OUTLINE OF SELECTED SEC ENFORCEMENT ACTIONS · 1 The Securities and Exchange Commission (SEC), as a...

OUTLINE OF SELECTED SEC ENFORCEMENT ACTIONS

1 The Securities and Exchange Commission (SEC), as a matter of policy, disclaims responsibility for any private

publication or statement by any of its employees. The views expressed herein are those of the authors and do not

necessarily reflect the views of the SEC or of the authors’ colleagues on the staff of the SEC. Parts of this outline

have been used in other publications.

Outline of Selected SEC Enforcement Actions

November 2014

Division of Enforcement

U.S. Securities and Exchange

Commission1

Washington, D.C

Submitted by:

Andrew J. Ceresney, Director,

Division of Enforcement

Prepared by:

Sherry A. Peyton

Research Specialist

Rachel Weitzman

Intern

Table of Contents

ACTIONS INVOLVING BROKER-DEALERS, INVESTMENT ADVISERS

AND INVESTMENT COMPANIES ..................................................................... 1

In the Matter of Barclays Capital Inc. ......................................................................................... 1

In the Matter of Wells Fargo Advisors, LLC .............................................................................. 1

In the Matter of Latour Trading LLC and Nicolas Niquet .......................................................... 2

In the Matter of Linkbrokers Derivatives LLC ........................................................................... 3

SEC v. Anthony Blumberg ......................................................................................................... 4

In the Matter of TL Ventures, Inc. .............................................................................................. 4

In the Matter of Penn Mezzanine Partners Management, L.P. ................................................... 4

In the Matter of Paradigm Capital Management Inc. and Candace Weir ................................... 5

In the Matter of Wedbush Securities Inc., Jeffrey Bell, and Christina Fillhart .......................... 6

In the Matter of Thomas Delaney II and Charles Yancey .......................................................... 7

In the Matter of Michael Johnson ............................................................................................... 7

In the Matter of Lindsey Wetzig ................................................................................................. 7

In the Matter of Visionary Trading LLC, et al............................................................................ 8

In the Matter of Jefferies LLC .................................................................................................... 9

ACTIONS INVOLVING OTHER REGULATED ENTITIES AND SELF-

REGULATORY ORGANIZATIONS ................................................................... 9

In the Matter of LavaFlow, Inc. .................................................................................................. 9

SEC v. International Stock Transfer Inc. and Cecil Speight..................................................... 10

In the Matter of Liquidnet, Inc. ................................................................................................. 11

SEC v. Robert Person and Illinois Stock Transfer Company ................................................... 11

In the Matter of New York Stock Exchange LLC, et al. .......................................................... 12

ACTIONS INVOLVING THE FOREIGN CORRUPT PRACTICES ACT ...13

In the Matter of Smith & Wesson Holding Corporation........................................................... 13

In the Matter of Hewlett-Packard Company ............................................................................. 14

ACTIONS INVOLVING MUNICIPAL SECURITIES .....................................14

In the Matter of the State of Kansas.......................................................................................... 14

In the Matter of Kings Canyon Joint Unified School District .................................................. 15

SEC v. City of Harvey, Illinois and Joseph Letke .................................................................... 15

ACTIONS INVOLVING INSIDER TRADING .................................................16

SEC v. Frank Tamayo ............................................................................................................... 16

SEC v. Saleem Khan, et al. ....................................................................................................... 17

ACTIONS INVOLVING MARKET MANIPULATION ..................................18

SEC v. Jason Cope, et al. .......................................................................................................... 18

In the Matter of Advent Capital Management, LLC................................................................. 19

In the Matter of Antipodean Advisors, LLC ............................................................................. 19

In the Matter of Blackrock Institutional Trust Company, N.A. ................................................ 19

In the Matter of East Side Holdings II, Inc. .............................................................................. 19

In the Matter of Explorador Capital Management, LLC .......................................................... 19

In the Matter of Formula Growth, Ltd. ..................................................................................... 19

In the Matter of Great Point Partners, LLC .............................................................................. 19

In the Matter of Indaba Capital Management, L.P ................................................................... 19

In the Matter of Ironman Capital Management, LLC ............................................................... 19

In the Matter of James Parsons ................................................................................................. 19

In the Matter of Midwood Capital Management LLC .............................................................. 19

In the Matter of Nob Hill Capital Management, Inc. ................................................................ 20

In the Matter of RA Capital Management, LLC ....................................................................... 20

In the Matter of Rockwood Investment Management, Inc. ...................................................... 20

In the Matter of Seawolf Capital, LLC ..................................................................................... 20

In the Matter of Solus Alternative Asset Management Lp ....................................................... 20

In the Matter of SuttonBrook Capital Management LP ............................................................ 20

In the Matter of Troubh Partners LP ......................................................................................... 20

In the Matter of Vinci Partners Investmentos Ltda. .................................................................. 20

In the Matter of Whitebox Advisors LLC................................................................................. 20

SEC v. Mikhail Galas, et al. ...................................................................................................... 21

SEC v. Christopher Plummer, Lex Cowsert, CytoGenix, Inc. ................................................. 21

In the Matter of Worldwide Capital, Inc. and Jeffrey Lynn ..................................................... 22

ACTIONS INVOLVING ISSUER FRAUD, DISCLOSURE, AND

REPORTING .........................................................................................................22

In the Matter of Bank of America Corporation ........................................................................ 22

In the Matter of Saba Software, Inc., Patrick Farrel, and Sajeev Menon ................................. 23

In the Matter of Babak Yazdani ................................................................................................ 23

In the Matter of Wilmington Trust Corporation ....................................................................... 24

In the Matter of Ligang Wang .................................................................................................. 25

In the Matter of Paul Arling ...................................................................................................... 25

In the Matter of Paul Cronson ................................................................................................... 25

In the Matter of Bradley Forsyth .............................................................................................. 25

In the Matter of Stephen Gans .................................................................................................. 25

In the Matter of Sidney Hooper ................................................................................................ 25

In the Matter of Edgar Levin .................................................................................................... 25

In the Matter of Raul McQuivey ............................................................................................... 25

In the Matter of Donald Nunemaker ......................................................................................... 25

In the Matter of Thomas Nord .................................................................................................. 25

In the Matter of Alan Schnaid ................................................................................................... 25

In the Matter of Justin Tang ...................................................................................................... 26

In the Matter of Charles Willis IV ............................................................................................ 26

In the Matter of Stephen Adams ............................................................................................... 26

In the Matter of Thomas Edelman ............................................................................................ 26

In the Matter of Neil Gagnon .................................................................................................... 26

In the Matter of Peter Kellogg .................................................................................................. 26

In the Matter of Gregory Shepard ............................................................................................. 26

In the Matter of Brown Brothers Harriman & Co ..................................................................... 26

In the Matter of Del Mar Asset Management, LP .................................................................... 26

In the Matter of Lazarus Management Company LLC ............................................................. 26

In the Matter of P.A.W. Capital Partners, L.P. ......................................................................... 26

In the Matter of Ridgeback Capital Management LP ............................................................... 27

In the Matter of RIMA Senvest Management, LLC ................................................................. 27

In the Matter of the Royal Bank of Scotland Group plc ........................................................... 27

In the Matter of Sankaty Advisors, LLC .................................................................................. 27

In the Matter of Security Capital Research & Management Incorporated ............................... 27

In the Matter of Trinad Management, LLC .............................................................................. 27

In the Matter of Jones Lan LaSalle Incorporated ...................................................................... 27

In the Matter of KMG Chemicals, Inc. ..................................................................................... 27

In the Matter of Starwood Hotel & Resorts Worldwide, Inc. ................................................... 27

In the Matter of Tel-Instrument Electronics Corp. ................................................................... 27

In the Matter of Universal Electronics Inc. ............................................................................... 27

In the Matter of Willis Lease Finance Corporation .................................................................. 28

In the Matter of Bank of America Corporation ........................................................................ 28

In the Matter of Marc Sherman ................................................................................................. 29

In the Matter of Edward Cummings, CPA................................................................................ 29

In the Matter of Morgan Stanley and Co. LLC, Morgan Stanley ABS Capital I Inc., and

Morgan Stanley Mortgage Capital Holdings LLC.................................................................... 30

In the Matter of Laird Daniels, CPA ......................................................................................... 30

SEC v. CVS Caremark Corp. .................................................................................................... 30

ACTIONS INVOLVING SECURITIES OFFERINGS .....................................31

SEC v. eAdGear, Inc. et al. ....................................................................................................... 31

SEC v. Jonathan Flom............................................................................................................... 32

SEC v. James Schmidt II .......................................................................................................... 32

In the Matter of Erik Voorhees ................................................................................................. 32

SEC v. TelexFree et al. ............................................................................................................. 33

ACTIONS INVOLVING ACCOUNTANTS AND AUDITORS .......................34

In the Matter of Ernst & Young LLP ........................................................................................ 34

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ACTIONS INVOLVING BROKER-DEALERS, INVESTMENT ADVISERS AND

INVESTMENT COMPANIES

In the Matter of Barclays Capital Inc.

Exchange Act Release No. 73183 (September 23, 2014)

Advisers Act Release No. 3929 (September 23, 2014)

http://www.sec.gov/litigation/admin/2014/34-73183.pdf

Press Release No. 2014-211 (September 23, 2014)

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543020599

The SEC charged Barclays Capital Inc. (“BCI”) with failing to maintain an adequate internal

compliance system after its wealth management business in the U.S. acquired the advisory

business of Lehman Brothers in September 2008.

According to the SEC’s order instituting settled administrative proceedings, when BCI attempted

to integrate Lehman Brothers’ advisory business into its existing business, it did not take the

necessary steps to assure that its infrastructure was enhanced to support the newly acquired

advisory business, it failed to adopt and implement written policies and procedures reasonably

designed to prevent violations of the Advisers Act, and it failed to make and keep certain

required books and records.

