The U.S. Securities and Exchange Commission said it halted a $50 million Ponzi scheme near Detroit that raised money for a real-estate investment fund and targeted the elderly.
A federal judge in Michigan agreed to freeze assets after the SEC sued John Bravata, 41, and Richard Trabulsy, 26, claiming they lured more than 400 investors by promising 8 percent to 12 percent annual returns, the agency said today in a statement. Of $50 million raised since May 2006, less than $20.7 million was spent on real estate, the SEC said.
“Investors thought they were investing in a safe and profitable real-estate investment fund, but instead their money was being used to pay for luxury homes, exotic vacations and gambling debts,” said Merri Jo Gillette, director of the SEC’s regional office in Chicago.
The men “lied” to prospective investors about the use of funds and spent $7.2 million buying a $85,000 Maserati, a $90,000 Ferrari, and paying about $80,000 on jewelry and almost $1 million on the mortgage for a vacation house, the SEC said. Trabulsy and Bravata made $11.3 million in Ponzi payments to earlier investors, the SEC said.
Wednesday, July 29, 2009
Tuesday, July 28, 2009
After FINRA's Warning Three Broker Dealers Ban the Sale of Leveraged Exchange Traded Funds
At least three brokerage firms have decided not to sell leveraged exchange traded funds a month after the Financial Industry Regulatory Authority Inc. warned brokers that they “typically are unsuitable for retail investors” who hold them longer than a day.
But that didn't stop Edward D. Jones & Co. LP of St. Louis, Ameriprise Financial Inc. of Minneapolis, and LPL Investment Holdings Inc. of Boston, from banning the sale of such ETFs within the last few weeks.
In LPL's case, the company decided to prohibit the sale of leveraged ETFs that seek more than two times the long or short performance of the target index, said spokesman Joseph Kuo.
But that didn't stop Edward D. Jones & Co. LP of St. Louis, Ameriprise Financial Inc. of Minneapolis, and LPL Investment Holdings Inc. of Boston, from banning the sale of such ETFs within the last few weeks.
In LPL's case, the company decided to prohibit the sale of leveraged ETFs that seek more than two times the long or short performance of the target index, said spokesman Joseph Kuo.
Monday, July 27, 2009
TD Ameritrade Agrees To Repurchase ARS From Customers
TD Ameritrade Inc. agreed to buy back $456 million of auction-rate securities from about 4,000 clients as part of a settlement with New York Attorney General Andrew Cuomo, the Securities and Exchange Commission and Pennsylvania securities regulators.
The online brokerage firm intends to return the money to customers, including individuals, charities, nonprofit entities and businesses, by March 2010 but could need until June 30 to complete the buybacks. TD Ameritrade said it will buy back the debt from clients with accounts of under $250,000 within 75 days.
Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008.
The online brokerage firm intends to return the money to customers, including individuals, charities, nonprofit entities and businesses, by March 2010 but could need until June 30 to complete the buybacks. TD Ameritrade said it will buy back the debt from clients with accounts of under $250,000 within 75 days.
Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008.
Sunday, July 26, 2009
FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds
Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track—or both—are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.
This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met.
For more information, click.
This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met.
For more information, click.
Saturday, July 25, 2009
SEC Charges Two Firms For Private Deals
On July 16, the Securities and Exchange Commission charged Medical Capital Holdings Inc. of Tustin, Calif., with fraud in the sale of $77 million of private securities in the form of notes. The same day, the Financial Industry Regulatory Author-ity Inc. of New York and Washington sent a sweep letter to broker-dealers looking for details into the sale of the product.
On July 7, the SEC charged Provident Asset Management LLC of Dallas with operating a fraud and a Ponzi scheme in the sale of $485 million of preferred stock and limited partnership offerings in oil and gas deals.
According to brokerage executives with the firms, industry sources and documentation, the firms that sold either one or both of the investments include American Portfolios Financial Services Inc., Capwest Securities Inc., GunnAllen Financial Inc., J.P. Turner & Co. LLC, National Securities Corp., Next Financial Group Inc. and Securities America Inc.
The outcome for broker-dealers whose advisers sold private securities and face fraud charges is unknown. They could face investor lawsuits or arbitration claims, and securities regulators may increase scrutiny of the firms.
In addition, executives and in-dustry observers said that they wonder whether errors and omission insurance will cover any of the potentially millions of dollars in losses from the soured investments.
On July 7, the SEC charged Provident Asset Management LLC of Dallas with operating a fraud and a Ponzi scheme in the sale of $485 million of preferred stock and limited partnership offerings in oil and gas deals.
According to brokerage executives with the firms, industry sources and documentation, the firms that sold either one or both of the investments include American Portfolios Financial Services Inc., Capwest Securities Inc., GunnAllen Financial Inc., J.P. Turner & Co. LLC, National Securities Corp., Next Financial Group Inc. and Securities America Inc.
