Securities Enforcement Reporter

Document Sample
Securities Enforcement Reporter Powered By Docstoc
					Securities Enforcement Reporter
Volume 1 / Number 1                                                                                                                             September 2009

StAteS                                                                                      Click any listing to read the
                                                                                            enforcement summary
ArizonA CorporAtion Commission imposes CeAse And desist,                                    Arizona
restitution And penAlties on Broker for illegAl sAles of                                    In the Matter of Dustin J. Lunt et al., Ariz. Corp.
                                                                                            Comm. (July 16, 2009) . . . . . . . . . . . . . . . . . . . . . . . . 1
seCurities And fAilure to supervise Order, Ariz. Corp. Comm. v. Lunt,
Docket No. 8-20674A-09-0199 (July 16, 2009).                                                California
                                                                                            In the Matter of Brian W. Bokon et al., Calif. Corp.
    Finding of violations of A.R.S. § 44-1841 by offering or selling securities that were   Comm. (July 21, 2009) . . . . . . . . . . . . . . . . . . . . . . . . 2
    neither registered nor exempt from registration, A.R.S. § 44-1842 by offering or        In the Matter of David Olvera, July 21, 2009 (Cal.
    selling securities while neither registered as dealers or salesmen nor exempt from      Corp. Comm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
    registration, and A.R.S. § 44-1991 by making untrue statements or misleading            In the Matter of Pinupitu, Inc. et al., Calif. Corp.
    omissions of material facts; order to cease and desist pursuant to A.R.S. § 44-         Comm. (July 21, 2009) . . . . . . . . . . . . . . . . . . . . . . . . 3
    2032, order for restitution pursuant to A.R.S. § 44-203; order for administrative
    penalties pursuant to A.R.S. § 44-2036; order of revocation of securities salesman
                                                                                            In The Matter Of Robert Tarini, Conn. Securities and
    registration pursuant to: (i) A.R.S. § 44-1962(A)(2) for violating A.R.S. §§ 44-        Business Investments Division (July 16, 2009) . . . . 3
    1841 and44-1991;(ii) A.R.S. § 44-1962(A)(10) for engaging in dishonest or un-
    ethical practices (effecting securities transactions that were not recorded on the
    records of the dealer with whom he was registered at the time of the transactions);     In the Matter of Michael Bark, July 9, 2009 (Iowa Ins
                                                                                            Comm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
    and (iii) A.R.S. § 44-l962(A)(11) for failing to reasonably supervise salesmen un-
    der the salesman’s supervisory control                                                  Massachusetts
                                                                                            In the Matter of Economic Development Finance
Findings                                                                                    Corp., Economic Development Funding Corporation,
According to an order issued by the Arizona Corporation Commission on July                  Boston South Financial Solutions, Inc., and Robert
                                                                                            Blaisdell, July 8, 2009 (Mass. Sec. Div.) . . . . . . . . . . 5
16, 2009, from October to November 2007, Dustin J. Lunt, a resident of Maricopa
County, Arizona, offered and sold to four investors $70,000 of “Rate of Return              Missouri
Contracts” issued by DJL & Associates, L.L.C.                                               In the Matter of Mark Andrew McEwen, July 9, 2009
                                                                                            (Mass. Sec. Div.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Rate of Return Contracts confirmed the amount of the investment by the
                                                                                            New Jersey
investors in DJL and gave the investors two options regarding the return on
their investment: “Monthly Income” and “Monthly Compounding.” The inves-                    In The Matter Of Samuel Serritella, N.J. Bureau of Sec.
                                                                                            (July 21, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
tors would either “be paid monthly at an interest rate of 5%’ or “get credited a
monthly interest of 5% [while] the money stays in and continues to compound.”               Pennsylvania
                                                                                            In the Matter of Charles Couch et al., Pa. Sec. Com-
Lunt deposited all of the investors’ money into one of his bank accounts and                mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 7
expected to keep as compensation the difference between what the investments                In the Matter of Julia Dagovich et al., Pa. Sec. Com-
would actually yield and the 5% return to be paid to investors pursuant to the Rate         mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 7
of Return Contracts. Lunt represented that DJL would put the investors’ money               In the Matter of Dianna S. Liner et al., Pa. Sec. Com-
into “some alternative investments,” including a highly profitable venture that             mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 7
funded television advertisements for a variety of products (the “TV Ad Venture”).           In the Matter of Gary M. Lumpp et al., Pa. Sec. Com-
In August 2007, Lunt viewed the TV Ad Venture’s website that claimed investors              mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 8
would earn annual returns between 4,800% and 12,000%. In September 2007, Lunt               In the Matter of Immensity Ventures, LLC et al., Pa.
learned that the TV Ad Venture’s operations were transitioning offshore. In early           Sec. Commission (July 20, 2009) . . . . . . . . . . . . . . . 8
November 2007, the TV Ad Venture stopped making payments to its investors and               In the Matter of Robert DeKett et al., Pa. Sec. Com-
Lunt was unable to obtain a refund of principal from the operators of the TV Ad             mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 9
Venture. In late December 2007, Lunt learned that the SEC had filed an enforce-             In the Matter of Joseph Gallardo et al.., Pa. Sec. Com-
ment action against the principals of the TV Ad Venture for fraud, alleging that            mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 9
the TV Ad Venture had no business operations and was a Ponzi scheme.                        In the Matter of Richard L. Tifone et al., Pa. Sec. Com-
                                                                                            mission (July 20, 2009) . . . . . . . . . . . . . . . . . . . . . . . 9
Lunt did not disclose to the investors the foregoing information. Although Lunt
and DJL received some payments from the operators of the TV Ad Venture,                                                                  continued on page 2
$20,000 of the investors’ money had been lost. In January 2008, Lunt told the
investors that the TV Ad Venture had lost money and that “things didn’t work                SeC
as planned,” and Lunt refunded to the investors the $50,000 that remained.                  SEC v. Jerry F. Wells, July 6, 2009 (US Dist. Ct., South
                                                                                            Car.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Rate of Return Contracts given to all of the investors guaranteed their
principal investment and provided that, upon cancellation, the investors                    SEC v. Colonial Investment Management LLC, Colo-
                                                                                            nial Fund LLC, and Cary G. Brody, July 7, 2009 (US
would receive a full refund. Lunt and DJL have repaid in full some, but not
                                                                                            Dist. Court, SDNY). . . . . . . . . . . . . . . . . . . . . . . . . . 11
all, of the investors.
                                                                                            SEC v. Sky Capital LLC a/k/a Granta Capital LLC,
In addition, from August 2007 to January 2008, Lunt was a registered                        Ross Mandell, Stephen Shea, Adam Harrington Ruck-
securities salesman and branch manager at World Group Securities (WGS),                     deschel, Arn Wilson, Michael Passaro and Robert
where he supervised a salesman who raised $1,429,000 from 11 investors to                   Grabowski, July 8, 2009 (US Dist. Ct., SDNY) . . 12
invest in the TV Ad Venture, the same advertising venture for which Lunt                    SEC v. Pointer Worldwide Ltd and Tatiana Badmae-
solicited investors. Lunt knew about these sales and knew that they were                    va, July 9, 2009 (US Dist. Ct., SDNY . . . . . . . . . . . 14
neither recorded on the records of WGS nor authorized by WGS. However,                      SEC v. David M. Otto, Todd Van Siclen, Mitopharm
Lunt did not contact the investors and did not report the salesman to WGS.                  Corporation, Pak Peter Cheung, Wall Street PR, Inc.,
                                                                                            and Charles Bingham, July 13, 2009 (US Dist. Ct.,
In January 2008, the salesman asked Lunt to attempt to recoup investors’                    West. Dist. Wash) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
losses by using $470,000 of investor money in foreign currency trading.                     SEC v. Anthony Perez and Ian C. Perez, U.S. Dist Ct. –
After just a few days of trading, Lunt lost $23,486 of the investor money.                  M.D. Fla.; SEC v. Math J. Hipp, Jr. US Dist. Ct. – W.D.
These securities transactions also were not recorded on the records of WGS.                 Wash..;, SEC v. Carl E. Binette and Peter E. Talbot, US
                                                                                            Dist. Ct – Mass (July 13, 2009) . . . . . . . . . . . . . . . . 18

Order by Consent                                                                            SEC v. Deborah Duffy, U.S. Dist. Ct – SDNY (July 21,
                                                                                            2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Lunt and DJL were ordered to: (i) permanently cease and desist from violat-
ing the Securities Act; (ii) pay restitution in the amounts of $24,363 plus                 CFtC
$23,486; and (iii) pay an administrative penalty in the amount of $20,000.                  CFTC v. Eldon A. Gresham, d/b/a The Gresham
                                                                                            Company AND Werner H. Beiersdoerfer, Interveston
In addition, the securities salesman registration of Lunt was revoked.                      Wines, LLC, and Kirk M. Gresham, July 2, 2009, (US
                                                                                            Dist. Ct,. North. Dist- Ga) . . . . . . . . . . . . . . . . . . . . 21
CAliforniA depArtment of CorporAtions Commission                                            CFTC v. David Michael Kogan and First Capital
imposes desist And refrAin order on seller of “equity                                       Futures Group a/k/a and d/b/a First Capital Group,
                                                                                            June 26, 2009 US Dist. Ct, West Dist - Mo.) . . . . ..22
leverAge investment loAn progrAm” Order, Calif. Corp. Comm’n.
v. Bokon (July 21, 2009).                                                                   SeC/CFtC
                                                                                            CFTC v. Sean Nathan Healy AND Shalese Rania
    Order to desist and refrain finding violations of California Corporations Code          Healy and Sand Dollar Investing Partners, LLC, July
    § 25110 by offering or selling securities that were neither qualified nor exempt        12, 2009 (US Dist. Ct., Mid Dist., Pa) . . . . . . . . . . 23
    and § 25401 by making untrue statements or omissions of material facts                  Commentary
                                                                                            State securities regulators: the real thing . . . . . . . . 10
                                                                                            Whistleblower program’s revolutionary promise
From February 2007 to August 2007,                investors were not                        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Westfina Financial Group, Inc., a Nevada         told that westFina and                     “New” SEC same as the old SEC? . . . . . . . . . . . . . . 20
corporation, and Brian W. Bokon, its             Bokon were misusing
President, sold securities in the form of        investor money
promissory notes in the Equity Leverage
Investment Loan Program (“ELI”) offered
by WestFina to at least 5 investors in excess of $1,000,000. Bokon obtained
investment money by soliciting investors through classified ads in newspa-
pers and by word of mouth.
ELI was purported to be a program where investors can unlock the hidden
potential in their homes by borrowing money from their equity and invest-
ing this money to earn high interest so that the return on investment would
pay their mortgage expenses and provide extra income. The customers were
promised a 12% yearly return to be paid every four months on their equity
because their investment was supposedly secured by assets that earned a
33% return on investment.

2                                                                                  Securities Enforcement Reporter                                      September 2009
According to a July 21, 2009 Desist and Refrain Order, inves-         securities in the form of investment contracts and/or prom-
tors were not told that WestFina and Bokon were misusing              issory notes labeled “Agreement for Investment” during
investor money, including using investor money to buy a               face-to-face meetings with individual investors. Kim rep-
boat; and investors were falsely guaranteed a 12% return              resented to investors that they would receive a 2% monthly
and the return of principal depending on the terms of the             return on their investment. Pinupitu and Kim specifically
investment based on representations that the investment               targeted members of the Korean-American community
was supposedly secured by both UCC-1 bankable paper                   when soliciting investors.
and WestFina and its employees’ assets.                               At least 4 California investors purchased Pinupitu Agree-
                                                                      ments for Investment, totaling at least $1,178,000.
CAliforniA depArtment of CorporAtions                                 According to July 21, 2009 Desist and Refrain Order, Kim
Commission imposes desist And refrAin or-                             told investors that he was a licensed stockbroker when in
der on truCk Bedliner frAnChisor Order, Calif.                        fact he had terminated his registration with the Financial
Corp. Comm’n. v. Olvera (July 21, 2009).                              Industry Regulatory Authority (formerly National Associa-
    Finding of violations of California Corporations Code §           tion of Securities Dealers) on or about January 5, 2005. Kim
    31110 by offering or selling franchises that were neither reg-    also, according to the Order, misrepresented and/or failed
    istered nor exempt; order to desist and refrain from further      to disclose to investors the risks related to the purchase of
    sales of franchises until registered pursuant to C.C.C. § 31402   the Pinupitu Agreement for Investment, and information
                                                                      regarding the assets, liabilities, profits, losses and cash flows
In 2007, California corporation Spray-On Bedliners, L.L.C.,
                                                                      of Pinupitu.
Spray-On Bedliners Development Company and David Olvera
of Stockton, California, began offering and selling franchises
pursuant to “Operating Agreements” to California residents.           ConneCtiCut BAnking Commissioner seeks A
                                                                      fine of up to $100,000 from rhode islAnd mAn
The “Operating Agreement” grants the “Member” the right
to engage in the business of operating, selling, supplying            for providing fAlse investigAtive testimony
                                                                      Order, Conn. Sec. and Bus. Inv. Div. v. Tarini, Docket No. CF-
and installing “spray-on” truck bedliners in a designated
                                                                      2008-7565-S (July 16, 2009)
franchise region in Northern or Central California. The
“Member,” while engaging in the business, is required to                  Order to cease and desist, notice of intent to fine and notice of
observe the specifications, directions, and processes fur-                right to hearing for violation of § 36b-23 of the Connecticut
nished by Olvera and Spray-On including the use of specific               Uniform Securities Act for making an oral statement in an
advertisement pamphlets and business operations meth-                     investigation that is false or misleading in a material respect.
ods. The “Member” is required to use the trademark or
tradename associated with “Spray-On Bedliners”. Lastly, the           Underlying Facts
“Member” is required to pay to Olvera and Spray-On a fee              On August 4, 2006 Rhode Island resident Robert Tarini
in the amount of at least $70,000.                                    testified under oath in an investigative deposition pursuant
According to the July 21, 2009 Desist and Refrain Order,              to a subpoena. Tarini was President of Markland Technolo-
Olvera and Spray-On’s offer and sale of franchises in Califor-        gies, Inc., a Rhode Island based holding company that held
nia have not been registered under the Franchise Investment           various intellectual property assets related to electro-optic
Law and are not exempted under that law.                              and biometric sensing technologies.
                                                                      Tarini testified that Charles A. Verdi testified that Verdi was
CAliforniA depArtment of CorporAtions                                 a consultant to Markland Technologies, who was retained
Commission imposes desist And refrAin                                 by Markland Technologies to “provide visibility for the
                                                                      corporation” and to “pro-
order on seller of investment ContrACts to
                                                                      vide some guidance with          tarini knew that in
memBers of koreAn-AmeriCAn Community
                                                                      respect to the structure of
Order, Calif. Corp. Comm’n v. Pinupitu, Inc. (July 21, 2009)                                           reality verdi actively
                                                                      public companies.”
    Order to desist and refrain finding violations of California
                                                                                                          solicited investments
                                                                      Tarini further testified
    Corporations Code § 25110 by offering or selling securities                                          From new investors
                                                                      that Verdi “may have
    that were neither qualified nor exempt and § 25401 by mak-        introduced investors to
    ing untrue statements or omissions of material facts              the company . . . . To the best of my recollection I don’t
                                                                      know that he did more than that.” Later in the Deposition,
                                                                      Tarini offered to clarify that earlier statement. Respondent
Beginning in September 2006, Pinupitu, Inc., a California             then testified that, inter alia, “[Verdi’s] basic role was not to
corporation, and Jin Sung Kim of Irvine, California sold

