AN ACTION BASED ON A FRAUDULENT PRIVATE PLACEMENT

The Commission filed a complaint against Anthony Banas, co-founder and former Chief Technology Officer of privately held Canopy Financial, Inc. Canopy is a Chicago based company which assists clients in administering and managing their employees’ health savings and flexible spending accounts. SEC v. Banas, Civil Action No. 10 cv 3977 (N.D. Ill. June 22, 2010).

The case against Mr. Banas is based on an alleged fraud in connection with a $75 million private placement. Specifically, the complaint alleges that Mr. Banas and co-founder Jeremy Blackburn, defrauded investors by furnishing them with forged bank statements misrepresenting the financial condition of the company, not informing them about the true financial condition of the company and misappropriating investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

The fraud was discovered when the newly hired General Counsel of the company contacted a friend at KPMG for assistance with a search for a new CFO in November 2009. At that time he learned that the audit opinion had not been issued by KPMG. Rather, it had been forged. The Commission subsequently filed SEC v. Canopy Financial, Inc., Case No. 09 cv 7429 (N.D. Ill. Filed Nov. 30, 2009) and obtained emergency relief as discussed here.

Mr. Banas has offered to settle the action brought against him by consenting to the entry of a permanent injunction prohibiting future violations of each section cited in the complaint. In addition, he agreed to pay $975,548.25 in disgorgement along with prejudgment interest and a civil penalty to be determined by the court. See also Litig. Rel. 21565 (June 22, 2010).

ANOTHER SIGNIFICANT MARKET CRISIS CASE

The SEC brought another significant market crisis case, SEC v. ICP Asset Management, LLC (S.D.N.Y. Filed June 21, 2010). The action is against ICP Asset Management, LLC, a registered investment adviser owned by ICP Holdco; ICP Securities, LLC, a registered broker dealer owned by ICP Holdco; and Institutional Credit Partners, LLC or ICP Holdco, controlled by Thomas Priore, also a defendant.

The Commission’s complaint centers on a series of transactions involving four multi-billion dollar collateralized debt obligations know as Triaxx CDOs. It alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(c)(1)(a) and Advisers Act Section 206.

ICP Asset Management has managed the Triaxx CDOs since 2006. As the markets declined, according to the SEC, ICP Asset Management and the other defendants engaged in repeated fraudulent conduct to the detriment of its clients. In one series of transactions, it caused the Triaxx CDOs to repeatedly overpay for bonds. Frequently, those transactions were undertaken to protect other clients. For example, in one transaction, ICP Asset Management had a CDO buy about $22 million of mortgage bonds from another client for $75 per bond. Earlier the same day ICP Asset Management had purchased the same bonds for that client at $63.50 per bond. As a result, the CDO lost about $2.5 million. According to the complaint, ICP Asset Management directed more than a billion dollars in fraudulent trades for Triaxx CDOs that were similar and at inflated prices.

Defendant ICP Asset Management also structured trades which benefited its affiliates at the expense of the CDOs. In one purchase of a large portfolio of mortgage bonds, ICP altered the trade so its affiliates could make a $14 million profit at the expense of the CDOs. In other transactions ICP Asset Management and its affiliates benefited from undisclosed mark ups. The defendants also caused the CDOs to enter into prohibited transactions and misrepresented the value of holdings.

By early 2010, the bulk of the bonds held by the Triaxx CDOs which had once been AAA rated were downgraded to junk status. In sum, the defendants put their profits and interest before those of their clients, according to the complaint. The case is in litigation.