by T. GormanPosted on Posted in SECActions

National Hockey League Players were the primary victims of a series of fraudulent investment schemes orchestrated by financial adviser Phillip Kenner and former professional race car driver Tommy Hormovitis. Collectively, the players others lost about $15 million. The court papers charge conspiracy, conspiracy to commit money laundering and wire fraud. U.S. v. Kenner, No. 13-CR-607 (E.D.N.Y. Unsealed Nov. 13, 2013).

Phillip Kenner met a future NHL player while attending college. Subsequently, Mr. Kenner became a licensed financial adviser in Boston. From 1994 through 2003 he used his college connection who had joined the NHL to build a client list which included several professional hockey players. The list became the foundation for his firm which he opened in 2003.

From the opening of his firm, and continuing to the present, Mr. Kenner advised a number of NHL players regarding their investments. He counseled them to participate in a number of investment schemes which were fraudulent. Those included:

The Hawaii scheme: This was a real estate investment scheme in Hawaii. Mr. Kenner solicited thirteen players, convincing them to invest $100,000 each and open lines of credit which he controlled. In addition, Lehman Brothers Holdings, Inc. was convinced to invest $2 million. The funds were to be used to develop real estate on the big island. Instead, Messrs. Kenner and Constantine diverted the money to their personal use. The victims lost over $13 million.

The Eufora Scheme: This was a prepaid debit card business, initiated in 2002. Mr. Kenner informed the NHL players who put $1.4 million into the scheme that Eufora was an up and coming business. Another investor was convinced to put up about $200,000. Most of the money was in fact diverted to an account controlled by Mr. Constantine. Investors lost about $1.5 million.

Global settlements scheme: Beginning in May 2009 Messrs. Kenner and Constantine convinced players to invest about $4.1 million in a plan which called for funding an attorney’s escrow account, the Global Settlement Fund. The fund would be used to finance litigation related to Mexican land deals. Most of the money was diverted to the personal use of the defendants. The players lost about $1 million.

Sag Harbor scheme: In this scheme Mr. Kenner acquired a 25% interest in real property in Sag Harbor, New York by taking $395,000 from a player’s line of credit. The player was unaware of the transaction. He then convinced a second player to purchase what was supposed to be a 50% interest in the deal for $375,000. The player, however, received papers showing that he only had a 25% interest. The investors sold the property at a loss. Mr. Kenner then filed a lawsuit in Arizona against one of the investors in connection with the property.

The defendants were arrested in Arizona and appeared in court on Wednesday. The case is pending.

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by T. GormanPosted on Posted in SECActions

The SEC entered into its first deferred prosecution agreement with an individual. The agreement with Scott Herckis, former administrator to hedge fund Heppelwhite Fund LP. The agreement recognizes his timely and significant contributions to the Commission’s efforts to halt an on-going fraud at the hedge fund which once employed Mr. Herckis. At the same time, the five year agreement imposes many of the remedies the agency would have demanded in settlement.

The underlying case

Mr. Herckis, the owner and managing member of accounting firm SJH Financial, LLC, was retained by the Fund in December 2012, according to an admitted statement of facts in the agreement. The Fund had about 25 investors and at least $6 million in assets. Its sole shareholder was Berton Hochfeld, manager of Hochfeld Capital Management, LLC. As fund administrator, Mr. Herckis was responsible for calculating the performance of the investments, preparing monthly account statements for investors and maintaining other pertinent accounting records.

Hochfeld Capital Management or HCM, the general partner, and each of the Fund’s limited partners or investors, had capital accounts at the Fund. Hochfeld Capital was required to maintain a balance in its capital account equal at least 1% of the Fund’s total assets. The Fund was prohibited from making loans to Mr. Hochfeld or the management company.

When Mr. Herckis began the HCM capital account had a positive balance. Repeated withdrawals by Mr. Herckis and transfers to other accounts he controlled changed that fact. Eventually the account had a negative balance.

As the withdrawals mounted, Mr. Herckis realized that there was an increasing discrepancy between the Fund’s net asset value which he calculated using the internal records and the NAV reported to the Fund’s prime broker. In June 2012 Mr. Herckis, in conjunction with a consultant, determined that the discrepancy was $1.5 million.

In September 2012 Mr. Herckis resigned and reported the difficulties to the authorities. He worked closely with the SEC, furnishing them a substantial number of documents and detailing the wrongful conduct. As a result the Commission brought an action against Mr. Hochfeld in which he consented to the entry of an injunction, an asset freeze and other relief. SEC v. Hochfeld, Civil Action No. 12-cv-8202 (S.D.N.Y.). Eventually Mr. Hochfeld pleaded guilty to criminal charges. U.S. v. Hochfeld, No. 13-CR-0021 (S.D.N.Y.).

The agreement

The agreement is for a term of five years. Under its terms Mr. Herckis:

Admissions: Admitted the facts regarding the underlying violations as detailed in the agreement;

No violations: Will not violate Federal or state securities laws;

Securities business: Will not serve in any capacity with an investment company or an investment adviser;

Disgorgement: Paid disgorgement in the amount of $48,000 along with prejudgment interest; and

Cooperation: Continues to cooperate with the Commission.

Previously, the Commission entered into non-prosecution and deferred prosecution agreements only with corporations. For example, the SEC entered into a non-prosecution agreement with Carter’s Inc. which involved a financial fraud. The agency entered into a deferred prosecution agreement with Tenaris S.A., centered on FCPA violations. While the SEC had entered into cooperation agreements with individuals, it had not previously entered into a non-prosecution agreement with an individual.

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