Among recent enforcement actions taken by the Department of Labor and the SEC were lawsuits to recover lost funds mishandled by pension plan administrators, charges against a Cyprus-based company over illegal binary options, and charges against a wealth management company and former fund manager for insider trading.
Also, top officials at a Detroit investment advisor were charged with stealing funds from a police officers’ and firefighters’ pension fund, and additional charges were filed in the case of a Venezuelan bank kickback scheme.
Execs Charged With Raiding Detroit Police, Firefighter Pension to Buy Strip Malls
Chauncey Mayfield, the founder, president and CEO of MayfieldGentry Realty Advisors in Detroit, was charged by the SEC, along with four top executives at the firm, in the theft of money from the pension fund managed by the firm for the city’s police officers and firefighters. Mayfield used the nearly $3.1 million to buy two strip malls in California, and the four helped him cover it up instead of exposing the theft.
Chief financial officer Blair Ackman, chief operating officer Marsha Bass, chief investment officer W. Emery Matthew, and chief compliance officer and general counsel Alicia Diaz were also charged.
Mayfield took the money, without permission, from a trust account for the pension fund in 2008. He used it to buy the California malls and title them in the name of a MayfieldGentry affiliate, and then later told Ackman what he had done. By May 2011, the others knew of his theft, and instead of turning him in and risking the loss of the pension fund’s business, they all went out of their way to cover it up and mislead the pension fund.
At a critical budget meeting with fund trustees in 2011, Diaz stressed MayfieldGentry’s success in generating a cash return for the pension fund, and touted a projection that MayfieldGentry would remit $4.96 million to the pension fund in 2012. Diaz never told the pension fund trustees that the cash remittance would be reduced by more than 60% once the stolen money was taken into account. At the same meeting, Matthews claimed that MayfieldGentry had achieved a benchmark-beating 6.8% return for the pension fund. He didn’t explain that the 6.8% return would be materially impacted by the $3.1 million theft.
The executives came up with a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. The money Mayfield stole, according to the SEC, could have provided a year of benefits for more than 100 retired police officers, firefighters, and surviving spouses and children. The plan to replace the money failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund.
They still did not reveal what had happened until May 2012, the evening before the SEC was to file a complaint against Mayfield and the firm for their participation in a “pay-to-play” scheme involving former Mayor Kwame Kilpatrick and Treasurer Jeffrey Beasley of Detroit. The pension plan immediately terminated the relationship. Mayfield and his firm agreed to settle the charges by paying back the stolen amount, but have neither admitted nor denied the settlement allegations. The settlement must be approved by the court.
Meanwhile, Mayfield awaits sentencing in a parallel criminal case in connection with his guilty plea for participation in the pay-to-play scheme.
SEC Warns Against Binary Options, Charges Cyprus-Based Company
The SEC has issued a warning to investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to U.S. investors.
Binary options are options contracts whose payout depends on whether the underlying asset (such as company stock) increases or decreases in value. Investors buying binaries could either receive a payout on expiration of the contract if the company value increased, or could lose everything if it decreased.
The company charged with selling binaries, Banc de Binary, has not registered the options as required, nor has it registered with the SEC as a broker despite acting as one. But it has been busy selling binaries to U.S. investors via YouTube videos, spam emails and other Internet advertising, and its reps have been directly in touch with investors via phone, email and instant messenger chats.
Banc de Binary started selling binary options to U.S. investors in 2010, according to the SEC. In doing so, it has attracted numerous investors, some of whom have very little money but were persuaded to open trading accounts and then buy binary options whose underlying assets include stock and stock indices.
The SEC is seeking disgorgement plus prejudgment interest, financial penalties and other penalties against Banc de Binary; the CFTC also announced a parallel action against the company. In addition, an investor alert on binary options was jointly issued by the SEC’s office of investor education and advocacy and the CFTC’s office of consumer outreach.
Whittier Trust, Former Fund Manager Charged by SEC with Insider Trading
South Pasadena, Calif.-based wealth management company Whittier Trust Co. and former fund manager Victor Dosti were charged by the SEC with insider trading in a scheme involving the securities of Dell, Nvidia Corp., and Wind River Systems.