According to the SEC’s order, these deficiencies contributed to other violations. Specifically,

BCI executed more than 1,500 principal transactions with its advisory client accounts without

making the required written disclosures or obtaining client consent. Additionally, for 2,785

advisory client accounts, BCI charged commissions and fees, and earned revenues, that were

inconsistent with its disclosure to clients. BCI also violated certain of the custody provisions of

the Advisers Act, and it underreported its assets under management on its March 31, 2011

amendment to its Form ADV by $754 million. BCI’s violations resulted in overcharges and

client losses approximating $472,000, and additional revenue to BCI of more than $3.1 million.

BCI subsequently reimbursed or credited its affected clients approximately $3.8 million.

The SEC’s order found that BCI violated Sections 204(a), 206(2), 206(3), 206(4), and 207 of the

Advisers Act and Rules 204-2, 206(4)-2 and 206(4)-7 thereunder. BCI agreed to a cease-and-

desist order, a censure, a $15 million penalty, and to retain an independent compliance consultant

to internally address the violations.

In the Matter of Wells Fargo Advisors, LLC


Advisers Act Release No. 3928 (September 22, 2014)




The SEC charged Wells Fargo Advisors LLC, a dually-registered broker-dealer and investment

adviser, with failing to adequately establish, maintain, and enforce policies and procedures





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reasonably designed to prevent the misuse of material nonpublic information, specifically, the

material nonpublic information obtained from its customers and its advisory clients.

According to the SEC’s order instituting settled administrative proceedings, in 2010 one of Wells

Fargo Advisors’ registered representatives misappropriated information from one of his

customers about Burger King Holdings, Inc. securities, traded on the basis of that information,

and tipped others including several of his Wells Fargo Advisors customers. Although a

compliance group at Wells Fargo Advisors reviewed this trading after an acquisition

announcement, information about the trading was not shared with senior managers or other

compliance groups.

According to the SEC’s order, Wells Fargo Advisors’ had policies and procedures in place, but

they were not reasonably designed. Multiple units within the firm received indications

suggesting that the registered representative was misusing material nonpublic information

obtained from a customer to trade in Burger King securities but because of a lack of assigned

responsibility or coordination, each of these units failed to: (a) recognize the significance of

those indications; (b) properly consider them; and (c) elevate those indications within their own

group or communicate with other groups responsible for conducting surveillance. Further, Wells

Fargo Advisors did not effectively maintain and enforce these inadequate policies and

procedures.

According to the SEC’s order, during an investigation, SEC staff formally requested that Wells

Fargo Advisors produce all documents relating to reviews of trading by the registered

representative who traded in Burger King securities. When Wells Fargo Advisors produced

documents in response to the staff’s request, documents relating to the review of the Burger King

trading were not produced. Wells Fargo Advisors unreasonably delayed for six months

producing documents relating to the RCG review without any explanation why they were not

produced previously. When the documents were produced, the firm failed to produce an

accurate record of the review as it existed at the time of the staff’s request.

As a result, Wells Fargo Advisors violated Sections 15(g), 17(a), and 17(b) of the

Exchange Act and Rule 17a-4(j) thereunder and Sections 204(a) and 204A of the Advisers Act.

In the Matter of Latour Trading LLC and Nicolas Niquet





The SEC charged Latour Trading LLC, a New York-based high frequency trading firm, and

Nicolas Niquet, the firm’s former CEO, with violating the net capital rule that requires all

broker-dealers to maintain minimum levels of net liquid assets or net capital.

According to the SEC’s order instituting settled administrative proceedings, from at least January

2010 through at least December 2011, Latour consistently conducted a securities business while

miscalculating the amount of net capital it had, thereby failing to maintain the required minimum

net capital by millions of dollars. The firm operated without maintaining its required minimum



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net capital on 19 of 24 reporting dates during this period and maintained net capital deficiencies

in amounts ranging from approximately $2 million to as much as $28 million.

According to the SEC’s order, Latour’s net capital violations resulted from multiple flaws and

errors in the firm’s haircut calculations, including the use of hypothetical positions to create

hedges for certain positions and a computer programming error. As a result, Latour regularly

understated its required haircut deductions in its net capital computations by tens of millions of

dollars. On one occasion, Latour understated its haircuts by nearly $40 million. Because of

these understatements, Latour’s net capital violations also resulted in violations of the broker-

dealer books and records and financial reporting rules.

According to the SEC’s order, Niquet designed the processing code that facilitated Latour’s

haircut calculations and caused its net capital violations.

The SEC’s order found that Latour violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act

and Rules 15c3-1, 17a-3(a)(11), 17a-4(f), and 17a-5(a), and that Niquet caused Latour’s

violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-3(a)(11),

and 17a-5(a). Latour agreed to be censured, to cease and desist from committing or causing

future violations, and to pay a $16 million penalty. This was the largest penalty for a violation of

the net capital rule to date. Niquet agreed to cease and desist from committing or causing future

violations and to pay a $150,000 penalty.

In the Matter of Linkbrokers Derivatives LLC

Exchange Act Release No. 72846 (August 14, 2014)


Press Release No. 2014-167 (August 14, 2014)


The SEC charged Linkbrokers Derivatives LLC for unlawfully taking secret profits of more than

$18 million from customers by adding hidden markups and markdowns to their trades.

According to the SEC’s order instituting settled administrative proceedings, from at least 2005

through at least February 2009, on over 36,000 customer transactions, certain employees of

Linkbrokers charged customers false prices in which Linkbrokers embedded hidden markups or

markdowns.

According to the SEC’s order, after receiving and executing orders on behalf of customers,

Linkbrokers’ employees routinely evaluated each transaction to determine whether they could

make an additional profit for Linkbrokers above the commission to be charged to the customer.

The employees considered other transactions in the relevant security occurring in the seconds to

minutes before and after the actual trade executed. Where the price fluctuated sufficiently to

conceal the fraud from customers, they recorded, on Linkbrokers’ internal records, a false

execution price that included the additional profit for Linkbrokers. Then, Linkbrokers charged

the customer the inflated price while also charging the agreed-upon commission.



4

The SEC’s order found that Linkbrokers violated Section 15(c)(1) of the Exchange Act and

Linkbrokers agreed to pay $14 million in disgorgement and agreed to a cease-and-desist order.

SEC v. Anthony Blumberg

Litigation Release No. 23061 (August 7, 2014)

http://www.sec.gov/litigation/litreleases/2014/lr23061.htm



The SEC charged Anthony Blumberg, the former chief executive officer of a broker-dealer

subsidiary of ConvergEx Group LLC, for deceiving brokerage customers with hidden fees.

The SEC’s complaint alleged that Blumberg engaged in a scheme that entailed concealing the

practice of routing orders to an offshore affiliate in Bermuda to add mark-ups or mark-downs,

and that he encouraged traders under his management to do the same. The hidden fees known as

“trading profits” were in addition to and often much higher than the commissions paid by

customers to have their orders executed. Blumberg made false and misleading statements to a

brokerage customer and authorized employees to falsify trading data for customers who inquired

about the details of their securities transactions.

The SEC’s complaint alleged that Blumberg violated the antifraud provisions of the federal

securities laws and an SEC antifraud rule. The complaint further alleged liability as a control

person and aiding and abetting violations by certain ConvergEx subsidiaries and former

employees. The SEC sought disgorgement of any ill-gotten gains with interest, a financial

penalty, and permanent injunctive relief.

In the Matter of TL Ventures, Inc.

Adviser Act Release No. 3859 (June 20, 2014)

http://www.sec.gov/litigation/admin/2014/ia-3859.pdf

Press Release No. 2014-120 (June 20, 2014)


In the Matter of Penn Mezzanine Partners Management, L.P.

Advisers Act Release No. 3858 (June 20, 2014)


In its first case under the pay-to-play rules for investment advisers, the SEC charged investment

advisers, TL Ventures Inc., a private equity firm, with violating “pay-to-play” rules and charged

TL Ventures and Penn Mezzanine Partners Management, L.P., with improperly acting as

unregistered investment advisers.

According to the SEC’s orders instituting settled administrative proceedings, on April 12, 2011,

an associate of TL Ventures made a $2,500 campaign contribution to a candidate for Mayor of

Philadelphia who appoints three of the nine members of the City of Philadelphia Board of

Pensions and Retirement (Retirement Board). In addition, on November 21, 2011, the associate

made a $2,000 campaign contribution to the Governor of Pennsylvania who appoints six of the






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eleven members of the board of the Pennsylvania State Employees’ Retirement System

(“SERS”).

According to the SEC’s orders, SERS has been a limited partner in two TL Ventures funds since

1999 and the Retirement Board has been a limited partner in TL Ventures since 2000. As limited

partners, SERS and the Retirement Board were contractually committed to invest a stated

amount of money in TL Ventures’ funds and they made those investments over time. Limited

partners in TL Ventures’ funds are generally prohibited from withdrawing their money for the

life of the fund, often 10 or more years. During the two years after the contribution to the mayor

and governor, TL Ventures continued to provide investment advisory services to the TL

Ventures funds and continued to receive advisory fees attributable to such services.

The SEC’s orders also alleged that TL Ventures and Penn Mezzanine separately claimed to be

exempt from Advisers Act’s registration requirements in March 2012. However, the facts and

circumstances surrounding their relationship indicate that the two advisers were under common

control, were not operationally independent of each other, and thus should have been integrated

as a single investment adviser for purposes of the applicable registration requirement and the

applicability of any exemption. Once integrated, Penn Mezzanine and TL Ventures would not

have qualified for any exemption from registration and therefore should have been registered.

The SEC’s orders found that TL Ventures violated Sections 203(a), 206(4) and 208(d) of the

Advisers Act and Rule 206(4)-5 and that Penn Mezzanine violated Sections 203(a) and 208(d) of

the Advisers Act. TL Ventures and Penn Mezzanine agreed to be censured and to cease and

desist from committing or causing any violations of these provisions. TL Ventures agreed to pay

$256,697 in disgorgement, prejudgment interest of $3,197, and a $35,000 penalty.