The outcome for broker-dealers whose advisers sold private securities and face fraud charges is unknown. They could face investor lawsuits or arbitration claims, and securities regulators may increase scrutiny of the firms.
In addition, executives and in-dustry observers said that they wonder whether errors and omission insurance will cover any of the potentially millions of dollars in losses from the soured investments.
Wednesday, July 22, 2009
Captured Broker Pleads Guildy
A former Wall Street broker who was captured in Spain pleaded guilty Wednesday to federal securities fraud and bail jumping charges, admitting that he fled the country because he was frightened.
Julian Tzolov, 36, entered his plea just minutes before his trial was to begin in federal court in Brooklyn.
U.S. District Judge Jack Weinstein asked Tzolov why he fled, touching off an international manhunt in May that ended when Spanish police caught the former broker for Credit Suisse's private banking division last week.
"I panicked, your honor. I got scared," Tzolov said.
The crimes to which Tzolov confessed, which also included visa fraud, carried a potential sentence of life in prison, but Assistant U.S. Attorney Greg Andres said there was a chance Tzolov may cooperate with the government and testify at the trial of Eric Butler, his former Credit Suisse colleague.
Julian Tzolov, 36, entered his plea just minutes before his trial was to begin in federal court in Brooklyn.
U.S. District Judge Jack Weinstein asked Tzolov why he fled, touching off an international manhunt in May that ended when Spanish police caught the former broker for Credit Suisse's private banking division last week.
"I panicked, your honor. I got scared," Tzolov said.
The crimes to which Tzolov confessed, which also included visa fraud, carried a potential sentence of life in prison, but Assistant U.S. Attorney Greg Andres said there was a chance Tzolov may cooperate with the government and testify at the trial of Eric Butler, his former Credit Suisse colleague.
Tuesday, July 21, 2009
SEC Charges Morgan Keegan With Making Misrepresentations
The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.
“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”
The SEC’s complaint, filed in U.S. District Court for the Northern District of Georgia, alleges that Morgan Keegan ignored indications that the risk of auction failures had materially increased amid investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan.
The SEC is seeking an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties, and other equitable relief for investors.
The SEC appreciates the assistance and cooperation of the Alabama Securities Commission and the New York Attorney General’s Office.
“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”
The SEC’s complaint, filed in U.S. District Court for the Northern District of Georgia, alleges that Morgan Keegan ignored indications that the risk of auction failures had materially increased amid investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan.
The SEC is seeking an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties, and other equitable relief for investors.
The SEC appreciates the assistance and cooperation of the Alabama Securities Commission and the New York Attorney General’s Office.
Aravali Fund Losses
The Aravali Fund was recommended by Deutsche Bank and other brokerage firms to income oriented investors who also sought to preserve their capital.
Deutsche Bank told it’s clients that the Aravali Fund was a safe investment that purchased investment grade or highly rated municipal bonds and acted as a municipal bond replacement fund. The Aravali fund was in fact a highly speculative fund engaged in a complex arbitrage strategy which involved a significant short position in treasury bonds, interest rate swaps and a leveraged pool of municipal bonds.
According to news sources, cases alleging losses of more than $10 million have already been filed.
One such investor alleged that their longtime investment adviser, Russell Smith, sent them a letter just before he killed himself, suggesting they contact his attorney, "for possible redress."
The defendants are Deutsche Bank Alex Brown, Deutsche Bank Securities Inc., Arthur Kreidel, Mark Young, Aravali Fund LP, and Aravali Partners LLC. Mark Young is or was the president of Aravali Partners.
The investor families claim that Deutsche Bank and its defendant employees persuaded them through misrepresentations to invest $13 million in the "virtually 'risk free'" Aravali Fund, then lost the money. Both families claim that Deutsche's Bank misrepresentations of Aravali were so blatant it caused Smith, both families' longtime financial counselor, to commit suicide in October.
The suicide letter, which was appended to the lawsuit, begins:
"Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.
The Aravali Fund declined more than 90% and investors in the Fund have sustained significant damages.
Deutsche Bank told it’s clients that the Aravali Fund was a safe investment that purchased investment grade or highly rated municipal bonds and acted as a municipal bond replacement fund. The Aravali fund was in fact a highly speculative fund engaged in a complex arbitrage strategy which involved a significant short position in treasury bonds, interest rate swaps and a leveraged pool of municipal bonds.
According to news sources, cases alleging losses of more than $10 million have already been filed.
One such investor alleged that their longtime investment adviser, Russell Smith, sent them a letter just before he killed himself, suggesting they contact his attorney, "for possible redress."
The defendants are Deutsche Bank Alex Brown, Deutsche Bank Securities Inc., Arthur Kreidel, Mark Young, Aravali Fund LP, and Aravali Partners LLC. Mark Young is or was the president of Aravali Partners.