Contact us at or call (888) 981-4448                                                                         3
specifically solicit anyone’s interest. It was to verify whom    or misleading in a material respect. Tarini is also given
they claimed to be and that their organizations were whom        notice of a hearing and the Commissioner’s intent to fine
they claimed to be, et cetera.”                                  him a maximum of $100,000.
Tarini also testified that Verdi did not represent Markland
Technologies “with respect to the detailed negotiations          iowA insurAnCe Commissioner issues CeAse
on any transactions”. Respondent was also asked who, on          And desist order to unregistered seCurities
behalf of Markland Technologies, negotiated the terms of         Agent engAged in selling shAres in AlternA-
a specific financing transaction between Markland Tech-          tive energy CompAny Order, Iowa Ins. Comm’n v. Bark,
nologies and a particular Connecticut-based hedge fund.          Docket No. 64901, (July 9, 2009)
Respondent testified that he, another officer of Markland
Technologies, and counsel for the company were the only               Cease and Desist Order issued under authority of Iowa
representatives of the company in the negotiations with the           Uniform Securities Act for Alleged Violations of: (i) §
hedge fund.                                                           502.102(7)2009 by selling unregistered securities, ii)
                                                                      502.402 and 502.301 for being an unregistered agent (iii) §
Findings:                                                             502.501 for making misrepresentations of material facts, and
According to an Order issued by the Connecticut Banking               (iv) § 502.501 for failing to state material facts (omission)
Commissioner on July 16, 2009, Tarini knew that in reality
Verdi actively solicited investments from new investors,         Underlying Facts
regularly sent out and received documents regarding this         In 2005, Michael Bark made an offer and sold shares/owner-
solicitation, including term sheets, and actively participated   ship by personal solicitation to Iowa residents in Bio-Energy
in negotiations with investors.                                  USA, a bio-energy company located in Glendale, AZ. Inves-
                                                                 tors made payment to Bark directly by means of a personal
Tarini also knew, according to the Order, that Verdi had
                                                                 check. Bark’s last known address was in Greta, Louisiana.
represented Markland Technologies in negotiating the terms
of transactions on multiple occasions and omitted to state
that Verdi had, in fact, represented Markland Technologies
in its negotiations with the hedge fund.                         According to an order filed on July 9, 2009 by the Commis-
                                                                 sioner of Insurance in the state of Iowa, Bark misrepresented
Order                                                            the investment risks taken by investors and the potential
                                                                 returns of investors in Bio-Energy. He also failed to disclose
Tarini is ordered to cease and desist from violating the pro-
                                                                 to investors (a) his background and investment experience,
visions of the Connecticut Uniform Securities Act, includ-
                                                                 (b) the scope of their risk, (c) that he had not registered as
ing making an oral statement in an investigation that is false
                                                                 an agent for the sale of securities pursuant to Iowa law, and
                                                                 (d) that the Bio- Energy were also unregistered. In addition,
                                                                 Bark failed to provide a subscription agreement and offering
                           Editor                                memorandum for the investors’ purchase.
                  Charley Seavey, JD, MBA
                                                                 Bark also made written and verbal promises to refund the
                     Contributing Editors
                                                                 amount invested to at least two individuals, but no refund
        Jonathan Matthews, JD; Stephanie Townsend, JD            was made despite considerable and desperate attempts by
               Theis Finlev, JD; Greg Jizmagian                  the investors providing their own personal bank account
                    Douglas Slain, JD, MA                        Order
                      Associate Publisher                        Bark was ordered to cease and desist from:
                         Gene Gable                              ■   offering, aiding and abetting, and/or participating in the
                                                                     sale of securities in Iowa while those securities are unreg-
                Litigation Research Group LLC                        istered, non-exempt and not federally covered;
                   225 Bush Street, 16th Floor
                    San Francisco, CA 94104                      ■   acting as an agent in Iowa without registration;
                    Telephone: (888) 981-4448
                                                                 ■   making untrue statements of material facts in the sale or
                    Facsimile: (415) 306-9365
                                                                     offer of securities; and
                                                                 ■   omitting material facts that are misleading with regards
                                                                     to the circumstances surrounding the sale of securities

4                                                                                Securities Enforcement Reporter     September 2009
Additionally, Bark was assessed a civil penalty amounting to       portfolio with Raymond James and reinvested the $435,000
$10,000 for violating provisions of the Iowa Securities Act.       in proceeds into Economic Development promissory notes.
                                                                   On November 24, 2008, Blaisdell, having complete control
                                                                   of Investor A’s assets, transferred an additional $264,000
mAssAChusetts seCurities division Alleges
                                                                   from her annuity and checking accounts (which contained
reAl estAte developer And finder sold
                                                                   life insurance proceeds from the death of her husband)
$2.5 million in risky, unregistered promis-                        into Economic Development promissory notes. Investor
sory notes to senior Citizens Complaint, Mass. Sec.                A’s investments in Economic Development now comprise
Div. v. Economic Development Finance Corp., Docket No. 2009-       90% of her assets.
0022, (July 8, 2009).
                                                                   After a majority of the promissory notes in question had
    Complaint by the Massachusetts Securities Division alleg-      been issued, in October 2008 Economic Development creat-
    ing violations of §§ 101, 201(a)-(c), 204(a)(2)(B), 204(a)     ed a private placement memorandum (the “October PPM”)
    (2)(G) and 301(1)-(3) of the Massachusetts Securities Act;     and filed for a notice filing under Regulation D. However,
    relief requested pursuant to § 407(A)(a) of the Massachu-      despite the fact that their interests had been transferred
    setts Securities Act                                           into the new securities described by the October PPM, no
                                                                   investors were given the opportunity to rescind their invest-
Underlying Facts                                                   ments, and most investors never signed the October PPM
According to a complaint filed by the Massachusetts Securi-        or associated subscription agreement. Moreover, the highly
ties Division on July 8, 2009, in March 2008 the principals        risky, unsecured securities described in the October PPM
of Dedham, Massachusetts-based Economic Development                were different from what was originally told the investors
Finance Corp. and Eco-                                             and described in promotional brochures, namely, that the
nomic Development               Blaisdell went to                  notes were guaranteed and secured.
Funding Corporation             investor a’s home
(collectively, “Economic                                           Allegations
                                several times and had
                                                                   The July 8, 2009 complaint alleges that Economic Develop-
approached Plymouth,            her turn over to him
                                                                   ment, Blaisdell and Boston South sold highly risky unreg-
Massachusetts resident          all oF her Financial               istered securities through an unregistered broker-dealer to
Robert Blaisdell and his        records.                           Massachusets senior citizens while making material misrepre-
company, Boston South                                              sentations and omissions, in violation of the aforementioned
Financial Solutions Inc. to                                        sections of the Massachusetts Securities Act. The complaint
raise money for series of proposed real estate developments,       seeks a cease-and-desist order, an accounting, restitution, a
some of which were for “workforce housing.”                        censure of Boston South, a bar of Blaisdell from offering or
Between June 2008 and March 2009, Blaisdell and Boston             selling securities in Massachusetts and administrative fines.
South raised $3.5 million in Economic Development prom-
issory notes from 26 Massachusetts investors, $2.5 million         missouri seCretAry of stAte issues CeAse And
of which was raised from senior citizens over the age of 62,       desist order to Broker for fAlse stAtements
and $1.75 million of which was raised from senior citizens         And unsuitABle reCommendAtions mAde to
over the age of 77. During part of this period, Blaisdell was
                                                                   Clients And senior Citizens Order, Mo. Sec’y of State
a registered representative with an unrelated broker-dealer;
                                                                   v. McEwen, Case No. AP-09-28, (July 9, 2009).
however, the promissory notes were not brokered by through
that entity but instead by Boston South, which has never been         Cease and desist order by the Missouri Secretary of State
registered as a broker-dealer. Economic Development paid              for multiple violations of Missouri Securities Act of 2003 §
Boston South approximately $147,000 in commissions and                409.5-501(2)
expenses for raising these funds.
                                                                   Underlying Facts
Many of Blaisdell’s senior-citizen investors were solicited at
seminars that he gave at various retirement centers around         From March 2003 through September 15, 2008, Mark
Massachusetts. For example, 86-year-old Investor A was             Andrew McEwen, resident of Saint Peters, Missouri, was a
solicited in a Council of Aging center in Harwich, Mas-            registered representative with World Group Securities, Inc.,
sachusetts, where she attended a seminar presented by              a Missouri-registered broker-dealer.
Blaisdell entitled “Investments, Annuities and Retirement          According to a cease and desist order issued by the Mis-
Analysis.” Blaisdell went to Investor A’s home several times       souri Commissioner of Securities on July 9, 2009, on
and had her turn over to him all of her financial records.         November 27, 2006 World Group entered into a consent
On July 16, 2008, Blaisdell liquidated Investor A’s securities

Contact us at or call (888) 981-4448                                                                 5
order with the Missouri Commissioner of Securities in             both suffered deterioration in their cash flows as a result of
which World Group agreed, among other things, to pay              mortgage resets. The second couple also ended up owing
a St. Charles, Missouri resident (“MR5”) $32,528.56 for           $50,000 more on their mortgage. McEwen did not disclose
the unsuitable sale of a variable rate annuity to MR5 by          to either couple that the mortgage broker that he used in both
McEwen. On January 11, 2007 McEwen went to MR5’s                  transactions paid 25% of its fees for refinancing mortgages to
home and told MR5 that the check that MR5 received from           an affiliate of World Group.
World Group was McEwen’s commission on Mr5’s vari-
able annuity and was sent to MR5 accidentally. McEwen             Findings and Order
then directed MR5 to cash the check and write McEwen a            In its July 9, 2009 order, the Commissioner of Securities
personal check for $32,528.56. In addition, from Novem-           finds that McEwen failed to state sixteen different material
ber 1, 2006 to January 1, 2007, MR5 paid over $31,000             facts to six different investors in connection with his sale
to McEwen for his assistance in finding employment for            of securities to them. McEwen is ordered permanently
MR5’s grandchildren.                                              to cease and desist from any further such violations. The
The order also alleges that McEwen visited an 83-year-old         Commissioner also states that he will issue a final order
Illinois resident (“IR”) three times between November 2007        in which he imposes a fine of up to $10,000 for multiple
and June 2008. IR wrote                                           violations as well as an award for the costs of investigation.
three checks to McEwen            mr5 paid over $31,000
totaling $130,000 that IR         to mcewen For his               new Jersey BureAu of seCurities Alleges
understood were to take                                           frAud in sAle of $1.7 million in seCurities for
care of his accounts at World
                                  assistance in Finding
                                                                  horseshoe mAnufACturer Complaint, N.J. Bureau of
Group and help McEwen             employment For mr5’s
                                                                  Sec. v. Serritella (July 21, 2009).
start a securities business.      grandchildren.
                                                                      Order to cease and desist by the New Jersey Bureau of Se-
In addition, the order alleges
                                                                      curities finding violations of New Jersey Uniform Securities
that in 2005 McEwen convinced two different Missouri
                                                                      Law §§ 49:3-52(b), 49:3-52(c), 49:3-60 and 49:3-56(a)
couple to refinance their homes by switching from fixed-
rate to variable-rate mortgages, thereby “freeing up cash” that   Underlying Facts
they could use to purchase a variable universal life insurance    Samuel Serritella, resident of Garfield, New Jersey, was
policy through McEwen. The first couple lost $13,000 as a         President of International Surfacing, a horseshoe manufac-
result of McEwen’s plan, and the second lost $18,000, and         turer also located in Garfield, New Jersey.

                                                                  According to a July 21, 2009 order by the New Jersey Bureau
                                                                  of Securities, from February 2002 to February 2005, Ser-
    About Us                                                      ritella offered and sold shares of International Surfacing to
    Litigation Research Group LLC is Charley Seavey, Karin        investors, including more than 300 New Jersey residents and
    Hern, Jonathan Matthews, Stephanie Townsend, Theis            residents of other states, raising approximately $1,779,000.
    Finlev, and other lawyers, who research, write and edit       Investors were not provided with any documentation,
    Securities Enforcement Reporter and Blue Sky Chronicle.       including any description of how International Surfacing
    Litigation Research Group Inc., incorporated in 1975          was to use the proceeds of Serritella’s capital-raising efforts.
    by Douglas Slain, published Professional Liability Re-        In addition, the shares sold by Serritella were not registered
    porter, Insurance Litigation Reporter, Construction           or exempt, and Serritella was not registered as an agent.
    Litigation Reporter, and Medical Liability Reporter.          Serritella misappropriated a total of $354,720 in Interna-
    These titles are currently owned and published by             tional Surfacing funds for his personal use, including hotels,
    Thomson Reuters.                                              airfare, medical expenses, taverns and liquor stores, loans to
                                                                  third parties, checks payable to himself, ATM withdrawals
    Founded in 2008, Litigation Research Group LLC is
                                                                  and debit-card purchases.
    a California limited liability company managed by
    Douglas Slain.                                                In addition, Serritella loaned a total of $59,000 to three
                                                                  individuals using International Surfacing funds. In return
                                                                  for one of the loans (for $30,000) Serritella received a prom-
                                                                  issory note with Personal Guaranty in favor of Serritella (not
                                                                  International Surfacing).

