by T. GormanPosted on Posted in SECActions

Ponzi scheme cases are a primary focuses of SEC Enforcement as the recent NERA report details. The question there is, of course, a variation of Jerry MacGuire’s “Show me the money” which asks “Where is the money?’ Now the Division is asking “Where is the gold?” Unfortunately for investors, the answer seems to be the same: Not to be seen. SEC v. Gold Standard Mining Corporation, Case No. CV 12-5662 (C.D. Cal. Filed June 29, 2012).

The defendants in Gold Standard, in addition to the company whose principal place of business is the law offices of its general counsel Kenneth Eads, are Panteleimon Zachos, a Greek resident who is CEO and CFO, Mr. Eads, audit firm Gruber & Company LLC and Edward Gruber, managing member of the audit firm.

From May 2009 through April 2011 Gold Standard and its CEO filed false and misleading periodic reports with the Commission concerning the operations of the company, its assts and financial statements. Specifically, although the company informed investors that it had acquired a Russian gold mining company, failed to mention that under the acquisition agreement portions of the profits from the mine were to be paid to the former Russian owner. It also failed to mention that the acquisition had not been properly registered with Russian regulatory authorities.

The financial statements also presented difficulties. Despite a claim by the company that its statements had been prepared in accordance with GAAP, in fact they were not. Indeed, the company failed to make and keep books and records and implement internal controls to provide accurate information about the financial activities occurring in its Russian subsidiary.

Attorney and defendant Eads prepared the false and misleading disclosure statements as well as the financial reports. To create interest in the company he initially included a representation in a report that the Russian mining interest were worth over $1.3 billion. Authority to prepare and sign the reports was given to Mr. Eads by defendant Zachos.

Gruber & Company LLC, a public accounting firm, was engaged by Mr. Eads. The firm and its principal claimed to have conducted an audit of Gold Standard’s financial statements in accord with generally accepted auditing standards. It did not, according to the complaint which alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).

Defendants Gold Standard and Zachos settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Zachos will also be barred from serving as an officer or director of a public company. The other defendants have not settled.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

Peter Madoff, the younger brother of jailed Ponzi king Bernie Madoff, pleaded guilty to criminal charges on Friday. He was also named as a defendant in a fraud suit filed by the SEC. While Mr. Madoff admitted to a series of crimes, he maintains that he was surprised by the massive fraud of his brother. U.S. v. Madoff (S.D.N.Y. June 29, 2012); SEC v. Madoff (S.D.N.Y. Filed June 29, 2012).

Peter Madoff was the Senior Managing Director and Chief Compliance Officer of Bernard L. Madoff Investment Securities LLC from 1969 through the December 2008. In that capacity he was responsible for BMIS’s market-making and proprietary trading operations. A two count superseding information charged Mr. Madoff with creating a series of false documents which facilitated the cover-up of his brother’s massive fraudulent scheme. Those documents included:

  • Compliance reviews of the trading in the BMIS IA business on a regular basis despite the fact that they were never performed;
  • False statements to regulators, auditors and IA clients; and
  • False reports with the SEC on an annual basis on Form ADV which misrepresented the number of adviser clients and the assets under management.

Mr. Madoff is also alleged to have engaged in a tax fraud which involved the transfer of family assets in a manner to avoid paying millions of dollars in required taxes. These schemes also permitted his brother to avoid paying millions of dollars in taxes.

To the end, Peter Madoff was involved in the scheme, according to the SEC’s complaint. At the time Bernie told Peter that there were insufficient funds to pay investor redemptions, he outlined a plan to distribute the remaining investor funds to family and friends. Peter Madoff helped decide how to implement the plan. Throughout the course of the scheme, Peter Madoff received tens of millions of dollars in benefits.

Mr. Madoff was charged with, and pleaded guilty to, a two count information which included a count of conspiracy to commit securities fraud, tax fraud, mail fraud, ERISA fraud and falsifying investment advisor records. The statutory maximum is 10 years in prison. Mr. Madoff has agreed not to seek a term of imprisonment of less than 10 years. He has also agreed to forfeit more than $143.1 billion. This arrangement includes a settlement with his family which requires the forfeiture of all of his wife and daughter’s assets and those of other family members. Under the agreement his wife will be left with $771,733. Sentencing is set for October 4, 2012.

The SEC complaint alleges violations of Exchange Act Sections 10(b), 15(b)(1), 15(c) and 17(a) and Advisers Act Sections 204, 206(1), (2), (4) and 207. The action is pending.

Tagged with: , ,