by T. GormanPosted on Posted in SECActions

Robert Allen Stanford, the convicted architect of an $8 billion Ponzi scheme centered around Stanford International Bank or SIB, is serving a 110 year prison sentence. Now the Commission has brought three administrative proceedings naming as Respondents five of his lieutenants.

One proceeding names as a Respondent Jay T. Comeaux, the president of Stanford Group Company or SGC (a registered broker dealer and investment adviser) from January 1996 to March 2005 and its executive director from March 2005 to February 2009. In the Matter of Jay T. Comeaux, Adm. Proc. File No. 3-15002 (Aug. 31, 2012). A second names as Respondents: Daniel Bogar, former President of SGC from March 2005 through 2009 who had previously overseen the merchant banking group from 2000 through 2005; Bernerd E. Young, COO of SGC from 20006 through 2009; and Jason Green who held several positions with SGC including senior v.p., financial planning from 1996 – 20001, senior managing director from April 2001 to January 2007 and president, Private Client Group at SGC from January 2007 through February 2009. In the Matter of Daniel Bogar, Adm. Proc. File No. 3-15003 (Aug. 31, 2012). A third proceeding named as a Respondent Jason A. D’Amato who held various positions with SGC and Stanford Capital Management, LLC or SCM beginning May 2003 and continuing through February 2009 including one in which he managed a proprietary mutual fund wrap program known as Stanford Allocation Strategies or SAS. In the Matter of Jason A. D/Amato, Adm. Proc. File No. 3-15004 (Aug. 31, 2012).

Essentially, each of the proceedings alleges that the Respondent or Respondents contributed to the financial success of the Stanford fraud by participating in or actually selling CDs for SIB or mutual funds despite being aware of information demonstrating that the representations made to investors were false. The Comeaux and Boger proceedings center on a core of similar allegations focused on the sale of certificates of deposit or CDs issued by SID beginning as early as 1998. At that time those instruments were marketed to U.S. investors through a private placement exemption from the registration provisions of the federal securities laws. The revenues from these sales represented a substantial potion of SGC’s overall revenue.

Critical to the sale of the CDs, an a part of the training furnished to those who were involved with the sales such as Mr. Comeaux, were representations regarding the investments of SIB and its insurance program. SIB was a private Antigua bank solely owned by Mr. Stanford which claimed to have $7.2 billion in deposits and $8 billion in assets. It sold CDs based on claims that they were backed by an investment portfolio of highly liquid securities and an insurance program which was better than that of the FDIC. Many of those CDs were sold through SGC. James Davis, the CFO of Stanford Financial Group, pleaded guilty and acknowledged that about 80% of SIB’s investment portfolio was illiquid investments, grossly overvalued real and personal property acquired in related party transactions and unsecured personal loans to Mr. Stanford which were disguised as investments.

Mr. Comeaux knew, that SIB would not disclose the details of its investment holdings to him or other SGC executives or representatives. Despite this fact he and others used marketing materials which trumpeted the diversified holdings of the bank in marketable securities. Those materials also touted the “comprehensive insurance program” that backed the CDs, a representation Mr. Comeaux knew was false. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).

Messrs. Bogar, Young and Green took several trips to Antigua to conduct due diligence on SIB. During the trips they investigated SIB and its CD program, reviewing reports, touring the facilities and meeting with officials. As a result of their investigations they learned: that SGC refused to permit a review of its investment portfolio; that there was no private insurance; and that SGC financial advisers had long-standing concerns about the auditors for SIB. Messrs Bogar and Young also knew, or were reckless in not knowing, of other misstatements and omissions regarding SIB.

Nevertheless, Respondents Bogar and Young reviewed and approved offering documents and trading materials used by SGC to market its CDs to U.S. investors which contained representations regarding the SIB investment portfolio and insurance program. Respondent Green marketed and sold millions of dollars of SIB CDs using the misleading documents and, in addition, made other oral misrepresentations. The Order alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(c)(1) and Advisers Act Sections 206(1) and (2).

The D’Amato proceeding is based on the sale of interests in the Stanford Allocation Strategies proprietary mutual fund wrap program for SCM and SGC rather than CDs for SID. The approach and results were the same however.