6                                                                                 Securities Enforcement Reporter    September 2009
Order                                                                   In June 2009, the representative e-mailed offering materi-
The Bureau of Securities ordered Serritella to cease and                als, including a Participation and Subscription Agreement,
desist from: (i) future violations of the anti-fraud provisions         to the PA Resident. The Materials state that full Units,
of the New Jersey Uniform Securities Law, (ii) offering                 representing a 1% working interest in the 2nd Palo-Strawn
and selling unregistered securities, and (iii) acting as an             7 Well Redevelopment, are available at a price of $83,700.
unregistered agent. The order also imposes a civil monetary         ■   In June 2009, The Savaged LLC and Julia Dagovich, both
penalty of $20,000.                                                     with an address in Las Vegas, Nevada, posted an adver-
The New Jersey Division of Criminal Justice also filed a                tisement entitled, “[f]ilm production company looking
criminal complaint on July 21, 2009 in Superior Court in                for an angel investor” on an Internet message board. The
Bergen County charging Serritella with the crimes of securi-            ad indicated that the person posting it was seeking $5.3
ties fraud, theft by deception, misapplication of entrusted             million and contained a link to the website, www.juliada-
property, money laundering and misconduct by a corporate      
official, all in the second degree.                                     A PA Resident viewed the website and, using an e-mail
                                                                        address contained on the website, sent an e-mail request-
pennsylvAniA issues 8 CeAse And desist                                  ing additional information. Dagovich sent an e-mail to
orders to hAlt the offer And sAle of                                    the PA Resident with attached offering materials, and
unregistered seCurities Order, Pa. Sec. Comm’n v.                       offered units for sale to the PA Resident.
Couch (July 20, 2009); Order, Pa. Sec. Comm’n v. Dagovich               The Materials state
(July 20, 2009); Order, Pa. Sec. Comm’n v. Liner (July 20, 2009);       that Savaged is raising        on July 20, 2009 the
Order, Pa. Sec. Comm’n v. Lumpp (July 20, 2009); Order, Pa. Sec.        money for the purpose
Comm’n v. Immensity Ventures, LLC (July 20, 2009); Order, Pa.           of financing and pro-
                                                                                                       pennsylvania securi-
Sec. Comm’n v. Gallardo (July 20, 2009); Order, Pa. Sec. Comm’n         ducing an independent,         ties commission issued
v. DeKett (July 20, 2009); Order, Pa. Sec. Comm’n v. Tifone (July       low-budget feature-            8 cease and desist
20, 2009).                                                              length horror film; that       orders
                                                                        Savaged is offering 160
     Cease and desist orders by the Pennsylvania Securities
                                                                        Units, each of which consist of a one-fourth limited liabil-
     Commission for violations of § 201 of the Pennsylvania Se-
                                                                        ity company interest in Savaged; that the 160 Units repre-
     curities Act of 1972
                                                                        sent a total of 40% ownership of Savaged; that the Units
On July 20, 2009 the Pennsylvania Securities Commission                 are being offered at a price of $32,750 for a total offering
issued 8 cease and desist orders to halt the offer and sale             of $5,239,898; that the minimum investment is $32,750;
of unregistered securities in the state. All of the orders              that “Commencing from the date of film delivery inves-
state that the securities in question were unregistered, and            tors will benefit by receiving 100% of all profits until they
that the Pennsylvania resident to whom the offering was                 have recouped 115% of their original capital contribution.
made had no pre-existing relationship with those offering               Thereafter investors will receive 40% of the producers net
the securities, was not an accredited investor and, in most             profits derived from exploitation of the film in the first
cases, did not have sufficient knowledge and experience in              five years after delivery”; that Savaged will be managed
financial and business matters to be capable of evaluating              “exclusively” by Dagovich, who will make “all decisions
the merits and risks of the investment.                                 with respect to [Savaged’s] assets, including investment
The specifics of the 8 orders are as follows:                           decisions and the day-to-day management [of Savaged]”;
                                                                        and that investors “have no right or power to take part in
■   In June 2009, Charles Couch and Couch Oil & Gas, Inc.
                                                                        the management [of Savaged].”
    (COGI), both with an address in Irving, Texas, posted an
    advertisement entitled, “Investors Wanted Producing Oil/            The PA Resident spoke with Dagovich, who stated that
    Gas Wells...” on an Internet message board.                         although a return on the investment was not guaranteed,
                                                                        her expectations were very high for a very high profit.
    At least one Pennsylvania resident observed the ad and
                                                                        “You are not likely to lose,” she said. Further, it was not
    sent an email requesting additional information about
                                                                        necessary for the PA Resident to do anything aside from
    investing with COGI. A representative of COGI then
                                                                        investing money. Dagovich failed to disclose to the PA
    telephoned the PA Resident and offered for sale fractional
                                                                        Resident that on July 13, 2007 Dagovich filed for bank-
    undivided working interests in the 2nd Palo-Strawn 7 Well
                                                                        ruptcy protection and on December 19, 2007, Dagovich’s
    Redevelopment to the PA Resident. The Representative
                                                                        debts were discharged in bankruptcy.
    stated that the PA Resident could invest in a one-quarter
    Unit for approximately $21,000.                                 ■   In May 2009, Liner Entertainment Group, Inc. (LEGI) and
                                                                        Dianna S. Liner, both with an address in Houston, Texas,

Contact us at or call (888) 981-4448                                                                    7
    placed an advertisement entitled “Invest in Celebrity                   Liner emailed offering materials and an Investment
    Concerts (Double your Money) 100% Tax Deductiable                       Agreement to the PA Resident. The materials state in
    [sic]” on an Internet message board. The ad contained a                 part that “Investors receive a return of their investment
    link to the website,,                   within a week. The PA Resident would receive a return of
    and a telephone number for people to use to learn more                  the PA Resident’s $25,000 investment after the first show”;
    about the opportunity.                                                  that “By the second or third concert, investors will receive
    In May or June 2009, at least one Pennsylvania Resident                 double their investment. The PA Resident would receive
    (PA Resident) viewed the ad and the website. The website                a return of $25,000, which is double the PA Resident’s
    stated that “With the economy in a slump, why not invest                investment, after the second show”; and that “The PA
    in something that has fast returns. Invest in Celebrity                 Resident could continue to invest in future shows, keeping
    Concerts”; “Learn how you can get a fast return on you                  his 50% return on investments.”
    [sic] investments in [as] little as 3 weeks”; and “Sometimes        ■   Mind’s I Productions (MIP) and Gary M. Lumpp, both
    you can even double your money.” Using the telephone                    with addresses in Woodstock, Illinois, posted an adver-
    number provided on the website, the PA Resident left a                  tisement entitled, “Looking for Angel Investor for Feature
    message requesting a return telephone call about invest-                Film.” The ad states that Lumpp is a screenwriter/producer
    ing in LEGI.                                                            looking for investors for a feature film and contains a link
    Liner telephoned the PA Resident and offered for sale the               to a website at
    Program. Liner stated that she “managed recording artists               In May 2009, a Pennsylvania resident observed the ad and
    and has a concert idea for a more ‘intimate’ concert with               sent an e-mail to Lumpp requesting additional informa-
    seating for between 1,500 and 3,000 people at prices of                 tion using an e-mail address provided in the ad.
    $40.00 to $50.00 per ticket; that “LEGI is looking for two              In May or June, Lumpp e-mailed offering materials to the
    to six investors per con-                                               PA Resident. The materials state that “MIP is seeking to
    cert; that “Investing in                                                raise $850,000 to finance the Movie”; that MIP is offering
    the Program is a ‘no          thereaFter investors
                                  will receive 40% oF the                   thirty-four ‘shares’ in the Program at a cost of $25,000
    brainer’”; that 30-40%                                                  each”; that “revenue generated from the sale of the film
    of proceeds from the          producers net proFits                     will be distributed to investors first, who will receive a
    ticket sales would go         derived From exploita-                    return of their original investment plus an additional 30%
    directly to various char-     tion oF the Film                          profit”; and that “after the investors are paid, MIP will pay
    ities and 60-70% goes                                                   for necessary services to produce and market the Movie,
    to the ‘foundation’”;                                                   and the remaining revenue will be divided with 50% being
    and that “if the PA Resident stayed ‘in’ for the third show,            split on a pro rata basis among the investors and 50%
    he would double his money.”                                             being split among the ‘managing members’.”
                                                                            Lumpp failed to disclose to the PA Resident that on Febru-
                                                                            ary 28, 2005, Lumpp filed for bankruptcy protection and on
                                                                            June 6, 2005, Lumpp’s debts were discharged in bankruptcy.
                                                                        ■   In or about June 2009, Immensity Ventures, LLC, an
    POSTMASTER: SEND ADDRESS CHANGES TO:                                    entity with an address in Las Vegas, Nevada, placed an
    LITIGATION RESEARCH GROUP LLC                                           advertisement on an Internet message board, seeking
    225 Bush Street, 16th Floor                                             investors. At least one Pennsylvania resident observed the
    San Francisco, CA 94104                                                 ad and emailed a request for additional information using
                                                                            the form on the website,
                                                                            Immensity, in response to contact information supplied
    JUSTMENTS OR BACK ISSUE INQUIRIES:  Please write                        by the PA Resident, e-mailed the PA Resident and offered
    to Litigation Research Group, 225 Bush Street, 16th Floor,              for sale “Corporate Debenture Agreements” The offering
    San Francisco, CA 94104, or telephone (888) 981-4448, or                materials included a Debenture in the amount of $10,000.
    email                                     According to the materials, the return on investment for
                                                                            the Debenture was 14.25% per year and the term of the
                                                                            Debenture was three years.
    Annual 12 issue subscription, print & electronic . . . . . . $787

8                                                                                       Securities Enforcement Reporter     September 2009
■   In May 2009, Nano Tech Entertainment, Inc. (NTEK)              ■   Clearcourse Consulting, Inc. (CCC) and Richard L.
    and Robert DeKett, both with addresses in San Jose, Cali-          Tifone, both with addresses in Gibsonia, Pennsylvania,
    fornia, posted an ad observed by at least one Pennsylva-           sought investors to fund a real estate investment program
    nia resident on an Internet message board that stated:             in the Pittsburgh area.
    “Seeking Private Placement Funding – Public Company                In June 2009, at least one Pennsylvania resident was pro-
    – Video Games...Posted by Robert DeKett [DeKett]                   vided a brochure from CCC which indicated that CCC
    on 5/29/09...Headquartered in Jan Jose, California, we             was offering for sale notes (Notes) to fund real estate
    [NTEK] operate as a virtual manufacturer, developing               loans. The brochure stated that CCC provides short term
    technology & games, and then licensing them to third               (1 year) loans to real estate investors in the Pittsburgh
    parties for manufacturing and distribution. This is an             area; “our borrowers are willing to pay a premium to do
    excellent opportunity for investment as the video game             business with us which translates into high returns to
    industry is the only stable industry today.” NTEK main-            you”; investing in the Notes offers “a great opportunity
    tained a website at                           to put your ‘Safe Money’ to work for you without the
    Using the e-mail address provided on the website, at least         volatility of the Stock Market or the low returns of a Bank
    one PA Resident sent an e-mail requesting additional               Deposit or CD”; the minimum investment is $25,000; the
    information. DeKett communicated with at least one                 interest rate on the Notes is 8% annually, paid monthly for
    PA Resident via e-mail and telephone and offered for sale          up to 12 months; and “your loan principal and interest is
    debentures in NTEK. DeKett stated to the PA Resident               guaranteed by CCC.”
    that investments in the debentures provide a 6% return;            Using the contact information provided in the brochure,
    investors in the Debentures were already making money              at least one PA Resident called CCC to request additional
    in NTEK stock as well as the 6% return provided by the             information regarding the Notes and spoke with Tifone,
    debentures; an investment in the debentures was for a              Tifone offered for sale a Note to the PA. Tifone stated that
    two-year term; the debentures had a ‘conversion feature’           he started his own commercial lending company about five
    whereby investors could convert the debenture into stock;          years ago to lend money to other real estate investors who
    and upcoming press releases promoting NTEK products                needed funds to purchase properties for the purpose of
    would increase the value of the stock.                             fixing them up for resale at a profit”; that he decided about
    DeKett e-mailed offering materials which included a                a year ago to allow others to get involved so that they could
    document entitled “Form of Debenture” to the PA Resi-              receive a guaranteed 8% return; investments in the Notes
    dent. The materials state that the maturity date for an            are backed by first mortgages and the loans do not exceed
    investment in the debentures is two years from the date            65% of the value to protect the investment; and that while
    of issuance; the debentures pay 6% interest over a two-            most of his investors had invested $75,000 to $100,000 in
    year period; investors have the option to convert the              the Notes he would accept investments in the amount of
    debentures to NTEK Stock at the price of ten cents per             $25,000. Tifone e-mailed a Note to the PA Resident.
    share in the first year and at a 20% discount off market
                                                                   [Editor’s note: In 6 of the 8 matters, the initial advertise-
    price in the second
                                                                   ment for the offering was “observed” by a Pennsylvania
    year; and the stock is
                                  Bmg purportedly                  resident on an Internet message board. In all 6 of these
    currently trading at
                                  purchased,                       Internet matters, the investor’s observation of the message
    twenty-five cents per
    share.                        reFurBished, rented,             board advertisement was followed by email communica-
                                 and sold low income               tion in which the investor was sent offering materials.
■   Blue Meadow Group,                                             In 4 of the 6 Internet matters, there was also follow-on
    LLC (BMG), Joseph            properties in the
                                                                   telephone communication with the potential investor. The
    Gallardo and Eliza-          wilkes Barre, pennsyl-
                                                                   follow-on emailing of offering materials appears to be the
    beth Gallardo all have       vania and scranton,               test that the Pennsylvania Securities Commission uses
    addresses in Bartons-        pennsylvania areas                to establish the offering of a particular investment in the
    ville, Pennsylvania. J.
                                                                   state of Pennsylvania when the initial advertisement is a
    Gallardo was the chief executive officer of BMG and E.
    Gallardo was the president of BMG. BMG purportedly             generally-accessible message board posting on an Internet
    purchased, refurbished, rented, and sold low income prop-      website.]
    erties in the Wilkes Barre, Pennsylvania and Scranton,
    Pennsylvania areas, and sold unregistered investment to
    Pennsylvania to invest in same.

