Among recent enforcement actions by the SEC were charges against a private equity manager and his firm for stealing $9 million in investor funds and against two college professors who worked out a complicated naked short selling scheme; suspension of trading of 255 companies as the latest move in its Operation Shell-Expel; stop orders against 20 purported mining companies for registration statements containing false information; and fraud charges against two Wall Street traders for a “parking” scheme designed to protect one trader’s year-end bonus.

The DOL also recovered nearly half a million dollars for a Kentucky-based pension plan and won judgments against the plan’s fiduciaries.

Camelot PE Firm, Manager Charged With Steaing $9 Million From Clients

Lawrence Penn III and his Manhattan-based firm, Camelot Acquisitions Secondary Opportunities Management, were charged by the SEC with stealing $9 million in client funds from their private equity fund. Their assets, along with those of one other individual and three entities involved in the theft, were hit with an emergency freeze order.

According to the agency, Penn and his longtime acquaintance Altura Ewers concocted a sham due diligence arrangement where Penn used fund assets to pay fake fees to Ssecurion, a front company controlled by Ewers, who lives in San Francisco. Instead of conducting any due diligence in connection with potential investments by Penn’s fund, Ssecurion promptly kicked the money back to companies and accounts controlled by Penn so he could secretly spend it.

Penn had tapped into a network of public pension funds, high-net-worth individuals and overseas investors to raise assets for his private equity fund Camelot Acquisitions Secondary Opportunities LP, which he started in early 2010. He eventually secured capital commitments of approximately $120 million. The fund is currently invested in growth-stage private companies that are seeking to go public.

But Penn wasn’t satisfied with that, and diverted approximately $9.3 million in investor assets to Ssecurion. With Ewers’s help, Penn repeatedly misled the fund’s auditors about the nature and purpose of the due diligence fees. But Camelot’s auditors became more and more suspicious in 2013. Penn and Ewers got sloppy as they rushed to cover up their actions. They outright lied to the auditors and forged documents as recently as July 2013, pretending the files were generated by Ssecurion.

In the meantime, Penn had been spending the money he stole on such things as hefty commissions to third parties to secure investments from pension funds, rent on luxury office space and other ways of presenting Camelot as a thriving international private equity operation.

The SEC, which has charged Penn, two Camelot entities, Ewers, and Ssecurion, seeks disgorgement of ill-gotten gains with interest and additional financial penalties. It also asks that they be barred from future violations of the antifraud provisions of the securities laws. Also charged by the SEC as a relief defendant to recover investor funds it received in the scheme is another company owned by Ewers, A Bighouse Film and Photography Studio LLC. The investigation is continuing.

College Professors Charged in Naked Short Selling Scheme

Gonul Colak and Milen Kostov, college professors in Tallahassee, Fla., were charged by the SEC with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits.

When the SEC investigated, it found that Colak and Kostov repeatedly engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy. Although the two were required to deliver the securities underlying their short positions within the standard three days, they never did. Instead, their sham reset transactions created the illusion that they had done so. That allowed them to maintain the uncovered short positions and profit.

They managed this by using multiple brokerage accounts to hide their failures to deliver, moving a short position from one brokerage firm to another every few days so that their failures to deliver occurred across multiple firms.

In early 2010, the two launched their scheme. Before they were done, they would sell more than $800 million in call options in more than 20 companies. They would purchase and write two pairs of options for the same underlying stock, focusing on options in securities that were both hard to borrow and that had put option prices higher than call option prices. They made their money by not having to pay to institute and maintain the short positions caused by their paired options trading.

However, SEC investigators discovered their strategy while checking out unusual trading in one of the companies the two were profiting from. An SEC examiner also separately discovered Kostov’s large-volume options trading in a different company. Investigators cross-referenced findings and used blue sheet data to uncover the fact that the pair were trading with each other. To uncover the mechanics of the strategy, which involved thousands of trades, investigaors traced one of the trading sequences from start to finish.

Colak and Kostov, without admitting or denying the findings, have agreed to settle the SEC’s charges by paying more than $670,000. Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty. Kostov agreed to pay $134,400 in disgorgement, $10,340 in prejudgment interest, and a penalty of $70,000.

SEC Suspends Trading in 255 Shell Companies to Fight Microcap Fraud

The SEC has proactively suspended trading in 255 dormant shell companies as the latest action in its continuing Operation Shell-Expel, designed to ward off pump-and-dump schemes involving microcap companies.

Since many schemes involve the use of dormant shell companies, the SEC has, since the operation began in 2012, suspended trading in several hundred such companies before fraudsters have an opportunity to manipulate them.

According to Margaret Cain, a microcap specialist in the SEC’s office of market intelligence, “Policing this sector of the markets can be a challenge. There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors.”

