by T. GormanPosted on Posted in SECActions

The Commission filed a financial fraud action against a former senior accounting officer and controller of Molex Japan Co., Ltd., the Japanese based subsidiary of publically traded Molex Inc. The scheme, which took place in Japan but impacted the books and records of the U.S. parent, was discovered after over twenty years when the controller of the Japanese firm wrote a letter of confession to the company. SEC v. Fusamae, Civil Action No. 15 C 3142 (N.D. Ill Filed April 9, 2015).

Katsuichi Fusamae was the senior accounting officer of Molex Japan, based in Yamato, Japan. The firm is a subsidiary of Molex, headquartered in Lisle, Illinois, whose shares were traded on the NASDAQ until the firm was acquired in December 2013.

Mr. Fusamae held various accounting positions at Molex Japan beginning in 1975. His responsibilities included investing excess cash from Molex Japan’s operations. Investments were restricted to certificates of deposit, government treasury bills, European currency deposits and prime corporate paper. The investments were made through firm brokerage accounts.

Beginning in 1989 Mr. Fusamae invested the firm’s excess cash in riskier securities. He also traded equities through a margin account. There was no authorization for these transactions Almost immediately Mr. Fusamae suffered losses. Initially, he was able to conceal the losses by borrowing from the broker and moving the funds into the accounts temporarily at year end to provide the auditors with appropriate account statement balances.

As the losses mounted Mr. Fusamae resorted to raising cash through the firm’s banking relationships. Although such documents had to have the company “seal,” which in Japan signified that they were authorized, Mr. Fusamae had access through his position. Mr. Fusamae collateralized the loans by pledging the firm’s real estate. He accessed the necessary documents through his position in the accounting department where they were kept. By taking control of the brokerage account and bank reconciliation process he was able to conceal his activities from the company.

Mr. Fusamae also concealed the unauthorized trading and borrowing from the outside auditors. As part of the audit process the audit firm sent confirmations to the brokerage firms and banks. When those confirmations were sent Mr. Fusamae arranged to meet met with the brokers and bankers and obtain the executed confirmations, assuring the executives that he would return documents to the audit firm. In fact he did return the confirmations through the mail as requested by the auditors, but only after altering the documents to conceal his activities.

In late March 2010 Mr. Fusamae was unable to secure additional funding to cover the loses. The next month he mailed a letter of confession to the company, revealing losses that he estimated to be about JPY 16.6 billion or U.S. $166 million.

The losses had a material impact on the financial statements of the parent company. In August 2010 Molex filed a Form 8-K disclosing that it was restating its financial statements for fiscal 2008, 2009 and the first three quarters of fiscal 2010 to account for the losses from the trading scheme. For the restated years Molex recognized loses of $4.7 million in 2008, $2.7 million in 2009 and $26.7 million in 2010. Mr. Fusamae knew that the financial statements of Molex Japan were consolidated into those of the parent, according to the complaint. That complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23237 (April 9, 2015). The company settled a related Commission action. In the Matter of Molex, Inc., Adm. Proc. File No. 3-1642 (April 9, 2015)(here).

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by T. GormanPosted on Posted in SECActions

A staple of SEC enforcement in recent years has been offering fraud and Ponzi scheme cases. This week the Commission filed two more of these actions, one an offering fraud targeting military personnel and a second and investment fund fraud case which virtually told investors it was a Ponzi scheme. SEC v. Brown, Civil Action No. 6:15-cv-119 (W.D. Tx. Filed April 13, 2015); SEC v. Evans, Civil Action No. 1:15-01118 (N.D. Ga. Filed April 13, 2015).

The offering fraud: Leroy Brown was a member of the United States Army for twelve years. He joined the Army at the age of 18 in 2001. He formed LB Stocks and Trades Advice LLC and has claimed on his Facebook page to be its CEO and founder since 2004, although the required certificates for the formation of the firm were not filed with Texas state authorities until 2014.

Mr. Brown and his firm claim on its website to furnish a variety of securities and investment related services. Those include investment advice, portfolio management, research and brokerage services for securities, currencies, commodities and real estate. The firm also claims to be a FINRA broker-dealer, although it has never registered with the regulator. The firm also claimed to offer 7,600 leading mutual funds and that investors can trade over 200 future products. These representations also were incorrect. Mr. Brown is not a licensed securities professional.

Mr. Brown, who resides near Fort Hood military instillation, began targeting military personnel to purchase $1,000 membership certificates in the company. Touting his military service, he claimed that investors would participate in LB Stocks’ speculative investments in raw, undeveloped land. Potential investors were told to wire their investment funds to Mr. Brown.

Beginning in early 2014 Mr. Brown began receiving substantial deposits into his personal brokerage account. Mr. Brown then transferred nearly all of these funds from his brokerage account to his personal bank account. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Commission obtained a temporary freeze order at the time the complaint was filed. The case is pending.

The Ponzi scheme: Beginning in 2012 defendant James Evans, operating a website using the DollarMonster name through domain name Cashflowbot.com, soliciting investors with claims of big profits. The site claimed to have been working with investors since 2003 and was designed to furnish reliable, profitable returns on investments.

The DollarMonster site stated that the payout of profits was tied to receipt of additional investment funds from others. Specifically, investors were told that their funds would be pooled, that the pool pays off the next person in line giving them a return of 200% after which that investor returns to the end of the line. Each time funds come in there is a payoff. If no funds come in the line does not change. For this service DollarMonster charged a fee of 2.5% plus a $2.24 transaction fee.

The website specifically represented that DollarMonster had paid out sums exceeding those contributed by investors, which is false. It also did not tell investors that if there were no additional contributions the scheme would collapse.

In 2013 the site was altered. In October the site told investors that DollarMonster was a “financial adviser” with over 120 management teams and $38 million of assets under management. The next month the site claimed DollarMonster managed a hedge fund which purchased stock. Later the site claimed DollarMonster was a private holding company. When the staff issued a subpoena to the site it ceased operation, although the complaint alleges, on information and belief, that Mr. Evans continues to solicit investor funds. The complaint alleges violations of Securities Act Sections 5(a) and 5(c), each subsection of Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The case is pending.

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