In the Matter of Paradigm Capital Management Inc. and Candace Weir

Exchange Act Release No. 72393 (June 16, 2014)



Press Release No. (June 16, 2014)


Under the SEC’s new authority to bring anti-retaliation enforcement actions under Dodd-Frank,

the SEC charged Paradigm Capital Management Inc., a hedge fund advisory firm, and Candace

Weir, the firm’s owner, with engaging in prohibited principal transactions and then retaliating

against the employee who reported the trading activity to the SEC.

According to the SEC’s order instituting settled administrative proceedings, from at least 2009

through 2011, Weir caused a hedge fund to engage in a trading strategy to reduce the tax liability

of the fund’s investors. As part of that trading strategy, Weir, as a portfolio manager for the

fund, directed Paradigm’s traders to sell selected securities at prevailing market prices from the

fund to a proprietary trading account she controlled at her affiliated broker-dealer C.L. King &

Associates, Inc. These sales were executed to realize trading losses for tax deduction purposes.

Because Weir controlled both entities, the transactions between them were principal transactions

that required written disclosure to, and consent from, the fund. Paradigm, however, did not



6

provide effective written disclosure to the fund and failed effectively to obtain the fund’s consent

to the transactions. Although Paradigm established a review committee to approve the pricing of

the trades to satisfy Section 206(3) of the Advisers Act, the committee was conflicted.

According to the SEC’s order, a whistleblower reported these potential securities law violations

to the SEC. Subsequently, Paradigm removed him from his head trader position, tasked him

with investigating the conduct he reported to the SEC, changed his job function from head trader

to a full-time compliance assistant, stripped him of his supervisory responsibilities, and

otherwise marginalized him. This ultimately resulted in the whistleblower’s resignation.

The order found that Paradigm violated Section 21F(h) of the Exchange Act and Sections 206(3)

and 207 of the Advisers Act, and that Weir caused Paradigm’s violations of Section 206(3) of the

Advisers Act. They each agreed a cease-and-desist order and agreed to jointly and severally pay

disgorgement of $1.7 million plus prejudgment interest of $181,771, and a penalty of

$300,000. Paradigm also agreed to retain an independent compliance consultant.

In the Matter of Wedbush Securities Inc., Jeffrey Bell, and Christina Fillhart






The SEC charged Wedbush Securities Inc., one of the largest volume market access providers in

the U.S., and Jeffrey Bell and Christian Fillhart, two officials, for violating the agency’s market

access rule that requires firms to have adequate risk controls in place before providing customers

with access to the market.

According to the SEC’s order instituting administrative proceedings, from July 2011 until at least

January 2013, Wedbush served as the gateway to U.S. markets for dozens of trading firms,

including foreign, domestic, registered, and unregistered firms, as well as thousands of their

traders. Most of these firms and their traders engaged in trading activity that did not flow

through any Wedbush systems before reaching exchanges and other trading venues in the U.S.

During this period, Wedbush failed to establish, document, and maintain a system of risk

management controls and supervisory procedures reasonably designed to manage the risks

associated with its market access business. As a result, Wedbush allowed thousands of

essentially anonymous foreign traders to send orders directly to U.S. trading venues to trade

billions of shares every month. Wedbush enjoyed increased trading commissions and fees

generated by its high volume market access customers from its risky market access business.

According to the SEC’s order, Wedbush’s failure to adopt and implement the required controls

came after communications by the SEC’s staff through an examination deficiency letter and in

face-to-face meetings regarding Wedbush’s compliance procedures whereby the staff informed

Wedbush of compliance shortcomings and significant compliance concerns. Bell and Fillhart

caused Wedbush’s violation of the Rule by virtue of their responsibilities at the firm and their

participation in communications with the SEC’s staff.



7

According to the SEC’s order, Wedbush violated Sections 15(c)(3) and 17(a) of the Exchange

Act and Rules 15c3-5, 17a-8, and 17a-4(b)(4) thereunder, Rule 203(b)(1) of Regulation SHO,

and Rule 611(c) of Regulation NMS, and Bell and Fillhart violated Section 21C(a) of the

Exchange Act.

In the Matter of Thomas Delaney II and Charles Yancey

Exchange Act Release No. 72185 (May 19, 2014)

Investment Company Act Release No. 31048 (May 19, 2014)


Press Release No. 2014-101 (May 19, 2014)


In the Matter of Michael Johnson


Investment Company Act Release No. 31049 (May 19, 2014)


In the Matter of Lindsey Wetzig



The SEC charged four former officials at Penson Financial Services, one of the largest

independent clearing firms in the U.S., for their roles in Regulation SHO violations. The SEC’s

administrative proceedings against Michael Johnson and Lindsey Wetzig were filed as settled,

while the administrative proceeding against Thomas Delaney II, Pension’s chief compliance

officer, and Charles Yancey, Pension’s CEO, was litigated.

According to the SEC’s orders, when Penson loaned securities held in customer margin accounts

to third parties and the margin customers sold those securities, Penson waited until settlement

date (T+3) to recall the stock loans. This practice resulted in repeated failures to deliver at the

firm level. Rule 204 required Penson to purchase or borrow sufficient shares to close out those

failures to deliver no later than the beginning of regular market hours on the sixth business day

after the sale (T+6).

According to the SEC’s orders, Penson’s securities lending personnel, including Johnson and

Wetzig, knew or should have known about Regulation SHO’s close-out requirements, however

did not comply with them. Instead, they allowed the firm-level failures to deliver to persist until

the borrowers returned the recalled shares, which often did not happen until the close of business

on T+6. In some circumstances, Penson’s securities lending personnel allowed the failures to

deliver to persist beyond the close of business on T+6.

The SEC alleged that Delaney discussed Penson’s non-compliant procedures with Johnson and

learned that the firm’s non-compliance with the regulation was intentional. He then agreed with

Johnson not to change the procedures to bring Penson into compliance with Rule 204 because

they did not want the firm to incur the costs of doing so. Delaney also approved written





8

supervisory policies and procedures that he knew concealed the non-compliant procedures at the

firm, and he further concealed the violations in numerous communications with the SEC and

FINRA. Meanwhile, Yancey failed reasonably to supervise Delaney and Johnson. He ignored

Delaney’s efforts to conceal the violations from regulators and despite being designated as

Johnson’s direct supervisor, Yancey exercised no supervision over Johnson whatsoever.

The SEC’s order found that Delaney and Yancey aided and abetted Pension’s violation of Rule

204T(a)/204(a) of Regulation SHO. In the settled administrative proceedings, Johnson agreed to

pay a $125,000 penalty, to cease and desist from future violations of Rule 204 of Regulation

SHO, and to be barred from the securities industry with the right to apply for reentry after five

years. Wetzig agreed to be censured and to cease and desist from committing or causing

violations of Rule 204(a) of Regulation SHO.

In the Matter of Visionary Trading LLC, et al.

Exchange Act Release No. 71871 (April 4, 2014)

Investment Company Act Release No. 31007 (April 4, 2014)


Press Release No. 2014-67 (April 4, 2014)


The SEC charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading

of publicly traded stocks through an illegal practice known as “layering” or “spoofing.” The SEC

also charged the owner and others for registration violations.

According to the SEC’s order instituting settled administrative proceedings, from May 2008

through November 2011, Visionary operated an office in New Jersey where the firm’s owners,

Dondero, Giaquinto, Heiss, and Medvin and as many as sixteen other individuals engaged in

day-trading through various accounts held at Lightspeed, a registered broker-dealer. The sixteen

other individuals included two groups: (a) individuals who traded securities using funds provided

by the Visionary Owners; and (b) customers who traded securities using their own funds. In

connection with their trading, the customers paid commissions to Lightspeed, and two

Lightspeed registered representatives improperly shared a portion of this transaction-based

compensation with Visionary, an unregistered entity. Visionary and the Visionary Owners

received $474,407 of the commissions that were generated by the customers’ trading, and

Lightspeed retained approximately $330,000 in commissions. In addition, Dondero engaged in a

sophisticated, manipulative trading strategy, referred to as “layering” or “spoofing.”

Dondero agreed to pay disgorgement of $1,102,999.96, prejudgment interest of $46,792, and

penalties of $785,000. He was also permanently barred from the securities industry and agreed

to cease and desist from violating Sections 9(a)(2), 10(b) and 15(a)(1) of the Exchange Act and

Rule 10b-5 thereunder. Giaquinto, Heiss, and Medvin each agreed to pay disgorgement of

$118,601.96 plus prejudgment interest of $14,391.32 and a penalty of $35,000. They were

barred from the securities industry with the right to reapply in two years and agreed to cease and

desist from violating Section 15(a)(1) of the Exchange Act. Lightspeed agreed to pay

disgorgement of $330,000 plus prejudgment interest of $43,316.54, post-order interest of

$4,900.38, and a penalty of $100,000, and agreed to cease and desist from violating Section



9

15(a)(1) of the Exchange Act. Actman agreed to a penalty of $10,000 and a supervisory bar with

the right to reapply after one year.

In the Matter of Jefferies LLC

Exchange Act Release No. 71695 (March 12, 2014)


Press Release No. 2014-48 (March 12, 2014)


The SEC charged global investment bank and brokerage firm Jefferies LLC with failing to

supervise employees working at its mortgage-backed securities desk.

According to the SEC’s order instituting settled administrative proceedings, from 2009 to 2011,

Jefferies failed to reasonably supervise Jesse C. Litvak and certain other representatives on their

mortgage-backed securities (MBS) desk with a view to preventing and detecting their violations

of the federal securities laws. Litvak was a managing director and senior trader of residential

MBS (RMBS). Among Litvak’s and the other representatives’ job responsibilities during this

time was to trade RMBS on a principal basis with counterparties. In doing so, Litvak and other

representatives of Jefferies would purchase RMBS from one customer and sell the same RMBS

to another customer on the same day. Litvak and others on the MBS desk would also purchase

RMBS, hold them in inventory and sell them to another customer at a later date. At this time,

Litvak and certain other representatives lied to, or otherwise misled, customers about the price at

which Respondent had bought RMBS and consequently the amount of the firm’s profit on the

trades. This misconduct deceived customers about the price at which Jefferies had recently

acquired the RMBS. Jefferies’ implementation of its supervisory procedures relating to review

of its MBS desk representatives’ electronic communications with customers was inadequate to

prevent and detect these misrepresentations to customers.

