Firm, CEO Settle Charges in Ponzi-Like Scheme Involving Life Settlements

The Securities and Exchange Commission today announced that a New Jersey-based firm and its CEO have agreed to pay more than $4 million to settle charges that they used new investor money to repay earlier investors in Ponzi-like fashion and tapped investor funds for the CEO’s personal use.

According to the SEC’s complaint, Verto Capital Management and William Schantz III raised approximately $12.5 million selling promissory notes to purportedly fund Verto Capital’s purchase and sale of life settlements, which are life insurance policies sold in the secondary market.  The SEC alleges that they misrepresented to investors that Verto Capital was a profitable company and investor funds would be used for general working capital purposes.  Verto Capital and other Schantz businesses had been unprofitable for several years, according to the SEC’s complaint, and Schantz resorted to taking disproportionately large distributions of investor funds for himself and using new investor money to repay earlier investors. 

Verto Capital and Schantz also allegedly made misrepresentations to investors about the safety of the notes and collateral underlying them.  The SEC alleges that the promissory notes were primarily sold through a group of insurance brokers in Texas, and religious investors were targeted.

“As alleged in our complaint, investors were told that the life settlement-backed notes were short-term investments with an unlikely event of default.  Schantz and Verto misled investors about the company’s past performance and the value of the collateral, and they diverted significant investor funds for Schantz’s personal use,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

A Fair Fund will be created to return money collected in the settlement to harmed investors.  Schantz and Verto Capital agreed to pay disgorgement of $3,433,666 plus interest of $124,851 and a penalty of $600,000.  Without admitting or denying the allegations, they consented to permanent injunctions against further violations of Section 17(a)(2) and (3) and Section 5 of the Securities Act of 1933.  Schantz further agreed to be enjoined from selling any promissory notes.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, is being conducted by Jennifer K. Vakiener, Vincent T. Hull, Christopher Mele, Thomas Feretic, and Steven G. Rawlings in the New York office.  The case is being supervised by Lara S. Mehraban.  The SEC examination that led to the investigation was conducted by Steven C. Vitulano, Terrence P. Bohan, and Edward J. Janowsky in the New York office.

SEC Staff Supplements Quarterly Private Funds Statistics

The U.S. Securities and Exchange Commission staff today published a suite of new data and analyses of private fund statistics and trends.

The Private Funds Statistics, released quarterly since October 2015 by the Division of Investment Management’s Risk and Examinations Office, offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF.  New analyses include information about the use of financial and economic leverage by hedge funds, and characteristics of private liquidity funds.

“We believe publishing these statistics provides the public with more transparency into and understanding of the private funds industry,” said Acting Chairman Michael Piwowar. “The additional statistical analyses represent a continued focus on using data to inform policy and provide public information and will continue to facilitate feedback and analysis that could be used by the Commission and others.”

With 90 separate tables and figures, the report provides comprehensive analysis of hedge fund industry practices, such as the use of economic and financial leverage, investment strategies, collateralization of borrowings, and investment category exposures. These new statistics supplement information about numbers and types of funds, the gross and net assets of funds, the distribution of borrowings, analysis of gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

About the Data Sources

Form ADV is used by investment advisers to register with the Commission and or certain state securities authorities. Advisers must report on Form ADV general information about private funds that they manage, such as basic organizational and operational information, fund size and ownership.

Form PF is filed by SEC-registered investment advisers with at least $150 million in private funds assets under management to report information about the private funds that they manage. Most advisers file Form PF annually to report general information such as the types of private funds advised (e.g., hedge funds or private equity), each fund’s size, leverage, liquidity and types of investors. Certain larger advisers provide more information on a more frequent basis (including more detailed information on certain larger funds).

SEC, FINRA Announce National Compliance Outreach Program for Broker-Dealers

Cybersecurity, investing by seniors, and other regulatory topics of interest will be discussed when the Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA) hold their National Compliance Outreach Program for Broker-Dealers on July 27. 

Registration opened today for the program, which is designed to provide an open forum for regulators and industry professionals, including compliance, audit, and other senior personnel of broker-dealer firms and branch offices, to discuss current compliance practices and promote an effective compliance structure for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) and FINRA sponsor the program in coordination with the SEC’s Division of Trading and Markets.  It will be held at the SEC’s Washington D.C., headquarters from 10:30 a.m. to 4:45 p.m. 

Peter Driscoll, Acting Director of OCIE’s National Examination Program said, “The Compliance Outreach Program for Broker-Dealers helps to facilitate effective communication and transparency and furthers the mission to protect investors and maintain fair, orderly, and efficient markets.”