Contact us at or call (888) 981-4448                                                                   9
                                                                       to provide additional documentation for these expenditures.
SeCurItIeS exChANge CoMMISIoN                                          Wells did not respond. On December 17, 2008, the Com-
                                                                       pany’s Board of Directors terminated Wells’ employment.
seC ACCuses Cfo of mediCAl AdministrAtor
of ACCounting frAud And emBezzling                                     Allegations
$2.9 million Complaint, S.E.C. v. Wells, Civil No. 3:09-CV-            According to an SEC complaint filed on July 6, 2009 in
01792-MJP (D.S.C., July 6, 2009).                                      the U.S. District Court for the District of South Carolina,
                                                                       between 2003 and 2008, Wells embezzled more than $2.9
     Civil complaint in the U.S. District Court for the District
                                                                       million, directing UCI to pay his personal expenses or make
     of South Carolina alleging violations of §§ 10(b) and 13(b)
                                                                       other payments for his personal benefit. Wells allegedly
     (5) of the Securities Exchange Act of 1934, and Rules 10b-5,
                                                                       caused UCI to record these illicit payments as legitimate
     13b2-1, 13b2-2 and 13a-14, promulgated thereunder; and
                                                                       business expenses and, on occasion, to capitalize these
     aiding and abetting the company’s violations of §§ 13(a),
                                                                       expenses on the balance sheet as asset purchases.
     13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and
     Rules 12b-20, 13a-1 and 13a-13, promulgated thereunder            In some instances, he used UCI’s corporate credit card to
                                                                       pay personal expenses. He was able to do this because his
Underlying Facts                                                       name, along with that of the Company, was on the corporate
Between 1995 and 2008, Columbia, South Carolina resi-                  credit card and the state-
dent Jerry F. Wells served as the Executive Vice President             ments came directly to
and Chief Financial Officer of UCI Medical Affiliates, Inc.            him. When Wells needed          wells emBezzled
(“UCI”), a public company that provides nonmedical man-                to make the payments for        additional Funds
agement and administrative services. UCI is 70% owned by               the corporate credit card,      By preparing False
Blue Cross/Blue Shield of South Carolina. Between 2003                 he instructed the compa-        expense reports and
and 2008, UCI reported total revenues between $43.5 mil-               ny’s accounts payable           suBmitting them For
lion and $72.3 million.                                                supervisor (“AP Supervi-        reimBursement.
In December 2008, the Company’s outside auditor requested              sor”) to issue a check to
a meeting with UCI’s Audit Committee to discuss concerns               the credit card company for the amount due. Wells also
raised after he had reviewed certain charitable contributions          instructed the AP Supervisor to allocate the amounts of the
that UCI had paid on behalf of Wells. After that meeting,              credit card payments among multiple cost centers in UCI’s
UCI’s Audit Committee instructed the auditor to test all of            accounting records. Wells embezzled additional funds by
UCI’s disbursements to its top three officers. After the testing       preparing false expense reports and submitting them for
revealed additional expenditures paid by UCI that appeared             reimbursement. The AP Supervisor paid them without ques-
to be for Wells’ personal expenses, the auditor asked Wells            tion. Similarly, Wells submitted unsupported check requests

                                                                       dated SEC to adopt special rules governing sale of Penny
     Commentary                                                        Stocks (<$5.00 per share) and public offerings of shares in
     State SecuritieS regulatorS: the real thing                       blank check companies (SEC Rule 419).
     In his testimony before the U.S. Senate Committee on Bank-
                                                                       $6 billion/yr. Losses in Micro-cap Stocks
     ing, Housing, and Urban Affairs on March 26, 2009, NASAA
                                                                       1996-97: 33 States participated in sweep of 15 broker-dealer
     President and Colorado Securities Commissioner Fred Joseph
                                                                       firms that specialized in aggressively retailing low priced secu-
     presented a list of 9 occasions between 1989 and 2008 when
                                                                       rities to individual investors. States found massive fraud in
     state securities regulators preceded their federal counterparts
                                                                       firms’ manipulation of shares of start-up companies, most of
     in identifying significant new gaps in investor protection.
                                                                       which had no operating history.
     $2 billion/yr. Losses in Penny Stocks
                                                                       National Response
     1989: States determined penny stock offerings by newly formed
                                                                       1997-98: Congress held hearings on fraud in the micro-cap
     shell companies to be per se fraudulent. These “blank check”
                                                                       securities markets (shares selling between $5-10).
     companies had no business plan except a future merger with
     an unidentified company.                                          2002: Congress passed Sarbanes-Oxley Act, which made cer-
                                                                       tain state actions a basis for federal statutory disqualification
     National Response                                                 from the securities industry.
     1990: Congress passed Penny Stock Reform Act, which man-

10                                                                                    Securities Enforcement Reporter        September 2009
for non-business expenses, including construction work on
                                                                        seC prevAils in AgAinst hedge fund thAt
Wells’ personal residences and personal credit card accounts.
                                                                        used 18 seCondAry offerings to Cover
In many instances, Wells capitalized the expenses as fixed              restriCted-period short sAles Order, S.E.C. v.
assets on the Company’s balance sheet, rather than expens-              Colonial Investment Management LLC, Civil No. 07 Civ. 8849
ing them in their entirety as they were incurred. To justify            (PKC) (S.D.N.Y., July 7, 2009).
capitalizing these expenses, Wells altered invoices from
contractors performing work on his personal residences                      Findings of fact and conclusions of law in the U.S. District
to suggest that the work was for one of UCI’s facilities. He                Court for the Southern District of New York for multiple
also provided fraudulent work descriptions on the related                   violations of Rule 105 of Regulation M under the Securities
check requests.                                                             Exchange Act of 1934
By directing the Company to capitalize these costs, rather              Underlying Facts
than expensing them on UCI’s income statement, Wells                    Between 2001 and 2004, Colonial Investment Management
caused UCI to overstate its pretax earnings in the annual               LLC, Colonial Fund LLC and Cary G. Brody purchased
reports it filed with the SEC during this period by as much             shares in 18 secondary offerings that they had sold short in
as 11 percent. Wells signed these annual reports. He also               the five days preceding the offering.
signed multiple Sarbanes-Oxley certifications during this
time, in which he certified that UCI’s financial statements             At the time of the viola-
were materially accurate. In connection with the audit of the           tions, Rule 105 provided
Company’s annual financial statements, Wells also signed                that “[i]n connection          colonial and Brody
multiple management representation letters to UCI’s audi-               with an offering of secu-      admitted to violating
tors. In these letters, Wells misrepresented that the Com-              rities for cash…it shall       rule 105 in 7 oF the 18
pany’s financial statements were prepared in conformity                 be unlawful for any            oFFerings
with GAAP.                                                              person to cover a short
                                                                        sale with offered securi-
Wells also signed each of the quarterly reports that UCI                ties purchased from an underwriter…if such short sale
filed with the SEC, and the accompanying Sarbanes-Oxley                 occurred during…[t]he period beginning five business days
certifications. The improperly capitalized expenses caused              before the pricing of the offered securities…” 17 C.F.R. §
the Company to overstate its pretax earnings by as much as              242.105(a) (2006). This five-day timeframe is referred to
15.6% in these quarterly reports.                                       as the “restricted period.”
Wells consented to the entry of an order (i) enjoining him
from violating these statutes and rules and (ii) barring him
from serving as an officer and director of a public company.

   Risks of Securities Offerings on the Internet                        National Response
   1996-97: States issued uniform interpretative guidance on use        2001: SEC approved a new NASD rule requiring brokers to
   of Internet for legitimate securities offerings and dissemina-       provide individual investors with a written disclosure state-
   tion of product information by licensed financial services           ment on the risks of buying securities on margin.
                                                                        Risks of Day Trading
   National Response                                                    1999: In a report on individuals engaged in day trading, States
   1998: SEC issued interpretative guidance based on the States’        found that day trading firms failed to tell prospective investors
   Model on the use of Internet for securities offerings and dis-       that 70% of day traders would lose their investment while the
   semination of services and product information by licensed           firm earned large trading commissions.
   financial services professionals.
                                                                        National Response
   Risks of Online Trading                                              2000: SEC approved new NASD rules making day trading
   1999: In a report on trading of securities on the Internet, States   firms give written risk disclosure to individual investors.
   found that investors did not appreciate certain risks, including
                                                                        2001: SEC approved new NASD and NYSE rules governing
   buying on margin and submitting market orders.
                                                                        margin extended to day traders.
                                                                                                                      continued on page 12

Contact us at or call (888) 981-4448                                                                            11
                                                                           by Colonial and also found, by virtue of Brody’s own asser-
Colonial and Brody admitted to violating Rule 105 in 7                     tion that Colonial was not large enough to have affected the
of the 18 offerings but argued that in the remaining offer-                offering price, that Brody understood the purpose of Rule 105
ings, they covered their short positions with open market                  such that he had the proper mental state to find he violated it.
purchases made immediately following the offerings. After
each allocation, defendants bought and sold within a span                  The court found that Brody and his two entities violated
of about 15 minutes (often much less) approximately the                    Rule 105 and that they acted recklessly with respect to five
same number of shares in the open market, and the quantity                 of the offerings, and knowingly, intentionally, and will-
bought or sold equaled or approximated: (a) Colonial’s total               fully with respect to the other thirteen offerings. The judge
short position prior to the offering; (b) Colonial’s restricted            determined that the post-offering trading did not undo
period short position; or (c) the number of shares Colonial                the violations, and that those trades were an effort by the
purchased in the offering. Colonial and Brody effectively                  defendants to create the false appearance to third parties and
argued that these additional share purchases were the cov-                 regulators that they had not used shares purchased in public
ering transactions, and that the fact that Colonial had also               offerings to illegally cover the short positions.
purchased shares in the offering itself was a coincidence.
The SEC argued, instead, that these purchases shortly after                Order
the offerings were “sham transactions” as described in the                 Judge Castel permanently enjoined the defendants from
SEC interpretive guidance issued on August 6, 2004.                        violating Rule 105 of Regulation M under the Securities
                                                                           Exchange Act of 1934. The court imposed a $450,000 civil
The Honorable P. Kevin Castel, United States District Judge
                                                                           penalty on Brody, finding that Brody’s unlawful actions
for the Southern District of New York found on July 7, 2009
                                                                           involved fraud, deceit, manipulation, or deliberate or reck-
that Colonial did not have a proper system set up to comply
                                                                           less disregard of a regulatory requirement. The court also
with Rule 105. The judge’s decision also shows that employ-
                                                                           ordered disgorgement of $1.4 million.
ees at Colonial were not properly trained to take the proper
steps to comply with Rule 105. Brody was found to have
full knowledge of all transactions made by Colonial at all                 seC Alleges Broker-deAler And 6 individuAls
times. When Brody was questioned about the transactions                    used Boiler room tACtiCs to rAise
at issue, he did not have an official explanation and described            $61 million Complaint, S.E.C. v. Sky Capital LLC, Civil No.
the timing of the transactions as a “coincidence.” He also
                                                                           09-CV-6129 (S.D.N.Y., July 8, 2009).
asserted that Colonial was a relatively small hedge fund and
could not affect the pricing of the offerings. The judge felt                  Civil complaint in the U.S. District Court for the Southern
that Brody’s explanation about the timing of the transactions                  District of New York charging each of the defendants with
was not credible given that he monitored all trading activity                  violations of § 17(a) of the Securities Act of 1933, and §

     Research Analyst Conflict of Interest                                 Senior Investment Fraud
     2002-03: States investigated and helped focus attention on            2008: After calling attention to widespread fraud against senior
     conflicts of interest between investment analysts and major           investors, NASAA members approved a model rule prohibit-
     Wall Street firms.                                                    ing the misleading use of senior and retiree designations and
                                                                           numerous states have adopted the model through legislation
     National Response                                                     or regulation.
     2002-03: The SEC, NASD, NYSE, and states reached a landmark
     $1.4 billion global settlement and firms agree to reform practices.   National Response
                                                                           2008: Sen. Herb Kohl, chair of the U.S. Senate Special Commit-
     Illegal Mutual Fund Trading Practices                                 tee on Aging, introduced legislation that would provide grants
     2003: States uncovered illegal trading schemes that had become        to states to enhance the protection of seniors from being misled
     widespread in the mutual fund industry.                               by false designations.
     National Response                                                     Auction Rate Securities
     2003-2004: SEC, NASD and NYSE launch investigations;                  2008: Based on investor complaints, states launched a series of
     reform legislation introduced in Congress but fails to gain           investigations into the frozen market for auction rate securities.
     support; SEC initiates wide-ranging effort to reform certain          The investigations led to settlements with 11 major Wall Street
     fund regulations.                                                     firms to return $50 billion to ARS investors.

