The Securities and Exchange Commission charged a Connecticut man with misappropriating at least $53 million of investor funds, saying he invested the money for himself.
The SEC alleges that Francisco Illarramendi defrauded investors in the hedge funds he managed by improperly transferring their money into bank accounts he personally controlled and then investing that money in private-equity investments, including a developmental-stage West Coast nuclear energy company and a manufacturing company in early development of clean-tech mass-transportation alternatives.
His biggest investor, an unnamed foreign company pension fund, contributed 90% of the money in his funds, the SEC said in a complaint filed Friday in federal court in Connecticut. Other investors were also based offshore.
Mr. Illarramendi, 41 years old, is the majority owner of Stamford, Conn.-based Michael Kenwood Group, LLC, an unregistered investment adviser, which in turn owns a number of entities through which Mr. Illarramendi advised hedge funds. According to a filing with the Financial Industry Regulatory Authority, he worked at Credit Suisse from 1994 to 2004 and was recently affiliated with a Stamford-based registered investment adviser, Highview Point Partners.
Saturday, January 29, 2011
Friday, January 28, 2011
NIR Group Probe
Hedge fund manager Corey Ribotsky recently sent a letter to his investors in his NIR Group telling them he has been the subject of "rumor and innuendo" and that his firm did nothing wrong.
Ribotsky wrote to his clients -- a relatively rare occurrence -- nearly a year after the initial disclosure that his $750 million hedge fund was being investigated by federal prosecutors for allegedly inflating returns.
"We are forwarding this letter in order to attempt to alleviate some of the concerns you may have," Ribotsky said in the Jan. 14 letter to investors in his Roslyn, New York-based fund. "We do not believe NIR has engaged in any wrongdoing, and NIR continues to cooperate fully in the governmental investigation."
Ribotsky, in his Jan. 14 investor letter, said the suspension of redemptions in 2008 was necessary to preserve the fund. He likened himself to a "captain" navigating a ship through a terrible storm and expressed dismay at how his name "has been maligned in the press."
Ribotsky wrote to his clients -- a relatively rare occurrence -- nearly a year after the initial disclosure that his $750 million hedge fund was being investigated by federal prosecutors for allegedly inflating returns.
"We are forwarding this letter in order to attempt to alleviate some of the concerns you may have," Ribotsky said in the Jan. 14 letter to investors in his Roslyn, New York-based fund. "We do not believe NIR has engaged in any wrongdoing, and NIR continues to cooperate fully in the governmental investigation."
Ribotsky, in his Jan. 14 investor letter, said the suspension of redemptions in 2008 was necessary to preserve the fund. He likened himself to a "captain" navigating a ship through a terrible storm and expressed dismay at how his name "has been maligned in the press."
Wednesday, January 26, 2011
Concern Over Lack of Transparency in Municipal Marketplace Grows
Investors and regulators are growing increasingly concerned about the quality and timeliness of information that state and local governments are disclosing about their finances.
The Securities and Exchange Commission is inquiring about public statements Illinois made about its pension funds amid the agency's increased scrutiny of the municipal-bond market, a representative for the governor said.
Amid governments' financial woes, meanwhile, angry investors are finding themselves blindsided by bad news. Those concerns are reflected in a forthcoming study that shows that public issuers routinely file information about their financial health well beyond the date they promise to bondholders, if at all.
This weak disclosure is raising anxiety in the $2.9 trillion market, where investors withdrew more than $20 billion from municipal bond funds in recent weeks.
Federal regulators' power in this realm is limited because municipal borrowers are unregulated. But they are trying to crack down on the disclosure issue
The Securities and Exchange Commission is inquiring about public statements Illinois made about its pension funds amid the agency's increased scrutiny of the municipal-bond market, a representative for the governor said.
Amid governments' financial woes, meanwhile, angry investors are finding themselves blindsided by bad news. Those concerns are reflected in a forthcoming study that shows that public issuers routinely file information about their financial health well beyond the date they promise to bondholders, if at all.
This weak disclosure is raising anxiety in the $2.9 trillion market, where investors withdrew more than $20 billion from municipal bond funds in recent weeks.