Dosti got his information from Danny Kuo, a Whittier Trust fund manager whom Dosti supervised. Kuo was charged by the SEC in January 2012 and is currently cooperating with the investigation. Kuo had also passed tips to the multibillion-dollar hedge fund advisory firms Diamondback Capital Management and Level Global Investors.
The SEC said that Dosti used nonpublic information that had been gleaned from employees at Dell and Nvidia to trade in advance of five quarterly earnings announcements in 2008, 2009 and 2010. He managed to bring in profits and avoid losses that together amounted to more than $475,000 for Whittier Trust funds. He also made $247,000 in illicit profits for Whittier Trust funds by trading Wind River stock after Kuo passed along detailed information the latter had gotten from an Intel employee about Intel’s confidential negotiations to acquire Wind River in 2009. Whittier Trust and Dosti agreed to pay nearly $1.7 million to settle the charges, the former to pay disgorgement of $724,051.62 plus prejudgment interest of $75,296.00 and a penalty of $724,051.62 and the latter to pay disgorgement of $77,900.00 plus prejudgment interest of $2,951.43, and a penalty of $77,900.00. The settlements must be approved by the court.
DOL Sues to Restore $4.9 Million to Pension Funds
After an investigation by the Employee Benefits Security Administration (EBSA), the Department of Labor has filed complaints on behalf of defined benefit pension plans at the Iowa-based foundry Fairfield Casting and the Michigan-based manufacturer Fourslides. Both suits were filed in U.S. District Court for the Eastern District of Kentucky; they allege improper use of pension funds and are aimed at restoring $4.9 million to the plans.
The investigation revealed a number of violations of the Employee Retirement Income Security Act. Among them were the use of plan funds to purchase and lease company property; purchase of customer notes from affiliated companies; transfer of assets in favor of a party-in-interest; payment of excessive fees to services providers; payment of fees on behalf of the companies; and failure to provide an updated summary plan description to participants. In all, the prohibited actions cost the plans some $4.9 million.
Named in the suits were George Hofmeister, trustee of the Revstone Casting Fairfield GMP Local 359 pension plan and the Fourslides plan, and Robert La Courciere and Pamela Babbish, former trustees to the Fourslides plan who had discretionary authority and control over the plan’s assets and took part in decisions related to the violations. Also named was Bernard Tew, managing director of investment service provider Bluegrass Investment Management, which serves as investment advisor to both plans.
In addition, Fairfield Casting, formerly Revstone Casting Fairfield, and Fourslides were named in the suits, as well as Nelson Clemmons and William Tweardy, members of the investment committee for the Revstone Casting Fairfield plan who had discretionary authority and control over the plan’s assets and took part in decisions related to the violations.
Revstone Industries is a related entity to both Fairfield Casting and Fourslides, which are owned by the Hofmeister children’s irrevocable trusts. George Hofmeister serves as the chairman of both Fairfield Castings and Fourslides.
Some of the actions were particularly brazen, considering that in Revstone’s case, they began within days after Castings LLC took control of the Revstone plan in December 2010 and acquired the assets of the Revstone plan’s former sponsor, Dexter Foundry Inc. The Fourslides plan fund misappropriation began in March 2006, with the coup de grâce being a 2009 loan of nearly half that plan’s assets for the benefit of a party-in-interest.
Additional Charges Filed by SEC in Venezuelan Bank Kickback Scheme
The SEC has filed more charges, this time against the former head of the Miami office at brokerage firm Direct Access Partners (DAP), for his role in a massive kickback scheme to secure the bond trading business of a state-owned Venezuelan bank.
Last month four individuals were charged for enabling the global markets group at DAP to generate more than $66 million in revenue from transaction fees related to fraudulent trades they executed for Banco de Desarrollo Económico y Social de Venezuela (BANDES). Some of that money was kicked back to the vice president of finance at BANDES, who authorized the fraudulent trades.
As managing partner of the global markets group, Ernesto Lujan, said the SEC, was an integral participant in the scheme, which included sham arrangements to hide the kickback payments and route money to the BANDES official through shell corporations. Lujan and others charged in the scheme deceived DAP’s clearing brokers, executed internal wash trades, interpositioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue.
The U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Lujan in a parallel action, and the investigation is continuing.
Check out SEC Enforcement: Broker Busted for Lying to Investigators on AdvisorOne.