The SEC’s order found that Jefferies failed to reasonably supervise representatives within the

meaning of Section 15(b)(4)(E) of the Exchange Act. Jefferies accepted a censure and consented

to pay $4,200,402 in disgorgement, prejudgment interest of $292,515, and a $4,200,402 civil

penalty. The firm also agreed to retain a compliance consultant to evaluate and recommend

improvements to its policies for the MBS desk.

ACTIONS INVOLVING OTHER REGULATED ENTITIES AND SELF-REGULATORY

ORGANIZATIONS

In the Matter of LavaFlow, Inc.

Exchange Act Release No. 72673 (July 25, 2014)


Press Release No. 2014-147 (July 25, 2014)


The SEC charged LavaFlow Inc., a Citigroup business unit, with failing to protect the

confidential trading data of its subscribers while operating an alternative trading system.





10

According to the SEC’s order instituting settled administrative proceedings, from at least March

2008 through March 2011, LavaFlow allowed an affiliate, Lava Trading Inc., operating a

technology application known as a smart order router, to access and use confidential information

related to the non-displayed orders of LavaFlow’s electronic communications networks’

(“ECN”) subscribers. The order router was located outside of the ECN’s operations and

LavaFlow did not have adequate safeguards and procedures to protect the confidential

information that the order router accessed. While LavaFlow only allowed the affiliate to use the

confidential trading data for order router customers who also were ECN subscribers, the firm did

not obtain consent from its subscribers to use their confidential information in this way, nor did

LavaFlow disclose this use in its regulatory filings with the SEC. LavaFlow discontinued this

practice, but not before the smart order router executed more than 400 million shares based in

part on the subscriber information contained in the ECN’s unexecuted hidden orders.

The SEC’s order also alleged that LavaFlow aided and abetted the violations of Lava Trading,

which continued to provide broker-dealer services for several months after it deregistered in

August 2008. Lava Trading, also owned by Citigroup, earned approximately $1.8 million in

broker-dealer business during this time period. LavaFlow provided operational and

administrative support and was responsible for a website that claimed Lava Trading was a

registered broker-dealer.

The SEC’s order found that LavaFlow violated Rule 301(b)(2) and 301(b)(10) of Regulation

ATS and aided and abetted and caused Lava Trading’s violation of Section 15(a) of the

Exchange Act. LavaFlow consented to pay $1.8 million in disgorgement plus $350,000 in

prejudgment interest and a $2.85 million penalty, and agreed to cease and desist from

committing or causing these violations. This was the SEC’s largest ATS settlement to date.

SEC v. International Stock Transfer Inc. and Cecil Speight

Litigation Release No. 23050 (July 24, 2014)




The SEC charged International Stock Transfer Inc. (“IST”), a registered Florida-based transfer

agent, and its owner, Cecil Speight, with defrauding investors.

According to the SEC's complaint, Speight abused the transfer agent function by creating and

issuing fake securities certificates, including the issuance of fake foreign bond certificates and

stock certificates for a publicly-traded microcap company with no connection to IST, to both

U.S. and international investors. While investors collectively sent in millions of dollars thinking

they were purchasing high-yield investments and discounted stock, they ended up receiving

counterfeit certificates that Speight and IST fooled them into thinking were legitimate.

According to the SEC’s complaint, to bolster the appearance of the safety of the investments and

conceal from investors how their money was really being spent, Speight enlisted two attorneys to

receive investment funds into their own bank accounts. From there, the money was transferred to

IST. Instead of making its way to any issuers, however, IST and Speight spent investors' money

almost as quickly as it came in. They used it to pay Speight's personal expenses, and in Ponzi



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scheme fashion new investor money was used to fund interest payments to prior foreign bond

investors. In all, Speight and IST stole more than $3.3 million from at least 70 investors.

The SEC's complaint charged Speight and IST with violating Section 17(a) of the Securities Act,

and Sections 10(b), 17(a)(3) of the Exchange Act and Rule 10b-5, 17Ad-6, and 17Ad-7. Speight

and IST consented to the entry of judgments permanently enjoining them from future violations

and requiring them to pay disgorgement plus prejudgment interest and penalties as determined

by the court.

In the Matter of Liquidnet, Inc.

Securities Act Release No. 9596 (June 6, 2014)





The SEC charged Liquidnet, a registered broker-dealer who operates a block-trading alternative

trading system (“ATS”), or dark pool, for large institutional investors, with improperly using

subscribers’ confidential trading information in marketing its services.

According to the SEC’s order instituting settled administrative proceedings, between 2009 and 2012,

Liquidnet sought to expand its business and to find additional sources of liquidity for its ATS by

offering its services to corporate issuers and control persons of corporate issuers, as well as to private

equity and venture capital firms looking to execute large equity capital markets transactions.

Liquidnet hoped to convince these entities to trade with members in its ATS, in part, by educating

them about the block opportunities available within Liquidnet by providing them with confidential

information about Liquidnet members’ indications and executions. The initiative eventually

developed into a stand-alone, small business unit called Equity Capital Markets (“ECM”).

According to the SEC’s order, in marketing ECM’s services to potential customers, ECM employees

used member data in ways that were not disclosed to Liquidnet members and that contradicted

Liquidnet’s assurances to members that Liquidnet would keep their trading information confidential.

Further, Liquidnet used confidential information about members’ indications in two sales tools, in a

manner that was not disclosed to Liquidnet members.

The SEC’s order charged Liquidnet with violating Section 17(a)(2) of the Securities Act and

Rules 301(b)(2) and 301(b)(10) of Regulation ATS. Liquidnet consented to be censured, to pay

a $2 million penalty, and to cease and desist from committing or causing any future violations.

SEC v. Robert Person and Illinois Stock Transfer Company

Litigation Release No. 23007 (May 28, 2014)




The SEC brought fraud charges and an emergency asset freeze against Illinois Stock Transfer

Company (“IST”), an Illinois-based transfer agent, and its owner, Robert Person, whose

misappropriation scheme was exposed during an SEC examination of the firm.





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According to the SEC's complaint, Pearson misappropriated more than $1.3 million during the

past two years from an IST bank account holding the funds of clients who use IST as a paying

agent to make cash disbursements to shareholders. The account also held money belonging to

shareholders who sent IST dividend reinvestment checks in order to purchase additional

securities. Pearson used funds from the account to meet payroll and payroll tax expenses

because IST simply had not earned enough income to cover its business expenses. The income

setbacks were attributed to a number of factors including the loss of several clients and

unanticipated expenses related to the relocation of the office.

The SEC's complaint further alleged that under Pearson's direction, IST failed to safeguard funds

and securities and did not properly report lost and stolen securities, it did not file an accurate

annual study and evaluation of internal accounting controls, and it failed to give notice of

assumption and termination of transfer agent services.

According to the SEC's complaint IST and Pearson violated Section 10(b) of the Exchange Act

and Rules 10b-5(a) and 10b-5(c), and that IST violated, and Pearson aided and abetted violations

of, Section 17A(d)(1) of the Exchange Act and Rules 17Ad-12, 17Ad-13, 17Ad-16, and 17f-1.

In the Matter of New York Stock Exchange LLC, et al.





The SEC charged the New York Stock Exchange LLC, two affiliated exchanges NYSE Arca,

Inc. and NYSE MKT LLC (“Exchanges”), and the affiliated routing broker Archipelago

Securities LLC, for their failure to comply with the responsibilities of self-regulatory

organizations (“SROs”) to conduct their business operations in accordance with SEC-approved

exchange rules and the federal securities laws.

According to the SEC’s order, the Exchanges devoted insufficient attention to ensuring that the

business operations of the exchanges and of their affiliated broker-dealer were conducted in

accordance with effective exchange rules and the federal securities laws. In particular, the

Exchanges lacked comprehensive and consistently-applied policies and procedures for

determining whether new business practices required an exchange rule or rule change and

evaluating whether business operations were being conducted fully in accordance with existing

exchange rules and the federal securities laws. Further, the exchanges lacked adequate policies

and procedures for ensuring that proposed rules and rule changes that were filed with the SEC

accurately reflected the manner in which a particular business operation or practice actually

would function. Moreover, the Exchanges continued to operate without effective exchange rules

or in violation of an existing rule for extended periods of time because they failed to promptly

file appropriate rule proposals for already ongoing exchange operations that required a rule or

filed rule proposals despite having been informed informally by the SEC’s staff that a particular

proposal was likely not consistent with the Exchange Act.



13

According to the SEC’s order, Archipelago failed to establish, maintain, and enforce policies and

procedures in connection with error account trading that were reasonably designed to prevent the

misuse of material, nonpublic information by the broker or any person associated with the

broker. They also violated the Exchange Act by effecting transactions in securities without

sufficient net capital and failing to provide timely notice of the net capital deficiency to the SEC.

As a result of this conduct, the Exchanges each violated Sections 19(b) and 19(g) of the

Exchange Act. Arca also violated Rule 612(a) of Regulation NMS. Archipelago violated

Sections 15(c)(3), 15(g), and 17(a)(1) of the Exchange Act, and Rules 15c3-1 and 17a-11(b)(1)

thereunder. NYSE, NYSE Arca, NYSE MKT, and Archipelago Securities agreed to retain an

independent consultant and agreed to pay a $4.5 million penalty.

ACTIONS INVOLVING THE FOREIGN CORRUPT PRACTICES ACT

In the Matter of Smith & Wesson Holding Corporation

Exchange Release No. 72678 (July 28, 2014)




The SEC charged Smith & Wesson Holding Corporation with violating the FCPA.

According to the SEC’s order instituting settled administrative proceedings, from 2007 through

early 2010, a senior employee and other employees and representatives of Smith & Wesson

made, authorized, and offered to make improper payments and/or to provide gifts to foreign

officials in an attempt to win contracts to sell firearm products to foreign military and law

enforcement departments. During this period, Smith & Wesson’s international business was in

its developing stages and accounted for approximately 10% of the company’s revenues.

