On April 22, 2011, the Securities and Exchange Commission obtained an emergency court order to shut down a Beverly Hills, Calif. hedge fund and wealth management business targeting retirees, university professors, and members of the Christian community.
The SEC alleges that IU Group Inc., its principal Elijah Bang, and its salesperson Daniel Lee targeted retirees and claimed on websites to have been founded by “devoted Christians who believe in God, Jesus Christ, and the Holy Spirit.” Lee allegedly also sent “cold call” e-mail solicitations to university professors.
It appears that IU Group was unsuccessful in obtaining any hedge fund investors or wealth management clients before the SEC’s emergency action halted its operations.
According to the SEC’s complaint filed in federal court in Los Angeles, Bang and Lee made numerous false representations to potential investors and wealth management clients, including the following statements:
The hedge fund was operational and had a successful performance history since January 2007.
The majority of IU Wealth’s clients are professional athletes, actors, producers, doctors, professors, politicians, and executives of private corporations.
IU Wealth has over $800 million under management.
Monday, April 25, 2011
Tuesday, April 19, 2011
SEC Charges Former Hedge Fund Portfolio Manager With Insider Trading
The Securities and Exchange Commission today charged a former hedge fund portfolio manager with insider trading in a bio-pharmaceutical company based on confidential information about negative results of the company’s clinical drug trial.
The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least $30 million in losses.
The SEC previously charged the medical researcher – Dr. Yves M. Benhamou – who illegally tipped Skowron with the non-public information and received envelopes of cash in return according to the SEC’s amended complaint filed today in federal court in Manhattan to additionally charge Skowron. The hedge funds, which have been charged as relief defendants in the SEC’s amended complaint, have agreed to pay back $33 million in ill-gotten gains.
In a parallel action today, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Skowron.
According to the SEC’s amended complaint, Benhamou served on the Steering Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C. While serving on the Steering Committee, Benhamou provided consulting services to Skowron through an expert networking firm. But over time, he and Skowron developed a friendship. By April 2007, many of their communications were independent of the expert networking firm. Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred during Phase 3 of the trial.
The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least $30 million in losses.
The SEC previously charged the medical researcher – Dr. Yves M. Benhamou – who illegally tipped Skowron with the non-public information and received envelopes of cash in return according to the SEC’s amended complaint filed today in federal court in Manhattan to additionally charge Skowron. The hedge funds, which have been charged as relief defendants in the SEC’s amended complaint, have agreed to pay back $33 million in ill-gotten gains.
In a parallel action today, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Skowron.
According to the SEC’s amended complaint, Benhamou served on the Steering Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C. While serving on the Steering Committee, Benhamou provided consulting services to Skowron through an expert networking firm. But over time, he and Skowron developed a friendship. By April 2007, many of their communications were independent of the expert networking firm. Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred during Phase 3 of the trial.
Wall Street Banks and SEC Near Deal on Toxic Mortgage Investments
U.S. securities regulators are in talks with several major Wall Street banks to settle fraud allegations related to mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter.
U.S. securities regulators are in talks with several major Wall Street banks to settle fraud allegations related to mortgage-bond deals that helped unleash the financial crisis. Jean Eaglesham has details.
.The expected settlements, some of which could be reached as soon as next week, collectively mark the biggest attempt by enforcement agencies to hold Wall Street accountable for its role in the subprime mortgage bust.
The cases highlight the aggressive tactics banks used to sell these securities to investors who suffered big losses. They also show how the banks' desire to keep the $1 trillion mortgage securities business going helped fuel the housing bubble.
The Securities and Exchange Commission is aiming to reach a series of settlements with individual firms over the sales of the investments, rather than a big industrywide deal, according to people familiar with the matter.
The settlements are expected to vary significantly among banks—but few, if any, are expected to surpass the $550 million penalty that Goldman Sachs Group Inc. paid last year to settle allegations that it misled investors in a mortgage-bond investment called Abacus 2007-AC1. That penalty was the largest ever paid by a Wall Street firm to settle SEC charges. Goldman didn't admit or deny the allegations.