12                                                                                        Securities Enforcement Reporter         September 2009
    10(b) of the Securities Exchange Act of 1934 and Rule 10b-5        Enterprises raised approximately $20.7 million from over
    thereunder; in the alternative, the complaint charges Shea         80 investors.
    with aiding and abetting the other defendants’ violations of
                                                                       From February 2003 through July 2003, Sky Capital acted
    § 10(b) of the Exchange Act and Rule 10b-5 thereunder; ad-
                                                                       as a sales agent for an offering of Sky Holdings’ Series A
    ditionally, the complaint charges Sky Capital with violating
                                                                       convertible preferred stock. Sky Holdings raised approxi-
    § 15(c) of the Exchange Act, and Mandell with aiding and
                                                                       mately $9.2 million from more than 50 investors.
    abetting Sky Capital’s violation of § 15(c) of the Exchange Act
                                                                       From September 2003
Underlying Facts                                                       through January 2004,
Sky Capital LLC (“Sky Capital”), a New York company,                   Sky Capital acted as a              mandell also allegedly
registered with the SEC as a broker-deal er on May 13, 2002            sales agent for an offering
                                                                       of Sky Holdings’ Series
                                                                                                           personally made mate-
and has offices in New York, New York, and Boca Raton,
Florida. Sky Capital Holdings Ltd. (“Sky Holdings”) owns               B convertible preferred             rial misrepresenta-
75% of Sky Capital and 100% of Sky Capital UK Ltd. (“Sky               stock to more than 240              tions to his customers.
Capital UK”), a broker-dealer in London that registered                investors. Sky Holdings
with the Financial Services Authority in October 2003. Sky             raised over $32 million in
Holdings began trading on the AIM on July 15, 2002. Sky                this offering.
Capital Enterprises, Inc. (“Sky Enterprises”) was formed to            After public trading in Sky Enterprises and Sky Holdings
invest in emerging growth companies and began trading                  commenced, Sky Capital continued to act as the sales agent
on the Alternative Investment Market of the London Stock               for subsequent private placements, and also “facilitated” Sky
Exchange (“AIM”) on March 29, 2004. Sky Holdings had                   Capital customers’ public trading of these stocks until trad-
access to Sky Enterprise’s funds through a revolving credit            ing in them was suspended by the London Stock Exchange
line of £3 million.                                                    on November 7, 2006.
Ross Mandell was founder and CEO of Sky Capital, Presi-
dent of Sky Holdings and CEO of Sky Enterprises. Stephen               Allegations
Shea was COO of Sky Capital. Adam Harrington Ruckde-                   According to an SEC complaint filed on July 8, 2009 in the
schel, Arn Wilson, Michael Passaro, and Robert Grabowski               U.S. District Court for the Southern District of New York,
were registered representatives at Sky Capital (collectively,          between 2002 and 2006, Mandell directed Sky Capital bro-
with Mandell, Shea and Sky Holdings, the “Defendants.”)                kers, through the use of scripts and specific instructions,
From September 2002 to August 2003, Sky Capital acted as               to make material misrepresentations, and fail to disclose
the sales agent for Sky Enterprises’ private placement. Sky            material information, to induce their Sky Capital customers
                                                                       to purchase stock in Sky Holdings and Sky Enterprises, or

  National Response                                                    other words, to addressing concerns regarding dealers or issuers
  2006: SEC looked into underwriting and sales practices of            in ARS auctions getting an upper hand over other dealers and
  auction rate securities. While it did discover and try to remedy     issuers, or vice versa, while omitting to address fraud on the
  certain manipulative practices, the SEC failed to identify or        end-buyers of auction rate securities.
  correct fundamental conflicts of interest and self dealing that      Meanwhile, it has since fully come to light that broker-dealers
  pervaded the auction rate market.                                    were marketing the auction rate securities to end-buyers as
  This last item, auction rate securities, may seem curious insofar    “safe and liquid cash equivalents” and that broker-dealers were
  as date of the “National Response” is 2006 while the date of state   often listing the securities on end-buyers’ account statements
  action is 2008. These are not typos. Instead, they stem from a       as “Cash.”
  regulatory failure by the SEC that has been scantly reported and     Notably, however, the SEC stated in its own press release regard-
  is surpassed only by the SEC’s reluctance to heed the detailed       ing the 2006 Order that “investors may not have been aware of
  warnings of whistleblowers in the Madoff scandal.                    the liquidity and credit risks associated with certain securities.”
  In 2006, having examined the ARS market as a whole, the SEC          In other words, the SEC’s investigation of the ARS market in
  issued an Order that addressed only violations in the ARS            2006 appears to have raised such concerns about the represen-
  market that related to “auction practices and procedures” of         tations that were being made to end investors, but the SEC’s
  dealers that affected the clearing rate of the auctions, such as     resultant regulatory action, two years before the 2007-2008
  prioritizing certain orders. The 2006 SEC Order was limited, in      investigations and actions of regulators in Massachusetts and
                                                                                                                      continued on page 14

Contact us at or call (888) 981-4448                                                                             13
to induce them not to sell stock that they already owned.                    Investor 1 and Investor 2 continued to hold a substantial
Mandell also allegedly personally made material misrep-                      amount of their Sky Holdings and Sky Enterprises stock
resentations to his customers. For example, beginning in                     until November 7, 2006 when trading in these stocks was
2002, Mandell personally solicited Investor 1 and Investor                   suspended.
2, both of Manchester, England, to invest in the Sky Enter-                  Additionally, the Defen-         deFendants
prises private placements. Mandell convinced Investor 1                      dants implemented and
                                                                                                              implemented and
and Investor 2 to invest approximately $1 million in Sky                     enforced a “no-net sales”
Enterprises by promising them the stock price would at                       policy, which had the            enForced a “no-net
least double in value, and that they would be able to sell                   effect of preventing inves-      sales” policy, which
their shares to capture this profit in six months.                           tors from selling their Sky      had the eFFect oF
Prior to July 2003, Mandell also solicited Investor 1 and                    Entities’ stocks that were       preventing investors
Investor 2 to invest in the Sky Holdings private placement.                  otherwise publicly traded        From selling their sky
Mandell met with Investor 1, and assured Investor 1 that                     on the AIM. The no-net           entities’ stocks
Investor 1 would be getting the Sky Holdings stock “cheap,”                  sales policy had the effect
that there was no doubt that Investor 1 would make a signifi-                of artificially inflating the
cant profit from his Sky Holdings investment, and that there                 price of the Sky Entities’ stocks. Moreover, as a result of the
was no risk of losing money on the investment. Mandell                       “no-net sales” policy, which the defendants did not disclose
persuaded Investor 1 and Investor 2 to buy 900,000 shares                    to their customers, numerous Sky Capital investors were
of Sky Holdings’ Series A convertible preferred stock for                    unable to sell their shares in the Sky Entities before trading
approximately £600,000.                                                      in those stocks was suspended thereby rendering the invest-
                                                                             ments worthless.
After Sky Holdings’ preferred stock was converted into
common stock, Investor 1 and Investor 2 met with Mandell                     At times, Mandell allegedly directed Sky Capital brokers
in approximately September 2004 to discuss selling all their                 whose customers wanted to sell their Sky Entities stocks to
Sky Holdings shares. At the meeting, in or around Septem-                    inform such customers that because the Sky Enterprises and
ber 2004, Mandell told them that it would be “ridiculous”                    Sky Holdings stocks were thinly traded, the customers had
for them to sell their Sky Holdings stock because in a few                   no option but to sell their shares to Sky Capital at a discount
weeks Mandell was going to sell Sky Holdings to a German                     from the publicly listed price. Sky Capital brokers, including
Bank for £4 per share, a price that constituted a premium                    Broker A and Broker B, then resold the discounted shares
of nearly 100% over £2.01, the highest price at which Sky                    to other Sky Capital customers at the publicly listed price,
Holdings’ stock traded in September 2004.                                    thereby making a profit for Sky Capital on the difference
                                                                             between the two prices, or the “spread.”
In fact, there was no such sale transaction in the works.
Investor 1 and Investor 2 continued to hold their Sky Hold-                  Sky Capital also offered its brokers, including Broker A and
ings stock. Soon thereafter, the price of Sky Holdings stock                 Broker B, additional commissions to find buyers of Sky
began to decline.                                                            Enterprises’ publicly traded stock to “keep the stock price
                                                                             up” while Sky Capital was soliciting investors to invest in a
Mandell later told Investor 1 and Investor 2 that the Sky Hold-              Sky Enterprises private placement.
ings acquisition was cancelled because the German bank had
wanted Mandell to work for the bank for three years as part of               The SEC’s complaint further alleges that the fraudulent
the deal, but because he was Jewish, Mandell could not work                  scheme was extremely profitable for the defendants.
for a German bank. In fact, the bank had never proposed any                  Between 2002 and 2006, Sky Capital raised over $61 million
employment arrangement of any type to Mandell.                               from investors in the U.S. and the U.K. Mandell used the
                                                                             investor funds to subsidize his own lifestyle, including using

     other states, failed to address these concerns in any way.              Rule 506 that are later discovered to be fraudulent,” Joseph said.
                                                                             “NASAA believes the time has come for Congress to reinstate
     In his Senate testimony, Joseph pointed as a current issue to the
                                                                             state regulatory oversight over Rule 506 offerings.”
     National Securities Markets Improvement Act (NSMIA), which
     preempted states from prohibiting offerings made under Rule             Indeed. Given the SEC’s failures in the ARS and Madoff mat-
     506 of Regulation D, as an example of misguided legislation             ters, as well as the above areas where state action preceded a
     that has limited the states’ ability to address fraud in its earliest   federal response, the idea of federal preemption of state securi-
     stages. “Since the passage of NSMIA, we have observed a steady          ties regulators rings hollow.
     and significant rise in the number of offerings made pursuant to
                                                                                                                      Charley Seavey, Editor

14                                                                                          Securities Enforcement Reporter        September 2009
investor funds for various personal expenses, including              same stocks previously purchased by Badmaeva in her own
first-class travel, five-star hotel stays, expensive meals, adult    account. Then, at the height of the pump, Badmaeva sold her
entertainment, and child-care expenses. Mandell also used            shares at the inflated prices for a profit. In other instances,
investor funds to richly compensate the other individual             Badmaeva engaged in short sales, timing her covers by taking
defendants by paying them hefty undisclosed commissions              advantage of the lower prices following the intrusions.
and giving them other perks.                                          On June 18, 2008, Badmaeva intruded on-line into inves-
The complaint seeks a final judgment permanently enjoin-             tors’ accounts at E*Trade, Fidelity Brokerage Services and
ing the Defendants from future violations of the above               Charles Schwab and, in the course of about 1 ½ hours, pur-
provisions of the federal securities laws, ordering them to          chased thousands of shares of Duff & Phelps Corporation in
disgorge their ill-gotten gains plus prejudgment interest,           those accounts at prices ranging from $17.40 to $18.70 per
and ordering them to pay civil penalties. The complaint              share. Badmeva then sold short 5,400 Duff & Phelps shares
also seeks to permanently prohibit Mandell from acting               using her own Nobletrading account, at prices ranging from
as an officer or director of any registered public company.          $18.40 to $18.72 per share. After the price fell, she covered
                                                                     the short sales at the price of $17.04 per share, resulting
seC Alleges russiAn BusinesswomAn                                    in a net profit of $7,877.27. Duff & Phelps’ trades on June
                                                                     18, 2008 were approximately eight times greater than their
CAused $3 million in losses By intruding
                                                                     average trading volume during the fifteen days leading up
into online ACCounts in modern-dAy
                                                                     to the intrusions.
mArket mAnipulAtion sCheme Complaint, S.E.C. v.
Pointer Worldwide Ltd., Civil No. 09-CV-6162 (S.D.N.Y., July 9,      On June 19, 2008, Badmaeva and Pointer Worldwide pur-
2009).                                                               chased several thousand shares of Stage Stores, a Houston-
                                                                     based department store retailer traded on the NYSE. Short-
    Civil complaint in the U.S. District Court for the Southern      ly thereafter, in the course of about 2 hours and 30 minutes,
    District of New York alleging violations of § 17(a) of the Se-   Badmaeva intruded on-line into investors’ accounts at Fidel-
    curities Act of 1933 and § 10(b) of the Securities Exchange      ity, Schwab and TD Ameritrade, purchased a total of over
    Act of 1934, and Rule 10b-5 promulgated thereunder               89,000 Stage Stores shares,
                                                                     and finally, sold her long         then, at the height oF
Underlying Facts
                                                                     position and then engaged
Tatiana Badmaeva, a Russian citizen, formed Defendant Point-                                            the pump, Badmaeva
                                                                     in short sales, benefitting
er Worldwide Ltd. in or about June 2007 in Elista, Kalmykia          from the higher prices of          sold her shares at
and serves as its sole officer and director. Badmaeva opened         the manipulated market.            the inFlated prices
an account in the name of Pointer Worldwide with Nobletrad-          After covering her shorts,         For a proFit., an online stock, option and futures brokerage, and is       she had realized a total net
registered as the beneficial owner of the account.                   profit of $5,610.90. Stage Stores’ trades on June 19, 2008
                                                                     were more than twice the average trading volume of the
Allegations                                                          fifteen days leading up to the intrusions.
According to an SEC complaint filed on July 9, 2009 in
                                                                     On June 20, 2008, Badmaeva and Pointer Worldwide pur-
the U.S. District Court for the Southern District of New
                                                                     chased several thousand shares of Cytori Therapeutics,
York, between June 18, 2008 and June 20, 2008, Badmaeva
                                                                     a San Diego-based medical manufacturer traded on the
intruded into the on-line trading accounts of fifteen inves-
                                                                     Nasdaq. Shortly thereafter, in the course of about 90 min-
tors at five on-line broker-dealers, liquidated existing equity
                                                                     utes, Badmaeva intruded on-line into investors’ accounts at
positions and, using the resulting proceeds, purchased
                                                                     Fidelity, Schwab, E*Trade and Scottrade, purchased a total of
shares in four publicly traded companies. The unauthor-
                                                                     126,000 shares of Cytori Therapeutics, and finally, sold her
ized purchases created the appearance of legitimate trading
                                                                     long position and engaged in short sales of her remaining
activity, thereby inducing others to trade the securities and
                                                                     shares, benefitting from the higher prices of the manipulated
driving up the price and volume of these stocks.
                                                                     market. After covering her shorts, she had realized a total
In some instances, Badmaeva first accumulated in her own             net profit of $10,367.60. Cytori Therapeutics’ trades on June
account a position in one of the issuers. Next, a series of          20, 2008 were nearly four times the average trading volume
unauthorized electronic intrusions involving that issuer             of the fifteen days leading up to the intrusions.
occurred at one or more broker-dealers whereby the intrud-
                                                                      On June 20, 2008, Badmaeva and Pointer Worldwide
ers liquidated existing positions in the accounts and used
                                                                     intruded on-line into investors’ accounts at E*Trade and
the resulting proceeds to buy thousands of shares of the

