The SE announced on April 1, 2019 that it had halted an ongoing investment fraud by Investment Advisor Motty Mizrahi targeting members of the Jewish community, primarily in the Los Angeles, California region.

The SEC filed an emergency action in federal court against Motty Mizrahi and MBIG Company, his sole proprietorship, alleging that, since June 2012, they defrauded at least 15 advisory clients out of more than $3 million. According to the SEC’s complaint, unsealed on March 29, 2019, Motty Mizrahi falsely claimed that MBIG used sophisticated trading strategies to generate “guaranteed” returns of between 2-3% per month, the investments were risk-free, and clients would not lose their money and could withdraw their funds at any time. Unbeknownst to his clients, however, MBIG had no bank or brokerage account of its own – rather, clients unwittingly sent money to Motty Mizrahi’s personal bank account. Motty Mizrahi used the money to fund his personal brokerage account, in which he engaged in high-risk options trading producing losses of more than $2.2 million, and to pay personal expenses. The SEC alleges that Motty Mizrahi covered up his fraud by issuing MBIG’s clients fabricated account statements, showing positive account balances and profits from trading. When clients demanded proof of MBIG’s securities holdings, Motty Mizrahi showed them brokerage statements reflecting a multi-million dollar balance for a fictitious MBIG brokerage account. Read More

On March 22, 2019, the SEC charged registered investment adviser Direct Lending Investments, LLC with a multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.

According to the SEC’s complaint, Direct Lending advises a combination of private funds that invest in various lending platforms, including QuarterSpot, Inc., an online small business lender. The SEC alleges that for years, Brendan Ross, Direct Lending Investments’s owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when, in fact, they had not. The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer. As a result, between 2014 and 2017, Direct Lending cumulatively overstated the valuation of its QuarterSpot position by approximately $53 million and misrepresented the Funds’ performance by approximately two to three percent annually. The SEC alleges that Direct Lending collected approximately $11 million in excess management and performance fees from the Funds that it would not have otherwise collected, had the QuarterSpot position been accurately valued. Read More

On March 26, 2019 the SEC filed settled charges against recidivist James K. McKillop for acting as an unregistered broker and for failing to timely file required beneficial ownership forms in connection with his position at Tiber Creek Corp. The SEC also separately filed related settled administrative charges against Tiber Creek and Tiber Creek’s president, James M. Cassidy.

According to the SEC’s complaint and the SEC’s order, Tiber Creek maintained an inventory of SEC-registered public shell companies, for which James McKillop and James Cassidy served as the officers, directors, and fifty percent shareholders. The SEC alleges that since July 2012, James McKillop and James Cassidy effected securities transactions through Tiber Creek for more than 100 public shell companies without being registered as brokers. The complaint also alleges that on more than 110 occasions, James McKillop and James Cassidy failed to timely file required beneficial ownership reports, including Schedules 13G and Forms 4, in connection with the public shell companies. Read More

The SEC filed on March 28, 2019 charges against the former Chief Operating Officer (COO), Richard Diver of a Commission-registered investment adviser for aiding and abetting the advisory firm’s actions to overbill its clients as part of a fraudulent scheme to improperly inflate his own pay.

According to the SEC’s complaint, between 2011 and December 2018, former COO Richard Diver, a resident of Spring Lake, New Jersey, engaged in an illicit scheme to steal approximately $6 million from his employer. Richard Diver, whose duties included managing the advisory firm’s payroll and client billing functions, allegedly inflated his salary by hundreds of thousands of dollars per year. As part of this scheme, Richard Diver defrauded investors by causing the investment adviser to overbill more than 300 investment advisory client accounts by approximately $750,000, for the purpose of generating additional revenue. As alleged in the complaint, Richard Diver used this revenue to finance his inflated salary and when confronted by the investment adviser’s CEO in December 2018, Richard Diver confessed to having carried out the scheme. Read More

The SEC announced fraud charges and an asset freeze on March 18, 2019, against the operators of a $25 million Ponzi scheme falsely promising high annual returns with minimal to no risk to investors in the Vietnamese community of Orange County, California.

