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September 20, 2012 at 10:50 AM
Recent actions taken by the SEC include charges against a hedge fund manager for running a $37 million Ponzi scheme; a former director in a compensation scheme that netted hundreds of thousands of dollars in undisclosed income; co-founders of a Chicago-area investment firm over misleading investors and supervisory failures that resulted in penalties of more than $1 million; and a private fund manager and his investment advisory firm over more than $17 million in losses in a Ponzi-like scheme.
Hedge Fund Manager Charged for $37 Million Ponzi Scheme
The SEC filed fraud charges against Jusaf Jawed, a Portland, Ore.-based investment adviser, who perpetrated a long-running Ponzi scheme that raised over $37 million from more than 100 investors in the Pacific Northwest and across the country.
The SEC alleges that Jawed used false marketing materials that boasted double-digit returns to lure people to invest their money into several hedge funds he managed. He then improperly redirected their money into accounts he personally controlled.
As part of the scheme, Jawed created phony assets, sent bogus account statements to investors, and manufactured a sham buyout of the funds to make investors think their hedge fund interests would soon be redeemed. He misused investor money to pay off earlier investors, pay his own expenses and travel, and create the overall illusion of success and achievement to impress investors.
According to the SEC’s complaint filed in federal court in Portland, Jawed managed a number of hedge funds through at least two companies he controlled: Grifphon Asset Management and Grifphon Holdings. Jawed’s marketing materials claimed that the Grifphon funds earned double-digit returns year after year, even as the S&P 500 Index declined. For certain funds, Jawed also falsely claimed they would invest in publicly traded securities and that their assets were maintained at reputable financial institutions.
The SEC alleges that Jawed instead invested very little of the more than $37 million that he raised. For one fund, 70% of the money raised was either paid in redemptions to investors in other funds, paid to finders, or merely transferred to accounts belonging to Grifphon Asset Management or other entities that he controlled. Jawed concealed the fraud by telling Grifphon’s bookkeepers that the money transfers represented purchases of offshore bonds, although the “investment” was actually a sham entity that was supposedly managed by Jawed’s unemployed aunt, who lives in Bangladesh.
According to the SEC’s complaint, Jawed further deceived investors as the funds were collapsing by telling them that independent third parties were buying the Grifphon funds’ alleged assets at a premium. In truth, the so-called third parties were more sham entities, originally formed by Grifphon and Jawed, and contained no assets, no income, and no ability to pay for the funds’ alleged assets.
The SEC’s complaint against Jawed additionally charges Robert Custis, an attorney hired by Jawed to assist him in the fraud. Custis sent false and misleading statements to investors about the status of the purported purchase of the Grifphon funds’ assets. Custis consistently misrepresented that this purchase was imminent and would result in investors’ investments being repaid at a profit.
The SEC filed separate complaints against two others connected to the scheme. One complaint alleges that Jacques Nichols, a Portland-based attorney, falsely claimed to investors that an independent third party would pay tens of millions of dollars to buy the hedge funds’ alleged assets at a premium; the second alleges that Jawed’s associate, Lyman Bruhn, of Vancouver, Wash., ran a separate Ponzi scheme and induced investments through false claims he was investing in blue-chip stocks.
Nichols and Bruhn agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to entry of permanent injunctions against violations of the antifraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 and other relief. The SEC’s litigation continues against Jawed, the two Grifphon entities, and Custis, alleging multiple violations of the antifraud provisions of the federal securities laws.
The SEC’s investigation is continuing. Five Years of Undisclosed Compensation
The SEC charged a former director at Port Washington, N.Y.-based consumer electronics retailer Systemax, Gilbert Fiorentino, for fraudulently bringing in hundreds of thousands of dollars in undisclosed compensation over a five-year period.
The SEC alleges that Fiorentino, who in addition to serving on the board was the former chief executive of Systemax’s technology products group in Miami, obtained more than $400,000 in extra compensation directly from firms that conducted business with the firm, and also stole several hundred thousand dollars’ worth of company merchandise that was used to market its products. According to the SEC’s complaint filed in federal court in Miami, this occurred from January 2006 to December 2010.
Systemax sells personal computers and other consumer electronics through its websites, retail stores and direct mail catalogs. Fiorentino arranged the extra compensation as he dealt directly with external service providers, manufacturer representatives and others that conducted business with Systemax. For example, he demanded and received $5,000 to $10,000 monthly from an entity that supplied materials to Systemax’s subsidiaries for use in retail and mail order operations.
The SEC also alleges that through his executive position at Systemax, Fiorentino had access to company merchandise used to market Systemax products in mail order catalogs and online, and routinely misappropriated some of this merchandise and failed to disclose it to Systemax and its auditors.
Because Fiorentino was one of Systemax’s highest-paid executives, the company was required by U.S. securities laws to disclose all compensation, perks and other personal benefits he received each year. However, he failed to disclose his extra compensation and perks to Systemax or its auditors, and the amounts reported to shareholders were understated. Fiorentino reviewed and signed each Systemax Form 10-K from fiscal years 2006 to 2010 while knowing that it failed to make the required disclosures. He also routinely signed management representation letters to Systemax’s independent auditors stating that he did not know of any fraud or suspected fraud involving Systemax’s management.