Contact us at or call (888) 981-4448                                                                  15
purchased and sold short thousands of shares of Digi Inter-
                                                                        seC ChArges seAttle lAwyer And others with
national, Inc., a Minnesota-based communications technol-
                                                                        “pump-And-dump” sCheme Complaint, S.E.C. v. Otto,
ogy producer, traded on the Nasdaq. In the middle of the
                                                                        Case No. CV-09-0960 RAJ (W.D. Wa., July 13, 2009).
account intrusions, Badmaeva engaged in a short sale and
cover for the same stock, benefitting from the price volatil-              Civil complaint in the U.S. District Court for the Western
ity caused by the manipulation of Digi’s stock. Badmaeva’s                 District of Washington alleging that all defendants vio-
conduct over the course of nine minutes resulted in a net                  lated §§ 5 and 17(a) of the Securities Act of 1933 and that
profit of $9,256.98. Digi’s trades on June 18, 2008 were more              Otto, Van Siclen, Cheung and MitoPharm violated Section
than six times greater than their average trading volume                   10(b) of the Securities Exchange Act of 1934 and Rule 10b-
during the fifteen days leading up to the intrusions.                      5 thereunder; the complaint also charges MitoPharm with
On August 6, 2008, Badmaeva requested that Nobletrading                    violating Section 13(a) of the Exchange Act and Rules 13a-
wire the entire balance of the Pointer Worldwide account                   1 and 13a-13 thereunder, and Otto with violating Section
to a bank in Cyprus.                                                       16(a) of the Exchange Act and Rule 16a-3 thereunder

The SEC alleges that the Pointer Worldwide account opened               Underlying Facts
just one week before the intrusions began, closed shortly               In late 2006, Seattle securities lawyer David Otto was hired
thereafter, and traded in only these four securities. Bad-              by the CEO of MitoPharm Corporation, Pak Peter Cheung,
maeva and Pointer Worldwide also made efforts to mask                   to purchase a publicly traded shell company as a reverse-
the Internet Protocol addresses used to access the Pointer              merger partner for MitoPharm. The day-to-day work
Worldwide account for each day of trading.                              on the MitoPharm engagement was performed by Otto’s
In three days of trading involving a combination of buys,               associate, Todd Van Siclen. On Otto’s recommendation,
sales and short sales, Badmaeva and Pointer Worldwide                   Cheung also hired stock promoter Charles Bingham and his
generated a net profit of $33,113.75 trading in the four                firm, Wall Street PR, Inc., to embark on a public relations
securities. Badmaeva’s activities resulted in losses exceeding          campaign regarding the company’s products. During the
$3 million to the victims’ accounts, and her manipulative               campaign, MitoPharm’s stock price rose more than 400
trading damaged market participants who purchased at the                percent through the summer of 2007. Otto made profits
inflated stock prices.                                                  of more than $1 million selling shares of MitoPharm, and
                                                                        Bingham made profits of almost $300,000.
The SEC seeks permanent injunctive relief, disgorgement
and civil penalties.
                                                                        According to an SEC complaint filed on July 13, 2009 in the

     Commentary                                                         On July 10, 2009, the Treasury released draft legislation,
                                                                        the Investor Protection Act of 2009, that allows the SEC to
     WhiStlebloWer program’S revolutionary promiSe                      compensate whistleblowers, with up to 30% of the monetary
     The Treasury Department’s June white paper, “Financial Regu-       sanctions imposed, who provide “original information” in
     latory Reform: A New Foundation,” is calling for the SEC to        connection with successful enforcement actions resulting in
     “establish a fund to pay whistleblowers for information that       sanctions exceeding $1 million.
     leads to enforcement actions resulting in significant financial
     awards.”                                                           The proposed legislation would create a new SEC Investor
                                                                        Protection Fund funded by monies collected in SEC enforce-
     The SEC now has the authority to compensate only sources           ment actions other than, in most cases, disgorgement actions
     that provide evidence leading to successful insider trading        under Section 308 of the Sarbanes-Oxley Act of 2002. The SEC
     cases. Extending that authority to other types of securities law   would have sole discretion to make whistleblower determina-
     violations holds significant promise. Indeed, according to a       tions, which determinations would be final and not subject to
     2008 report by the Association of Certified Fraud Examiners,       judicial review. The proposed legislation would also provide
     whistleblowers are the single largest source of fraud detection,   for whistleblower confidentiality protection and prohibitions
     accounting for 54% of fraud detection at public companies.         on retaliation, stating that “all information provided to the
     However, the devil will be in the details of any securities        Commission by a whistleblower shall be confidential and
     whistleblower legislation, and so far the details are a bit dis-   privileged as an evidentiary matter.”

16                                                                                    Securities Enforcement Reporter      September 2009
U.S. District Court for the Western District of Washing-               regarding the date of payment for the shares, and the Form
ton, MitoPharm originated from Peter Cheung’s desire to                144 filled out by the Nominee Shareholder. Each opinion
develop and market a beverage and nutritional supplements              letter concludes that the Nominee Shareholder is not an
that would contain a compound extracted from a berry                   affiliate of MitoPharm and provided valuable consideration
used in traditional Chinese medicine purported to have                 for the shares more than two years ago.
anti-aging health benefits.                                            Based on the misrepresen-
In June or July 2006, Otto’s associate, Van Siclen located a           tations in the OLG opinion
public shell offered by a shell broker who was also Otto’s             letters, the transfer agent        otto did not tell
former client. The shell broker initially set the price of the         issued share certificates to       cheung aBout the
shell at $275,000. Otto and Van Siclen negotiated with the             the Nominee Shareholders           discount, charging
broker to secure the shell for $225,000. Otto did not tell             for 7,706,663 shares dated         him the Full amount oF
Cheung about the discount, charging him the full amount                November 22, 2007 with-
                                                                                                          $275,000 For the shell
of $275,000 for the shell and keeping the $50,000 difference           out restrictive legends.
for himself. The merger of the private corporation into the            Otto now had undisclosed           and keeping the $50,000
public entity closed on October 25, 2006.                              control over 25% of Mito-          diFFerence For himselF.
Otto and Van Siclen then assigned to entities Otto controlled          Pharm, and over 99% of
a convertible note that included a non-dilution provision by           the public float.
using a back-dated document. Then, on October 25, 2006                 In the winter and spring of 2007, Otto, Van Siclen, Cheung,
MitoPharm’s board (including Cheung and two others)                    Charles Bingham and Wall Street PR began to work on a
approved a resolution Van Siclen drafted issuing over seven            promotional campaign for MitoPharm. The promotional
million MitoPharm shares based on conversion of the Note.              campaign touted MitoPharm’s two supposed products,
Once MitoPharm authorized issuance of the shares, Otto                 “Restorade” and “Stamina Solution.”
instructed Van Siclen to “go get those shares.” Van Siclen             The complaint alleges that the campaign was false and
drafted and signed six legal opinion letters, as opinions of           misleading because it used statements and images, such
OLG, to the transfer agent to have the restrictive legends             as statements that MitoPharm’s products “are available”
removed from the stock certificates, making them freely                as a beverage or a soft gel capsule and pictures of a bever-
tradable. Van Siclen represented in these opinion letters              age can and a plastic pill bottle, were not true at the time
dated October 24, 2006 that he had reviewed a Shareholder              they were made to create the impression that MitoPharm
Representation Letter containing statements regarding pay-             was in a position to distribute widely, and sell commer-
ment for the shares and beneficial ownership, evidence                 cially, different product lines, when in reality MitoPharm
                                                                       was a development stage company that had no money, no

   The problems with this draft legislation fall in two areas. First   may be a reticence to recognize initial contributions.
   is the lack of SEC accountability. The proposed Act states that
                                                                       Second is the definition of “original information.” According
   “any determinations under this section, including whether, to
                                                                       to the Act, “original information” worthy of potential financial
   whom, or in what amounts to make awards, shall be in the sole
                                                                       reward includes only information that
   discretion of the Commission, and any such determinations
   shall be final and not subject to judicial review.”                   “(A) is based on the direct and independent knowledge or
                                                                         analysis of a whistleblower;
   The irony of this “sole discretion” language is that a key impe-
   tus for the creation of this SEC whistleblower program is the         “(B) is not known to the Commission from any other
   fact that the SEC for nine years rejected as insignificant the        source; and
   information and detailed analysis provided to it by Harry
                                                                         “(C) is not based on allegations in a judicial or administra-
   Markopolos regarding Bernie Madoff.
                                                                         tive hearing, in a governmental report, hearing, audit, or
   In his congressional testimony, Markopolos pointed to the             investigation, or from the news media… .”
   lack of financial sophistication and “turfiness” of SEC staff as
                                                                       The words “direct and independent” would seem to exclude
   underlying causes of their failure to heed his attempts to blow
                                                                       hearsay or “water-cooler” knowledge. Must one directly see
   the whistle on Madoff. Whether or not SEC staff are financially
                                                                       false journal entries in order to blow the whistle on a company
   unsophisticated and turfy, it is perhaps true that at the conclu-
                                                                       for accounting fraud?
   sion of a successful case—after all the sturm und drang—there
                                                                                                                     continued on page 18

Contact us at or call (888) 981-4448                                                                          17
distribution channels, and no production capability. The                The complaint seeks injunctive relief, disgorgement and
promotional campaign, including MitoPharm’s website and                 financial penalties from the defendants as well as penny
press releases, was virtually the only information available            stock bars for Otto, Van Siclen, and Cheung, and an officer-
to investors about the company.                                         and-director bar against Cheung.
As MitoPharm’s stock price steadily rose in May 2007, Otto
sold thousands of shares nearly every day in May 2007,                  seC ChArges 5 with insider trAding Before
eventually selling over 730,000 shares in the month for                 sAfeCo ACquisition Complaint, S.E.C. v. Perez, Case No.
approximately $730,000.                                                 6:09-CV-1225-ORL-19 DAB (M.D. Fla., July 15, 2009). Com-
In early June 2007, Bingham sold Wall Street PR’s shares                plaint, S.E.C. v. Hipp, Case No. C09-0987-MAT (W.D. Wa., July
while MitoPharm’s stock continued to rise, making $80,000.              15, 2009). Complaint, S.E.C. v. Binette, Case No. 09:CV-30107-
In addition, Bingham received via wire transfer $207,000                MAP (D. Mass., July 15, 2009).
from an Luxembourg entity that had sold MitoPharm stock                    Civil complaints in the U.S. District Courts for the Middle
it had received from one of the Otto Entities.                             District of Florida, the District of Massachusetts and the
Meanwhile, in early June 2007, Van Siclen prepared a Com-                  Western District of Washington alleging violations of §
pany Information File (the “Profile”) required by the Pink                 10(b) of the Securities Exchange Act of 1934 and Rule 10b-
Sheets that included a table of five percent owners that failed            5 thereunder for tipping or trading on material non-public
to include the holdings or ownership interest of any of the                information
Otto Entities. In addition, throughout the period of these
stock sales, MitoPharm and Otto failed to file § 13 and 16              Underlying Facts
disclosures.                                                            On April 23, 2008 Safeco Corp. announced that it was being
                                                                        acquired by Liberty Mutual Insurance Company for an all-
MitoPharm’s misleading promotional campaign continued                   cash price of $68.50 per share, a $23.02 premium over the
through the summer of 2007, with MitoPharm’s stock price                prior day’s closing price.
peaking in early August. As the promotional campaign
lost momentum, Otto began selling MitoPharm stock in                    During the period preceding the announcement, Anthony
September 2007 and did not stop selling until November                  Perez, of Maitland, Florida, was a junior analyst at Goldman
15, 2007, by which time the entities under his control had              Sachs & Co. on investment banking teams that examined
sold over 4,500,000 shares for $1.3 million. Nearly all of              potential merger and acquisition opportunities for clients.
these proceeds were deposited into a money market account               Beginning around the end of March 2008, Perez worked on
controlled by Otto.                                                     the Goldman Sachs investment banking team for a client
                                                                        that was considering an acquisition of Safeco.
This sales activity crushed MitoPharm’s stock price, which
dropped from a high of $2.31 on August 9, 2007 to $0.05 in              During the period preceding the announcement, Peter E.
the beginning of November 2007.                                         Talbot was an Assistant Vice President at Hartford Invest-

     In addition, this definition of original information seems to      In a recent interview with Securities Enforcement Reporter,
     prohibit a financial reward to an employee who goes through        Hurson cautioned that the enactment of this concept needs to
     internal channels to expose fraud at a company. If the appropri-   embody a sense of appreciation and good faith toward whistle-
     ate board committee then informs the SEC, resulting in fines       blowers by the SEC.
     and disgorgement, should the employee who initially brought
                                                                        “The SEC needs to demonstrate that they are ‘whistleblower-
     the situation to light then be exempted from any reward for
                                                                        friendly.’ They need to be fair, even if that means that certain
     having going through the proper channels instead of going
                                                                        whistleblowers make very large amounts of money,” Hurson
     directly to the SEC?
                                                                        said, emphasizing that whistleblowers are often taking a risk
     Daniel J. Hurson, a former federal prosecutor and SEC enforce-     with their careers and even lives.
     ment trial lawyer, agrees about the general importance of this
                                                                        Hurson also disagrees with the exclusion of hearsay from the
     whistleblower proposal: “While federal qui tam actions initiat-
                                                                        definition of original information. “People actively involved
     ed by whistleblowers who report fraud against the government
                                                                        with a fraud will generally be the last to blow the whistle on
     have been around for many years, the concept of rewarding
                                                                        it,” he said.
     those who report on securities fraud (other than insider trad-
     ing) is new, and revolutionary,” he writes in a paper published    - Charley Seavey, Editor
     on the website of The Hurson Law Firm LLP.