Susan Axelrod, FINRA Executive Vice President of Regulatory Operations said, “FINRA is pleased to continue our successful partnership with the SEC to provide this opportunity for broker-dealer senior personnel, particularly compliance officers, and regulators to foster open lines of communication and work together.”  

There is no cost to attend the event, but in-person attendance is limited to 500 on a first-come, first-served basis.  There will be a maximum of 10 attendees per firm.  The event will be webcast live on the SEC’s website, but CPE credits will be available to in-person attendees only.

Visit the SEC’s website or FINRA’s website for additional details on the 2017 National Compliance Outreach Program for Broker-Dealers, including the agenda and information on how to register for the event.

Whistleblower Award of More Than Half-Million Dollars for Company Insider

The Securities and Exchange Commission today announced that a company insider has earned a whistleblower award of more than $500,000 for reporting information that prompted an SEC investigation into well-hidden misconduct that resulted in an SEC enforcement action.

“This company employee saw something wrong and did the right thing by reporting what turned out to be hard-to-detect violations of the securities laws,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Company insiders are in a unique position to provide specific information that allows us to better protect investors and the marketplace.  We encourage insiders with information to bring it to our attention.”

The whistleblower award is the second announced by the SEC in the past week.  Approximately $154 million has now been awarded to 44 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. 

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

SEC and NYU to Host Forum on Reviving IPO Market to Help Drive Economy, Create Jobs

Going public has helped many companies grow and create jobs, so why has the number of initial public offerings (IPOs) decreased in recent years? What are the consequences of this trend on investors? The U.S. Securities and Exchange Commission and New York University’s Salomon Center will tackle those questions next week in New York City.

The Commission’s Division of Economic and Risk Analysis (DERA) is partnering with NYU’s Salomon Center for the Study of Financial Institutions to bring together regulators, practitioners, and academics for a half-day symposium on May 10 at NYU. Panelists will take a look at data and explore the economic causes and consequences of the perceived weakness in the IPO market, and discuss ways to encourage more capital-raising through IPOs.

“IPOs can play a critical role in fostering long-term economic growth, but as we see less and less companies taking advantage of the public markets, we could be missing important opportunities,” said Acting Chairman Michael Piwowar. “We are excited to collaborate with NYU in this event focused on the potential causes of the current state of the U.S. IPO market, as well as possible solutions to IPO decline driven by the needs of market participants.”

Attendees can expect discussions focusing on what has led to the existing condition of the IPO market, including changes in technology and funding sources, regulatory and institutional influences, and the challenges that these issues pose to firms seeking to raise capital.

The event is free and open to the public, and will kick off with welcoming remarks by Acting Chairman Michael Piwowar at 9:15 am at NYU’s Salomon Center located at 44 West 4th Street, New York, NY. Information about the event agenda and webcast will be available at DERA Events. The public is welcome to attend, and are asked to register in advance. 

Semiconductor Company and Former CFO Settle Accounting Fraud Charges

The Securities and Exchange Commission today announced that a South Korea-based semiconductor manufacturer and its former CFO have agreed to settle charges related to an accounting scheme to artificially boost revenue and manipulate the financial results reported to investors.

The SEC’s order finds that MagnaChip Semiconductor Corp. overstated revenues for nearly two years in response to immense pressure placed on employees each quarter to meet revenue and gross margin targets that had been communicated to the public.  Then-CFO Margaret Sakai directed or approved several fraudulent accounting practices to make it falsely appear the company had met those targets.  For example, MagnaChip recognized revenue on sales of incomplete or unshipped products, and the company delayed booking obsolete or aged inventory to manipulate its reported gross margin.  MagnaChip also engaged in roundtrip transactions to manipulate accounts receivable balances, and concealed from auditors that there were side agreements with distributors to induce them to accept products early.

“MagnaChip engaged in a panoply of accounting tricks to artificially meet its financial targets,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Companies that sell stock in the U.S. markets should prioritize a robust accounting culture that is entirely truthful with investors.”

Without admitting or denying the findings in the SEC’s order, MagnaChip agreed to pay a $3 million penalty and Sakai agreed to pay a $135,000 penalty.  Sakai also agreed to be barred from serving as an officer or director of a public company and from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.

The SEC’s investigation has been conducted by Justin M. Lichterman and Michael D. Foley of the San Francisco office, and supervised by Steven D. Buchholz.