The SEC alleges that Kent R.E. Whitney founded The Church for the Healthy Self three months after being released from federal prison for orchestrating a prior investment scheme involving commodities. According to the SEC, the Church for the Healthy Self’s investment program, CHS Trust, promised investors tax-deductible, guaranteed, and insured returns of at least 12%, through reinsurance investments and options trading. Read More

On January 2, 2019, a federal district court entered final consent judgments against an Australia-based investment adviser, Goldsky Asset Management, LLC, and its owner, Kenneth Grace, for making false and misleading statements about its business in filings with the Commission and on its website.

The SEC’s complaint, filed on September 27, 2018 in the Southern District of New York, alleged that Goldsky Asset Management’s Forms ADV for 2016 and 2017, which Grace signed, falsely stated that Goldsky Asset Management’s hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. The complaint further alleged that, in its Forms ADV and ADV Part 2A, Goldsky Asset Management stated that it managed over $100 million in discretionary assets under management, when it in fact had no assets. According to the complaint, Goldsky Asset Management’s website falsely claimed that Goldsky Global Alpha Fund earned 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. Read More

The SEC announced on March 12, 2019 that it has charged Texas resident William Neil “Doc” Gallagher-the self-styled “Money Doctor” featured on three Dallas-area radio stations-in an emergency action to shut down a $19.6 million Ponzi scheme targeting elderly investors’ retirement funds. The SEC also charged Gallagher Financial Group, Inc. and W. Neil Gallagher, Ph.D. Agency, Inc., companies that Gallagher used to carry out the scheme.

The SEC’s complaint, which was filed under seal on March 7, 2019, alleged that Gallagher made frequent religious references on his radio shows to establish his standing among a target audience of retired Christian investors. From December 2014 through January 2019, he raised at least $19.6 million from approximately 60 senior citizens. Falsely claiming to be a licensed investment adviser, he offered an investment that he called a Diversified Growth and Income Strategy Account, in which he promised to acquire income-generating assets for his clients in five specified categories. He promised investors that they would receive guaranteed, risk-free returns in their accounts ranging from 5% to 8% per year. In reality, except for one $75,000 annuity purchase, Gallagher purchased no assets in any of the five categories and no other assets to back the promised returns. Instead, he exhausted virtually all investor funds on spending unrelated to the accounts, including misappropriating significant portions for personal and company expenses and to make Ponzi payments to investors. To lull investors and conceal the scheme, Gallagher provided investors phony account statements showing false account balances. Read More

The SEC charged  on February 21, 2019, Joseph Frank Vacante, a former employee of a biotech company with insider trading on confidential information regarding the company’s withdrawal of certain products from consideration by the U.S. FDA.

Joseph Frank Vacante agreed to pay more than $140,000 to settle the SEC’s charges.

According to the SEC’s complaint, on September 29, 2016, Joseph Frank Vacante learned that the FDA had recommended that Trinity withdraw two products which Joseph Frank Vacante believed represented the future of the company. The complaint further alleges that, that same day, Joseph Frank Vacante twice communicated with his broker in efforts to sell Trinity American Depository Receipts (ADRs) which he had received as part of his employment, including lowering the price to ensure the sale occurred. Read More

On March 1, 2019, a federal district court entered a final consent judgment against broker, William Gennity who was charged with defrauding customers by making unsuitable and unauthorized trades and churning customers’ accounts that enriched the broker at the customers’ expense.