18                                                                                     Securities Enforcement Reporter       September 2009
ment Management Company (HIMCO). In early April                    acquisition target. The Commission’s complaint alleges that
2008, HIMCO was evaluating a potential acquisition of              Talbot learned this information because he was snooping
Safeco for its parent company, The Hartford Financial Ser-         in a co-worker’s folder on the shared computer network
vice Group, Inc.                                                   which contained Safeco’s Form 10-K and detailed analyses
                                                                   and evaluations of Safeco’s assets. When Talbot subsequently
During the period preceding the announcement, the wife
                                                                   noticed that key employees were working long hours and
of Math J. Hipp, Jr., was the executive assistant to Safeco’s
                                                                   in unusual pairings, Talbot told Binette to buy Safeco call
Executive Vice President of Insurance Operations. From
                                                                   options because Safeco was an acquisition target.
approximately April 9-17, 2008, Hipp’s wife began working
overtime and during weekends, which was highly unusual             Using Binette’s brokerage account, Talbot and Binette
for her. She told him she was concerned Safeco employees           bought Safeco call options from April 17, 2008 to April 22,
would lose their jobs, but she would not tell him why. She         2008 and sold them on April 23, 2008, for a realized profit
told him that representatives from other companies would           of $615,833.
be visiting Safeco headquarters on the weekends and that           The Commission seeks a final judgment enjoining Talbot
she and the executive                                              and Binette from further violations of Section 10(b) of
assistant to Safeco’s CEO       hipp misappropriated               the Exchange Act and Rule 10b-5, and ordering Talbot
were preparing decorative                                          and Binette to disgorge their illegal trading profits, with
                                material, non-puBlic
food baskets for meetings                                          prejudgment interest, and imposing civil penalties against
to be held during a week-       inFormation aBout
                                                                   each of them.
end at Safeco headquar-         a potential sale oF
ters.                           saFeco From his wiFe               In the third action, in the United States District Court for
                                                                   the Western District Washington, the Commission alleges
Allegations                                                        that Hipp misappropriated material, non-public information
According to three SEC complaints filed on July 13, 2009,          about a potential sale of Safeco from his wife. Hipp’s wife was
Perez and Talbot illegally tipped relatives regarding a poten-     working on projects related to the potential sale of Safeco and
tial acquisition of Safeco, and Hipp illegally traded on infor-    received material, non-public information about merger-
mation that he had surmised from the unusual behavior and          related developments. Based on conversations and his wife’s
statements of his wife.                                            behavior, Hipp surmised that “something big” was happening
                                                                   at Safeco that would result in an increase of its stock price.
In the first action, the Commission alleges that Perez misap-
propriated material non-public information from Goldman            Hipp bought Safeco call options on April 17, 2008, and
Sachs and its client regarding a potential acquisition of          sold them on April 23, 2008 through early May 2008, for a
Safeco, and unlawfully tipped his brother, Ian C. Perez.           realized profit of over $118,245.

Ian C. Perez bought Safeco call options on April 22, 2008,         Hipp has consented to entry of a proposed final judgment,
and sold them on April 23, 2008, for a realized profit of          without admitting or denying the allegations of the Commis-
over $152,000.                                                     sion’s complaint, permanently enjoining him from further
                                                                   violations of Sections 10(b) of the Exchange Act and Rule
Both defendants have consented to entry of proposed final          10b-5, and ordering him to pay disgorgement of $118,245
judgments, without admitting or denying the allegations of         and pre-judgment of $3,280, and a civil penalty of $118,245.
the Commission’s complaint, permanently enjoining them
from further violations of Sections 10(b) of the Exchange
Act and Rule 10b-5 and holding them jointly and severally          seC ChArges Chief CompliAnCe offiCer
liable for payment of disgorgement of $152,231 and prejudg-        for Aiding And ABetting in $554 million
ment interest in the amount of $761. The proposed final            investment frAud Complaint, S.E.C. v. Duffy, Civ. No.
judgment against Ian C. Perez does not order him to pay a          09-6458 (S.D.N.Y., July 21, 2009).
civil penalty based upon his sworn Statement of Financial              Civil complaint in the U.S. District Court for the Southern
Condition; the proposed final judgment against Anthony                 District of New York alleging violation of § 20(e) of the Se-
Perez orders him to pay a penalty in the amount of $25,000,            curities Exchange Act of 1934 for aiding and abetting gen-
but does not impose a higher penalty based upon his sworn              eral partners in violating§ 10(b) of the Act and Rule 10b-5
Statement of Financial Condition.                                      promulgated thereunder, and §§ 206(1) and 206(2) of the
In the second action, filed in the United States District              Investment Advisers Act of 1940
Court for the District of Massachusetts, the Commission
alleges Talbot tipped his nephew, Carl E. Binette, of Ludlow,      Underlying Facts
Massachusetts, after he learned at work that Safeco was an         On February 29, 2009, the SEC filed an emergency action
                                                                   to halt the investment fraud at WG Trading Company Lim-

Contact us at or call (888) 981-4448                                                                  19
ited Partnership (“WGTC”), an SEC registered Greenwich,                 amount. Greenwood and Walsh continually promised
Connecticut based broker-dealer, and obtained preliminary               investors in meetings and marketing materials that 85%
injunctions, asset freezes and other relief against the WGTC            of their investment would “pass-through” their investment
principals who were the primary perpetrators of the fraud,              company, WGTI, and be invested with WGTC using the
general partners Paul Greenwood and Stephen Walsh.                      “index arbitrage trading strategy.”
In a second SEC complaint filed in the District Court for the           However, instead of investing the money as promised,
Southern District of New York on July 21, 2009, the SEC has             Greenwood and Walsh treated the investors’ account as
now also charged WGTC’s former Chief Compliance Officer                 their personal piggy-bank to pay for their lavish lifestyles,
for assisting the principals of WGTC orchestrate a $554 mil-            which included multi-million dollar homes, luxury cars,
lion investment fraud. Defendant Deborah Duffy, age 53, a               horses, and rare collectible items. Of the $667 million total
New Jersey resident, worked for WGTC from 1996 through                  investor contributions, Greenwood and Walsh only actually
February 2009, the Chief Compliance Officer of WGTC.                    invested $94 million, and misappropriated the remaining
Duffy was also a registered representative associated with              $573 million which were evidenced only by a series of per-
WGTC and held Series 7, 24 and 63 licenses.                             sonal promissory notes signed by Greenwood and Walsh
                                                                        dating back to 1996.
                                                                        The SEC’s complaint alleges that Duffy assisted in the fraud
The SEC complaint alleges that from 1996 to February 2009,              by knowingly wiring investor funds to Greenwood and
Duffy aided and abetted Greenwood and Walsh’s fraudulent                Walsh’s personal bank accounts and by creating the phony
investment scheme. Greenwood and Walsh promised inves-                  “promissory notes” to cover up the fraud. Duffy knew that
tors, which included several pension funds and educational              the funds she was wiring out of the investors’ account were
institutions and endowments, that their money would be                  being used by Greenwood and Walsh for their personal
invested in a relatively “risk free” trading strategy at WGTC.          expenses and were not being invested at WGTC.
Greenwood and Walsh convinced the investors that 85% of
their investment should be directed by their “enhanced cash             Duffy was highly compensated for her services – every year
management” strategy, where S&P 500 or other futures were               she received salary plus several hundred thousand dollars in
sold short and the underlying equities in the index were                bonuses. In 2008, she was paid almost $800,000. Duffy also
purchased long – or, depending on market conditions, the                misappropriated as much as $292,000 of investors’ money for
reverse strategy of selling the underlying equities short and           herself by wiring investor funds to accounts that she controlled
purchasing the futures long – in an arbitrage transaction               or to third-parties to pay for personal items she purchased.
that locked in a set interest rate for a given period of time.          The SEC seeks a final judgment permanently enjoining
Investors were issued promissory notes, signed by Green-                Duffy from violating or aiding and abetting future violations
wood and Walsh, indicating the principal investment                     of the federal securities laws and ordering her to disgorge
                                                                        her ill-gotten gains with prejudgment interest and to pay a

                                                                            sion approval before the staff could even begin negotiating
     Commentary                                                             penalties against public company defendants. In addition,
     “neW” Sec Same aS the old Sec?                                         in order to ensure that subpoena power is available to the
     On July 14, 2009 SEC Chairwoman Mary Schapiro testified                staff when needed, the SEC has returned to a policy of
     before the Subcommittee on Capital Markets, Insurance and              expedited consideration of most formal orders by a single
     Government-Sponsored Enterprises of the U.S. House of Rep-             Commissioner acting as duty officer. The number of formal
     resentatives Committee on Financial Services.                          orders issued from January to the end of June this year is
     “The Madoff fraud is one that the agency did not detect, and           224, compared with 93 over the same period last year.
     not a day goes by that we don’t regret it…” Schapiro stated in     ■   Organizational Restructuring – Recently-appointed
     her opening remarks. “That is why we are implementing many             Enforcement Director Robert Khuzami is “completing
     of the measures I will outline today.”                                 an extensive effort to evaluate Enforcement processes to
     She went on to outline the various measures, the first and chief       improve the way the Division operates.”
     of which was “Reinvigorating SEC Enforcement.” Under this          ■   Vigorous Enforcement – Schapiro detailed a marked
     category, Schapiro outlined five categories of action:                 increase in enforcement activity at the SEC since the begin-
     ■   Penalty Pilot Program & Formal Orders – Schapiro                   ning of the Obama administration and her tenure. She did
         has done away with the two-year “penalty pilot program”            not link this increased activity to increased funding, staffing,
         that required Enforcement staff to obtain majority Commis-         or a specific policy change, but instead implicitly ascribed it to

20                                                                                       Securities Enforcement Reporter           September 2009
civil monetary penalty.                                                  Gresham also told prospective investors that their risk was
Duffy also pled guilty to related criminal charges brought               limited because he was a conservative trader. In addition,
by the United States Attorney’s Office for the Southern                  Gresham told at least one customer that her investment with
District of New York involving the same conduct alleged                  Gresham is insured by the federal government and the larg-
in the SEC’s complaint.                                                  est forex exchange in the United States.
                                                                         In some cases, Gresham
                                                                         solicited customers by           gresham’s
CoMModIty FutureS trAdINg CoMMISSIoN                                     purportedly opening and          representations
                                                                         funding trading accounts         aBout his trading
CftC oBtAins Asset freeze And files                                      in their names because of        acumen were False
ComplAint in $15 million forex ponzi sCheme                              their friendship over the
                                                                                                          and misleading.
tArgeting persons of ChristiAn fAith                                     years. He then sent them
Complaint, C.F.T.C. v. Gresham, Case No. 3:09-cv-00075-JTC (N.D.         emails showing purported
Ga., July 2, 2009).                                                      extraordinary returns in their accounts, leading them to
    Civil Complaint filed by the CFTC in the U.S. District Court         start contributing their personal funds to the accounts.
    for the Northern District of Georgia alleging violations of          Gresham also persuaded some customers temporarily
    §§ 4b(a)(2)(A)-(C) of the Commodity Exchange Act                     to withdraw retirement funds to earn 5-10% per month
                                                                         through forex trading with the promise that he would return
Underlying Facts
                                                                         the principal in less than sixty days so that the investors
According to a complaint filed by the CFTC under seal on                 could transfer the funds back into their retirement funds in
July 2, 2009, from January 2004 to the present Eldon A.                  time to avoid a 20% early withdrawal tax penalty.
Gresham has solicited at least $15 million from more than
75 persons for foreign exchange trading. Gresham promised                Allegations
5-10% monthly returns to prospective customers.                          In reality, Gresham has unsuccessfully traded forex in 19
Gresham told them that he and his son each received a                    different personal accounts since January 2003. As a result,
$5,000 scholarship for a forex trading course that they took             Gresham’s representations about his trading acumen were
in 2002. Gresham stated that since the course he has suc-                false and misleading.
cessfully traded forex without experiencing a single losing              In addition, of the $15 million raised by Gresham to trade
month. Gresham also stated that he was successful trading                forex, only $2 million was ever deposited into one of Gresh-
forex because the “Lord had blessed him.” Gresham said                   am’s forex trading accounts. Of this amount, $90,000 was
he was offering his program to a limited number of fellow                lost trading forex and $1.4 million was withdrawn. Accord-
Christians for a limited time.                                           ingly, the CFTC infers in the complaint, any returns pro-

       increased effort and dedication under new leadership. Specifi-        more effectively identify valuable leads for potential enforce-
       cally, Schapiro pointed out that, since the end of January 2009       ment action as well as areas of high risk for compliance
       (the beginning of the Obama administration) the SEC has:              examinations. Having received the Center’s recommenda-
                                                                             tions, Schapiro said the next phase will be to procure and
       ■   filed actions seeking at least 42 emergency temporary
                                                                             implement a centralized information technology solution
           restraining orders, versus 16 during roughly the same
                                                                             that will provide the SEC with an automated mechanism for
           period last year;
                                                                             tracking, analyzing and reporting on tips and complaints on
       ■   opened more than 439 investigations, versus 395                   an agency-wide basis.
           during roughly the same period last year; and
                                                                         ■   Disgorgements – Schapiro testified that the SEC is work-
       ■   issued at least 224 formal orders, versus 93 during               ing to identify and evaluate various alternatives for reform-
           roughly the same period last year.                                ing the structure of the Office of Collections and Distribu-
   ■   Tips & Complaints – Schapiro is seeking legislation to                tions, which oversees the distribution of disgorgements to
       incentivize whistleblowers and is revamping the process for           injured investors, and “considering how best to improve the
       evaluating the 2,000 tips it gets each day. Schapiro further          administration of the Office and ensure that its workflows
       stated that the SEC has retained the Center for Enterprise            and processes are run efficiently.”
       Modernization, a federally funded research and develop-           The subtext that emerges from Schapiro’s comments is an
       ment center, to help the SEC establish a centralized system to
                                                                                                                        continued on page 22