The investor families claim that Deutsche Bank and its defendant employees persuaded them through misrepresentations to invest $13 million in the "virtually 'risk free'" Aravali Fund, then lost the money. Both families claim that Deutsche's Bank misrepresentations of Aravali were so blatant it caused Smith, both families' longtime financial counselor, to commit suicide in October.
The suicide letter, which was appended to the lawsuit, begins:
"Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.
The Aravali Fund declined more than 90% and investors in the Fund have sustained significant damages.
Monday, July 20, 2009
Troubled Infrastructure Funds Lead To Problems For Former Citigroup Exec
Following its receipt of some $45 billion in taxpayer bail-out money during 2009, Citigroup has been burdened by numerous issues. “The problem child of banking,” as Capitol Hill refers to them, suffered huge losses in its private investments division which at the time was overseen by former Citigroup Chief Financial Officer Michael Froman.
According to a July 20, 2009 story in the Wall Street Journal, the funds in question include the Citi Infrastructure Investors fund, a private-equity fund that amassed $3.4 billion to invest in various infrastructure projects before clients pulled the plug, exercising their right to restrict new investments because of previously failed deals. Adding to the fund’s problems were resignations by several key Citigroup managers, one of whom included Froman. Another Citigroup private equity fund was shelved altogether after failing to attract clients.
In January 2009, the Obama administration welcomed the former Citigroup manager of those troubled funds - Froman - into its fold as deputy assistant to the president and deputy national security adviser for international economic affairs. Given the depth of financial problems in the two funds formerly managed by Froman, the addition of the Citigroup executive to the president’s inner circle was viewed by many as controversial.
Throughout 2009, Citigroup was immersed in legal and financial issues related to its alternative investments. Two such products, the ASTA/MAT hedge funds, currently are the focus of numerous lawsuits and arbitration claims by investors who say Citigroup misrepresented the funds as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal – no more than 5% a year in the worst-case scenario.
Instead, ASTA/MAT plummeted in value during the summer of 2008 because of turmoil in the financial markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and to expect ASTA/MAT to rebound once the market returned to normal. That didn’t happen, of course. Investors later learned the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible, including subprime mortgages and derivatives.
Now Citigroup has new issues to deal with: massive losses in its infrastructure fund and the ongoing compensation controversy surrounding the fund’s former manager, Froman. According to the Wall Street Journal, as Froman prepared to begin his White House post in late January, he was due and later received more than $4 million in compensation from Citigroup.
Froman also had a big financial stake in the Citi Infrastructure Investors fund, which he had received as part of his pay package. When Froman wanted to cash out, he suggested Citigroup pay him at least $10 million for his stake in the fund, according to the Wall Street Journal.
Furthermore, Froman, who during the relevant time was also a part of Citigroup’s Alternative Investment division - the same department being held responsible for hundreds of millions of dollars in losses as a result of recommendations to invest in high-risk and esoteric securities. Subsequently, a number of Citigroup executives in that division - including Froman -bailed, as financial losses began to multiply, but not before claiming their large salaries and bonuses as a figurative reward for their contributions to the firm.
According to a July 20, 2009 story in the Wall Street Journal, the funds in question include the Citi Infrastructure Investors fund, a private-equity fund that amassed $3.4 billion to invest in various infrastructure projects before clients pulled the plug, exercising their right to restrict new investments because of previously failed deals. Adding to the fund’s problems were resignations by several key Citigroup managers, one of whom included Froman. Another Citigroup private equity fund was shelved altogether after failing to attract clients.
In January 2009, the Obama administration welcomed the former Citigroup manager of those troubled funds - Froman - into its fold as deputy assistant to the president and deputy national security adviser for international economic affairs. Given the depth of financial problems in the two funds formerly managed by Froman, the addition of the Citigroup executive to the president’s inner circle was viewed by many as controversial.
Throughout 2009, Citigroup was immersed in legal and financial issues related to its alternative investments. Two such products, the ASTA/MAT hedge funds, currently are the focus of numerous lawsuits and arbitration claims by investors who say Citigroup misrepresented the funds as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal – no more than 5% a year in the worst-case scenario.
Instead, ASTA/MAT plummeted in value during the summer of 2008 because of turmoil in the financial markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and to expect ASTA/MAT to rebound once the market returned to normal. That didn’t happen, of course. Investors later learned the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible, including subprime mortgages and derivatives.
Now Citigroup has new issues to deal with: massive losses in its infrastructure fund and the ongoing compensation controversy surrounding the fund’s former manager, Froman. According to the Wall Street Journal, as Froman prepared to begin his White House post in late January, he was due and later received more than $4 million in compensation from Citigroup.
