, 2013, the SEC announced charges against eight Argentine citizens who unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also obtained an emergency order to freeze assets in the U.S. brokerage accounts of the eight defendants and two other Argentine citizens who had Biozoom shares but had not yet sold them. The action follows last week’s suspension of trading in Biozoom due to concerns that some shareholders may be unlawfully distributing its securities.

Biozoom, formerly Entertainment Art, Inc., announced in April that it was changing its name and moving from producing leather bags to developing biomedical technology. The SEC’s complaint alleged that from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company’s total outstanding shares. In a one-month period beginning in mid-May, eight of them sold more than 14 million shares. The sales yielded almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze.

The SEC’s complaint, filed in U.S. District Court in Manhattan, charged the eight defendants — Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari — along with two others, Mariano Graciarena and Fernando Loureyro, who received shares but have yet to sell them.

According to the SEC’s complaint, when the defendants deposited the Biozoom stock into their U.S. brokerage accounts, they claimed to have acquired the bulk of the shares in March 2013 from Entertainment Art shareholders who purchased them in private placements that began in 2007. Each of the defendants provided stock purchase agreements between them and the former shareholders purportedly signed by the defendants and those shareholders. The SEC alleged that the documents were false because the Entertainment Art investors had sold all of their stock in the company in 2009, almost four years earlier. The defendants’ shares of Biozoom were deposited into their accounts as shares that purportedly could be freely traded and the defendants sold them even though no registration statement was filed with the SEC for any of the sales transactions, in violation of U.S. law.

In addition to the temporary restraining order and asset freeze granted by the court, the SEC is seeking preliminary and permanent injunctions, return of the selling defendants’ allegedly ill-gotten sale proceeds, and civil penalties. The SEC is also seeking preliminary and permanent injunctions against the non-selling defendants, Graciarena and Loureyro, because of the likelihood that both defendants will offer or sell their Biozoom shares to the public in violation of the registration requirements of U.S. securities law.

On July 2, 2013, the SEC announced three  initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations. The initiatives are:

Financial Reporting and Audit Task

The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. The principal goal of the Task Force will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. The Task Force will focus on identifying and exploring areas susceptible to fraudulent financial reporting, including on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model. It will include Enforcement attorneys and accountants from across the country, working in close consultation with the Division’s Office of the Chief Accountant, the SEC’s Office of the Chief Accountant, the Division of Corporation Finance, and the Division of Economic and Risk Analysis.

Microcap Fraud Task Force

The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The principal goal of the Task Force will be to develop and implement long-term strategies for detecting and combating fraud in the microcap market, especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.

The Microcap Fraud Task Force will build on the extensive and successful work of the Microcap Fraud Working Group – created in 2010 to bring together enforcement and examination staff with common interests in detecting and preventing microcap fraud – in amassing data, developing new approaches to investigations in this sector of the market, and forging relationships with criminal law enforcement authorities. The Task Force will not replace the Working Group but will differ from it in that it will consist of staff dedicated exclusively to investigation of participants in the microcap securities market.

Center for Risk and Quantitative Analytics

The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. It will work in close association with other Commission offices and divisions, especially the Division of Economic and Risk Analysis, and provide guidance to the Enforcement Division’s leadership on how to allocate resources strategically in light of identified risks. As a central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.

On June 20, 2013, the SEC charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.

The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S. The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleged that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000. Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year. The actual cash balance was just $10 million.

The SEC’s complaint stated that after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share. At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund. Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets. For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

The SEC’s complaint charged Zheng and China MediaExpress with violations of the antifraud provisions of the federal securities laws. The complaint charged China MediaExpress with violations of the reporting, books and records, and internal control provisions, and charged Zheng with violating the SEC’s rules prohibiting lying to auditors and making false certifications required under the Sarbanes-Oxley Act. The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

On June 18, 2013, the SEC charged a penny stock promoter for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleged that David F. Bahr of Rancho Santa Fe, California, artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California filed criminal charges against Bahr.

According to the SEC’s complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr’s success and future profits.

The SEC’s complaint alleged that Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers’ accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr’s stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr’s trading volume during that time.  Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.

The SEC’s complaint alleged that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint is seeking financial penalties, a penny stock bar, and a permanent injunction against Bahr.

On June 17, 2013, the SEC charged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleged that Duncan MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. In reality, GCA was merely a start-up company with no operating history and virtually no revenue. As they raised investor funds, MacDonald and Solomon used proceeds from new investors to pay returns to existing investors. Once they couldn’t find any new investors, MacDonald and Solomon used a stall campaign of purported excuses to delay making any further payments to investors.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Texas filed criminal charges against MacDonald and Solomon.

According to the SEC’s complaint filed in federal court in Dallas, MacDonald set out in 2008 to start an insurance company that would market medical insurance to large groups. He tried for months to find a single investor to fund the company’s initial capital needs, but was unsuccessful. Meanwhile, MacDonald and Solomon began spending money on the business before raising any capital. They hired employees, heavily marketed the program, and secured a sponsorship agreement with a large national membership group. MacDonald was GCA’s president and chairman, and Solomon was chief administrative officer.

The SEC alleged that when unable to land a major investor, MacDonald fractionalized his efforts and sought individual investors who could contribute smaller amounts. When pitching GCA to investors as well as brokers assisting him in identifying investors, MacDonald significantly misrepresented the history and state of his business. Besides misleading investors to believe there were more than 100,000 premium-paying members, MacDonald misrepresented that GCA had previously sold a portion of its revenue stream from paying members to a Chinese hedge fund. GCA had no relationships with a Chinese hedge fund or any other institutional investors.

According to the SEC’s complaint, MacDonald and Solomon began fabricating enrollment numbers to make it appear that GCA was enrolling new members each month. They created a so-called “Monthly Overage Disbursement Statement” that purported to show the monthly member enrollments and cancellations. The statements were meant to look as if they were generated from a database, but they were actually made in Excel and populated by Solomon. These monthly statements were provided to the brokers by MacDonald and Solomon so they could be used to induce investments from potential investors and serve as the basis for payments to existing investors. At MacDonald’s direction, Solomon was primarily responsible for making the monthly payments to investors based on the false enrollment numbers. In reality, these were Ponzi payments rather than revenues from policyholders.

The SEC alleged that by the time the scheme collapsed, GCA had raised nearly $10 million from investors and returned about $2 million to investors in the form of Ponzi payments. MacDonald and Solomon each took around $1 million of investor funds, and spent the remaining investor funds on various business-related expenses until GCA’s accounts were left with a negative balance. After investor money was gone and GCA could no longer make monthly payments to investors, MacDonald and Solomon spent the next year concocting various reasons to investors about why they could not make payments. Meanwhile, MacDonald was pursuing alternative means of financing the company and redeeming the investors, but no more money ever came.

The SEC’s complaint charged MacDonald and Solomon with securities fraud and conducting an unregistered securities offering while acting as unregistered broker-dealers. The SEC seeks various relief for investors including disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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