According to the SEC’s order, the bribe payments were inaccurately recorded in Smith &

Wesson’s books and records as legitimate sales commissions or other business expenses.

Despite its push to make sales in new and high risk markets overseas, Smith & Wesson failed to

establish an appropriate compliance program or devise and maintain an adequate system of

internal accounting controls, which allowed the repeated improper offers and payments to

continue undetected for years.

The SEC’s order found that Smith & Wesson violated Sections 30A, 13(b)(2)(A) and (b) of the

Exchange Act. Smith & Wesson agreed to a cease-and-desist order, agreed to self-report to the

SEC on its FCPA compliance efforts for two years, and agreed to pay $107,852 in disgorgement,

$21,040 in prejudgment interest, and a $1.906 million penalty.



14

In the Matter of Hewlett-Packard Company



Press Release No. 2014-73


The SEC charged Hewlett-Packard Company for violating the internal control and books and

records provisions when its subsidiaries in Russia, Poland, and Mexico made improper payments

to government officials for lucrative public contracts.

According to the SEC’s order instituting settled administrative proceedings, from approximately

2003 to 2010, HP’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and

through their employees, agents and intermediaries, made unlawful payments to various foreign

government officials to obtain business. In Russia, HP’s subsidiary made payments through their

agents to a Russian government official to retain a multi-million dollar contract with the federal

prosecutor’s office. In Poland, HP’s subsidiary provided gifts and cash bribes to a Polish

government official to obtain contracts with Poland’s national police agency. In Mexico, HP’s

subsidiary made improper payments to a third party in connection with a sale of software to

Mexico’s state-owned petroleum agency.

According to the SEC’s order, the payments and improper gifts to government officials made

directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books

and records, and ultimately HP’s books and records, as legitimate consulting and service

contracts, commissions, or travel expenses. During this time, HP lacked sufficient internal

controls to detect and prevent the improper payments and gifts made by executives and

representatives of certain of its foreign subsidiaries.

The SEC’s order found that HP violated Sections 13(b)(2)(A) and (B) of the Exchange Act. HP

agreed to pay $29 million in disgorgement plus $5 million in prejudgment interest, and agreed to

cease and desist from committing or causing any violations. HP also agreed to report to the SEC

for three years the status of its remediation and implementation of compliance measurers.

ACTIONS INVOLVING MUNICIPAL SECURITIES

In the Matter of the State of Kansas

Securities Act Release No. 9629 (August 11, 2014)




The SEC filed securities fraud charges against the state of Kansas for their failure to disclose that

the state’s pension system was significantly underfunded which created a repayment risk.

According to the SEC’s order instituting settled administrative proceedings, from August 2009

through July 2010, the Kansas Development Finance Authority raised $273 million through eight

series of bonds on behalf of the State and its agencies without disclosing in the bond offering





15

documents the existence of the significant unfunded liability in the State’s pension system, or the

effect of such unfunded liability on the risk of nonappropriation of debt service payments by the

State Legislature. The failure to disclose this material information in the offering documents

resulted from insufficient procedures and poor communications between the Finance Authority

and the Kansas Department of Administration, which provided information to the Finance

Authority for inclusion in the offering documents, including the State’s financial statements.

Kansas consented to the SEC’s order to cease and desist from committing or causing any

violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.

In the Matter of Kings Canyon Joint Unified School District Securities Act Release No. 9610 (July 8, 2014)




The SEC charged California’s Kings Canyon Joint Unified School District with misleading bond

investors about its failure to provide contractually required financial information and notices.

According to the SEC’s order instituting settled administrative proceedings, between December

2006 and December 2007, Kings Canyon contractually undertook to annually disclose certain

financial information, operating data, and event notices in three municipal bond offerings,

totaling over $30 million. Between at least 2008 and 2010, however, Kings Canyon failed to

comply with its contractual undertakings by failing to submit some of the required disclosures.

Despite this failure to fully comply with its prior undertakings, in November 2010 Kings

Canyon, in a fourth, $6.8 million municipal bond offering, affirmatively stated in the public bond

offering documents that it had not failed, in the previous five years, to comply in all material

respects with any prior disclosure undertakings. This was an untrue statement of a material fact.

Kings Canyon consented to an order to cease and desist from committing or causing any future

violations of Section 17(a)(2) of the Securities Act. It also agreed to adopt written policies for its

continuing disclosure obligations, comply with its existing continuing disclosure obligations,

cooperate with any subsequent investigation, and disclose the terms of its settlement with the

SEC in future bond offering materials.

SEC v. City of Harvey, Illinois and Joseph Letke

Civil Action No. 1:14-cv-04744 (June 24, 2014)

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-122.pdf



The SEC charged the City of Harvey, Illinois, and its comptroller Joseph Letke for offering a

fraudulent bond that the city had been marketing to potential investors, and obtained an

emergency court order to halt the allegedly fraudulent bond offering.

According to the SEC’s complaint, instead of general obligations bonds that are repaid from the

general coffers of a municipality, Harvey’s bond offerings in 2008, 2009, and 2010 were limited





16

obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s

hotel-motel tax, sales tax, or incremental tax from the Tax Increment Financing District that the

city created for the development and construction of the Holiday Inn project. Therefore, it was

important to bond investors that the bond offerings were consistent with the stated purpose and

the money raised was actually used to fund the hotel development, because the amount of funds

available to repay the bonds derived from tax revenues would be materially affected by the

funding and progress of the project. However, the SEC alleged that Harvey’s bond investors

were materially misled about the purpose and risks of the bonds they purchased from the city.

The SEC’s complaint alleged that Harvey and Letke violated Section 17(a) of the Securities Act

and Section 10(b) of the Exchange Act and Rule 10b-5.

ACTIONS INVOLVING INSIDER TRADING

SEC v. Frank Tamayo



The SEC charged a Frank Tamayo with facilitating a $5.6 million insider trading scheme. In a

previous action, the SEC charged a stockbroker and a law firm managing clerk with insider

trading and alleged they were connected by a mutual friend who served as a “middleman” in an

effort to keep the two unlinked. In this separate complaint, the SEC identified Frank Tamayo as

that middleman.

According to the SEC’s complaint against Tamayo, for a five-year period, the law clerk

repeatedly accessed confidential information in his law firm’s computer system and met with

Tamayo at bars and coffee shops in New York City to provide tips about firm clients ready to

participate in a corporate transaction. Tamayo typically would then connect with the stockbroker

near the clock at the information booth at Grand Central, where he would show him a post-it note

or napkin on which Tamayo wrote the stock ticker symbol of the company to be

acquired. Tamayo then chewed up and sometimes even ate the post-it note or napkin to destroy

evidence of the tip. Tamayo also conveyed to the stockbroker the approximate transaction price

and timing of the deal. After the stockbroker returned to his office and gathered research about

the target company, he would e-mail Tamayo supposed thoughts about why buying the stock

made sense. Their intent was to create a paper trail of e-mails to make it appear they were

making their trading decisions based on research and analysis, not inside information.

The SEC’s complaint charges Tamayo with violations of Section 17(a) of the Securities Act and

Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3thereunder.


17

SEC v. Saleem Khan, et al.

Litigation Release No. 23022 (June 13, 2014)




The SEC charged four Northern California residents with insider trading in Ross Stores stock

options based on nonpublic information about monthly sales results leaked by a Ross employee.

According to the SEC’s complaint, from August 2009 until December 2012, Saleem Khan was

routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department

at Ross headquarters until he was terminated. Chaganlal had access to confidential sales figures

on an internal webpage limited to a relatively small group of Ross employees. Chaganlal

regularly communicated the confidential details to Khan so he could trade ahead of impending

monthly sales announcements by Ross. Khan traded in his account and in the name of two

others. Khan generated $5.4 million in profits in his own account, and $6 million in profits in his

brother-in-law’s account. Khan also tipped his work colleagues Ranjan Mendonsa and Ammar

Akbari. Mendonsa made approximately $800,000 in insider trading profits and Akbari made

approximately $2,000.

The SEC further alleged that Chaganlal gave $17,000 to Khan for the purpose of insider trading

in Ross securities using Khan’s brother-in-law’s account. They attempted to disguise the

exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of

a different surname. Khan later funneled $130,000 of the generated trading profits back to

Chaganlal by using third-party intermediaries. Another $75,000 was routed in a roundabout way

to a title company so it could be credited at closing toward Chaganlal’s purchase of a new home.

According to the SEC’s complaint, Khan separately made approximately $450,000 in illicit

profits by insider trading in stock options of software company Taleo Corporation ahead of its

2012 acquisition by Oracle Corporation. Khan began purchasing large numbers of options in

Taleo six days before the merger announcement based on nonpublic information he received

from an insider he knew at Oracle. Khan had never previously traded in Taleo securities.

The SEC’s complaint named two relief defendants—Khan’s acquaintance Michael Koza and

Khan’s brother-in-law Shahid Khan—to recover insider trading profits in their brokerage

accounts through trades conducted by Khan. Shahid Khan paid the court $240,741 and Koza

paid $31,713, the entire amount of insider trading profits remaining in their accounts.

The SEC’s complaint charged Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating

the antifraud provisions of the federal securities laws and sought permanent injunctive relief,

disgorgement of illicit profits plus interest, and financial penalties. The complaint also sought an

officer-and-director bar against Chaganlal.



18

ACTIONS INVOLVING MARKET MANIPULATION

SEC v. Jason Cope, et al.

Litigation Release No. 23087 (September 18, 2014)


The SEC charged a ring of eight individuals for their roles in an alleged pump-and-dump scheme

involving a penny stock company.

According to the SEC's complaint, Zirk de Maison secretly controlled a shell company since its

incorporation in 2008 under a different name. During the next five years, he caused the company

to enter into a number of reverse mergers and its reported business evolved from equipment

leasing to prepaid stored value cards related to electronic devices until the company eventually

became known as WikiFamilies and claimed to own and operate a social media website. The

company name changed to Gepco in 2013, and after a failed attempt to merge it into a private

mixed martial arts company, de Maison created his own private company purportedly in the

high-end diamond business and merged Gepco into it.