U.S. securities regulators are in talks with several major Wall Street banks to settle fraud allegations related to mortgage-bond deals that helped unleash the financial crisis. Jean Eaglesham has details.
.The expected settlements, some of which could be reached as soon as next week, collectively mark the biggest attempt by enforcement agencies to hold Wall Street accountable for its role in the subprime mortgage bust.
The cases highlight the aggressive tactics banks used to sell these securities to investors who suffered big losses. They also show how the banks' desire to keep the $1 trillion mortgage securities business going helped fuel the housing bubble.
The Securities and Exchange Commission is aiming to reach a series of settlements with individual firms over the sales of the investments, rather than a big industrywide deal, according to people familiar with the matter.
The settlements are expected to vary significantly among banks—but few, if any, are expected to surpass the $550 million penalty that Goldman Sachs Group Inc. paid last year to settle allegations that it misled investors in a mortgage-bond investment called Abacus 2007-AC1. That penalty was the largest ever paid by a Wall Street firm to settle SEC charges. Goldman didn't admit or deny the allegations.
Friday, April 15, 2011
Securities and Exchange Commission v. Inofin, Inc., Michael Cuomo, Kevin Mann, Sr., Melissa George, Thomas Keough, David Affeldt, Nancy Keough
SEC CHARGES SUBPRIME AUTO LOAN LENDER AND EXECUTIVES WITH FRAUD
The Securities and Exchange Commission announced that it filed a civil injunctive action today in federal district court in Massachusetts charging Massachusetts-based subprime auto loan provider Inofin Inc. and three company executives with misleading investors about their lending activities and diverting millions of dollars in investor funds for their personal benefit. The SEC also charged two sales agents with illegally offering to sell company securities without being registered with the SEC as broker-dealers.
The SEC alleges that Inofin executives Michael Cuomo of Plymouth, Mass., Kevin Mann of Marshfield, Mass., and Melissa George of Duxbury, Mass., illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. Investors in the notes were told that Inofin would use the money for the sole purpose of funding subprime auto loans. As part of the pitch, Inofin and its executives told investors that they could expect to receive returns of 9 to 15 percent because Inofin loaned investor money to its subprime borrowers at an average rate of 20 percent. But unbeknownst to investors, and starting in 2004, approximately one-third of investor money raised was instead used by Cuomo and Mann to open four used car dealerships and begin multiple real estate property developments for their own benefit.
Inofin is not registered with the SEC to offer securities to investors.
According to the SEC’s complaint filed in federal court in Boston, Inofin and the executives materially misrepresented Inofin’s financial performance beginning as early as 2006 and continuing through 2011. Inofin had a negative net worth and a progressively deteriorating financial condition caused not only by the failure of Inofin’s undisclosed business activities, but also by management’s decisions in 2007, 2008, and 2009 to sell some of its auto loan portfolio at a substantial discount to solve ever-increasing cash shortages that Inofin concealed from investors. Nonetheless, Inofin and its principal officers continued to offer and sell Inofin securities while knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and sound investment.
The SEC further alleges that beginning in 2006 and continuing to April 2010, Inofin’s executives defrauded investors while maintaining Inofin’s license to do business as a motor vehicle sales finance company by preparing and submitting materially false financial statements to its licensing authority, the Massachusetts Division of Banks. The SEC’s complaint charges Cuomo, Mann, and George with violating the antifraud and registration provisions of the federal securities laws, and seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties.
The SEC’s charges against the two sales agents — David Affeldt and Thomas K. (Kevin) Keough — allege that they promoted the offering and sale of Inofin’s unregistered securities. They were unjustly enriched with more than $500,000 in referral fees between 2004 and 2009. Affeldt and Keough are charged with selling the unregistered Inofin securities and failing to register with the SEC as a broker-dealer, and the SEC seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
The Commission’s complaint alleges that Inofin, Cuomo, Mann, and George violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that Kevin Keough, and David Affeldt violated Sections 5(a), and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The Commission seeks the entry of a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of civil monetary penalties against Inofin, Cuomo, Mann, George, Kevin Keough, and David Affeldt. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
The SEC appreciates the assistance of the Secretary of the Commonwealth of Massachusetts William F. Galvin, who today filed charges against Inofin, Cuomo, Mann, George, Affeldt, Kevin Keough, and Nancy Keough based on the same conduct. The SEC also appreciates the assistance of the Massachusetts Division of Banks, which previously took action requiring Inofin to surrender its license to operate as a subprime auto lender in Massachusetts.