Froman also had a big financial stake in the Citi Infrastructure Investors fund, which he had received as part of his pay package. When Froman wanted to cash out, he suggested Citigroup pay him at least $10 million for his stake in the fund, according to the Wall Street Journal.
Furthermore, Froman, who during the relevant time was also a part of Citigroup’s Alternative Investment division - the same department being held responsible for hundreds of millions of dollars in losses as a result of recommendations to invest in high-risk and esoteric securities. Subsequently, a number of Citigroup executives in that division - including Froman -bailed, as financial losses began to multiply, but not before claiming their large salaries and bonuses as a figurative reward for their contributions to the firm.
Morgan Keegan Receives A Wells Notice
Regions Financial Corp. said its Morgan Keegan & Co. investment-banking operation may face charges related to "certain mutual funds" formerly run by an asset-management unit with a well-known manager who was clobbered by exposure to collateralized debt obligations and other mortgage-related holdings.
In a securities filing, the Birmingham, Ala., regional bank said it received on July 9 a Wells notice from the Securities and Exchange Commission's regional office in Atlanta.
Regions was told that SEC "staff intends to recommend that the commission bring enforcement actions for possible violations of the federal securities laws," the filing said.
Regions didn't disclose in the filing which mutual funds are being scrutinized by the SEC, except that they were managed by Morgan Asset Management Inc., part of Morgan Keegan, a regional brokerage firm based in Memphis, Tenn.
Regions said Wednesday that it transferred management of those funds last July to Hyperion Brookfield Asset Management Inc. of New York.
In a securities filing, the Birmingham, Ala., regional bank said it received on July 9 a Wells notice from the Securities and Exchange Commission's regional office in Atlanta.
Regions was told that SEC "staff intends to recommend that the commission bring enforcement actions for possible violations of the federal securities laws," the filing said.
Regions didn't disclose in the filing which mutual funds are being scrutinized by the SEC, except that they were managed by Morgan Asset Management Inc., part of Morgan Keegan, a regional brokerage firm based in Memphis, Tenn.
Regions said Wednesday that it transferred management of those funds last July to Hyperion Brookfield Asset Management Inc. of New York.
Thursday, July 16, 2009
UBS Sues Highland Capital Over CDO Losses
UBS AG, Switzerland’s biggest bank, sued Highland Capital Management LP in New York, claiming losses of at least $745 million in a failed collateralized debt obligation transaction.
Highland Capital, the investment firm founded by James Dondero and Mark Okada, failed to fulfill terms of the deal reached in April 2007, UBS said in a breach-of-contract lawsuit filed today in state court in Manhattan. UBS Securities LLC, a UBS unit, agreed to arrange the transaction and serve as placement agent, according to the complaint.
After the original transaction expired in early 2008, the parties restructured the agreement in March 2008, UBS said. UBS and Dallas-based Highland Capital agreed that the fund and a special holding company would bear 100 percent of the risk of losses, according to the lawsuit.
“UBS has suffered losses of no less than $745 million as a result of the depreciation in value of the warehoused collateral obligations and credit default swap obligations that it assumed in connection with the failed CDO transaction,” Zurich-based UBS said in the complaint.
Because of declining market values for the portfolios and collateral in September and October 2008, UBS said it required Highland to produce additional collateral. Highland offered “certain securities” that UBS rejected, according to the complaint.
Highland Capital, the investment firm founded by James Dondero and Mark Okada, failed to fulfill terms of the deal reached in April 2007, UBS said in a breach-of-contract lawsuit filed today in state court in Manhattan. UBS Securities LLC, a UBS unit, agreed to arrange the transaction and serve as placement agent, according to the complaint.
After the original transaction expired in early 2008, the parties restructured the agreement in March 2008, UBS said. UBS and Dallas-based Highland Capital agreed that the fund and a special holding company would bear 100 percent of the risk of losses, according to the lawsuit.
“UBS has suffered losses of no less than $745 million as a result of the depreciation in value of the warehoused collateral obligations and credit default swap obligations that it assumed in connection with the failed CDO transaction,” Zurich-based UBS said in the complaint.
Because of declining market values for the portfolios and collateral in September and October 2008, UBS said it required Highland to produce additional collateral. Highland offered “certain securities” that UBS rejected, according to the complaint.
Charles Schwab Found Liable in YieldPlus FINRA Arbitration – SCHW, SWYSX, SWYPX
A San Diego based Financial Industry Regulatory Authority (FINRA) arbitration panel awarded damages to the widow of San Diego resident Everett Ross as a result of losses sustained by the Ross family trust in the Charles Schwab YieldPlus Fund. The panel awarded the Ross family trust 100 percent of their net out of pocket losses of $157,498 plus expert witness costs and assessed the entire cost of the arbitration proceeding against Charles Schwab (SCHW).
