by T. GormanPosted on Posted in SECActions

Offering fraud and Ponzi scheme cases have, in recent years, become a staple of the SEC enforcement division. Some of these cases are simple shams where the promoters lure unsuspecting investors with tales of quick, easy and safe returns. Others are more complex, involving ventures which actually have an operating businesses but nevertheless defraud investors and may use their funds to cover-up the short comings of the business by paying promised investor returns with money obtained from other investors. In the end, typically, the investors lose and, while the Commission does its best to preserve and recover the funds, much of the cash is gone.

This week the Commission announced the filing of two offering fraud cases. One is SEC v. Pedras, Civil Action No. CV 13-07932 (C. D. Cal. Filed under seal on Oct. 28, 2013). The action names as defendant Christopher Pedras, his partner Sylvester Gray, lead sales agent Alicia Bryan and several companies controlled by the individual defendants. The complaint details two schemes. In the first investors were solicited to acquire interests in the Maxum Gold Small Cap Trading Program. Maxum, it was claimed acted as an intermediary between banks that were not permitted to trade directly with each other. Investors were assured that they would be paid between 4% and 8% monthly and that the investment was safe. Minimum investment was between $5,000 and $10,000 for one program. There were variations of the program that required a larger investment. About 50 investors participated in the program. In fact it was fictitious according to the Commission.

When the promised returns could not be paid, the individual defendants moved to scheme two – the FMP Renal Program. Investors were told they could acquire shares of a New Zealand company which expected to be publicly traded. It operated kidney dialysis clinics in New Zealand. Investors from the first scheme were told they could convert their shares and become an investor in scheme two, netting an 80% increase in value. At least eight U.S. investors participated. This deal was also a fraud, according to the SEC.

Overall about $2.4 million in investor money was used to make Ponzi type payments to investors while another $2 million was stolen by Mr. Pedras. About $1.2 million was used to pay sales commissions. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). An emergency asset freeze was obtained by the Commission. The case is pending. See Lit. Rel. No. 22862 (Nov. 5, 2013).

The other is SEC v. Wang, Civil Action No. CV 13-07553 (C.D. Calif. Filed under seal Oct. 15, 2013). This is an action against Yin Nan Wang, Wendy Ko, Velocity Investment Group, Inc. which is controlled by the two individual defendants, a series of entities controlled by Investment Group and Rockwell Realty Management, Inc. Beginning as early as 2005 the defendants raised about $9.8 million from 2,000 investors, selling promissory notes issued through Velocity. The company was supposed to be in the real estate business. While apparently it did own real estate, the complaint alleges that its business model was not sustainable because it assumed that the funds raised would be available for operations. In fact large portions were used to pay fees and other items. As a result defendants sought to conceal the true financial condition of the company. In part they did this by making what they admitted were Ponzi type payments to earlier investors from funds obtained from more recent investors. In part they sought to conceal the financial condition of the company by entering into a series of what appear to be meaningless transactions with Rockwell. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

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by T. GormanPosted on Posted in SECActions

For the SEC, a Continued Focus on the Municipal Bond Market

Municipal bond offering cases have become an enforcement priority for the SEC. In recent months the Commission has brought a series of actions against the City of Miami, the West Clark City School District and others.

Now the agency has brought two proceedings related to bonds issued by a municipal corporation in Washington State. In the Matter of Greater Wenatchee Regional Events Center Public Facilities District, Adm. Proc. File No. 3-15602 (Nov. 5, 2013) and In the Matter of Piper Jaffrey & Co., Adm. Proc. File No. Nov. 5, 2013). The former names as Respondents: a municipal corporation formed by nine cities and counties to fund a Regional Center; Allison Williams, the Executive Services Director of Wenatchee, Washington who executed the closing certificate for the bond issue; Global Entertainment Corporation, the developer of the Regional Center; and Richard Kozuback, Global’s CEO and President. The latter names as Respondents the underwriter of the bonds involved here and Jane Towery, a Managing Director at Piper.

The underlying facts trace to 2005 when Mr. Kozuback made several presentations regarding potential funding sources to develop a Regional Center to interested groups. The next year the City of Wenatchee, Washington, along with eight neighboring municipalities and counties, formed the District which in turn entered into a development contract with Global, although the firm had limited experience in the area.

Global developed a series of financial projections for the operation of the Regional Center over the course of project. The projections were prepared for the budget and inclusion in the District’s Official Statement. After the initial projections were prepared in the summer of 2006, the City Council requested that in independent consultant review them. The consultant determined that the Regional Center might operate at a deficit and that its projected annual net operating income could be overstated by as about 16% to 25%. The next month the City entered into a contingent loan agreement which would provide financial support for all or part of the project if necessary. Construction began.

By early 2007 the facility had to be redesigned and reduced in size because of cost overruns and unexpected building costs. Global crafted new projections. Again, the City Council brought in a consultant. Again the Consultant raised questions about the projections although it concluded that the reduced project might be viable. In May 2007 the City Council voted to proceed with the Regional Center. Shortly thereafter the District authorized a lease agreement for the Center. Construction resumed.

By April 2008 Mr. Kozuback became concerned that sales of luxury seats were not proceeding as expected. Global provided new projections for the official bond statement which was in preparation. Funds from the issuance needed to be available by the completion of the center in September 2008 for its acquisition by the District. Based on the projections, the underwriter advised that a bond issuance might be difficult. The Mayor, who had cast a decisive vote at the City Council meeting which approved continuation, demanded that the projections be revised to be more optimistic. The revisions were made. The revised projections were included in the Official Statement without revealing the issues surrounding the revisions. The underwriter was unable to complete the financing.

Piper Jaffrey was retained in late 2008. The City and the District were searching for financing avenues. While various options were considered, the only viable one called for the issuance of short-term Bond Anticipation Notes or BANs that would mature two years later. The short term instruments would be refinanced through the issuance of long-term bonds. At the time the District and Mr. Williams knew that that if the revenue from the Regional Center was not adequate to support a bond issuance to repay the short term instruments the support of the City would be necessary. In the offering materials for the short term bonds a section discussing the constraints on the financial ability of the City to assist was deleted.

In 2011 the District defaulted on the outstanding $41.77 million short term BANs which had been issued. The State legislature then passed a sales tax to assist. In late September the District sold the long term bonds secured by the sale tax revenues to refinance the short term instruments.

Order alleges that the Official Statement for the short term instruments was false and misleading as was the certification of full disclosure. The papers did not adequately disclose the facts regarding the projections for the project and the limitations on the City finances, according to the Order. It alleges violations of Securities Act Sections 17(a)(2) and (3).

The Respondents in both proceedings settled. The District undertook to establish appropriate policies, procedures and internal control, institute training and certify completion of these steps to the Commission. It also consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2) and a directive to implement the undertakings and pay a civil money penalty of $20,000. Ms. Williams and Mr. Kozuback both consented to the entry of cease and desist orders but based on Securities Act Section 17(a)(3) and will each pay a civil penalty of $10,000.

Piper revised its due diligence procedures and Ms. Towery agreed to implement undertakings which include limiting her activities as an associated person of a securities professional and to retain a consultant to review Piper’s municipal underwriting due diligence polices and procedures. In addition, the firm and Ms. Towery each consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will pay a penalty of $300,000 while Ms. Towery will pay $25,000.

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