by T. GormanPosted on Posted in SECActions

The SEC claims that an individual that controlled several entities including an investment fund created phony consumer loans to funnel investor cash to his faltering financial operations rather than investing the money in actual loans in accord with the representations made to investors. The complaint is the result of an inspection by the Commission’s staff. It alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1) and (2). SEC v. Thibeault, Civil Action No 1:15-cv-10050 (D. Mass. Filed Jan. 9, 2015).

The action names as defendants: Daniel Thibeault, President, primary owner and CEO of defendant Graduate Leverage, LLC; Graduate Leverage, founded by Mr. Thibeault in 2003, operates multiple investment and financial businesses; GL Capital Partners LLC is a registered investment adviser primarily owned by Graduate Leverage; GL Investment Services, LLC is a registered investment adviser whose sole member is Graduate Leverage; and Taft Financial Services, LLC which is “nominally” run by Eric Kratzer but on “information and belief” is controlled by Mr. Thibeault.

The GL Beyond Income Fund was created by Mr. Thibeault in 2012. He served as the portfolio manager or co-manager. It is a closed end management company which purchases consumer loans. The Fund’s daily valuation report for December 8, 2014 lists about $35.65 million in consumer loans. It also claims to hold about $385,000 in U.S. equities and $6.55 million in promissory notes issued from the Fund to an entity named LAOH Capital LLC. The fund listed its total assets as of December 8, 2014 as $423.585 million.

In early 2013, Mr. Thibeault initiated a scheme, on information and belief according to the complaint, to use the Fund’s money to support his faltering financial advisory business. That business included Graduate Leverage. As part of the scheme fictitious loans were created with the proceedings being transferred to Taft Financial which then forwarded the funds to Graduate Leverage. Mr. Kratzer, on information and belief, facilitated the transfers.

To conceal the scheme, forged promissory notes in the name of real investors who did not request a loan were prepared. Periodic interest payments were made at the direction of Mr. Thibeault to make the notes appear to be genuine. It “appears,” according to the complaint, that about two-fifths of the Funds reported assets consisted of fictitious loans.

On December 8, 2014 during an examination of GL Capital the Commission’s inspection staff requested that certain promissory notes and related documents be produced. Only six promissory notes were produced over two days. The loan documents produced contained false information regarding the borrowers. The promissory notes, in many instances, contained incorrect information. At least one of the loan borrowers was unaware that a loan had been taken out in his name. During the examination Mr. Thibeault made misrepresentations regarding the loans to the staff.

Following the inspection the FBI executed a search warrant at the offices of the defendants. Requests for freeze orders and other relief are pending.

The case is pending. See Lit. Rel. No. 23171 (Jan. 9, 2015).

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by T. GormanPosted on Posted in SECActions

FCPA enforcement was the focus this first week of the new year. The DOJ brought FCPA and Travel Act charges against an individual alleged to have repeatedly bribed an official of the European Bank of Reconstruction and Development to secure contacts for clients by funneling the payments to the sister of the official.

The SEC announced one action. It centered on enforcing a previous investment adviser bar order.

SEC

Remarks: Chair Mary Jo White addressed the Association of American Law Schools Annual Meeting, delivering remarks titled: Public Service: An Obligation and Opportunity for Lawyers. Washington, D.C. (Jan. 3, 2015). Her remarks reviewed the public service obligation of lawyers and public service jobs (here).

SEC – Suit arising from use of administrative proceedings

Bebo v SEC, Case No. 15-cv-00003 (E.D. Wis. Filed Jan. 2, 2015) is another suit challenging the decision to bring an action as an administrative proceeding rather than in Federal District Court. The underlying administrative proceeding named as Respondents Laurie Bebo and John Buono, respectively, the CEO and CFO of Assisted Living Concepts, Inc. In the Matter of Laurie Bebo and John Buono, Adm. Proc. File No. 3-16293 (December 3, 2014). The firm is a publicly-traded assisting living and senior residence firm based in Wisconsin. The Order, which alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)B) and 13(b)-5, centers on claimed false disclosures in the SEC filings of the company. Those filings represented Assisted Living was in full compliance with a lease for certain properties when in fact the Respondents had falsified certain occupancy data to deceive the lessee into believing that the company was in compliance, according to the Order.