The SEC alleged that Zirk de Maison and his wife brought in at least six others to coordinate

various components of the scheme. Jason Cope, a longtime associate of Zirk de Maison, had a

past record of securities fraud with a court judgment against him in a previous SEC enforcement

action. On Cope's behalf, Louis Mastromatteo allegedly dumped more than 2.5 million shares of

Gepco stock through a nominee into the public market for hundreds of thousands of dollars in

illicit profits that were kicked back to Cope. Trish Malone served as Gepco's president, CFO,

and secretary. She allegedly used Gepco to issue stock to Zirk de Maison and others so that they

could conduct two unregistered and illegal distributions of the securities. Peter Voutsas served

as Gepco's CEO and chief investment officer. Along with Angelique de Maison, Voutsas

allegedly made a materially misleading statement about Gepco to the public while the de

Maisons manipulated the market for Gepco's stock. Ronald Loshin served as Gepco's chief

creative officer and allegedly failed to make required regulatory filings to report his transactions

in Gepco stock as an insider. Furthermore, Loshin enabled de Maison to deceptively hide his

own trading by allowing him to use a brokerage account held in Loshin's name. Finally, Kieran

Kuhn allegedly promoted Gepco stock through his firm Small Cap Resource Corp. and inflated

the stock value to help the scheme succeed. He then conducted one of the unregistered and

illegal distributions of Gepco-related securities for Zirk de Maison's benefit.

According to the SEC's complaint, Zirk de Maison exchanged e-mails and text messages with

many of his co-conspirators as they openly discussed coordinating their promotional activities

and manipulative trading in Gepco's stock in order to create a false impression of market activity.

The SEC suspended trading in Gepco securities.

The SEC's complaint, which additionally charged several companies connected to the scheme,

alleged violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 9 and 10(b)

of the Exchange Act and Rule 10b-5. The complaint sought a permanent injunction,

disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and penny

stock bars. The SEC also sought officer-and-director bars against the de Maisons and Malone.


19

In the Matter of Advent Capital Management, LLC





In the Matter of Antipodean Advisors, LLC



In the Matter of Blackrock Institutional Trust Company, N.A.



In the Matter of East Side Holdings II, Inc.



In the Matter of Explorador Capital Management, LLC



In the Matter of Formula Growth, Ltd.



In the Matter of Great Point Partners, LLC



In the Matter of Indaba Capital Management, L.P



In the Matter of Ironman Capital Management, LLC



In the Matter of James Parsons



In the Matter of Midwood Capital Management LLC

Exchange Act Release No. 73104(September 16, 2014)














20

In the Matter of Nob Hill Capital Management, Inc.



In the Matter of RA Capital Management, LLC



In the Matter of Rockwood Investment Management, Inc.



In the Matter of Seawolf Capital, LLC



In the Matter of Solus Alternative Asset Management Lp



In the Matter of SuttonBrook Capital Management LP

Exchange Act Release No 73110 (September 16, 2014)


In the Matter of Troubh Partners LP



In the Matter of Vinci Partners Investmentos Ltda.



In the Matter of Whitebox Advisors LLC



The SEC charged 19 firms and one individual trader as part of a continuing initiative to enhance

enforcement of Rule 105 of Regulation M, which prohibits selling short an equity security that is

the subject of certain public offerings and purchasing the offered security from an underwriter or

broker or dealer participating in the offering, if such short sale was effected during the restricted

period as defined therein.

According to the SEC’s orders instituting settled administrative proceedings, each firm and the

individual trader have agreed to settle the SEC’s charges and pay a combined total of more than

$9 million in disgorgement, interest, and penalties.










21

SEC v. Mikhail Galas, et al.

Civil Action No. 3:14-cv-5621 (August 5, 2014)




The SEC charged Mikhail Galas, Alexander Hawatmeh, Christopher Mwroca, and Tovy Pustovit

for manipulating the securities of several microcap companies.

According to the SEC’s complaint, the four promoters bought inexpensive shares of thinly traded

penny stock companies on the open market and conducted pre-arranged, manipulative matched

orders and wash trades to create the illusion of an active market in these stocks. They then sold

their shares in coordination with aggressive promotional campaigns that urged investors to buy

the stocks because the prices were on the verge of rising substantially. However, these

companies had little to no business operations at the time. The promoters earned more than $2.5

million in illegal profits through their schemes.

The SEC’s complaint charged the promoters with violating antifraud provisions of the federal

securities laws. The SEC sought temporary, preliminary, and permanent injunctions along with

an emergency asset freeze, disgorgement, prejudgment interest, financial penalties, and orders

barring the promoters from participating in a penny stock offering. The SEC’s complaint also

named Nadia Hawatmeh as a relief defendant for the purposes of recovering ill-gotten gains in

her brokerage account, which was used by the promoters to conduct some of their trades.

SEC v. Christopher Plummer, Lex Cowsert, CytoGenix, Inc.

Litigation Release No. 23047 (July 18, 2014)




The SEC charged Christopher Plummer, a serial con artist, CytoGenix, a penny stock company,

and the CEO Lex Cowsert, with misleading investors by issuing false press releases.

According to the SEC's complaint, Cowsert and Plummer further defrauded CytoGenix

shareholders by misappropriating the proceeds of purported private offerings. Cowsert obtained

approximately $91,000 in funds directly from CytoGenix investors by falsely telling them that

they were investing in a private placement of CytoGenix stock, but no shares were ever issued to

the investors. Cowsert asked the investors to make their checks payable to him personally,

deposited the checks into his personal bank account, and used the funds to pay personal

expenses. Plummer also defrauded a shareholder out of more than 6.5 million free trading shares.

The SEC's complaint charged Plummer, Cowsert, and CytoGenix with violating antifraud

provisions of the federal securities laws. Plummer was also charged with violating Section 20(b)

of the Exchange Act. The SEC sought permanent injunctions along with disgorgement,

prejudgment interest, financial penalties, and orders barring Plummer and Cowsert from acting

as officers or directors of a public company and from participating in penny stock offerings.





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In the Matter of Worldwide Capital, Inc. and Jeffrey Lynn

Exchange Act Release No. 71653 (March 5, 2014)


Press Release No. 2014-43 (March 5, 2014)


The SEC charged Worldwide Capital, Inc. and Jeffrey Lynn with violating Rule 105.

According to the SEC’s order instituting settled administrative proceedings, on 60 occasions

between October 2007 to February 2012, Lynn, operating thought his alter ego Worldwide,

bought offered shares from an underwriter or broker or dealer participating in a follow-on public

offering after having sold short the same security during the restricted period.

Worldwide and Lynn agreed to jointly pay disgorgement of $4,212,797, prejudgment interest of

$526,358, and a penalty of $2,514,571. This was the largest monetary sanction to date for Short

Selling Rule 105 violations. Lynn and Worldwide also agreed to cease and desist from violating

Rule 105.

ACTIONS INVOLVING ISSUER FRAUD, DISCLOSURE, AND REPORTING

In the Matter of Bank of America Corporation


Accounting and Auditing Release No. 3588 (September 29, 2014)




The SEC charged Bank of America Corporation (“BAC”) with violating internal controls and

recordkeeping provisions of the federal securities laws.

According to the SEC’s order instituting settled administrative proceedings, as part of BAC’s

acquisition of Merrill Lynch on January 1, 2009, BAC assumed a $52.5 billion portfolio of

structured notes and other financial instruments that Merrill issued (the “Notes”). BAC recorded

the Notes at fair value, which was a $5.9 billion discount. As of March 31, 2014, 87 percent of

the Notes had either matured or been repurchased by BAC. Because BAC recorded the Notes at

a discount to par when acquired, BAC realized losses on the Notes. From 2009 through 2014,

BAC failed to deduct certain realized losses on the Notes although, for purposes of calculating

regulatory capital, the applicable rules required this deduction. These realized losses increased

over time as the Notes matured or were redeemed, which lead to an overstatement of regulatory

capital by a greater amount in each of BAC’s 10-Q and Form 10-k filings. In total, BAC

overstated its regulatory capital by $3.714 billion. In mid-April 2014, BAC internally discovered

the regulatory capital overstatements and disclosed the overstatements in a Form 8-K filing.

BAC should have made and kept accurate books and records and also should have devised and

maintained a system of internal accounting controls sufficient to provide reasonable assurances

that transactions were recorded.





23

Pursuant to the SEC’s order, BAC violated Sections 13(b)(2)(A) and (B) of the Exchange Act.

BAC agreed to a cease-and-desist order and agreed to pay a $7.65 million penalty.

In the Matter of Saba Software, Inc., Patrick Farrel, and Sajeev Menon

Securities Act Release No. 9654 (September 24, 2014)





In the Matter of Babak Yazdani




The SEC charged Saba Software, Inc., a Silicon Valley-based software company, and three

former executives for falsifying time records and revenue recognition to hit financial targets.

According to the SEC’s orders instituting settled administrative proceedings, from 2008 through

2012, professional services managers in multiple geographies directed consultants in Saba’s

Indian subsidiary to falsify time records by either recording time in advance of performance of

work or failing to record time for hours worked in order to achieve their quarterly revenue and

margin targets. Former Vice Presidents Patrick Farrell and Sajeev Menon were the most senior

individuals involved in the improper time-reporting practices and understood the impact that

these improper practices had on Saba’s reporting of professional services revenue. As a result,

Saba reported false financial results in at least 40 SEC filings and dozens of press releases. This

time-reporting misconduct at Saba went uncorrected and undetected for so long because Saba

failed to devise and maintain adequate internal accounting controls over its professional services

business and Indian subsidiary.

According to the SEC’s orders, Saba’s Chief Executive Officer, Bobby Yazdani, received

bonuses and incentive and equity-based compensation from Saba, and also realized Saba stock-

sale profits, during the 12-month periods following the filings containing financial results that

Saba was required to restate.

