ANOTHER INVESTMENT FRAUD CASE – BUT IT’S CHURNING

Departing from its seemingly unbroken string of investment fund and Ponzi scheme cases, the Commission brought an action against a registered representative based on claims of churning the non-discretionary securities accounts of two Florida municipalities. Using an investment strategy based on trading long term, zero-coupon Treasury Bonds, the defendant reaped huge commissions, while the two municipalities avoided huge losses only because of a dramatic market swing in their favor. In the end, the small profits in each account were less than the commissions. SEC v. Jaschke, Case No. 6:09-CV-2178 (M.D. Fla. Filed December 29, 2009).

Defendant Harold Jaschke was a registered representative associated with First Allied Securities, Inc. in its Huston, Texas office from June 2005 to August 2008. The two municipalities involved are the City of Kissimmee, Florida and the Tohopekaliga Water Authority of Florida. Each municipality had a non-discretionary account with Mr. Jaschke and First Allied. The applicable municipal ordinances required that each account be managed in a conservative manner to safeguard the principle. Each municipality had an unsophisticated investment manager who relied on Mr. Jaschke.

Mr. Jaschke utilized an investment strategy centered on trading STRIPS, a particular type of long term zero-coupon Treasury Bond. The bonds are a conservative investment since the U.S. Treasury will pay the face amount at maturity. When traded however, the bonds the investment becomes risky because the bonds are very sensitive to interest rate movements. Small changes in interest rates can have a significant impact in the value of the bonds.

Under the strategy used by Defendant Jaschke, the bonds in each account were frequently traded. At times, trades were made within the same day. The risk of this strategy was multiplied by using repurchase agreements to finance bond purchases. This increased the leverage to as high as $20 to $1 in Kissimmee’s account.

Over a two year period beginning in June 2005, the value in Kissimmee’s account declined about 84%. During the same period the value in the account of the Water Authority declined about 68%.

During the time period, Defendant Jaschke did not disclose the risks to the client and, in some instances, was not truthful. For example, Mr. Jaschke told the Kissimmee Fund Manager that the repos would be used in accord with the municipal ordnances to provide liquidity. He did not tell the fund manager that they were in fact used to leverage the account and greatly increased the risk. Later, when an accountant discovered the short term trading, the defendant blamed it on the clearing broker. He also attempted to blame large unrealized losses on the clearing broker, while assuring the Fund Manager that Allied was replacing the firm. The Fund Manager was also told to ignore a multi-million dollar house margin call from the clearing broker.

Similar misrepresentations were made to the Fund Manager for the Water Authority when large unrealized losses were discovered. In another instance, Mr. Jaschke told the same Fund Manager that account statements showing large unrealized losses were inaccurate when in fact they were not.

From June 2005 through March 2008, Mr. Jaschke placed a total of 478 trades to purchase $2.8 billion of STRIPS in the account for Kissimmee. This resulted in a profit of $4.3 million when the market swung in favor of the municipality. Mr. Jaschke made $6.1 million in commissions.

The Water Authority account was similar. There, the defendant place 563 trades resulting in the purchase of $3.1 billion of STRIPS. When the market moved in its favor the Water Authority was able to avoid a loss and make $5.5 million. Mr. Jaschke generated $8.1 million in commissions. The complaint alleges violations of the antifraud provisions of the securities laws. The case is in litigation. See also Litig. Rel. 21355 (Dec. 29, 2009).

A related administrative proceeding was brought against Jeffrey Young, a vice president of supervision at Allied. The Order alleges a failure to supervise Mr. Jaschke. In the Matter of Jeffrey C. Young, Adm. Proc. File No. 3-13731 (Dec. 29, 2009). The proceeding was settled with Mr. Young consenting to the entry of an order suspending him from association in a supervisory capacity with any broker, dealer or investment adviser for a period of nine months. Mr. Young also agreed to pay a civil penalty of $25,000.

SEC FILES SETTLED ACTION BASED ON TWO IMPROPER STOCK SCHEMES

The SEC filed a settled enforcement action against William Jacobson alleging that the former CEO of Atlas Mining Company employed two illegal stock schemes to try to prop up the struggling mining company. SEC v. Jacobson, Case No. 2:09-cv-00669 (D. Idaho Filed Dec. 22, 2009). A separate, settled, administrative proceeding was brought as to the company. In the Matter of Applied Minerals, Inc. (formerly known as Atlas Mining Company), Adm. Proc. File No. 3-13728 (Filed Dec. 22, 2009).

The complaint against Mr. Jacobson details two schemes which apparently were intended to raise money for the company. One involved shares sold under an S-8 registration statement. A second involved shares issued under Form SB-2.

From 2002 through late 2005, Mr. Jacobson caused Atlas Mining to improperly issue about 14.6 million S-8 shares to ineligible recipients, according to the complaint. Form S-8 is an abbreviated registration form. Using this form, a company can issue shares as part of a benefit plan to employees and certain types of consultants who furnish bona fide services to the registrant. Here however, the recipients included the defendant’s wife and son, neither of whom performed any services for the company. Millions of shares were also sold to entities, including an affiliated mining company Mr. Jacobson controlled which had no employees or operations. Those shares were later sold to investors and portions of the proceeds were returned to Atlas. Shares were also in capital raising efforts for the company.

The second scheme began in early 2003, when Atlas filed a Form SB-2 followed by a prospectus. The documents were for an offering of 10 million over a 180-day period. When the shares could not be sold within the allotted time, Mr. Jacobson, according to the complaint, illegally parked them. Those claimed investors never paid for the shares or received them. They did however execute blank irrevocable powers of attorney giving Mr. Jacobson discretion to sell the shares. Ultimately, the shares were sold to the public, raising over $800,000. To conceal this scheme, as well as the first, the Mr. Jacobson had the company file false documents with the Commission.

To resolve the case, Mr. Jacobson consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting, internal control, certification and registration provisions of the federal securities laws. He also agreed to pay a penalty of $50,000 and to the entry of an order barring him from serving as an officer or director of any issuer or from participating in any offering of a penny stock for five years. The company, now known as Applied Minerals, Inc., consented to the entry of a cease and desist order barring violations of the registration and reporting provisions. See also Litig. Rel. 21345 (Dec. 21, 2009).