by T. GormanPosted on Posted in SECActions

The Commission brought a fraud action against a movie producer who is alleged to have misappropriated client funds in two complex transactions. SEC v. Bergstein, Civil Action No. 1:16-cv-08701 (S.D.N.Y. Filed Nov. 9, 2016). The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action.

David Bergstein, a producer of films, is the CEO of a private equity company that performs services such as debt restructuring. He is also the president and secretary of Swartz IP. Each transaction primarily involves: Weston, a registered investment adviser; Keith Wellner, the firm’s general counsel and COO; Gerova Financial Group Ltd., a reinsurance firm controlled by Jason Galanis, a repeat securities law violator currently in prison for securities fraud; Wimbledon Financing Fund Fund, a Cayman Island exempt company; and the P2 Fund, also a Cayman Island exempt company with multiple classes of shares.

In 2010 Weston entered into a transaction with Gerova Financial in which the adviser forwarded assets from one of its hedge funds – Wimbledon Financing – that were illiquid to Gerova for restricted shares of that firm which was publically traded. The next year Weston sought to unwind the deal after trading in Gerova’s shares were suspended by the New York Stock Exchange following reports that the firm was a fraud.

To facilitate that transaction Defendant Bergstein approached Weston’s president, Albert Hallac, and general counsel and COO, Keith Wellner. Mr. Bergstein claimed that Gerova owed him money which had not been repaid. Mr. Bergstein thus claimed that he and Weston had been wronged by scofflaw Jason Galanis.

A plan was formulated by Mr. Bergstein which called for Gerova to unwind the transaction by having its assets placed in a firm he controlled, Arius Libra Inc., as an investment in another business. To facilitate the transaction, a loan was extended to a special purpose entity, Arius Libra, by the P2 Fund which was managed by Weston. The loan was to pay certain debts associated with Gerova and fund the medical billing businesses of Arius Libra. The loan was secured by assets of Wimbledon Financing Fund. If the loan was not repaid the P2 fund had the ability to liquidate the assets and repay its investors. About $9 million in investor funds were made available to the P2 Fund under the loan arrangement. The transaction was not disclosed to the P2 investors.

Mr. Bergstein failed to use the P2 loan proceeds to pay Gerova creditors and fund the medical billing businesses in accord with his representations. Rather, he misappropriated a substantial portion of the loan proceeds, diverting the funds to his own use.

The second transaction involved essentially the same parties along with TT Portfolio, another Cayman Island exempt fund managed by Weston. In this transaction Mr. Bergstein arranged for TT Portfolio to enter into a swap agreement with Swartz IP. Wellner and others transferred about $17 million to Swartz IP from TT Portfolio. Swartz IP issued a note in return – essentially Mr. Bergstein agreed to provide certain investment returns and to meet investor redemption requests. The transaction was premised on false financial statements for Swartz IP. The transaction also involved the diversion of about $3 million to the P2 Fund to repay the P2 loan – essentially funds were moved from one fund managed by Weston to another. Neither the deal nor the resulting conflict were disclosed to the shareholders of TT Portfolio.

The representations made by Mr. Bergstein were false – investment returns were not paid nor were investor redemption requests honored. Rather, he had the funds secretly diverted to his use. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The parallel criminal action, which names Messrs. Bergstein and Wellner as defendants, contains counts of conspiracy to commit investment adviser and securities fraud, investment adviser fraud, securities fraud, wire fraud and conspiracy to commit wire fraud. Both actions are pending.

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by T. GormanPosted on Posted in SECActions

The Commission filed two more “to good to be true” fraud actions yesterday. One centered on an offering fraud involving a recycling firm which repeatedly promised investors that it was about to obtain the financing that would move the company forward. Although the funding source continued to change the result did not – no financing. In the Matter of Glenn Johnson, Adm. Proc. File No. 3-17671 (Nov. 8, 2016). A second action centered on an advance fee scheme which promised investors, in part, returns as high as 35% per week which ultimately would give them huge profits. The only profits, however, went to the defendants. SEC v. Smith, Civil Action No. 1:16-cv-4171 (N.D. Ga. Filed Nov. 8, 2016).

Glenn Johnson names as Respondents Mr. Johnson, the President, COO and a director of Feather N Time Corp, d/b/a Nature’s Fuel, and William Sinish, CEO and a director of the same firm. In January 2011 Nature’s Fuel signed a Memorandum of Understanding for the development of seven former manufacturing sites and a landfill in Huntington, Indiana. While the MOU was scheduled to terminate at the end of the month, it had a clause extending the agreement for 30 days after execution. A term sheet was later executed with Company A, the same firm that signed the MOU.

Nature’s Fuel did not have the funding necessary for development. The firm also did not have the necessary permits. A water issue developed. To obtain the necessary operating funds Respondents marketed and sold shares of the firm and its subsidiaries. Over a two year period, beginning in January 2013, about $2,275,000 was raised from over 70 investors. During the period investors were repeatedly assured that the firm’s funding prospects were bright and that it had either been or was about to be obtained. In fact the statements were materially incorrect.

The identity of the firm through which the funding would be obtained continually changed. Over the two year period four different sources were identified. Respondents knew, or were reckless in not knowing, that their statements regarding the particular possible funding source were incorrect. Misrepresentations were also made regarding the existence and terms of purchase agreements for the firm’s products. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b).

To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Mr. Johnson will pay disgorgement of $237,867.85 along with prejudgment interest. Payment, except for $1,200, is waived and no penalty was imposed based on financial condition. Mr. Sinish will pay disgorgement of $302,077.05 and prejudgment interest. Payment of all but $600 is waived based on financial condition.

Smith named as defendants Jeffery Smith, Joseph Carswell and Michael Fullard. Messrs. Smith and Carswell did business as Atlantis Capital, LLC and Capital Funding, LLC, two fictitious companies. Investors were told that Mr. Smith could obtain medium term notes, bank guarantees and standby letters of credit worth millions of dollars for fees of $100,000 and $250,000. Those instruments could be “monetized” and the proceeds loaned to the investor as non-recourse loans. The remaining funds would be invested in debentures that would pay returns of as much as 35% per week. Those returns would pay off the investor loans. Mr. Fullard served as a finder. Investor funds were almost immediately taken by the defendants. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 23685 (Nov. 8, 2016).

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