Saba consented to cease and desist from committing or causing any violations of Sections 10(b),

13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11

and 13a-13 thereunder, Farrell and Menon consented to cease and desist from committing or

causing any violations of Sections 10(b), 13(a), 13(b)(2)(A) and (B), and 13(b)(5) of the

Exchange Act and Rules 10b-5(a) and (c), 12b-20, 13a-1, 13a-11, 13a-13 and 13b2-1thereunder,

and Yazdani agreed to cease and desist from committing or causing any violations of Section

304 of SOX. Saba agreed to pay a penalty of $1.75 million, Farrell agreed to pay disgorgement

and prejudgment interest of $35,017 and a penalty of $50,000, Menon agreed to pay

disgorgement and prejudgment interest of $19,621 and a penalty of $50,000, and Yazdani agreed

to reimburse Saba $2,570,596 in bonuses, other incentive-based or equity-based compensation,

and stock sale profits.




24

In the Matter of Wilmington Trust Corporation

Securities Act Release No. 9646 (September 11, 2014)






The SEC filed disclosure fraud charges against a Wilmington Trust Corporation for failing to

report the true volume of its loans at least 90 days past due.

According to the SEC’s order instituting settled administrative proceedings, Wilmington Trust

was the public holding company for Wilmington Trust Company, a retail and commercial bank.

By mid-2009, many of the construction projects underlying the Bank’s loans stalled or failed to

sell or lease when completed. At the same time, an increasing number of the Bank’s loans to

these projects matured. The Bank had deficient underwriting and loan monitoring controls and

failed, for these and other reasons, to take appropriate action on many of its matured loans for

protracted periods of time. As a result, the Bank had a large volume of loans that were past due,

for reasons of maturity, 90 days or more.

According to the SEC’s order, the Bank omitted almost $339 million in matured loans past due

90 days or more from its disclosures in its filings with the SEC for the third quarter of 2009. The

Bank further omitted over $330 million in matured loans past due 90 days or more from its

disclosures in its filings for the year ended 2009, including its Form 10-K. The Bank then

incorporated its false and misleading Form 10-K for 2009 by reference into the offering materials

for a February 2010 public offering in which the Bank sold $287 million of its common stock.

According to the SEC’s order, at the end of 2009, the Bank decided to address its misreporting of

past due loans beginning in 2010; however, the Bank negligently implemented various practices

that had the effect of avoiding full disclosure of the problems with matured loans in its portfolio.

Wilmington Trust also failed to disclose in its Form 10-K, as required by Regulation S-K, that its

matured, maturing and short-term extended commercial loan portfolio represented a material, but

unquantified, risk to the stability of the Bank.

Wilmington Trust agreed to cease and desist from committing or causing any violations of

Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and (B) of the

Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and agreed to pay

disgorgement and prejudgment interest of $18,545,896.16.



25

In the Matter of Ligang Wang





In the Matter of Paul Arling



In the Matter of Paul Cronson



In the Matter of Bradley Forsyth



In the Matter of Stephen Gans



In the Matter of Sidney Hooper



In the Matter of Edgar Levin



In the Matter of Raul McQuivey



In the Matter of Donald Nunemaker



In the Matter of Thomas Nord



In the Matter of Alan Schnaid















26

In the Matter of Justin Tang



In the Matter of Charles Willis IV



In the Matter of Stephen Adams



In the Matter of Thomas Edelman



In the Matter of Neil Gagnon



In the Matter of Peter Kellogg



In the Matter of Gregory Shepard



In the Matter of Brown Brothers Harriman & Co



In the Matter of Del Mar Asset Management, LP



In the Matter of Lazarus Management Company LLC



In the Matter of P.A.W. Capital Partners, L.P.














27

In the Matter of Ridgeback Capital Management LP



In the Matter of RIMA Senvest Management, LLC



In the Matter of the Royal Bank of Scotland Group plc



In the Matter of Sankaty Advisors, LLC



In the Matter of Security Capital Research & Management Incorporated



In the Matter of Trinad Management, LLC



In the Matter of Jones Lan LaSalle Incorporated



In the Matter of KMG Chemicals, Inc.



In the Matter of Starwood Hotel & Resorts Worldwide, Inc.



In the Matter of Tel-Instrument Electronics Corp.



In the Matter of Universal Electronics Inc.

Exchange Act Release No. 73033(September 10, 2014)













28

In the Matter of Willis Lease Finance Corporation



The SEC charged 28 individuals—officers, directors, and major shareholders—for violating

federal securities laws which required them to promptly report information about their holdings

and transactions in company stock, and charged six publicly-traded companies for contributing

to filing failures by insiders or failing to report their insiders’ filing delinquencies. According to

the SEC’s orders instituting administrative proceedings, the defendants were filing their

ownership reports weeks, months and even years late.

A total of 33 of the 34 individuals and companies named agreed to settle the charges under

Sections 13(d), 13(g), or 16(a) of the Exchange Act and Rules 13d-1, 13d-2, or 16a-3 thereunder,

and pay financial penalties totaling $2.6 million. The SEC will litigate the Section 16(a) charges

against Ligang Wang in an administrative proceeding.

In the Matter of Bank of America Corporation

Exchange Act Release No. 72888 (August 21, 2014)




The SEC charged Bank of America with failing to make required disclosures in the MD&A

sections of their periodic filings.

According to the SEC’s order instituting settled administrative proceedings, between 2004 and

the first half of 2008, Bank of America and certain companies that it acquired in the second half

of 2008 sold approximately $2.1 trillion of mortgage loans and residential mortgage backed

securities. Approximately $1.8 trillion of the overall loan amounts remained outstanding as of

December 31, 2009. In connection with these sales, Bank of America made contractual

representations and warranties regarding the underlying mortgage loans.

According to the SEC’s order, following the appointment of a conservator for Fannie Mae in

September 2008, Bank of America received information indicating that Fannie Mae may be

adopting a more aggressive approach to asserting and contesting repurchase claims. Also,

between 2004 and 2008, Bank of America sold approximately $160 billion of residential

mortgage backed securities with monoline insurance but did not reserve for claims not yet

submitted by the monoline insurers, or for claims submitted and rejected by Bank of America,

but not rescinded by the monoline insurers. These contested claims increased from $203 million

in 2008 to nearly $1.7 billion in 2009. During the second and third quarters of 2009, there were

known uncertainties as to whether future repurchase obligations to Fannie Mae or future costs

related to loans Bank of America would ultimately be required to repurchase from the monolines

would have a material effect on Bank of America’s future income from continuing operations.

Bank of America failed to disclose these known uncertainties and Bank of America’s MD&A

failed to comply with the disclosure requirements of Item 303 of Regulation S-K.




29

As a result, Bank of America violated Section 13(a) of the Exchange Act and Rules 12b-20 and

13a-13. Bank of America agreed to pay a $20 million penalty and agreed to cease and desist

from causing any violations and any future violations of these securities laws.

In the Matter of Marc Sherman

Exchange Release No. 72723 (July 30, 2014)

Accounting and Auditing Enforcement Release No. 3573 (July 30, 2014)




In the Matter of Edward Cummings, CPA


Accounting and Auditing Enforcement Release No. 3572 (July 30, 2014)


The SEC charged Marc Sherman, CEO, and Edward Cummings, former CFO, of QGSI Inc., a

Florida-based computer equipment company, with misrepresenting the state of the company’s

internal controls over financial reporting to external auditors and the investing public. The SEC

filed a settled administrative proceeding against Cummings and a litigated administrative

proceeding against Sherman.

According to the SEC’s orders, from 2008 to 2009 QSGI was a reseller of and maintenance

services provider for used computer equipment. Sherman and Cumming were aware of

deficiencies in and the circumvention of internal controls for inventory and the resulting

falsification of the Company’s books and records. Specifically, Sherman and Cumming

improperly accelerated the recognition on QSGI’s books and records of accounts receivable and

receipt of inventory in order to increase the borrowing base available under a revolving credit

facility with the Company’s chief creditor. Sherman and Cummings withheld this information

from the Company’s external auditors in connection with their audit of the financial statements

and made affirmative material misrepresentations and statements that were materially misleading

as a result of their omission of information in management representation letters to the auditors

about the design, maintenance, and operation of internal controls.

According to the SEC’s orders, Sherman and Cummings signed the required Form 10-K and a

Form 10-K/A each containing a management’s report on internal control over financial reporting

which falsely represented that in their capacity as CEO and CFO, they had participated in

assessing the effectiveness of the Company’s internal controls. They also signed required

certifications included in filings with the SEC falsely representing that the other had evaluated

the internal controls and, based on their evaluation, disclosed all significant deficiencies.

The SEC charged Sherman and Cumming with violating Sections 10(b) and 13(b)(5) of the

Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and charged both with

causing QSGI’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

Cummings consented to a cease-and-desist order, agreed to pay a $23,000 penalty, agreed to be

barred from serving as an officer and director of a publicly traded company for five years, and




30

agreed to a barred from appearing or practicing before the SEC as an accountant, with the right

to reapply after five years.

In the Matter of Morgan Stanley and Co. LLC, Morgan Stanley ABS Capital I Inc., and

Morgan Stanley Mortgage Capital Holdings LLC

Securities Act Release No. 9617 (July 24, 2014)




The SEC charged Morgan Stanley & Co. LLC, Morgan Stanley ABS Capital I Inc., and Morgan

Stanley Mortgage Capital Holdings LLC with misleading public disclosures regarding the

number of delinquent loans in a pair of residential mortgage-backed securities (“RMBS”)

transactions that the firms underwrote, sponsored, and issued.

According to the SEC’s order instituting settled administrative proceedings, Morgan Stanley

misrepresented in the offering documents the current or historical delinquency status of certain

loans collateralizing the transactions. This information was information that investors would

have considered important and Morgan Stanley knew or should have known that the disclosures

concerning current and historical delinquencies were materially inaccurate and would mislead

purchasers in the securities offerings.