“Although Charles Schwab recommended the purchase of the Schwab YieldPlus Fund Select Shares (SWYSX) and the Schwab YieldPlus Investor Shares (SWYPX) (the "YieldPlus Funds") as safe conservative cash alternatives to investors, the evidence established that the YieldPlus funds were over concentrated in toxic mortgage backed securities,” said the Ross’ attorney Ryan K. Bakhtiari.
“Although Charles Schwab recommended the purchase of the Schwab YieldPlus Fund Select Shares (SWYSX) and the Schwab YieldPlus Investor Shares (SWYPX) (the "YieldPlus Funds") as safe conservative cash alternatives to investors, the evidence established that the YieldPlus funds were over concentrated in toxic mortgage backed securities,” said the Ross’ attorney Ryan K. Bakhtiari.
Friday, July 10, 2009
SEC Charges NY Broker-Dealer In Boiler Room Scheme
The Securities and Exchange Commission today charged New York-based broker-dealer Sky Capital LLC and six individuals involved in a fraudulent boiler room scheme that raised millions of dollars from U.S. and UK investors who were then restricted from selling their stock, and their investments later became worthless.
The SEC alleges that the firm's founder, president and CEO Ross Mandell directed Sky Capital brokers to make material misrepresentations, omit material information, and use high-pressure sales tactics to induce customers to purchase stock in two related companies — Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (Sky Entities). Sky Capital brokers used scripts to solicit investors for the private placements, and based their sales pitches on what Mandell told them. The brokers enjoyed hefty undisclosed commissions and other perks, and Mandell used investor funds to subsidize his own lifestyle including expensive travel and hotels, adult entertainment, and child care expenses.
"Boiler room tactics like those used by Sky Capital and its brokers undercut the level of honesty and fair play we seek to maintain in the securities markets," said James Clarkson, Acting Director of the SEC's New York Regional Office. "This firm and these brokers went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares."
In addition to Sky Capital and Mandell, who resides in Boca Raton, Fla., the SEC's complaint charges the firm's former chief operating officer Stephen Shea of Brooklyn and four former registered representatives at the firm: Robert Grabowski of Staten Island, Adam Harrington (a/k/a Adam Rukdeschel) of Miami, Fla., Michael Passaro of Delray Beach, Fla., and Arn Wilson of Concord, N.C. Sky Capital is also known as Granta Capital LLC.
The SEC alleges that the firm's founder, president and CEO Ross Mandell directed Sky Capital brokers to make material misrepresentations, omit material information, and use high-pressure sales tactics to induce customers to purchase stock in two related companies — Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (Sky Entities). Sky Capital brokers used scripts to solicit investors for the private placements, and based their sales pitches on what Mandell told them. The brokers enjoyed hefty undisclosed commissions and other perks, and Mandell used investor funds to subsidize his own lifestyle including expensive travel and hotels, adult entertainment, and child care expenses.
"Boiler room tactics like those used by Sky Capital and its brokers undercut the level of honesty and fair play we seek to maintain in the securities markets," said James Clarkson, Acting Director of the SEC's New York Regional Office. "This firm and these brokers went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares."
In addition to Sky Capital and Mandell, who resides in Boca Raton, Fla., the SEC's complaint charges the firm's former chief operating officer Stephen Shea of Brooklyn and four former registered representatives at the firm: Robert Grabowski of Staten Island, Adam Harrington (a/k/a Adam Rukdeschel) of Miami, Fla., Michael Passaro of Delray Beach, Fla., and Arn Wilson of Concord, N.C. Sky Capital is also known as Granta Capital LLC.
Thursday, July 9, 2009
SEC Director of Compliance Inspections to Resign
The Securities and Exchange Commission announced today that Lori A. Richards, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), plans to leave the agency after more than two decades of government service.
Ms. Richards has been the Director of OCIE since it was created by Chairman Arthur Levitt in May 1995. As its Director, Ms. Richards managed the SEC’s nationwide examination oversight programs for investment advisers, hedge fund managers, mutual funds, broker-dealers, clearing agencies, transfer agents, trading markets, self-regulatory organizations and credit rating agencies. She spearheaded numerous examination initiatives, including targeted examination sweeps focused on emerging compliance risks, as well as routine, cause, and other examination reviews of industry firms for compliance with the law.
Ms. Richards has been the Director of OCIE since it was created by Chairman Arthur Levitt in May 1995. As its Director, Ms. Richards managed the SEC’s nationwide examination oversight programs for investment advisers, hedge fund managers, mutual funds, broker-dealers, clearing agencies, transfer agents, trading markets, self-regulatory organizations and credit rating agencies. She spearheaded numerous examination initiatives, including targeted examination sweeps focused on emerging compliance risks, as well as routine, cause, and other examination reviews of industry firms for compliance with the law.
California IOUs May Be Treated As Municipal Securities
The recipients of billions of dollars in IOUs being issued by California soon may have a regulated market where they could sell them.