Contact us at or call (888) 981-4448                                                                               21
vided to Gresham’s customers came from either Gresham’s                    tol fraudulently solicited members of the public to trade
customers’ original investments or money invested by sub-                  options on commodity futures contracts by misrepresent-
sequent customers.                                                         ing and failing to disclose material facts concerning (1) the
Gresham also defrauded his customers by sending them                       likelihood that a customer would realize large profits from
false account statements by email.                                         trading options; (2) the risk involved in trading options;
                                                                           (3) the existence of certain options positions in customer
Order                                                                      accounts; and (4) the dismal performance record of First
                                                                           Capitol customers trading options.
In a separate order, the U.S. District Court for the Northern
District of Georgia on July 2, 2009 granted the CFTC’s                     The complaint alleges that the defendants promised
motion for an asset freeze, an accounting and expedited                    potential customers the potential for large profits. It also
discovery.                                                                 alleges that the defendants sometimes advised clients to
                                                                           trade options based upon well-known publicly-available
CftC oBtAins Asset freeze And files frAud
ChArges AgAinst CAliforniA futures Broker                                  The complaint further alleges that the defendants told
for Aggressive sAles tACtiCs Complaint, C.F.T.C. v.                        customers that certain trades had mistakenly been execut-
First Capitol Futures Group, Case No. 4:09-cv-00488-DW (W.D.               ed on the customers’ behalf when in fact, the complaint
Mo., June 26, 2009).                                                       alleges, these trades had not occurred and the resultant
                                                                           positions did not exist.
      Civil Complaint filed by the CFTC in the U.S. District Court
                                                                           Finally, the complaint alleges that the defendants failed to
      for the Western District of Missouri alleging violations of
                                                                           disclose to prospective customers that the firm’s “invest-
      § 4c(b) of the Commodity Exchange Act and Regulations
                                                                           ment strategy” had produced losses for the overwhelming
      33.10(a) and (c)
                                                                           majority of its customers.
Underlying Facts
According to a complaint filed by the CFTC under seal on
June 26, 2009, from August 2007 to August 2008, regis-                     In a separate order, the U.S. District Court for the Western
tered introducing broker First Capitol Trading Group, its                  District of Missouri on June 30, 2009 granted the CFTC’s
principal Michael David Kogan, and its associated persons,                 motion for an asset freeze, an accounting and document
solicited a total of 58 persons to open futures options trading            preservation.
accounts. Trading in these accounts resulted in $3 million                 [Editor’s note: This action by the CFTC is notable insofar as it
in losses and $2.2 million in commissions and fees.                        styles relatively common sales conduct by futures and futures
                                                                           option brokers- with the exception of the allegations regarding
Allegations                                                                First Capitol’s misrepresentations about account positions- as
According to a complaint filed by the CFTC in the U.S.                     constituting securities fraud.]
District Court for the Western District of Missouri, First
Capitol, Kogan and the associated persons at First Capi-

     image of an SEC Enforcement Division under the Bush admin-            that the size, stature, reputation and power of Madoff ’s enter-
     istration that was almost deliberately ineffectual and that hog-      prise, and Madoff himself, that likely caused the whistleblower
     tied itself with bureaucratic “reforms,” such as the penalty pilot    complaints regarding Madoff to be ignored or dismissed.
     program, that further reduced the agency’s responsiveness.
                                                                           As Professors and securities enforcement researchers James D.
     With roughly the same budget and staffing, the SEC has almost
                                                                           Cox and Randall S. Thomas concluded in their recent paper,
     tripled the level of its enforcement activity since the end of the
                                                                           Mapping the American Shareholder Litigation Experience: A
     Bush administration.
                                                                           Survey of Empirical Studies of the Enforcement of U.S. Securities
     Our concern about Schapiro’s enforcement reforms is that they         Law: “SEC enforcement efforts, while significant, have tended
     do not address a long-standing small-target bias in SEC enforce-      to focus on weaker targets, suggesting that the big fish get away.”
     ment that was at least a partial cause of the SEC’s failure to act
                                                                           Indeed, if history is any guide, few if any of the hundreds of
     on the Madoff fraud despite having been provided ample notice
                                                                           cases and investigations that Schapiro mentions as having
     of the fraud’s likely existence. We do not agree with Schapio’s
                                                                           been commenced or formalized during the first half of 2009
     implication that it was the way in which the detailed complaints
                                                                           involve fraud or misconduct at the largest investment banks,
     regarding Madoff were bureaucratically processed that resulted
                                                                           public companies and credit-rating agencies, despite the fact
     in inaction by the enforcement division. Instead, it is more likely

22                                                                                         Securities Enforcement Reporter        September 2009
                                                                         excellent returns, Healy did not invest any of the money he
seC And CftC freeze Assets And file Com-
                                                                         received in securities or commodities futures and instead
plAints AgAinst floridA dAy-trAder for                                   made personal purchases, as well as payments to investors
steAling millions of investor funds for                                  he defrauded.
personAl luxury purChAses Complaint, S.E.C. v.
Healy, Case No. 1:09-CV-01330-CCC (M.D. Pa., July 12, 2009).             Healy allegedly obtained most of the funds -- $15 million
Complaint, C.F.T.C. v. Healy, Case No. 1:09-cv-01331-CCC                 dollars -- from Pennsylvania resident Alfred L. Madeira
(M.D. Pa., July 12, 2009).                                               between May 2008 and February 2009, who invested his
                                                                         own money as well as funds provided by his attorney and
    Civil complaint filed by the SEC in the U.S. District Court          more than 40 of their
    for the Middle District of Pennsylvania alleging violations          friends, acquaintances
    of § 17(a) of the Securities Act of 1933, and § 10(b) of the         and business associates.       despite repeated
    Securities Exchange Act of 1934, and Rule 10b-5, promul-             Madeira initially provid-      assurances that his
    gated thereunder; Civil complaint filed by the CFTC in the           ed Healy with $1.2 mil-        purported trading
    U.S. District Court for the Middle District of Pennsylvania          lion and, based upon           was earning excellent
    alleging violations of § 4(a)(2)(i)-(iii) of the Commodity           Healy’s supposed extraor-      returns, healy did not
    Exchange Act (“CEA”) for conduct prior to June 18, 2008; §           dinary trading success
                                                                                                        invest any oF the money
    4b(a)(1)(A)-(C) of the CFTC Reauthorization Act for con-             and promises that he
    duct on or after June 18, 2008, and §4c(b) of the CEA and            could make them more           he received
    CFTC Reg. 33.10(a)-(c)                                               money trading gold fu
                                                                         tures, Madeira and the other investors provided an addi-
Underlying Facts                                                         tional $13 million. Healy and Madeira formed Sand Dollar
Florida resident Sean Nathan Healy (“Healy”) claims to be                purportedly to receive investment money and conduct trad-
a self-employed trader of futures, options and securities.               ing; however, no such trading occurred. Healy directed
Healy maintains nearly all his assets under the name of his              Madeira and the other investors to deposit funds into a Bank
wife, Shalese Healy. Sand Dollar Investing Partners, LLC                 of America account held in the name of Shalese Healy.
(“Sand Dollar”), is a Nevada LLC formed by Healy on July
                                                                         Healy repeatedly assured Madeira and other investors that
21, 2008.
                                                                         their money had been invested in gold futures and that trad-
Allegations                                                              ing profits would be distributed in February 2009. After the
                                                                         distribution date passed, Healy continued to assure Madeira
SEC Complaint                                                            that the accounts would be distributed in early March 2009.
According to the SEC Complaint filed on July 12, 2009                    On or about March 5, 2009, Healy informed Madeira that
against defendant Healy and relief defendants Shalese Healy              no profits would be distributed.
and Sand Dollar, beginning in 2005, Healy began promis-                  Rather than investing the monies he received in securities,
ing investors that he would use their money to trade in                  futures or options, the SEC alleges that he used the money
securities and commodities futures on their behalf. Despite              for daily living expenses and spent $2.4 million on a new
repeated assurances that his purported trading was earning

  that any misconduct at such institutions affects literally tens of     the lives of enforcement staff much more difficult and pose the
  millions of investors.                                                 risk of legal defeat and possible embarrassment.
  As Cox and Thomas found in their own 2003 analysis of ten              What gets lost in these reputational calculations is that the little
  years of SEC enforcement actions, the SEC targeted firms that          fish, the small targets, affect tens of investors, while the big fish,
  were mostly smaller firms suffering from financial distress and,       the large targets, can affect tens of millions of investors, cause
  somewhat astonishingly, the SEC did not seem to select its targets     damages in the tens of billions, and cause systemic risk to the
  for enforcement actions based on investors’ losses.                    capital markets. These big fish include the large investment
                                                                         banks, investment advisors, and public companies that account
  Our own interviews of current and former SEC staff indicate
                                                                         for 90% of the our country’s securities transaction volumes.
  that this long-standing bias towards smaller targets at the SEC
  is largely a function of the ability of larger targets vigorously to   There is no indication from Schapiro’s testimony that her new
  defend themselves. The smaller targets thus represent quick,           SEC is any different from the SEC of the 1980s and 1990s insofar
  easy wins that can boost exactly the sorts of statistics that          as it remains “captured” by the largest firms that it regulates.
  Schapiro so proudly cited in her testimony. In contrast, large
                                                                                                                     Charley Seavey, Editor
  well-heeled targets, such as Mark Cuban or Microsoft, make

Contact us at or call (888) 981-4448                                                                                  23
home and $1.9 million on more than 10 luxury vehicles,                 Finally, in August 2008, Healy promised Madeira that
including Porsches, Lamborghinis, Ferraris, a Bentley, and a           one investment account totaled $79 million as of August
Lincoln limousine. Healy further spent investor money on a             6, 2008 and that Madeira would get his 50% by February
$3,500 per month lease for 2,500 square feet of garage space           1, 2009. At or around that time, Healy also raised an
to store the vehicles. He also purchased approximately $1.4            additional $13.2 million from Madeira and his attorney by
million worth of jewelry, including an engagement ring for             promising that he knew a commodities trader, “Matt,” who
his wife, $50,000 in gold bullion, $51,000 to rent a private           could turn $1.5 million into $16 million through trading
jet for a Bahamas trip, $67,700 to rent a suite at the Bank            gold futures and options. By December 2008, the supposed
Atlantic Center in Miami where Miami Heat plays, and                   aggregate value of Madeira’s investment accounts was $160
approximately $2.3 million in home renovations, including              million. After Madeira demanded his profits in February
a $500,000 home movie theater and $144,000 swimming                    2009, Healy finally informed him on March 5, 2009 that
pool. Healy also used the money to pay approximately $1                no distributions would be made.
million to previous investors.                                         To date, a small fraction of the investors’ principal pro-
The SEC’s complaint further alleges that when Healy was                vided to Healy has been returned. The futures and options
questioned about his trading, he provided falsified bank and           trading represented by Healy did not occur and the oral
trading records to Madeira and the U.S. Attorney’s Office              and written representations made by Healy regarding
for the Middle District of Pennsylvania.                               purported trade activity were false.
The SEC seeks entry of a court order of temporary and per-             The CFTC seeks restitution, disgorgement of ill-gotten
manent injunction and order directing disgorgement of ill-             gains, civil monetary penalties, and permanent injunctions
gotten gains, prejudgment interest and civil penalties. The            against further violations of the federal commodities laws
SEC also seeks an order freezing the assets of defendants that         and CFTC regulations and against further trading.
are traceable to the fraud, expediting discovery, preventing
the destruction or alteration of documents, and appointing a           Orders
temporary receiver to oversee the defendants’ assets.                  In the SEC action, the U.S. District Court for the Middle
                                                                       District of Pennsylvania granted the SEC’s request for a
CFTC Complaint                                                         temporary restraining order and asset freeze against the
The CFTC’s complaint, also filed with the District Court on            Defendants. The court also appointed a Receiver to oversee
July 12, 2009, sets forth essentially similar claims against           all assets that are traceable to the fraud.
Healy for misappropriation of investor funds, making false             Interestingly, in a separate order in the CFTC action on July
statements, and failing to disclose material information               13, 2009, the same U.S. District Court appointed a Receiver
to his investors. The complaint differs factually from the             and froze the Defendants’ assets, as well as permitting the
SEC complaint in some regards. The CFTC complaint                      CFTC and the Receiver to seize all relevant records. A pre-
claims that since May 2008, Healy engaged in a fraudulent              liminary injunction hearing was set for July 23, 2009.
scheme to solicit funds from Madeira and approximately
44 other investors in Pennsylvania to invest in futures
and options. From June to August 2008, Healy allegedly                  Please click on our online web sites and blogs for
received approximately $1.2 million from Madeira and                    more timely information on legal proceedings of note:
other investors. He sent a handwritten letter to Madeira      
on June 18, 2008, confirming that he had purchased certain
gold and oil futures and/or options on Madeira’s behalf,
a second handwritten letter on June 30, 2008 assuring         
Madeira that the oil futures had been “extremely success-     
ful,” and a third letter on July 1, 2008 stating that certain 
oil futures or options had also successfully resulted in $1.2
million “gross value” for each of them. Healy allegedly
told Madeira “’[a]t times, this is almost too easy…there’s    
times and this is one of the few times in your life that you’re
going to see oil go up like this, therefore, you have to take 
advantage of the opportunity because this only happens        
like [sic] once in a lifetime.’”

       Copyright © 2009 Litigation Research Group LLC. Reproduction or redistribution, in whole or in part, and in any form, without
               express written permission, is prohibited except as permitted by Litigation Research Group Copyright Policy.

24                                                                                     Securities Enforcement Reporter        September 2009

Shared By:
Description: Vol 1 / Number One of monthly law reporting service covering state regulation of exempt offerings.