SEC Charges EB-5 Operator With Securities Fraud

The Securities and Exchange Commission today announced that an Idaho man has agreed to pay back several million dollars he siphoned away for personal use rather than investing it as promised to create U.S. jobs through the EB-5 Immigrant Investor Program.

The SEC alleges that Serofim Muroff raised more than $140.5 million in EB-5 offerings to Chinese investors through his companies Blackhawk Manager and ISR Capital for the intended purposes of acquiring and developing luxury real estate in McCall, Idaho, and investing in gold mining ventures in Idaho and Montana.  Muroff allegedly misappropriated more than $5 million in investor funds for such unrelated uses as an investment in a zip line operation as well as his purchase of two personal residences, a Range Rover, and a BMW.

“As alleged in our complaint, Muroff secretly enriched himself with millions of dollars in EB-5 investor funds that should have gone into job-creating enterprises,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

In the settlement, which is subject to court approval, Muroff and his companies agreed to pay disgorgement of $5,062,082 plus interest totaling $865,270 and a penalty of $2 million.  Muroff also agreed to be prohibited from conducting EB-5 offerings, acting as an officer or director of a public company, and associating with any investment adviser.  Muroff’s bookkeeper and administrative assistant Debra L. Riddle, who was charged in the SEC’s complaint along with Muroff and his companies, agreed to pay disgorgement of $503,417 plus interest totaling $81,626 and a penalty of $100,000.  They neither admitted nor denied the allegations in the SEC’s complaint.

The SEC’s investigation was conducted by Alice Liu Jensen, Rahul Kolhatkar, and Ellen Chen of the San Francisco office, and the case was supervised by Steven D. Buchholz.  The SEC appreciates the assistance of U.S. Citizenship and Immigration Services.

Executives Charged in Connection With Accounting Failures at Government Contractor

The Securities and Exchange Commission today announced charges against two former executives at a government contractor that was the subject of an SEC enforcement action earlier this year and paid a $1.6 million penalty for accounting failures.

The SEC Enforcement Division alleges that David Pruitt, the then-vice president of finance in the Army Sustainment Division of L3 Technologies Inc., circumvented internal accounting controls and caused L3 to improperly recognize $17.9 million in revenue from a contract with the U.S. Army by creating invoices that were not actually delivered at the same time that the revenue was recorded.  The extra revenue allegedly enabled employees in that division to barely satisfy an internal target for management incentive bonus payments. 

The SEC Enforcement Division further alleges that Pruitt, a CPA, took steps on several occasions to conceal from L3’s corporate office and external auditor the fact that the invoices were not delivered.  The matter against Pruitt will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The SEC separately instituted an order against Mark Wentlent, the former president of L3’s Army Sustainment Division, finding that he failed to follow up on red flags that Pruitt had caused L3 to improperly recognize revenue.  Wentlent consented to the order without admitting or denying the findings, and he agreed to pay a $25,000 penalty.  The bonus payment that Wentlent received as a result of the misconduct already has been rescinded by L3.

“Executives must be held accountable when they’re actively involved in corporate wrongdoing or look the other way.  We allege that Pruitt circumvented critical accounting safeguards so improper revenue could be recorded to reach an internal target that enabled management to receive bonuses, and it was unreasonable for Wentlent to rely solely on Pruitt under the circumstances,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s investigation was conducted by H. Gregory Baker, David Oliwenstein, Christopher Mele, and Steven G. Rawlings of the New York office.  The litigation against Pruitt will be led by Paul Gizzi, Mr. Baker, and Mr. Oliwenstein.  The case is being supervised by Sanjay Wadhwa.

Broker Charged With Defrauding Customers

The Securities and Exchange Commission today charged a former broker with knowingly or recklessly trading unsuitable investment products in the accounts of five customers and misappropriating more than $170,000 from one of those customers.

The SEC’s complaint alleges that Demitrios Hallas repeatedly traded unsuitable investments in his customers’ accounts, exposing customers who were unsophisticated with limited or no investing experience and modest incomes, net worth levels, and assets to a significant degree of volatility and risk.  In a little more than a year, Hallas allegedly traded 179 daily leveraged exchange traded funds (ETFs) and exchange traded notes (ETNs) – products that the SEC alleges are inherently risky, complex and volatile, and only appropriate for sophisticated investors – in the customers’ accounts, generating commissions and fees of approximately $128,000.  The net loss across all 179 positions was approximately $150,000.  The SEC’s complaint further alleges that Hallas misappropriated more than $170,000 in funds from one customer.  Instead of investing the funds on the customer’s behalf, Hallas allegedly deposited the funds into his own personal bank accounts and spent them on personal expenses, including significant bar and restaurant bills, credit card and student loan payments, and rent.