Some of the nation's largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.
The Securities and Exchange Commission is going to recommend that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. The guidance could come as soon as Thursday, according to two people familiar with the matter who spoke on condition of anonymity because the SEC hasn't yet acted.
A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.
The SEC oversees rules set by the nongovernment MSRB. SEC spokesman John Nester declined to comment Thursday.
With JPMorgan Chase & Co., Bank of America Corp., Wells Fargo and Citigroup Inc. and some regional banks in the state saying they won't accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.
A regulated market for the IOUs "makes it even more advantageous" for individuals holding them, who could sell them at a fair price, Maco said. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.
SecondMarket, which creates marketplaces for the trading of illiquid assets, has received "decent interest" from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company's chief strategy officer, said this week.
Some of the nation's largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.
The Securities and Exchange Commission is going to recommend that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. The guidance could come as soon as Thursday, according to two people familiar with the matter who spoke on condition of anonymity because the SEC hasn't yet acted.
A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.
The SEC oversees rules set by the nongovernment MSRB. SEC spokesman John Nester declined to comment Thursday.
With JPMorgan Chase & Co., Bank of America Corp., Wells Fargo and Citigroup Inc. and some regional banks in the state saying they won't accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.
A regulated market for the IOUs "makes it even more advantageous" for individuals holding them, who could sell them at a fair price, Maco said. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.
SecondMarket, which creates marketplaces for the trading of illiquid assets, has received "decent interest" from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company's chief strategy officer, said this week.
Wednesday, July 8, 2009
Bank Sued Over Madoff Losses
The holders of more than two dozen retirement accounts have sued the Westport National Bank in Connecticut over its role in handling their investments in Bernard L. Madoff’s long-running Ponzi scheme.
The lawsuit, filed on Wednesday in Connecticut Superior Court in Stamford, seeks to recover $60 million that the retirement plans lost when the Madoff fraud collapsed in December, as well as millions of dollars in fees that the bank charged customers who maintained the accounts.
The focus of the lawsuit is the custodian agreement that the bank required each account holder to sign before it accepted any money to be invested with Mr. Madoff.
The agreement, a copy of which was filed as an exhibit in the case, states that the customer “has not relied on the bank in choosing” the Madoff firm.
But it also indicates that the bank would take custody of whatever investments Mr. Madoff made on the customers’ behalf. For example, the agreement specifically requires the bank to adequately document the customers’ ownership of investments made with the Madoff firm “and held by the bank as custodian.”
In fact, there was nothing for the bank to hold since Mr. Madoff never purchased any securities for his investors, according to the bankruptcy trustee liquidating the Madoff estate. Instead, he used most of the cash he received from investors to cover dividends and redemptions paid to other investors.
The lawsuit, filed on Wednesday in Connecticut Superior Court in Stamford, seeks to recover $60 million that the retirement plans lost when the Madoff fraud collapsed in December, as well as millions of dollars in fees that the bank charged customers who maintained the accounts.
The focus of the lawsuit is the custodian agreement that the bank required each account holder to sign before it accepted any money to be invested with Mr. Madoff.
The agreement, a copy of which was filed as an exhibit in the case, states that the customer “has not relied on the bank in choosing” the Madoff firm.
But it also indicates that the bank would take custody of whatever investments Mr. Madoff made on the customers’ behalf. For example, the agreement specifically requires the bank to adequately document the customers’ ownership of investments made with the Madoff firm “and held by the bank as custodian.”
In fact, there was nothing for the bank to hold since Mr. Madoff never purchased any securities for his investors, according to the bankruptcy trustee liquidating the Madoff estate. Instead, he used most of the cash he received from investors to cover dividends and redemptions paid to other investors.
Tuesday, July 7, 2009
Government Freezes $485 Million on Offering Fraud Assets
The Securities and Exchange Commission has obtained an emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through a company they owned and controlled, Provident Royalties LLC.
The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States. Provident’s entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the SEC’s complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States. Provident’s entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the SEC’s complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
Sunday, July 5, 2009
Provident Royalties -- SEC OBTAINS ASSET FREEZE IN $485 MILLION NATIONWIDE OFFERING FRAUD
On July 2, 2009, the Securities and Exchange Commission obtained a temporary restraining order and emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison through a company they owned and controlled, Provident Royalties LLC. In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.
The Commission alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent offerings of preferred stock and limited partnership interests for the purpose of generating promised returns through investments in oil and gas assets. The complaint alleges the sales were made through 21 affiliated entities to more than 7,700 investors throughout the United States. It is also alleged that Provident Asset Management, LLC, an affiliated broker-dealer, made some direct retail sales of securities, but primarily solicited unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the Commission's complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. The Commission alleges that, in fact, less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
The Commission's complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.