The Securities and Exchange Commission announced that it filed a civil injunctive action today in federal district court in Massachusetts charging Massachusetts-based subprime auto loan provider Inofin Inc. and three company executives with misleading investors about their lending activities and diverting millions of dollars in investor funds for their personal benefit. The SEC also charged two sales agents with illegally offering to sell company securities without being registered with the SEC as broker-dealers.
The SEC alleges that Inofin executives Michael Cuomo of Plymouth, Mass., Kevin Mann of Marshfield, Mass., and Melissa George of Duxbury, Mass., illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. Investors in the notes were told that Inofin would use the money for the sole purpose of funding subprime auto loans. As part of the pitch, Inofin and its executives told investors that they could expect to receive returns of 9 to 15 percent because Inofin loaned investor money to its subprime borrowers at an average rate of 20 percent. But unbeknownst to investors, and starting in 2004, approximately one-third of investor money raised was instead used by Cuomo and Mann to open four used car dealerships and begin multiple real estate property developments for their own benefit.
Inofin is not registered with the SEC to offer securities to investors.
According to the SEC’s complaint filed in federal court in Boston, Inofin and the executives materially misrepresented Inofin’s financial performance beginning as early as 2006 and continuing through 2011. Inofin had a negative net worth and a progressively deteriorating financial condition caused not only by the failure of Inofin’s undisclosed business activities, but also by management’s decisions in 2007, 2008, and 2009 to sell some of its auto loan portfolio at a substantial discount to solve ever-increasing cash shortages that Inofin concealed from investors. Nonetheless, Inofin and its principal officers continued to offer and sell Inofin securities while knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and sound investment.
The SEC further alleges that beginning in 2006 and continuing to April 2010, Inofin’s executives defrauded investors while maintaining Inofin’s license to do business as a motor vehicle sales finance company by preparing and submitting materially false financial statements to its licensing authority, the Massachusetts Division of Banks. The SEC’s complaint charges Cuomo, Mann, and George with violating the antifraud and registration provisions of the federal securities laws, and seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties.
The SEC’s charges against the two sales agents — David Affeldt and Thomas K. (Kevin) Keough — allege that they promoted the offering and sale of Inofin’s unregistered securities. They were unjustly enriched with more than $500,000 in referral fees between 2004 and 2009. Affeldt and Keough are charged with selling the unregistered Inofin securities and failing to register with the SEC as a broker-dealer, and the SEC seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
The Commission’s complaint alleges that Inofin, Cuomo, Mann, and George violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that Kevin Keough, and David Affeldt violated Sections 5(a), and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The Commission seeks the entry of a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of civil monetary penalties against Inofin, Cuomo, Mann, George, Kevin Keough, and David Affeldt. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
The SEC appreciates the assistance of the Secretary of the Commonwealth of Massachusetts William F. Galvin, who today filed charges against Inofin, Cuomo, Mann, George, Affeldt, Kevin Keough, and Nancy Keough based on the same conduct. The SEC also appreciates the assistance of the Massachusetts Division of Banks, which previously took action requiring Inofin to surrender its license to operate as a subprime auto lender in Massachusetts.
Thursday, April 14, 2011
Proposed Rule Change to Amend the Customer and Industry Codes of Arbitration Procedure Relating to Motion Practice
Financial Industry Regulatory Authority, Inc.'s filing with the Securities and Exchange Commission of a proposed rule change to amend FINRA Rules 12206, 12503, and 12504 of the Code of Arbitration Procedure for Customer Disputes and Rules 13206, 13503, and 13504 of the Code of Arbitration Procedure for Industry Disputes to provide moving parties with a five-day period to reply to responses to motions has now been approved.
