SEC Files Prime Bank Fraud and Offering Fraud Actions as Administrative Proceedings
The trend of selecting administrative proceedings rather than Federal court by the SEC appears to be continuing. Since last September, for example, the SEC has filed at least seven insider trading cases as administrative proceeds. Previously, the agency typically brought insider trading cases as civil injunctive actions. While the Commission has acknowledged the trend, it ascribes no particular significance to it. At the same time it is spawning increasing numbers of suit trying to halt it.
Despite those suits the trend seems to be continuing and broadening. At the end of last week the SEC filed two more administrative proceeding. This time the actions focused on prime bank fraud and an offering fraud. Frequently these types of actions have been brought as civil injunctive actions, although not always.
In the Matter of Spectrum Concepts, LLC, Adm. Proc. File No. 3-16356 (Jan. 23, 2015) is a prime bank fraud action which names as Respondents Spectrum, a vehicle used in the transactions; Donald Worswick, the president and owner of Spectrum; Michael Grosso, previously a nutritionist and fitness trainer; and Michael Brown who claimed to be an attorney but in fact was not.
The scheme was orchestrated by Mr. Worswick and Spectrum with assistance from Messrs. Grosso and Brown. Over several months in 2012 the Respondents sold about $465,000 of investments in a “Private Joint Venture Credit Enhancement Agreement” to at least five elderly investors. Investors were told their funds would be invested in a variety of items including private funding projects used to set up a credit facility and a trade slot that would be blocked for the benefit of a trade platform. A number of investors were promised the full return of their capital in addition to returns on their investment. Those returns supposedly ranged from 900% in 20 days to as much as over 4,600% annually.
The investments were fictitious, according to the Order. While some investors were able to obtain a refund after changing their mind, others had their funds misappropriated. The Order alleges violations of Securities Act Sections 5(a) and (c) and 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.
In the Matter of David B. Havanich, Jr., Adm. Proc. File No. 3-16354 (Jan 23, 2014) is an offering fraud action. The scheme was allegedly conducted by Respondents: David Hananich, the co-founder and president of Diversified Energy Group, Inc. and the president and director of St. Vincent de Paul Children’s Foundation, Inc., a non-operating non-profit corporation; Carmine DeLLaSala, a co-founder and director of Diversified; and Matthew Welch, an officer of Diversified. They were assisted by Hampton Scurlock, RTAG Inc., a registered investment adviser owned by Mr. Welch, Jose Carrio, Dennis Karaski, Carrio, Karasik & Associates LLP and Michael Salovay.
About $17.4 million was raised from 440 investors over a six year period beginning in 2006. Investors were told that Diversified invested in fractional interests in oil and gas production properties and commodities trading. A portion of investor funds were also used to purchase interests in oil and gas wells, cattle, a device to increase gas mileage and real estate.
Misrepresentations were made to investors. Those included misstatements regarding Diversified’s financial performance, its use of industry experts and technologies and the affiliation of certain officers with St. Vincent’s charity which did not operate.
The interests sold were not registered. The agents retained beginning in 2009 to sell Diversified bonds were not registered. Those agents were paid 5% to 10% of the investor proceeds. Despite receiving an email and other correspondence from Diversified’s outside counsel detailing the limits on the firm’s use of unregistered agents, sales by agents continued. Collectively those agents earned about $985,000.