In 2000 SGC began offering a mutual fund allocation program through its investment advisory group. Mr. D’Amato began as an assistant analyst with SGC in May 2003. As part of his duties he calculated the returns of the product in 2004 compared to the S&P 500. The backtested models consistently outperformed the S&P 500 by a significant margin.

By 2006 clients complained that their returns were nothing close to those recorded in the materials. While the performance data for 2000 through 2004 could not be verified and in fact SGC could not identify any records substantiating performance for that period, the claimed results were included in new pitch books with a disclaimer for that period. The material for the unverified period was set along side of that for 2005 and later years that was in fact verified. This was misleading.

Mr. D’Amato knew that the 2000 to 2004 data was calculated differently than information for later years according to the Order and that labeling the composite data as “historical performance” in materials was misleading. He also knew that the claimed returns for 2000 to 2004 were not realistic. He failed to disclose these facts to clients. He also misrepresented his credentials to clients, falsely claiming that he was a Chartered Financial Analyst when in fact he was not. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) and Section 207.

Only Mr. Comeaux settled. He consented to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business and participating in a penny stock offering. Issues regarding disgorgement and civil penalties will be resolved in a future proceeding. At that time the extent to which his assets are subject to the control of the court-appointed receiver in the Commission’s enforcement action against Robert Allen Stanford will be credited against any monetary sanctions. The other to proceedings will be scheduled for hearing.

Tagged with: , ,

by T. GormanPosted on Posted in SECActions

As summer draws to a close, the Commission continued its work under Dodd-Frank, issuing a staff study on financial literacy. It focuses on what investors want to know about financial professionals and investment products. Proposed rules were also issued under the JOBS Act regarding the general solicitation and advertising of securities offerings.

Enforcement actions continue to focus on insider trading. One case filed this week involves a former executive at Carter’s, Inc., the company that secured the first non-prosecution agreement under SEC’s recent initiative. A group of five cases were also brought centered on information misappropriated about a then upcoming tender offer by an accountant from his client board member.

Finally, the PRC continues to refuse to allow the production of audit work papers. In an action which mirrors one brought earlier by the SEC, securities regulators in Hong Kong are seeking an order against an audit firm that resigned from an engagement for a PRC based company after issues arose. The audit firm failed to produce the audit work papers when requested because local law restrictions.

The Commission

Financial literacy study: The Commission issued a Financial Literacy Study as required by the Dodd-Frank Act. The staff study focuses on what investors want to know about financial professionals and investment products and services (here).

JOBS Act: The Commission proposed rules to implement the JOBS Act provision regarding general solicitation and advertising in securities offerings (here).

SEC Enforcement: Filings and settlements

Statistics: This week the Commission filed 8 civil injunctive actions and 2 administrative proceedings (excluding follow on and 12j actions).

Conflicts; In the Matter of Matthew Crisp, Adm. Proc. File No. 3-14520 (Aug. 30, 2012). Mr. Crisp was formerly associated with Adams Street Partners, LLC, a registered investment adviser to a number of private equity funds. The Order alleges that Mr. Crisp usurped a corporate opportunity from Adams Street which he misappropriated for another entity with which he was secretly involved. In doing so he failed to disclose his conflicts, made misrepresentations and eventually received a payout of $150,000 that should have gone to Adams Street. His deceit also secured another investment opportunity for the undisclosed company from which he attempted to arrange a second payout. Although he later was forced to repay the money, Mr. Crisp initially profited by over $2 million from his actions. The Order alleges violations of Advisers Act Sections 206(1), (2) and 206(4). Mr. Crisp resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an order barring him from the securities business with the right to apply for reentry after one year to the appropriate self-regulatory organization. In addition, he agreed to pay disgorgement of $89,761 to Adams Street and a civil penalty of $50,000.