Federal regulators' power in this realm is limited because municipal borrowers are unregulated. But they are trying to crack down on the disclosure issue
Tuesday, January 25, 2011
SEC Urges Uniform Fiduciary Duty For Brokers and Advisers
U.S. securities regulators on Friday called for a new uniform fiduciary standard for broker-dealers and investment advisers that would require them to put retail customers ahead of their own financial interests. The recommendations, laid out by the Securities and Exchange Commission in a study reviewed by Reuters late on Friday, would drastically alter the landscape for broker-dealers who under current laws are only required to recommend products that are "suitable" to mom-and-pop investors.
It could also potentially mean changes for investment advisers if the SEC opts to replace their fiduciary standard with a new one, although the study says it would be "no less stringent" than what they face today.
Under today's standard, advisers must act in a client's best interest. The study was required under the Dodd-Frank financial law, and its findings are likely to help shape future rule-making at the agency. SEC Chairman Mary Schapiro has long called for harmonizing regulations between brokers and advisers who offer retail customers advice, saying investors may not know the difference between those acting in their best interest and those who are just peddling products.
But both Republican commissioners issued a harsh critique of the study on Friday, saying it failed to provide evidence that investors are "being systemically harmed or disadvantaged". They also questioned if a uniform standard would eliminate any investor confusion.
It could also potentially mean changes for investment advisers if the SEC opts to replace their fiduciary standard with a new one, although the study says it would be "no less stringent" than what they face today.
Under today's standard, advisers must act in a client's best interest. The study was required under the Dodd-Frank financial law, and its findings are likely to help shape future rule-making at the agency. SEC Chairman Mary Schapiro has long called for harmonizing regulations between brokers and advisers who offer retail customers advice, saying investors may not know the difference between those acting in their best interest and those who are just peddling products.
But both Republican commissioners issued a harsh critique of the study on Friday, saying it failed to provide evidence that investors are "being systemically harmed or disadvantaged". They also questioned if a uniform standard would eliminate any investor confusion.
Friday, January 21, 2011
SEC Charges 3 Investment Firms With Fraud
Three affiliated New York investment firms and four senior officers were charged with fraud, misuse of client assets and other violations involving their advisory business, according to the Securities and Exchange Commission.
The SEC alleged that investment adviser William Landberg and President Kevin Kramer, through firms West End Financial Advisors LLC, West End Capital Management LLC and Sentinel Investment Management Corp., misused investor assets, fraudulently obtained more than $8.5 million from a bank and used a reserve account for unauthorized purposes.
"West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems and the misappropriation of investor assets," said David Rosenfeld, associate director of the SEC's New York regional office.
Mr. Landberg allegedly used substantial amounts of fraudulently obtained bank loans to make distributions to certain West End investors, sustaining the illusion their investments were performing well.
The SEC accused Mr. Kramer of knowing, or being reckless in not knowing that West End faced severe financial problems and had difficulty obtaining funding its investment strategy, though he continued to market the funds to investors through April 2009.
West End Financial Officer Steven Gould and Controller Janis Barsuk also face charges related to the alleged misconduct, which the SEC said occurred from January 2008 to May 2009. The SEC accused the two of knowing, or being reckless for not knowing, about Mr. Landberg's alleged fraud. Mr. Gould allegedly used improper accounting methods and issued account statement with false investment returns.
Mr. Landberg also is accused officials of misappropriating at least $1.5 million for himself and his family.
The SEC alleged that investment adviser William Landberg and President Kevin Kramer, through firms West End Financial Advisors LLC, West End Capital Management LLC and Sentinel Investment Management Corp., misused investor assets, fraudulently obtained more than $8.5 million from a bank and used a reserve account for unauthorized purposes.
"West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems and the misappropriation of investor assets," said David Rosenfeld, associate director of the SEC's New York regional office.
Mr. Landberg allegedly used substantial amounts of fraudulently obtained bank loans to make distributions to certain West End investors, sustaining the illusion their investments were performing well.
The SEC accused Mr. Kramer of knowing, or being reckless in not knowing that West End faced severe financial problems and had difficulty obtaining funding its investment strategy, though he continued to market the funds to investors through April 2009.
West End Financial Officer Steven Gould and Controller Janis Barsuk also face charges related to the alleged misconduct, which the SEC said occurred from January 2008 to May 2009. The SEC accused the two of knowing, or being reckless for not knowing, about Mr. Landberg's alleged fraud. Mr. Gould allegedly used improper accounting methods and issued account statement with false investment returns.