The SEC acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA) in this matter. For information.
The Commission alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent offerings of preferred stock and limited partnership interests for the purpose of generating promised returns through investments in oil and gas assets. The complaint alleges the sales were made through 21 affiliated entities to more than 7,700 investors throughout the United States. It is also alleged that Provident Asset Management, LLC, an affiliated broker-dealer, made some direct retail sales of securities, but primarily solicited unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the Commission's complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. The Commission alleges that, in fact, less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
The Commission's complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.
The SEC acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA) in this matter. For information.
SEC v. Berkshire Resources - Charges in Connection with Oil and Gas Offering
On June 8, 2009, the Securities and Exchange Commission filed a complaint in the United States District Court for the Southern District of Indiana charging Berkshire Resources, L.L.C. ("Berkshire"), a Wyoming company purportedly involved in oil and gas exploration, its principals, Jason T. Rose and David G. Rose, the six companies through which Berkshire carried out a securities offering - Berkshire (40L), L.L.P., Berkshire 2006-5, L.L.P., Passmore-5, L.L.P., Gueydan Canal 28-5, L.L.P., Gulf Coast Development #12, L.L.P., Drilling Deep in the Louisiana Water, J.V. (collectively, the "Berkshire Offerings")- with securities fraud in connection with an oil and gas offering fraud. The complaint also charged Berkshire's head sales agents, Mark D. Long and Yolanda C. Velazquez, with securities registration and broker-dealer registration violations.
In its complaint, the Commission alleges that from April 2006 through December 2007, Berkshire raised approximately $15.5 million from about 265 investors in the U.S. and Canada through a series of unregistered, fraudulent offerings of securities in the form of "units of participation." The defendants marketed the offerings to the public through cold call sales solicitations, and at trade shows and "wealth expositions." The purported purpose of the offerings was to fund oil and gas development projects that Berkshire was to oversee. According to the complaint, Jason Rose was the public face of Berkshire and was held out as its lead manager with significant experience in the oil and gas industry. In reality, Jason Rose had no experience managing an oil and gas company, and David Rose, Jason's father, ran the company behind the scenes. David Rose has an extensive disciplinary history for securities fraud and is facing a criminal indictment in connection with another similar but unrelated oil and gas scam.
The complaint further alleges that Berkshire, the Berkshire Offerings, Jason Rose, and David Rose also misled investors, among other things, about the use of investor proceeds. The defendants assured investors they would use 100 percent of their funds for the oil and gas drilling projects. Contrary to these representations, Berkshire spent approximately $6.7 million on items having nothing to do with developing the projects, including its own payroll and outside sales commissions, as well as marketing and promotional expenses. Moreover, of the $6.7 million, approximately $1.3 million went directly to members of the Rose family to pay for mortgages on their homes, home furnishings and electronics, cars, and personal credit card charges. The complaint also alleges that to further their scheme, Jason and David Rose enlisted Velazquez and Long to run two boiler-room type sales offices on Berkshire's behalf; one in Lake Mary, Florida and the other in Jeffersonville, Indiana. Long and Velazquez received commissions for their sales efforts, despite the fact that neither they nor Berkshire were registered broker-dealers. The complaint also alleges that Velazquez violated a prior Commission order issued in March 2005 that barred her from association with any broker or dealer. Finally, the complaint names Brian C. Rose and Joyce A. Rose as relief defendants and alleges that they received ill-gotten gains.
In its complaint, the Commission alleges that from April 2006 through December 2007, Berkshire raised approximately $15.5 million from about 265 investors in the U.S. and Canada through a series of unregistered, fraudulent offerings of securities in the form of "units of participation." The defendants marketed the offerings to the public through cold call sales solicitations, and at trade shows and "wealth expositions." The purported purpose of the offerings was to fund oil and gas development projects that Berkshire was to oversee. According to the complaint, Jason Rose was the public face of Berkshire and was held out as its lead manager with significant experience in the oil and gas industry. In reality, Jason Rose had no experience managing an oil and gas company, and David Rose, Jason's father, ran the company behind the scenes. David Rose has an extensive disciplinary history for securities fraud and is facing a criminal indictment in connection with another similar but unrelated oil and gas scam.
The complaint further alleges that Berkshire, the Berkshire Offerings, Jason Rose, and David Rose also misled investors, among other things, about the use of investor proceeds. The defendants assured investors they would use 100 percent of their funds for the oil and gas drilling projects. Contrary to these representations, Berkshire spent approximately $6.7 million on items having nothing to do with developing the projects, including its own payroll and outside sales commissions, as well as marketing and promotional expenses. Moreover, of the $6.7 million, approximately $1.3 million went directly to members of the Rose family to pay for mortgages on their homes, home furnishings and electronics, cars, and personal credit card charges. The complaint also alleges that to further their scheme, Jason and David Rose enlisted Velazquez and Long to run two boiler-room type sales offices on Berkshire's behalf; one in Lake Mary, Florida and the other in Jeffersonville, Indiana. Long and Velazquez received commissions for their sales efforts, despite the fact that neither they nor Berkshire were registered broker-dealers. The complaint also alleges that Velazquez violated a prior Commission order issued in March 2005 that barred her from association with any broker or dealer. Finally, the complaint names Brian C. Rose and Joyce A. Rose as relief defendants and alleges that they received ill-gotten gains.