Wednesday, April 13, 2011
JPMorgan Ex-Structured Product CDO Head Llodra May Face SEC Suit
U.S. regulators notified a former JPMorgan Chase & Co. (JPM) executive whose unit packaged mortgage- linked investments that he may be sued for his role in selling the securities as the housing crisis worsened in 2007.
Michael Llodra, who was global head of structured-product collateralized debt obligations when he left JPMorgan, received a Wells notice from the Securities and Exchange Commission on Jan. 4 saying investigators planned to pursue civil claims against him related to the sale of a 2007 product, according to Llodra’s broker registration filings. The SEC also gave a Wells notice on Jan. 14 to Edward Steffelin, a former executive at a firm that helped manage JPMorgan’s 2007 “Squared” CDO, his brokerage records show.
The SEC has been probing whether JPMorgan, the second biggest U.S. bank by assets, and Steffelin’s former firm, GSC Group, misled investors about hedge-fund Magnetar Capital LLC’s possible role in selecting underlying assets in the $1.1 billion Squared deal, according to a person briefed on the matter who spoke on condition of anonymity because the probe isn’t public.
Magnetar has said it bought the junior-most slice of the Squared CDO as part of its strategy of investing in some mortgage-linked securities while betting against other housing debt, sometimes including bonds from the same deals. CDOs package assets such as mortgage bonds and buyout loans into new securities with varying risks.
Michael Llodra, who was global head of structured-product collateralized debt obligations when he left JPMorgan, received a Wells notice from the Securities and Exchange Commission on Jan. 4 saying investigators planned to pursue civil claims against him related to the sale of a 2007 product, according to Llodra’s broker registration filings. The SEC also gave a Wells notice on Jan. 14 to Edward Steffelin, a former executive at a firm that helped manage JPMorgan’s 2007 “Squared” CDO, his brokerage records show.
The SEC has been probing whether JPMorgan, the second biggest U.S. bank by assets, and Steffelin’s former firm, GSC Group, misled investors about hedge-fund Magnetar Capital LLC’s possible role in selecting underlying assets in the $1.1 billion Squared deal, according to a person briefed on the matter who spoke on condition of anonymity because the probe isn’t public.
Magnetar has said it bought the junior-most slice of the Squared CDO as part of its strategy of investing in some mortgage-linked securities while betting against other housing debt, sometimes including bonds from the same deals. CDOs package assets such as mortgage bonds and buyout loans into new securities with varying risks.
Tuesday, April 12, 2011
UBS Fined By FINRA For Lehman Principal Protected Note Meltdown
The Financial Industry Regulatory Authority imposed a $2.5 million fine on UBS AG's (UBS) wealth-management services unit and ordered $8.25 million in restitution in settlement of charges that it had misled investors about the risk of default in certain Lehman Brothers Holdings Inc. notes.
In the months leading up to Lehman's collapse, UBS Financial Services Inc. advertised the investment bank's so-called principal-protection notes without emphasizing that the debt was still unsecured, Finra said. Lehman eventually filed for bankruptcy in September 2008.
PPNs are fixed-income securities with a bond and an option component that promise a minimum return equal to the investor's initial investment. They don't guarantee the principal in the event of a default.
"This matter underscores a firm's need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors," Finra enforcement chief Brad Bennett said. "In cases, UBS's financial advisers did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer's credit risk so investors would understand the magnitude of the potential losses."
In the months leading up to Lehman's collapse, UBS Financial Services Inc. advertised the investment bank's so-called principal-protection notes without emphasizing that the debt was still unsecured, Finra said. Lehman eventually filed for bankruptcy in September 2008.
PPNs are fixed-income securities with a bond and an option component that promise a minimum return equal to the investor's initial investment. They don't guarantee the principal in the event of a default.
"This matter underscores a firm's need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors," Finra enforcement chief Brad Bennett said. "In cases, UBS's financial advisers did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer's credit risk so investors would understand the magnitude of the potential losses."
Thursday, April 7, 2011
U.S. appeals court upholds Jeff Skilling conviction
Former Enron Chief Executive Jeffrey Skilling was unsuccessful in his latest bid to overturn his criminal conviction as a U.S. appeals court called any errors in his trial "harmless."