Misrepresentations: SEC v. Wwebnet, Inc., Civil Action No. 12-CV-6581 (S.D.N.Y. Filed Aug. 28, 2012) is an action against the company and Robert Kelly, its CEO. Over a three year period beginning in 2005 the complaint alleges that the defendants made a series of misrepresentations to investors. Those included a misrepresentation about a related party transaction which permitted Mr. Kelly to funnel about $2 million to his personal accounts and others regarding the revenue of the company and his compensation. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Excessive mark ups: SEC v. Neves, Case No. 1:12-cv-23131 (S.D. Fla. Filed Aug. 28, 2012) is an action against Fabrizio Neves and Jose Luna, both registered representatives at now defunct Florida broker LatAm Investments, Inc. They are alleged to have defrauded a group of Brazilian pubic pension funds and a Columbian institutional investor out of about $36 million. The wrongful conduct took place over a three year period beginning in 2006 during which the men took fraudulent marked ups on about $70 million in structured notes issued by commercial banks. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c). Mr. Luna settled with the Commission, consenting to the entry of a permanent injunction based on the antifraud provisions cited in the complaint. He also agreed to pay disgorgement of $923,704.85 along with prejudgment interest and a penalty in an amount to be determined. In a related administrative proceeding Mr. Luna agreed to be barred from the securities business. Mr. Neves is litigating the action. See also, Lit. Rel. No. 22462 (Aug. 29, 2012); In the Matter of Angelica Aguilera, Adm. Proc. File No. 3-14999 (Aug. 29, 2012)(Failure to supervise proceeding against former principal of LatAm).

Insider trading: SEC v. Melvin, Civil Action No. 1:12-cv-02984 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Berry, Civil Action No. 1:12-cv-02985 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Coots, Civil Action No. 1:12-cv-02986 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Jackson, Civil Action No. 1:12-cv-02987 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Rooks, Civil Action No. 1:12-cv-02988 (N.D. Ga. Filed Aug. 28, 2012). This is a group of cases centered on an accountant who, based on information he misappropriated from a client, tipped four friends who then furnished the inside information to others. The information concerned the then pending tender offer by French pharmaceutical company Sanofi-Aventis for Chattem, Inc., announced on December 21, 2009. The offer was for $93.50 per share, a 32.60% premium over the closing share price the day before the announcement. In November 2009 the Chattem board members were informed that Sanofi had a serious interest in acquiring the company. The next month one of its board members consulted with his personal accountant, defendant Thomas D. Melvin, Jr., about 50,000 Chattem options he held that would be automatically exercised if there was a change in the ownership of the company. After learning about the deal Mr. Melvin is alleged to have told four individuals, each named as a defendant, about the pending deal. Each traded: Charles Cain, his long time broker, who purchased 1,500 shares of Chattem which yielded $36,680.10 in trading profits following the announcement; Joel C. Jenks, a close friend, who purchased 1,000 shares of Chattem which yielded $24,337.43 in trading profits; R. Jeffrey Rooks, his partner at the accounting firm, who purchased $16,000 in Chattem shares, yielding trading profits after the announcement of $6,020.39; and C. Roan Barry, a close friend, who purchased 1,700 shares which yielded $41,859.71 in trading profits following the announcement.

Each person tipped by accountant Melvin is alleged to have tipped another: Mr. Cain told his friend, defendant Peter Doffing, and an unidentified individual; Mr. Doffling purchased out of the money call options which yielded trading profits of $378,979.32 following the deal announcement; the unidentified individual bought 250 shares which yielded $5,877.35 in illicit trading profits; Mr. Jenks is alleged to have tipped another unidentified individual who purchased call options which yielded trading profits of $38,802.71; Mr. Rooks tipped another unidentified individual who purchased 725 shares of stock which resulted in $12,461.75 in illicit trading profits; and Mr. Berry tipped defendant Ashley J. Coots, a friend and neighbor who, in turn tipped defendant Casey D. Jackson and another person. Mr. Coots purchased 540 shares of Chattem which resulted in $13,231.40 in illicit trading profits while Mr. Jackson bought 100 shares which yielded $2,369.78 in trading profits; the other person tipped by Mr. Coots bought 165 shares yielding $4,128.63 in profits following the deal announcement. The complaint against defendants Melvin, Cain, Jinks and Doffing alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.