Morgan Stanley agreed to cease and desist from committing or causing any violations of Section

17(a)(2) and (3) of the Securities Act, and agreed to pay $160,627,852 in disgorgement plus

$17,995,437 in prejudgment interest and a $96,376,711 penalty to be deposited into a Fair Fund.

In the Matter of Laird Daniels, CPA

Securities Act Release No. 9573 (April 8, 2014)


Accounting and Auditing Enforcement Release No. 3548 (April 8, 2014)




SEC v. CVS Caremark Corp.

Litigation Release No. 22968 (April 8, 2014)


The SEC charged CVS Caremark Corp. with misleading investors about significant financial

setbacks and using improper accounting that artificially boosted its financial performance, and

charged Laird Daniels for CVS’s accounting violations.

The SEC alleged that CVS had two business segments, as a pharmacy benefits manager and a

retail chain of drug stores. In offering documents for a $1.5 billion bond offering in 2009, CVS

fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in

the pharmacy benefits segment. Investors were therefore misled about the expected future






31

financial results for that line of business. When CVS eventually revealed the full extent of the

setbacks on November 5, 2009, its stock price fell 20 percent in one day. CVS further misled

investors on an earnings call that same day by maintaining there was a slight improvement in its

“retention rate,” which is a key metric of retained business often used to compare pharmacy

benefits management companies. But CVS omitted the fact that it had manipulated how it

calculated the rate and concealed the full extent of its lost business.

The SEC’s further alleged that CVS improper accounting adjustments, orchestrated by Daniels,

that overstated the financial results for its retail pharmacy line of business. During the same

2009 timeframe, CVS altered the accounting treatment for its acquisition of another drug store

chain—Longs Drugs—and failed to disclose the adjustments in its quarterly report filed on

November 5. This increased CVS’s third-quarter earnings and enabled CVS to exceed analysts’

expectations at a time when it was otherwise announcing significant bad news about earnings

projections in its pharmacy benefits line of business.

The SEC’s complaint charged CVS with violating and Section 17(a) of the Securities Act and

Section 10(b) of the Exchange Act and Rule 10b-5. The SEC also charged CVS with violations

of the reporting, books and records, and internal control provisions of the federal securities laws.

CVS agreed to pay a $20 million penalty and consented to a permanent injunction.

The SEC’s order found that Daniels willfully aided, abetted, and caused violations of Section

17(a) of the Securities Act and Sections 13(a), 13(b)(2)(A) and (B) of the Exchange Act and

Rules 12b-20, 13a-13 and 13b2-1. Daniels agreed to a cease-and-desist order, paid a $75,000

penalty, and agreed to a bar from practicing as an accountant on behalf of any publicly traded

company or other entity regulated by the SEC, with the right to reapply after one year.

ACTIONS INVOLVING SECURITIES OFFERINGS

SEC v. eAdGear, Inc. et al.

Civil Action No. 3:14-cv-4294

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-217-eadgear.pdf



The SEC charged eAdGear Holdings Limited and eAdGear, Inc., along with operators Charles

Wang, Qian Zhang, and Francis Yuen, with operating an international pyramid scheme.

According to the SEC complaint, even though eAdGear claimed to be a successful Internet

marketing company, nearly all of its revenue was generated by investors, not its products or

services. The complaint alleged that eAdGear’s operators used money from new investors to pay

earlier investors, to repay a personal loan, and to purchase million-dollar homes for themselves.

The complaint alleged that the operators concealed and perpetuated the scheme by displaying

sham websites on eAdGear’s own site to make it appear as if it had real, paying customers and

manipulated revenue distributions to investors to appear profitable. The SEC’s alleged that this

scheme raised more than $129 million from investors, primarily in the U.S., China, and Taiwan.

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-217-eadgear.pdf


32

The court granted the SEC’s request for an asset freeze and issued a temporary restraining order

that bared the defendants from soliciting investors, including through websites they had used.

SEC v. Jonathan Flom

Civil Action No. 14-cv-5575 (September 23, 2014)

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-213-flom.pdf



SEC v. James Schmidt II

Civil Action No. 14-cv-5574 (September 23, 2014)

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-213-schmidt.pdf

The SEC charged two Florida-based attorneys for their roles in an offering fraud conducted by a

transfer agent that was previously the subject of an SEC enforcement action.

According to the SEC’s complaints, Jonathan Flom and James Schmidt were designated to

receive wire transfers of funds from investors who were solicited by cold callers who told

investors to wire their money to either Schmidt or Flom in order to purchase purported securities

that included fake foreign bond certificates and stock certificates for a publicly-traded microcap

company. Flom and Schmidt kept two percent of the funds they received from investors and

transferred the remaining amounts to Cecil Speight, who promptly used the funds for personal

expenses or to make Ponzi-like payments instead of investing the funds as promised. According

to the SEC’s complaints, Flom and Schmidt enabled Speight to steal more than $3.3 million from

at least 70 investors.

The SEC alleged that Schmidt and Flom knowingly participated with Speight in the sale of

fraudulent securities. Flom received e-mails from Speight that explicitly discussed the

misappropriation of investor funds. Schmidt collaborated with Speight to craft misleading

responses to numerous investors who complained about the absence of promised coupon

payments as well as the counterfeit appearance of the stock certificates they received and the

inability to contact the cold callers who solicited them.

The SEC’s complaints charge Schmidt and Flom with violating Section 17(a) of the Securities

Act and Section 10(b) of the Exchange Act and Rule 10b-5.

In the Matter of Erik Voorhees

Securities Act Release No. 9592 (June 3, 2014)




The SEC charged Erik T. Voorhees, co-owner of two Bitcoin-related websites, SatoshiDICE and

FeedZeBirds, for publicly offering shares in the two ventures without registering them.

According to the SEC’s order instituting settled administrative proceedings, in May 2012,

FeedZeBirds offered and sold 30,000 shares, and raised 2,600 bitcoins in connection with an

http://www.sec.gov/litigation/complaints/2014/comp-pr2014-213-flom.pdf


http://www.sec.gov/litigation/complaints/2014/comp-pr2014-213-schmidt.pdf



33

unregistered offer and sale. At the time of the FeedZeBirds offering, the USD value of the

bitcoins raised was approximately $15,000. From August 2012 through February 2013, in two

separate offerings, SatoshiDICE offered and sold 13 million shares, and raised 50,600 bitcoins in

connection with those unregistered offers and sales. At the time of the SatoshiDICE offerings,

the USD value of the total bitcoins raised was approximately $722,659. In July 2013,

SatoshiDICE bought back all outstanding SatoshiDICE shares from investors at a price of 0.0035

bitcoins per share, for a total of 45,500 bitcoins. Due to the significant rise in the exchange rate

of bitcoin, the total USD amount paid to investors in the buy-back transaction, approximately

$3.8 million, exceeded the total USD amount raised.

Voorhees consented to cease and desist from committing or causing any future violations of the

registration provisions, agreed to cease from participating in any issuance of a security in an

unregistered transaction in exchange for virtual currency including Bitcoin for a period of five,

and agreed to pay $15,000 in disgorgement plus $843.98 prejudgment interest of $843.98, and a

penalty of $35,000.

SEC v. TelexFree et al.

Litigation Release No. 22974 (April 17, 2014)




The SEC filed charges against operators of a large pyramid scheme that mainly targeted

Dominican and Brazilian immigrants in the U.S.

According to the SEC's complaint, the defendants sold securities in the form of TelexFree

"memberships" that promised annual returns of 200 percent or more for those who promoted

TelexFree by recruiting new members and placing TelexFree advertisements on free Internet ad

sites. The SEC complaint alleged that TelexFree's "voice over Internet" technology sales

revenues of approximately $1.3 million from August 2012 through March 2014 were barely one

percent of the more than $1.1 billion needed to cover its promised payments to its promoters. As

a result, TelexFree was paying earlier investors with money received from newer investors.

According to the SEC's complaint, the defendants continued enrolling new investors but

subsequently changed TelexFree's method of compensating promoters, requiring promoters to

actually sell the product to qualify for payments. The complaint also alleged that since December

2013, TelexFree had transferred $30 million or more of investor funds from TelexFree operating

accounts to accounts controlled by TelexFree affiliates or the individual defendants.

The SEC's complaint alleged that defendants violated Sections 5(a), 5(c), and 17(a) of the

Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. SEC's

complaint sought permanent injunctions, disgorgement of ill-gotten gains plus prejudgment

interest, and civil monetary penalties. The SEC also charged three entities related to TelexFree

as relief defendants based on their receipt of investor funds, and sought disgorgement of those

funds plus prejudgment interest.



34

ACTIONS INVOLVING ACCOUNTANTS AND AUDITORS

In the Matter of Ernst & Young LLP


Accounting and Auditing Enforcement No. 3566 (July 14, 2014)




The SEC charged Ernst & Young LLP (“EY”) with violating the auditor independence rules that

require firms to maintain their objectivity and impartiality with clients.

According to the SEC’s order instituting settled administrative proceedings, prior to 2009,

certain conduct related to EY’s provision of legislative advisory services violated the

independence rules with respect to two of EY’s SEC-registrant audit clients. For example, EY

sent letters urging passage of bills to congressional staff on behalf of one of its clients (“Client

A”). These bills were important to Client A’s business interests. In another instance, EY asked

congressional staff to insert into a bill a provision favorable to Client A. For another audit client

(“Client B”), EY attempted to persuade congressional offices to withdraw their support for

legislation detrimental to that client’s business interests. In addition, EY worked closely with

congressional staff in drafting an alternative bill more favorable to Client B. EY also marked up

a draft of the alternative bill, inserting language written by Client B, and sent the mark-up to

congressional staff. Despite providing these services, EY repeatedly represented that it was

“independent” in audit reports issued on Client A’s and Client B’s financial statements, which

were included or incorporated by reference in public filings with the SEC.

According to the order, EY violated Rule 2-02(b)(1) of Regulation S-X and caused Client A and

Client B to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. EY’s conduct

also constituted improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act

and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice. EY agreed to a cease-and-desist order and

agreed to pay $1.24 million in disgorgement, $351,925.98 in prejudgment interest, and a $2.48

million penalty.



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