SEC Enforcement Roundup: $300M Resort Scam Leads to Rum-Soaked Investment

A Sugar Land, Texas-based day trader was charged by the SEC for targeting, in particular, investors in the Houston-area Lebanese and Druze communities in a high-frequency trading program.

Firas Hamdan was charged with defrauding investors in the trading program; he also provided those investors with falsified brokerage records that drastically overstated assets while at the same time hiding Hamdan’s huge trading losses. The SEC also seeks an emergency court order to put an end to the scheme and to freeze Hamdan’s assets and those of his firm, FAH Capital Partners.

Hamdan, according to the SEC’s complaint, is well-known in the Lebanese and Druze communities in the Houston area and is a former treasurer of the Houston branch of the American Druze Society. He took advantage of that fact by talking to friends and family in both communities about his trading program, which supposedly conducted high-frequency trading via a proprietary trading algorithm. He also asked these people to spread the word, and unfortunately they did. Hamdan said he would pool his own money with that of his prospective investors; he promised his targets an annual return of 30% and claimed it was a safe investment. However, the program churned up $1.5 million in losses instead. He had brought in over $6 million from at least 33 investors over a five-year period, and when he couldn’t deliver the promised unrealistic returns, he blamed it on funds being held up in the Greek debt crisis or the MF Global bankruptcy, and made up other excuses as well.

Hamdan allegedly told investors that his program brought in positive returns in 59 out of 60 months between 2007 and 2012, and produced phony documentation to “prove” it. One faked statement provided to investors for Q1 of 2010 showed an opening balance of over $2.3 million, quarterly trading gains of $2.7 million and a closing balance over $5.1 million, The real statement for that period had an opening balance of $27,970.76, quarterly trading losses of $7,452.80, and a closing balance of $148,210.02.

Hamdan allegedly told numerous other lies to investors, such as claiming that a cash reserve account secured their investments, that there was a $5 million key man policy in effect, and that a Dallas-area hedge fund manager had invested $1 million with him and promised to do more. None of these things were true.

The SEC’s complaint seeks various forms of relief, including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest and financial penalties.

Former Exec Charged with Defrauding Investors on MBS

Jesse Litvak, a former executive at broker-dealer Jeffries & Co., was charged by the SEC with defrauding investors on sales of MBS after the financial crisis to bring in more money for the firm.

The SEC’s complaint alleges that Litvak, formerly managing director of the MBS desk at Jeffries in the Stamford, Conn. office, was responsible for, among other things, arranging trades for customers. From 2009 to 2011, when he bought MBS from one customer and then sold them to another, he often lied about the price paid for the MBS to the purchasing customer so that he could charge more and keep the difference for the firm’s coffers. Other times, he simply created a fictional seller so that he could give the buyer a higher price on MBS from the firm’s inventory.

Among Litvak’s customers were some funds created by the U.S. government under a program designed to help strengthen the markets for MBS during the financial crisis. If those customers had known the MBS they bought could have been had for a lower price, they probably would have sought out that lower price. And since MBS have low liquidity and are tough to price, honesty in the information provided by the broker is particularly important.

Litvak’s actions not only brought in more than $2.7 million for the firm that it would not otherwise have had, but it also boosted both his standing and his bonuses, since the latter was based on how profitable his efforts were.

The SEC’s investigation is continuing, and the U.S. Attorney’s Office for the District of Connecticut has also announced criminal charges against Litvak.