More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
Continuing investigations and charges against a China-based company and its executive and a Hawaii resident and the firms he used, as well as charges against a New Jersey man in a fraudulent Ponzi-type real estate scheme, were among the enforcement activities reported by the SEC during the week.
Real Estate Ponzi Scheme in New Jersey
Charges were filed by the SEC on Thursday, in parallel with a criminal indictment announced by the U.S. Attorney’s Office for the District of New Jersey, against a Watchung, N.J., man.
The SEC charged that David M. Connolly operated a Ponzi-like scheme involving a series of investment vehicles formed for the purported purpose of purchasing and managing rental apartment buildings in New Jersey and Pennsylvania.
Connolly, according to the complaint, induced investors to buy shares in real estate investment vehicles he created through his firm, Connolly Properties Inc. He promised investors monthly dividends based on cash flow profits from rental income at the apartment buildings, as well as the growth of their principal from the appreciation of the property.
However, none of Connolly’s securities offerings in the investment vehicles were registered with the SEC as required under the federal securities laws. The real estate investments did not produce the projected dividends, and Connolly instead made Ponzi-like dividend payments to earlier investors using money from new investors.
Connolly ultimately raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles, and also siphoned off at least $2 million in investor funds for his personal use. The whole scheme collapsed in 2009, with the properties going into foreclosure and total losses for the investors of their equity.
The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties from Connolly, who was charged with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Connolly was also indicted for one count of securities fraud, in addition to other charges.
More than $14 Million in Secret Loans
The SEC filed charges Monday and is seeking a final judgment with penalties against a China-based natural gas company and an executive for defrauding investors by secretly loaning company funds totaling more than $14 million to benefit the executive’s son and nephew while failing to disclose the true nature of the loans.
Investigation is continuing into the case of Qinan Ji, the former CEO who remains chairman of China Natural Gas Inc., and who was alleged by the SEC to have coordinated two short-term loans totaling more than $14 million in January 2010. Ji approved both loans without obtaining prior authorization from the board or informing the CFO.One of the loans, for $9.9 million and wired directly into a Demaoxing bank account with a note stating that the amount was for “raw material expenses,” went to a real estate firm co-owned by Ji’s son and nephew through a sham borrower. The other, for $4.4 million, went to Shaanxi Juntai Housing Purchase Co., a business partner of the real estate firm.
The SEC also alleged that in Q4 2008, China Natural Gas paid $19.6 million to acquire a natural gas company but did not properly report the transaction in its SEC filings. Ji also approved the acquisition, as he had the loans, without obtaining prior authorization from the board.
In its complaint, the SEC seeks a final judgment that imposes financial penalties, bars Ji from acting as an officer or director of a public company, and permanently enjoins Ji and China Natural Gas from future violations of these provisions.
Hawaiian Boiler Room Charges
Under a continuing investigation, the SEC filed charges and is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, penny stock bars, and permanent injunctions against all of the defendants in a $35 million international boiler room scheme.
On Wednesday, the SEC charged Nicholas Louis Geranio, a Hawaii resident, and two firms he used to orchestrate a scheme in which he covertly founded small companies, installed management, and recruited overseas boiler rooms that pressured investors into buying their stock while he pocketed more than $2 million in consulting fees from proceeds of the fraudulent stock sales.
Teams of telemarketers working in boiler room operations in primarily in Spain were recruited by Geranio, the subject of a previous SEC enforcement action in 2000. Through the use of high-pressure sales tactics and false statements about the companies Geranio founded, they raised some $35 million from investors outside the U.S., according to the allegations.
Geranio worked behind the scenes to create eight U.S.-based companies used to raise money through the sale of Regulation S stock, which is exempt from SEC registration under the securities laws because it is offered solely to investors located outside the U.S.
Geranio hand-picked the management for the companies, primarily Keith Michael Field of Sherman Oaks, Calif., who served as an officer, director, or investor relations representative for each company and also is charged in the SEC’s complaint. Then Geranio set up consulting arrangements through his firms—The Good One Inc. and Kaleidoscope Real Estate Inc.—so he could instruct management on how to run the companies and raise money offshore. He then extracted consulting fees from the companies, which generally had few or no employees, little or no office space, and no sales or customers.
He also instructed Field and others to buy and sell shares in some of the companies to create an illusion of trading activity and manipulate upward the price of the publicly-traded stock.
In addition, the SEC alleged that Geranio also assisted in diverting $240,000 in investor funds toward an undisclosed down payment on a property to start a Hawaiian wedding planning company.
In addition to the penalties listed above, the SEC is also seeking officer and director bars against both Geranio and Field, and disgorgement and prejudgment interest against relief defendant BWRE Hawaii LLC based on its alleged receipt of investor funds.