The SEC’s complaint, filed in the Southern District of New York, alleges that from July 2012 to August 2014, William Gennity recommended to four customers a pattern of high-cost, in-and-out trading without any reasonable basis to believe that his customers could make a profit. William Gennity’s recommendations resulted in losses for the customers and gains for William Gennity. He allegedly also lied to his customers about the potential for the accounts to profit. The complaint also alleges that William Gennity engaged in unauthorized trading and churning. Read More

On February 22,2019 the SEC announced  the entry of a final judgment against James Polese, a former investment adviser at a large financial institution who was charged with misappropriating client funds.

On January 31, 2018, the Commission filed a complaint in the United States District Court for the District of Massachusetts charging James Polese and his former colleague, Cornelius Peterson, with securities fraud for engaging in various schemes to defraud their clients, including fraudulently misappropriating $350,000 of one client’s money, using $100,000 of those funds to make investments in their own names, and directing the remaining $250,000 to James Polese’s personal bank account. The Commission’s complaint also alleged that James Polese and Cornelius Peterson invested $100,000 of another client’s funds into an investment in which Cornelius Peterson and James Polese held a financial interest, without informing the client or disclosing their conflict of interest. Read More

On February 20, 2019, the U.S. District Court for the Southern District of Florida entered final judgments on consent against Mathias Francisco Sandoval Herrera and Maria D. Cidre, the former Chief Executive Officer and former Chief Financial Officer, respectively, of the Rest of World operating segment of General Cable Corp.

The SEC’s complaint, filed on January 24, 2017, alleged that Mathias Francisco Sandoval and Maria Cidre learned in January 2012 of an inventory overstatement and related accounting errors at General Cable’s subsidiary in Brazil. The complaint alleged that, over the course of 2012, the estimated overstatement grew to tens of millions of dollars. Instead of disclosing the overstatement pursuant to General Cable’s policies and system of internal controls, the complaint alleges that Mathias Francisco Sandoval and Maria Cidre concealed the errors by omitting them from required reports and making false certifications to executive management. Read More

On February 19, 2019, the SEC posted a new proposed rule intended to make it possible for all issuers to “test the waters” when contemplating a public offering of securities. Until now, only issuers considered emerging growth companies (EGCs) under the JOBS Act of 2012 qualified to solicit investor interest prior to a registered public offering.  An EGC is defined as an issuer with “total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement”. A company continues to be an emerging growth company for the first five years after it completes an Initial Public Offering (“IPO”).  Its status will change only if its gross revenues exceed the $1.07 billion threshold, if it has issued more than $1 billion in non-convertible debt, or it becomes a large accelerated filer.

In addition being allowed to test the waters—with the object of gauging investor interest in an initial public offering (IPO)—the JOBS Act conferred other advantages on EGCs, most of them having to do with less stringent SEC Reporting Requirements in quarterly and annual reports.  Another benefit enjoyed by these fledgling companies was the ability to file draft registration statements with the SEC confidentially.  When an EGC files a confidential initial registration statement, the filing itself is not made available to the public, and the review process is between the company and the SEC’s Division of Corporation Finance.  The original submission and subsequent amendments need not be made public until 15 days prior to the start of the company’s road show.  Read More

On February 15, 2019  the SEC announced charges against four individuals and related businesses for their roles in two microcap frauds and unlawful securities offerings. In sum, the alleged illegal transactions resulted in proceeds of more than $25 million.

According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock. The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally. The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public. The complaint alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and executed the sham transactions. Read More

On February 15, 2019, Cognizant Technology Solutions Corporation has agreed to pay $25 million to settle charges that it violated the Foreign Corrupt Practices Act, and two of the company’s former executives were charged for their roles in facilitating the payment of millions of dollars in a bribe to an Indian government official.