The SEC previously issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts, and an Investor Bulletin educating investors about ETNs and the risks associated with them.

“As alleged in our complaint, Hallas enriched himself by systematically disregarding his customers’ investment profiles and repeatedly trading in risky, volatile products that were unsuitable for them,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker Dealer Task Force.  “As reflected in this case and our recent case against two former JD Nicholas brokers, the SEC is very focused on brokers who seek to exploit their customers by willfully recommending unsuitable trades or strategies to them.”

The SEC’s complaint charges Hallas with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.

The SEC’s investigation was conducted by Michael C. Ellis and Thomas P. Smith Jr. in the New York office.  The litigation will be led by David Stoelting and Mr. Ellis, and the case is being supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Ronald Krietzman, John Celio, Dee-Ann DiSalvo, and Bernard Bujak.

SEC Awards Nearly $4 Million to Whistleblower

The Securities and Exchange Commission today announced an award of nearly $4 million to a whistleblower who tipped the agency with detailed and specific information about serious misconduct and provided additional assistance during the ensuing investigation, including industry-specific knowledge and expertise.

“Not only did this whistleblower step forward and report suspicious conduct, but continued to help after we opened our investigation,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”

Approximately $153 million has now been awarded to 43 whistleblowers who became eligible for an award after voluntarily providing the SEC with original and useful information that led to successful enforcement actions. 

SEC enforcement actions from whistleblower tips have resulted in more than $953 million in financial remedies against wrongdoers.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

Investment Bank VP Charged With Insider Trading

The Securities and Exchange Commission today charged a vice president in the risk management department of a New York-based investment bank with insider trading on confidential information he learned in advance of a private equity firm’s acquisition of a publicly-traded technology company.

The SEC alleges that Avaneesh Krishnamoorthy learned that Golden Gate Capital planned to acquire Neustar Inc., and he then began trading in Neustar securities.  The trading took place in two brokerage accounts that Krishnamoorthy allegedly kept hidden from his employer, which had been approached by Golden Gate Capital to finance the transaction.  According to the SEC’s complaint, Krishnamoorthy made approximately $48,000 in illicit profits.

“As alleged in our complaint, Krishnamoorthy was entrusted with confidential, market-moving information by his employer and he misused it for personal gain,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today filed criminal charges against Krishnamoorthy. 

The SEC is seeking an emergency court order to freeze the assets in the brokerage accounts belonging to Krishnamoorthy and his wife, who has been named as a relief defendant in the SEC’s complaint for purposes of recovering allegedly ill-gotten gains in the account in her name.  The complaint charges Krishnamoorthy with violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 

The SEC’s investigation is being conducted by Alison R. Levine, Preethi Krishnamurthy, Neil Hendelman, and Thomas P. Smith Jr.  The litigation will be led by Ms. Krishnamurthy and Ms. Levine.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Portfolio Manager Charged With Diverting Nearly $2 Million to Personal Account

The Securities and Exchange Commission today announced fraud charges against a Massachusetts-based portfolio manager accused of diverting at least $1.95 million to his personal brokerage account from a fund over which he had trading authority.

The SEC’s complaint alleges that Kevin J. Amell carried out a fraudulent matched-trades scheme in which he prearranged the purchase or sale of call options between his own account and the brokerage accounts of the fund at prices that were disadvantageous to the fund and advantageous to him.  In one series of trades involving Amazon securities, for example, Amell allegedly generated a $23,000 profit for himself in less than 23 minutes at the fund’s expense.

“As alleged in our complaint, Amell abused his trading authority at least 265 times by matching trades between the fund and his personal account at prices that he intentionally and fraudulently skewed to benefit himself,” said Joseph G. Sansone, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.

In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts today filed criminal charges against Amell.

The SEC’s complaint charges Amell with violating Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c), and Sections 17(a)(1), 17(a)(2) and 17(j) of the Investment Company Act of 1940 and Rules 17j-1(b)(1), (3) and (4).  The SEC is seeking disgorgement of Amell’s ill-gotten gains plus interest and penalties as well as injunctions.  

The SEC’s investigation, which is continuing, is being conducted by Melanie A. MacLean, John D. Marino, and Simona Suh of the Market Abuse Unit and Elzbieta Wraga of the New York Regional Office.  The case has been supervised by Mr. Sansone.  The litigation will be led by Ms. MacLean, Ms. Suh, and Martin F. Healey of the Boston Regional Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation’s Boston Field Office, and the Financial Industry Regulatory Authority.