A jury convicted Skilling in 2006 on 19 counts, including conspiracy and securities fraud, in connection with the collapse of the one-time energy trading giant. Prosecutors said Skilling's fraud was an elaborate ruse to fool investors into believing the shaky company was healthy.
He was sentenced to 292 months in prison. However, the U.S. Supreme Court later invalidated one theory underpinning the conspiracy conviction, and instructed the appeals court to review the case again.
The U.S. 5th Circuit Court of Appeals on Wednesday found that any error committed by the trial judge was "harmless." Skilling's challenge to all of his convictions must fail, the appeals court ruled.
A jury convicted Skilling in 2006 on 19 counts, including conspiracy and securities fraud, in connection with the collapse of the one-time energy trading giant. Prosecutors said Skilling's fraud was an elaborate ruse to fool investors into believing the shaky company was healthy.
He was sentenced to 292 months in prison. However, the U.S. Supreme Court later invalidated one theory underpinning the conspiracy conviction, and instructed the appeals court to review the case again.
The U.S. 5th Circuit Court of Appeals on Wednesday found that any error committed by the trial judge was "harmless." Skilling's challenge to all of his convictions must fail, the appeals court ruled.
Monday, April 4, 2011
Wachoiva to Face SEC Civil Charges Over Mortgage Backed Bond Deals
The Securities and Exchange Commission is preparing to bring civil charges against Wachovia Corp., the once-troubled bank now owned by Wells Fargo & Co., for allegedly overpricing mortgage-bond deals, according to people familiar with the matter.
The agency has focused on the amounts Wachovia charged investors for collateralized debt obligations, a type of security created by packaging mortgages, according to people familiar with the matter. SEC officials believe the Charlotte, N.C., bank applied excessive markups that didn't reflect the diminishing value of the underlying loans, according to people familiar with the matter.
Wells Fargo, which assumed Wachovia's liabilities when it purchased the bank for $19.36 billion in 2008, declined to comment. John Nester, a spokesman for the SEC, also declined to comment.
The Wachovia inquiry is part of a broader probe by the SEC into Wall Street's sales of about $1 trillion worth of CDOs. Banks' appetite for the lucrative deals fueled the demand for the risky subprime mortgages underlying many of the bonds. But the housing collapse dragged down the value of CDOs, spreading losses to investors around the world.
As part of its broad probe, the SEC, which has stepped up efforts to hold Wall Street accountable for some of the losses during the financial crisis, has issued subpoenas for documents and interviewed officials from nearly every bank or securities firm that was a major player in creating, selling or trading CDOs. The agency is in discussions with firms and could announce charges and settlements concurrently, said one person familiar with the matter. Banks that received SEC subpoenas include Citigroup Inc., Deutsche Bank AG, J.P. Morgan Chase & Co., Morgan Stanley and UBS AG.
The agency has focused on the amounts Wachovia charged investors for collateralized debt obligations, a type of security created by packaging mortgages, according to people familiar with the matter. SEC officials believe the Charlotte, N.C., bank applied excessive markups that didn't reflect the diminishing value of the underlying loans, according to people familiar with the matter.
Wells Fargo, which assumed Wachovia's liabilities when it purchased the bank for $19.36 billion in 2008, declined to comment. John Nester, a spokesman for the SEC, also declined to comment.
The Wachovia inquiry is part of a broader probe by the SEC into Wall Street's sales of about $1 trillion worth of CDOs. Banks' appetite for the lucrative deals fueled the demand for the risky subprime mortgages underlying many of the bonds. But the housing collapse dragged down the value of CDOs, spreading losses to investors around the world.
As part of its broad probe, the SEC, which has stepped up efforts to hold Wall Street accountable for some of the losses during the financial crisis, has issued subpoenas for documents and interviewed officials from nearly every bank or securities firm that was a major player in creating, selling or trading CDOs. The agency is in discussions with firms and could announce charges and settlements concurrently, said one person familiar with the matter. Banks that received SEC subpoenas include Citigroup Inc., Deutsche Bank AG, J.P. Morgan Chase & Co., Morgan Stanley and UBS AG.
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