Recent enforcement actions by the SEC include charges against a former Morgan Stanley executive for violation of the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisors; a mother and daughter and their attorney in a penny stock scheme; UBS Puerto Rico for defrauding fund customers; and a Florida man and 10 cohorts in two stock-selling schemes, one of which was focused on Haiti.
Former Morgan Stanley Exec Violated FCPA, SEC Says
The former Morgan Stanley executive, Garth R. Peterson, was accused of secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds. He agreed to a settlement.
According to SEC allegations, Peterson, who was a managing director in Morgan Stanley’s real estate investment and fund advisory business, had a personal friendship and secret business relationship with the former chairman of Yongye Enterprise (Group) Co., a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai.
The SEC said Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official; he disguised the money as finder’s fees that Morgan Stanley’s funds owed to third parties. He also secretly arranged for himself, the Chinese official, and an attorney to acquire a valuable Shanghai real estate interest from a Morgan Stanley fund—and at the same time he negotiated both sides of the transaction. In exchange, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments.
Peterson agreed to a settlement in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the Shanghai real estate (currently valued at approximately $3.4 million). The Department of Justice has filed a related criminal case against him.
In the mother-and-daughter case, Christel Scucci and her mother Karen Beach, who live in Florida, are alleged to have used alter ego companies (Protégé Enterprises LLC and Capital Edge Enterprises LLC) to make more than $1.5 million from selling approximately 3.3 billion shares of purportedly unrestricted stock that they acquired in so-called debt conversion “wraparound” transactions.
Under the wraparound agreements, affiliates or others purportedly owed money by certain microcap issuers for more than one year assigned from the issuers to Protégé or Capital Edge the right to collect the debts. The wraparound agreements also purported to amend the initial debt agreements, thereby allowing Protégé and Capital Edge to convert the money owed to them by the issuers into shares of the issuers’ common stock at a deep discount (usually 50%) to the prevailing market price. Protégé and Capital Edge almost always elected to receive stock from the issuers shortly after execution of the wraparound agreements. None of the transactions were registered with the SEC.
They were able to sell most of this stock, the SEC said, only because Florida-based attorney Cameron H. Linton issued baseless legal opinions for them stating that the stock could be issued without restrictive legends and that their resales were exempt from the registration requirements of the federal securities laws.