SEC Busts ‘Frack Master’ Again, This Time in Real Estate Scheme: Enforcement

In other enforcement actions, the SEC barred a company president for accounting fraud

Christopher Faulkner, the self-proclaimed "Frack Master" who was accused by the Securities and Exchange Commission of running an $80 million oil-and-gas scheme, has had his assets frozen in what the SEC says is a real estate scam he perpetrated with four others.

To halt the scam, the SEC obtained court-ordered emergency relief in the form of a temporary restraining order, asset freeze, and other emergency and ancillary relief against Faulkner and defendants Homes Inc., HOMESINC Renaissance LLC, Matthew Rapoport and Earl Nelson Davenport.

The court has entered preliminary injunctions against all five defendants. These injunctions keep the defendants' assets frozen and restrain and enjoin the defendants, during the pendency of the case, from violating the antifraud provisions of the federal securities laws and from participating, directly or indirectly, in the issuance, purchase, offer or sale of any security.

According to the SEC's complaint, which was filed under seal on Sept. 11, Faulkner orchestrated a scheme to deceive and mislead investors about his latest venture, Homes Inc., by claiming that it had a proven and extensive track record of offering and selling passive real estate investments to investors; used investor funds for the acquisition, renovation and resale of residential real estate in Southern California; and consistently produced double-digit returns to its investors.

The SEC alleges that these statements are untrue, that Faulkner created and disseminated misleading promotional materials, and that Faulkner and Rapoport created and maintained a website that touted properties the company falsely claimed to have flipped in prior offerings.

The SEC contends that Homes has raised at least $168,750 from at least eight investors but has not used any investor funds for real estate transactions.

The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against the defendants.

Faulkner is also the subject of another pending SEC enforcement action alleging he orchestrated an $80 million oil-and-gas scheme. According to the complaint in that case, Faulkner disingenuously promoted himself as an oil-and-gas expert and marketed himself as the "Frack Master."

In this oil-and-gas fraud case, the court froze the assets of Faulkner and two others, appointed a temporary receiver over their assets, and preliminarily enjoined them from violating the antifraud provisions of the federal securities laws on Sept. 25.

CFTC Orders Morgan Stanley to Pay $350K Penalty for Omitting Data From Large Trader Reports

The Commodity Futures Trading Commission issued an order filing and simultaneously settling charges against Morgan Stanley for omitting futures and options data from its “Large Trader” reports.

The CFTC Order requires Morgan Stanley to pay a $350,000 civil monetary penalty, cease and desist from further violations of the Commodity Exchange Act (CEA), and comply with certain undertakings, including continuing cooperation with the CFTC's Division of Enforcement in any investigation, civil litigation, or administrative matter related to the subject matter of this action.

The CEA, and the accompanying regulations, require registered futures commission merchants, such as Morgan Stanley, to report certain futures and options positions to the CFTC. Reports made by FCMs pursuant to these regulations, commonly referred to as Large Trader reports, are used by the CFTC to evaluate potential market risks and monitor compliance with CFTC requirements.

The order finds that from 2007 through 2017, Morgan Stanley omitted mandatory futures and options data from its Part 17 Large Trader reports to the CFTC. These omissions were the result of problems with Morgan Stanley's proprietary reporting software that caused required data to be omitted.

In 2017, Morgan Stanley discovered, and self-reported to the CFTC, a further problem involving incorrect coding of active client accounts. As a result of this coding error, certain positions held in these client accounts were not correctly aggregated and, consequently, were not reported consistent with Part 17 requirements.

The order finds that, by not including this mandatory futures and options data in its Large Trader reports, Morgan Stanley violated the CEA and CFTC regulations.

The civil monetary penalty imposed has been significantly reduced on account of Morgan Stanley’s expansive cooperation.

Company President Barred for Accounting Fraud

The SEC obtained a final judgment on consent against Gavin Campion, the former president of KIT Digital Inc., barring him from serving as an officer or director of any public company.

Campion had been charged with securities fraud for his role in an accounting scheme by which KIT Digital inflated its publicly reported financial results by improperly recognizing $25 million in false revenue from sham license agreements.

Campion has pleaded guilty to securities fraud and conspiracy to commit securities fraud in a parallel criminal action based on substantially the same facts underlying the commission's complaint.

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