The SEC’s complaint alleges that in 2014, a senior government official of the Indian state of Tamil Nadu demanded a $2 million bribe from the construction firm responsible for building Cognizant’s 2.7 million square foot campus in Chennai, India. As alleged in the complaint, Gordon Coburn, Cognizant’s President, and Steven E. Schwartz, the company’s Chief Legal Officer, authorized the contractor to pay the bribe, and directed their subordinates to conceal the bribe by doctoring the contractor’s change orders. The Commission also alleges that Cognizant authorized the construction firm to make two additional bribes totaling more than $1.6 million. Cognizant allegedly used sham change order requests to conceal the payments it made to reimburse the firm. Read More

On February 12, 2019, the SEC charged two former high-ranking executives,  of an Indiana-based plastics manufacturer with concealing from potential buyers of the manufacturer the fact that the company’s core business model was a sham.

According to the SEC’s complaint, Lucent Polymers, Inc. premised its business model on its ability to transform “garbage to gold” – that is, to use low-grade, non-prime feedstock to develop high-quality plastics. The company’s near-magic “garbage to gold” process, the SEC alleges, was a huge commercial success. However, the complaint alleges that Lucent’s business model was a fraud. The complaint alleges that the company routinely lied to its customers and falsified its certifications of test data to show that its products complied with customer specifications, including on important aspects such as fire-retardant measures, when in fact the products did not meet customer specifications. Read More

A federal district court has permanently barred two former corporate officers of a North Carolina-based hygiene and sanitation company from serving as officers or directors of public companies.

The SEC charged the two officers of Swisher Hygiene, Inc., Michael J. Kipp, Swisher’s former CFO, and Joanne K. Viard, Swisher’s former Director of External Reporting, in 2016 with fraud for participating in an earnings management scheme. Read More

The SEC obtained a final judgment on February 8, 2018, against Niket Shah, a New Jersey resident who was charged last year by the agency with stealing more than $250,000 in a Ponzi scheme in which his friends and coworkers invested.

The court’s final judgment follows the court’s grant of summary judgment in the agency’s favor. In granting summary judgment, the court found that Niket Shah and his company, Spark Trading Group LLC, falsely claimed that Spark Trading was registered with the SEC; that their investments were profitable; that investors’ funds were guaranteed; and that defendants received $250,000 in start-up capital, including $200,000 that Shah deposited into a binary options trading account. Read More

On January 9, the Cato Institute filed suit against the Securities & Exchange Commission (the “SEC”), its chairman Jay Clayton, and its secretary Brent J. Fields.  For decades, questions have been raised, and criticisms offered, of the SEC’s longstanding practice of requiring (or allowing, depending on one’s point of view) settling defendants in enforcement actions to sign consent decrees in which they “neither admit nor deny” the charges lodged against them.  Thanks to a standard clause in their decrees, for the rest of their lives, the defendants will be prevented from explaining what really happened, if their views don’t coincide with the agency’s.  These strictures apply to corporate as well as individual defendants.

The Cato Institute believes these SEC Gag Orders are wrong.  Cato is a libertarian think tank located in Washington, D.C.  It was founded in 1974 in Wichita, Kansas, as the Charles Koch Foundation, and was at first wholly funded by Koch.  It’s by now considered one of the most influential think tanks in the world.  Cato is not a public company, and is not regulated by the SEC.  Ordinarily, it would have lacked standing to sue the agency, but thanks to special circumstances, it was able to file a complaint for declaratory and injunctive relief.  Read More

On February 7,2019, the SEC charged Robert Alexander with fraudulently raising approximately $9 million from more than 50 individuals by selling investments in Kizzang LLC, a purported online gaming business.

According to the SEC’s complaint, among other misrepresentations, Robert Alexander told investors that they would make a minimum of ten times their investment, Robert Alexander had personally invested millions of dollars in Kizzang, Robert Alexander had made a $50 million charitable donation, and that he had led the creation of a prominent video game. Rather than using investor funds for Kizzang’s business, Robert Alexander stole at least $1.3 million, including spending more than $450,000 on gambling sprees. Robert Alexander also used investor funds to finance his daily living and other personal expenses, including credit card bills, shopping and entertainment, and expenses for his daughter, including culinary school tuition and luxury car payments. Read More