Thursday, July 2, 2009
FINRA Investigates Municipal Bond Failures
The Financial Industry Regulatory Authority announced Tuesday that it was “conducting sweeps” of firms involved in several recent municipal bond collapses with an eye toward future investigations and possible disciplinary actions.
The regulator, known as Finra, an industry-funded group that polices Wall Street, is seeking information from financial firms involved in several recent market problems — firms that underwrote securities tied to derivatives that were sold to municipalities and those that sold so-called municipal gas bonds that were guaranteed by the defunct Lehman Brothers and are now distressed securities.
The sweeps are part of a new scrutiny of the $2.7 trillion municipal bond market, which has been shaken by a rise in defaults and increased pressure from a weakened economy. Finra will be looking at a broad range of practices, including interactions with retail investors, and will collect data on sales, marketing, pricing, disclosure and consumer complaints.
“Finra is taking concerted action to ensure that investors are aware of both the risks and the benefits that might be associated with a muni bond investment,” said Richard G. Ketchum, chief executive of Finra.
Highly complex instruments like derivatives were often marketed to municipalities as a way to lower their borrowing costs through variable rate securities. But in many cases, these securities have had the opposite effect.
One case involves Jefferson County, Ala., which now faces bankruptcy after its interest on $3 billion of adjustable rate debt, rather than being lowered, rose to 10 percent.
In the case of the gas bonds, Finra is seeking information from firms that sold the bonds to retail investors. The bonds were underwritten and guaranteed by Lehman Brothers, and quickly lost value when they, too, became distressed securities.
The regulator, known as Finra, an industry-funded group that polices Wall Street, is seeking information from financial firms involved in several recent market problems — firms that underwrote securities tied to derivatives that were sold to municipalities and those that sold so-called municipal gas bonds that were guaranteed by the defunct Lehman Brothers and are now distressed securities.
The sweeps are part of a new scrutiny of the $2.7 trillion municipal bond market, which has been shaken by a rise in defaults and increased pressure from a weakened economy. Finra will be looking at a broad range of practices, including interactions with retail investors, and will collect data on sales, marketing, pricing, disclosure and consumer complaints.
“Finra is taking concerted action to ensure that investors are aware of both the risks and the benefits that might be associated with a muni bond investment,” said Richard G. Ketchum, chief executive of Finra.
Highly complex instruments like derivatives were often marketed to municipalities as a way to lower their borrowing costs through variable rate securities. But in many cases, these securities have had the opposite effect.
One case involves Jefferson County, Ala., which now faces bankruptcy after its interest on $3 billion of adjustable rate debt, rather than being lowered, rose to 10 percent.
In the case of the gas bonds, Finra is seeking information from firms that sold the bonds to retail investors. The bonds were underwritten and guaranteed by Lehman Brothers, and quickly lost value when they, too, became distressed securities.
Wednesday, July 1, 2009
SEC Charges Prime Capital Services In Variable Annuity Sales Practice Case
The Securities and Exchange Commission today instituted an enforcement action against a Poughkeepsie, N.Y.-based firm and several representatives and supervisors for their alleged roles in fraudulent and unsuitable sales of variable annuities to senior citizens who were lured through free-lunch seminars at restaurants in south Florida.
The SEC's Division of Enforcement alleges that Prime Capital Services (PCS) and its parent company recruited elderly investors to attend the seminars, after which the seniors were encouraged to schedule private appointments with PCS representatives who then induced them to buy variable annuities. The sales pitches allegedly concealed high costs, lock-in periods, and other material information. While the firm and its representatives earned millions of dollars in sales commissions, the Division alleges that many of the variable annuities were unsuitable investments for the customers due to their age, liquidity, and investment objectives.
Further information including the administrative proceeding can be found by clicking here.
The SEC's Division of Enforcement alleges that Prime Capital Services (PCS) and its parent company recruited elderly investors to attend the seminars, after which the seniors were encouraged to schedule private appointments with PCS representatives who then induced them to buy variable annuities. The sales pitches allegedly concealed high costs, lock-in periods, and other material information. While the firm and its representatives earned millions of dollars in sales commissions, the Division alleges that many of the variable annuities were unsuitable investments for the customers due to their age, liquidity, and investment objectives.
Further information including the administrative proceeding can be found by clicking here.
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