Defendants Berry, Coots, and Rooks settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Jackson also settled, consenting to the entry of an injunction based on Exchange Act Section 10(b). In addition, each agreed to pay disgorgement, prejudgment interest, and a penalty as follows: Mr. Barry, $55,091.51 and a penalty in the same amount; Mr. Coots $17,360.51 and a penalty of $13,231.80; Mr. Jackson $2,369.78 and a penalty of $1,184.89; and Mr. Rooks $18,482.14 and a penalty of $4,620.54. Mr. Rooks also agreed to be barred from appearing and practicing before the Commission as an accountant. His settlement reflects his cooperation with the Commission.

Suitability: SEC v. Marks, CV-12-4486 (N.D. Cal. Filed Aug. 27, 2012) is an action against Gary Marks, a former Sky Bell Hedge Fund Manager. Mr. Marks is alleged to have misrepresented the nature of the investments in funds and made unsuitable recommendations from 2005 to 2007 in connection with recommending fund of funds investments. The complaint alleged violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4)-8. To resolve the action Mr. Marks consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to pay disgorgement of $321,702 along with prejudgment interest and a penalty of $100,000. See also Lit. Rel. No. 22460 (Aug. 27, 2012).

Insider trading: SEC v. Martin, Case No. 1:12-CV-02922 (N.D. Ga. Filed Aug. 23, 2012); See also Lit. Rel. No. 22458 (Aug. 24, 2012). This is an action against former Carter’s Inc. executive Eric M. Martin, who was employed at the company from March 2003 until he was terminated six years later in March 2009. He was the Director and later Vice President of Investor Relations. Mr. Martin reported directly to the CFO. His job required him to help prepare senior management for earnings calls. Mr. Martin is alleged to have utilized the information from his position to trade in advance of earnings releases in the securities of the company. In some instances he was successful, making about $170,000 in illicit profits. In others he was not. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Criminal cases

Investment fraud: U.S. v. Leiske, 8:08-cr-00176C.D. Ca.) is an action in which William Perry, a former stock broker and investment advisor, and Dennis Clinton, a former real estate investment manager were found guilty by a jury for their roles in a conspiracy to defraud a wealthy investor of $1 billion in an investment scheme. Each defendant was convicted of one count of conspiracy, two counts of mail fraud and six counts of wire fraud. The scheme centered on promises that funds would be invested in very high yield investments as part of the “Fed trade program.” That program was supposed to be operated under strict Federal Reserve guidelines. Investors were to meet a Federal Reserve official and the chairman of a major bank. Portions of the profits were to go to the investors while other parts were to be paid to charitable programs and others used for project finance. It turned out that the defendants made the representations about the program to an under cover FBI agent. The date for sentencing has not been set.

Investment fund fraud: U.S. v. Dinning, 2:12-cr-00084 (E.D.Va.) is a criminal action which names attorney Brian Dinning as a defendant in an indictment which charges 25 counts of wire fraud. Mr. Dinning raised over $2.9 million from 23 investors since 2005, according to the court papers. Investors were told they were investing in his entities which had luxury prosperities in South Africa along with mining interests. In fact much of the money was diverted to his personal use. The case is pending.

SFC

Audit work papers: The SFC requested that EY Hong Kong produce the audit work papers for Standard Water, a company which applied for listing to the Stock Exchange of Hong Kong in November 2009. In March 2010 E&Y told the Exchange that it was resigning as the reporting auditors for Standard after discovering certain inconsistencies in documentation provided by the company. Later the company withdrew its application for listing.

Subsequently, the SFC issued a formal notice to E&Y for the audit work papers. The firm failed to produce the papers since they are held by an affiliate in the Peoples Republic of China. A request to the PRC firm, Ernst & Young Hau Ming, also proved fruitless. Under an October 2009 statement by PRC authorities accounting records, including audit working papers, may be subject to claims of state secrecy. That law specifies that Hong Kong accountants are required to obtain the consent of the relevant PRC authorities before producing any accounting records to regulator even, even those in Hong Kong.

The SFC has applied to the court, seeking an order against E&Y. The court may, under the articles invoked, order the firm to comply with the request if it is satisfied that the audit firm does not have any reasonable excuse for not complying. The regulator is also continuing discussions with the mainland authorities who were consulted prior to the initiation of this its court proceeding.

Tagged with: , , , , , ,