The Bebo complaint alleges due process and equal protection violations, a violation of the right to a jury trial and presents a separation of powers issue. The suit is based on claims that the limited right to discovery in the administrative forum will effectively precluded the plaintiff from adequately presenting a defense. Specifically, plaintiff claims that the board of directors of Assisted Living specifically authorized the actions taken with respect to the lease. Because five of seven board members reside in Canada, they will not be available to testify and cannot be compelled to appear. Likewise, three of the four members of the audit committee will not be available to testify regarding an internal investigation the committee conducted which found no wrong doing. This evidence, plaintiff contends, is essential to presenting a defense but is beyond the reach of the limited discovery available in an SEC administrative proceeding. The case is pending.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive action and 0 administrative proceedings, excluding 12j and tag-along-actions.

Bar order: SEC v. Brown, Civil Action No. 1:14-cv-05057 (D. Min. Filed Dec. 23, 2014) is an action against Sherwin Brown and Jamerica Financial Inc., an investment adviser. Mr. Brown was previously barred from associating with an investment adviser in a 2011 Commission proceeding. The complaint here claims that Mr. Brown continues to associate with Jamerica and control the firm. It alleges violations of the 2011 order as well as Advisers Act Sections 203(f). The complaint is pending. See Lit. Rel. No. 23170 (Jan. 7, 2015).

FCPA

U.S. v. Harder, Case No. 2:15-cr-00001 (E.D. Pa. Filed Jan. 6, 2015). Defendant Dmitri Harder is a Russian national, naturalized German citizen who is a permanent resident of the U.S. He is the president and owner of Chestnut Consulting Group, Inc. and Chestnut Consulting Group, Co. Collectively the companies provided consulting services to firms seeking financing from multilateral development banks.

The charges here center on investments and loans secured from the European Bank of Reconstruction and Development, an entity owned by 60 sovereign nations, based in London. The loans were secured for, among others, Company A and Company B. The former is a Russian independent oil and gas company. It retained Chestnut to provide consulting and other services. The latter is a U.K entity that had oil and gas operations in the Russian Federations. It retained Chestnut to provide consulting and other services after initially approaching the EBRD and then declining financing.

The arrangement negotiated for Company A, which retained Chestnut in 2007, is typical of those on which the action centers. Under that arrangement Company A agreed to pay Chestnut a “success fee” which was a percentage of the funds obtained from the EBRD. In 2008 the EBRD approved an $85 million equity investment in Company A. Chestnut was subsequently paid a success fee of about $1.7 million. The consulting firm then wired over $750,000 in three payments to a bank account in Jersey, Channel Islands through other banks, for the benefit of the sister of the EBRD official who Mr. Harder initially contacted by e-mail regarding a proposed arrangement for the company.

Mr. Harden and the sister of the EBRD official took steps to conceal the payments. Specifically, false paperwork was created to make it appear the sister had provided services to the Chestnut Group in return for the payments. No work was performed, according to the indictment.

The indictment charges: One count of conspiracy to violate the FCPA and Travel Act; five counts of violating the FCPA; five counts of violating the Travel Act; one count of conspiracy to commit international money laundering; and two counts of money laundering. The case is pending.

Hong Kong

Boiler rooms: The Securities and Futures Commission obtained restraining orders against Broadspan Securities, Shepherds Hill Partners and Rich Futures from using their respective websites which were part of boiler room operations. The regulator also obtained interim orders against related entities suspected of receiving investor funds in connection with the scheme.

U.K.

Inflated assets: The Serious Fraud Office announced conspiracy to commit fraud charges against Stephen Dartnell, George Alexander, Kerry Lloyd, Elfed Thomas, Carl Cuminskey and Simon Mundy. The charges are based on selling inflated receivables agreements to KBC Lease (UK) Ltd. and Barclays Asset Finance from Total Asset Ltd. The defendants will appear in court on January 22, 2015.

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