Mr. Landberg also is accused officials of misappropriating at least $1.5 million for himself and his family.
Thursday, January 20, 2011
SEC Investigating Life Partners
The Securities and Exchange Commission is investigating Life Partners Holdings Inc., a Waco, Texas, company that has arranged for investors to buy several billion dollars of life-insurance policies from their original owners, according to four people who have been contacted recently by the agency.
As part of its probe, the SEC's enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.
The shorter an insured person's expected life span, the more Life Partners generally can charge for that policy, because investors expect a faster payout. If the death comes later than anticipated, not only is the policy payout delayed, but investors who buy policies or parts of them must continue to pay premium bills while they wait to collect on a death benefit.
Questions about the accuracy of Life Partners' life-expectancy estimates were the focus of a December Page One article in The Wall Street Journal. The article reported that many of the insured people are living well beyond the company's estimates, suggesting that the 10% or 15% yearly returns promoted to Life Partners' investor clients may prove elusive for many.
The company has said it remains confident in its methodology, and that even if many insured people outlive their projected life spans, investors likely will still make respectable single-digit annual returns.
Attractive projected returns for clients are a key part of Life Partners' formula for success. One of the fastest-growing small companies in the U.S. in recent years, Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.
Life Partners says it has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since its 1991 founding. Life Partners extracts often-hefty fees in the deals, averaging $308,000 apiece for the 201 policies sold in its most recent fiscal year. Investors often buy pieces of multiple policies.
The company uses a Reno, Nev., physician, Donald T. Cassidy, to provide its life-expectancy estimates. Wednesday, Dr. Cassidy didn't respond to requests to his office for comment. He declined to be interviewed for the Journal's earlier story.
Rick Bergstrom, an actuary in Bellevue, Wash., who has worked in the life-settlements field since 1997, said an attorney from the SEC's Fort Worth, Texas, office called him last week, to ask whether he could help analyze Life Partners' life-expectancy projections.
Mr. Bergstrom said he and a partner five years ago examined Dr. Cassidy's work for an institutional investor that was thinking of hiring the physician. They concluded Dr. Cassidy was using an "unrealistic" approach that tended to produce inaccurately short life expectancies, Mr. Bergstrom said.
As part of its probe, the SEC's enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.
The shorter an insured person's expected life span, the more Life Partners generally can charge for that policy, because investors expect a faster payout. If the death comes later than anticipated, not only is the policy payout delayed, but investors who buy policies or parts of them must continue to pay premium bills while they wait to collect on a death benefit.
Questions about the accuracy of Life Partners' life-expectancy estimates were the focus of a December Page One article in The Wall Street Journal. The article reported that many of the insured people are living well beyond the company's estimates, suggesting that the 10% or 15% yearly returns promoted to Life Partners' investor clients may prove elusive for many.
The company has said it remains confident in its methodology, and that even if many insured people outlive their projected life spans, investors likely will still make respectable single-digit annual returns.
Attractive projected returns for clients are a key part of Life Partners' formula for success. One of the fastest-growing small companies in the U.S. in recent years, Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.
Life Partners says it has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since its 1991 founding. Life Partners extracts often-hefty fees in the deals, averaging $308,000 apiece for the 201 policies sold in its most recent fiscal year. Investors often buy pieces of multiple policies.
The company uses a Reno, Nev., physician, Donald T. Cassidy, to provide its life-expectancy estimates. Wednesday, Dr. Cassidy didn't respond to requests to his office for comment. He declined to be interviewed for the Journal's earlier story.
Rick Bergstrom, an actuary in Bellevue, Wash., who has worked in the life-settlements field since 1997, said an attorney from the SEC's Fort Worth, Texas, office called him last week, to ask whether he could help analyze Life Partners' life-expectancy projections.
Mr. Bergstrom said he and a partner five years ago examined Dr. Cassidy's work for an institutional investor that was thinking of hiring the physician. They concluded Dr. Cassidy was using an "unrealistic" approach that tended to produce inaccurately short life expectancies, Mr. Bergstrom said.
Monday, January 3, 2011
Securities America Loses $1.2 million FINRA Arbitration
A FINRA arbitration panel ordered Securities America to pay an investor more than $1.2 million in damages related to losses in promissory notes issued by Medical Capital Holdings Inc., which entered receivership in 2009. The sum included $250,000 in punitive damages.
The case, decided on Dec. 31, was the first among dozens of arbitration cases against Securities America involving its sale of Medical Capital notes to proceed to an arbitration hearing, a Securities America spokeswoman confirmed. Private placements are sales of unregistered securities that are supposed to be marketed only to institutions and sophisticated individuals who meet certain income and net worth requirements.
Josephine Wayman, a California-based investor, filed the case against Securities America and one of its brokers, Randall R. Talbott of Newport Beach, Calif., in late 2009, alleging misrepresentation and fraud, among other things, according to the ruling. She sought $729,000 plus interest, legal fees, punitive damages and other relief. The panel ruled that Securities America and Talbott as jointly responsible for more than $905,000 of the total award, including $734,000 in damages plus interest, $111,465 in legal fees and $59,883 in expert witness fees, according to the award. The firm and Talbott must also pay an additional $17,000 in hearing fees, which are typically split between the parties in most cases.
Securities America, however, is solely responsible for the $250,000 in punitive damages. The panel didn't fully explain its decision, as is customary in arbitration rulings. One paragraph of the ruling, however, suggests that issues related to witnesses and the discovery phase of the proceeding, when parties exchange information, may have prompted the punitive damages.
The case, decided on Dec. 31, was the first among dozens of arbitration cases against Securities America involving its sale of Medical Capital notes to proceed to an arbitration hearing, a Securities America spokeswoman confirmed. Private placements are sales of unregistered securities that are supposed to be marketed only to institutions and sophisticated individuals who meet certain income and net worth requirements.
Josephine Wayman, a California-based investor, filed the case against Securities America and one of its brokers, Randall R. Talbott of Newport Beach, Calif., in late 2009, alleging misrepresentation and fraud, among other things, according to the ruling. She sought $729,000 plus interest, legal fees, punitive damages and other relief. The panel ruled that Securities America and Talbott as jointly responsible for more than $905,000 of the total award, including $734,000 in damages plus interest, $111,465 in legal fees and $59,883 in expert witness fees, according to the award. The firm and Talbott must also pay an additional $17,000 in hearing fees, which are typically split between the parties in most cases.
Securities America, however, is solely responsible for the $250,000 in punitive damages. The panel didn't fully explain its decision, as is customary in arbitration rulings. One paragraph of the ruling, however, suggests that issues related to witnesses and the discovery phase of the proceeding, when parties exchange information, may have prompted the punitive damages.
Sunday, January 2, 2011
SEC Charges Hedge Fund Managers with Offering Fraud
The Securities and Exchange Commission announced today that it filed a civil injunctive action against Robert Buckhannon, Terry Rawstern, Dale St. Jean and Gregory Tindall (the "Managing Members"), the four managing members of two now-defunct hedge funds, Arcanum Equity Fund, LLC and Vestium Equity Fund, LLC (the "Funds"), through which they conducted an offering fraud that raised $34 million from 101 investors throughout the U.S. and Canada. The SEC also charged Imperium Investment Advisors, LLC, a registered investment adviser which served as trustee for Vestium Equity Fund, and its three principals, Richard Mittasch, Christopher Paganes and Glenn Barikmo, for their roles in the scheme.
The SEC's complaint, filed in the U.S. District Court for the Middle District of Florida, alleges that from April 2008 through April 2010, the Managing Members raised funds promising investors that they would generate substantial returns through conservative investments in high-grade debt instruments and, in some cases, limited physical commodities transactions. Additionally, the offering materials and prospectus for Vestium Equity Funds further assured investors that Imperium would safeguard their funds from impermissible uses. Contrary to these assurances, however, the defendants disregarded the Funds' respective investment parameters and used investor funds for illiquid private investments and loans to affiliate entities. Additionally, although the Funds incurred investment losses of at least $8.1 million, the Managing Members disseminated monthly statements falsely depicting consistent profits and paid at least $6 million to investors in alleged profits. The Managing members further paid themselves over $1.3 million in compensation that was improperly based on inflated asset values and fictitious profits. The SEC's complaint further alleges that Buckhannon, Mittasch, Paganes and Barikmo collectively misappropriated at least $734,000 of investor funds to themselves and others.
The SEC's complaint, filed in the U.S. District Court for the Middle District of Florida, alleges that from April 2008 through April 2010, the Managing Members raised funds promising investors that they would generate substantial returns through conservative investments in high-grade debt instruments and, in some cases, limited physical commodities transactions. Additionally, the offering materials and prospectus for Vestium Equity Funds further assured investors that Imperium would safeguard their funds from impermissible uses. Contrary to these assurances, however, the defendants disregarded the Funds' respective investment parameters and used investor funds for illiquid private investments and loans to affiliate entities. Additionally, although the Funds incurred investment losses of at least $8.1 million, the Managing Members disseminated monthly statements falsely depicting consistent profits and paid at least $6 million to investors in alleged profits. The Managing members further paid themselves over $1.3 million in compensation that was improperly based on inflated asset values and fictitious profits. The SEC's complaint further alleges that Buckhannon, Mittasch, Paganes and Barikmo collectively misappropriated at least $734,000 of investor funds to themselves and others.
Saturday, January 1, 2011
Securities and Exchange Commission v. Kenneth W. Burnt, Perimeter Wealth Financial Services, Inc., and KSB Financial, Inc.
On December 20, 2010 the Securities and Exchange Commission filed a civil injunctive action in U.S. District Court for the Northern District of Georgia, charging Kenneth W. Burnt (“Burnt”), Perimeter Wealth Financial Services, Inc. (“Perimeter Wealth”) and KSB Financial, Inc. (“KSB”), with violations of federal securities laws for making false and misleading statements in connection with an unregistered covered-call equities trading program.
The Commission’s Complaint alleges that Burnt, through two entities which he controls, Perimeter Wealth and KSB, raised approximately $4.5 million from more than 20 investors. Burnt represented to investors that: (1) investment returns were guaranteed to be between 8% to 12% per annum; (2) Burnt would not be paid any funds for his advisory services unless investors were earning 8% minimum annualized returns; and (3) any principal losses or shortfalls to the guaranteed returns would be contractually covered by a reserve account funded by defendants. These representations were false in that Burnt failed to disclose to investors that he had begun directly drawing on investor funds prior to their earning the minimum guaranteed interest and that the purported reserve account was inadequately funded and incapable of covering the investor losses incurred. Since its inception through November 30, 2010, the defendants’ covered-call program has suffered net equalized losses of approximately 15%.
In its Complaint, the Commission alleges that Burnt and Perimeter Wealth violated Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”). The Complaint further alleges that KSB violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act.
On December 21, 2010 the Honorable William S. Duffey, Jr., United States District Judge for the Northern District of Georgia, entered an order preliminarily enjoining the defendants’ violative conduct, instituting a limited asset freeze, and requiring defendants to produce an accounting of all funds raised in violation of the federal securities laws as well as an accounting of the disposition and use of said proceeds. The defendants consented to the order without admitting or denying the allegations of the Commission’s complaint. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter.
The Commission’s Complaint alleges that Burnt, through two entities which he controls, Perimeter Wealth and KSB, raised approximately $4.5 million from more than 20 investors. Burnt represented to investors that: (1) investment returns were guaranteed to be between 8% to 12% per annum; (2) Burnt would not be paid any funds for his advisory services unless investors were earning 8% minimum annualized returns; and (3) any principal losses or shortfalls to the guaranteed returns would be contractually covered by a reserve account funded by defendants. These representations were false in that Burnt failed to disclose to investors that he had begun directly drawing on investor funds prior to their earning the minimum guaranteed interest and that the purported reserve account was inadequately funded and incapable of covering the investor losses incurred. Since its inception through November 30, 2010, the defendants’ covered-call program has suffered net equalized losses of approximately 15%.
In its Complaint, the Commission alleges that Burnt and Perimeter Wealth violated Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”). The Complaint further alleges that KSB violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act.
On December 21, 2010 the Honorable William S. Duffey, Jr., United States District Judge for the Northern District of Georgia, entered an order preliminarily enjoining the defendants’ violative conduct, instituting a limited asset freeze, and requiring defendants to produce an accounting of all funds raised in violation of the federal securities laws as well as an accounting of the disposition and use of said proceeds. The defendants consented to the order without admitting or denying the allegations of the Commission’s complaint. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter.
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