This latest trading suspension involves dormant shell companies uncovered in 26 states and two foreign countries. Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it is still operational. It is extremely rare for a company to do this, so the trading suspension essentially renders the shells worthless and useless to scam artists.

SEC Seeks Stop Orders Against 20 So-Called Mining Companies

The SEC filed stop order proceedings against 20 supposed mining companies thought to have filed registration statements containing false information.

According to the agency, all the companies are controlled by John Briner, a promoter who was the subject of a prior SEC enforcement action and who was suspended from practicing as an attorney on behalf of any entity regulated by the agency. However, each registration statement claimed instead that management consisted of a different individual who controlled and solely governed the company. The names of these bogus managers varied by company.

A stop order in such instances prevents privately held shares of the company in question from being sold to the public when the registration is misleading or deficient. Instead, the company must first correct errors or deficiencies in the prospectus before any shares may enter the market under that registration statement.

The companies also falsely stated that they had no material agreements with an undisclosed control person or promoter when in fact they did with Briner. According to the SEC, some of these issuers obstructed SEC staff and refused to permit examinations of their registration statements.

The 20 companies that are the subjects of the stop order proceedings are: Braxton Resources Inc.; Bonanza Resources Corp.; Canyon Minerals Inc.; CBL Resources Inc.; Chum Mining Group Inc.; Clearpoint Resources Inc.; Coronation Mining Corp.; Eclipse Resources Inc.; Gaspard Mining Inc.; Gold Camp Explorations Inc.; Goldstream Mining Inc.; Jewel Explorations Inc.; Kingman River Resources Inc.; La Paz Mining Corp.; Lost Hills Mining Inc.; PRWC Energy Inc.; Seaview Resources Inc.; Stone Boat Mining Corp.; Tuba City Gold Corp.; and Yuma Resources Inc.

Bonus Protection ‘Parking’ Scheme Gets Traders Charged With Fraud

The SEC has charged two Wall Street traders, Thomas Gonnella and Ryan King, with cooking up a “parking” scheme to protect Gonnella’s year-end bonus.

Fraud charges were brought against the pair for what the SEC said was an arrangement devised to protect Gonnella’s bonus from financial penalties that would otherwise have been imposed by his firm for holding securities too long. Gonnella arranged with King to sell him the securities, thus “parking” them at King’s firm, and promised that he would repurchase them at a profit for King’s firm.

Gonnella intended that parking the securities in King’s trading book would reset the holding period when he repurchased them. Gonnella would then, theoretically, avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory. Gonnella parked a total of 10 securities with King, beginning on May 31, 2011, when the former offered to sell the latter several asset-backed bonds issued by Bayview Commercial Asset Trust (BAYC). Gonnella wrote in an instant message to King, “i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging purposes … i like these bonds … and would more than likely have a higher bid for these later this wk when the calendar turns …”  Gonnella’s reference to “aging purposes” was his firm’s aged-inventory policy. After King agreed, Gonnella sold him the securities and repurchased them before they had even settled in the account at King’s firm.

On August 29, Gonnella was at it again, writing to King, “let’s talk tmrw. Have some aged bonds that I might offer you, if you’re game … maybe do what we did a few months ago w/ some of those bayc’s …”  After Gonnella sold three BAYC bonds to King, he repurchased two but did not immediately repurchase the other security. He later did so at a loss to King’s firm, but made them whole by selling two other bonds at prices favorable to King’s firm but costing his own firm some $174,000. King then used the resulting profit on the two bonds to offset the original loss incurred.

After Gonnella’s supervisor began inquiring about the trades, Gonnella and King tried to evade detection by interposing an interdealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. Cell phone records show that they rarely contacted one another that way in the prior four years. For example, after discussing some trades in instant messages, Gonnella told King, “Check your text [messages] in like 3 minutes.” King responded, “haha, ok … sneaky sneaky.”

Gonnella and King were eventually fired by their firms for their actions.

King, who has cooperated with the SEC investigation, agreed to settle the charges by agreeing to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66, as well as being barred from the securities industry. Any additional financial penalties will be determined at a later date. Litigation against Gonnella continues in a proceeding before an administrative law judge.

DOL Recovers More than $490,000 in Pension Funds

A Kentucky-based pension plan is better off by $490,594 thanks to the efforts of the Department of Labor, which has also obtained consent judgments against Robert La Courciere and Pamela Babbish, two former trustees of the Fourslides Inc. pension plan, permanently barring them from serving as fiduciaries to any ERISA plan. Action is continuing against the remaining defendants.

According to the DOL, La Courciere and Babbish, George Hofmeister and Fourslides Inc. improperly used pension funds over the course of three years beginning in March 2006.

La Courciere, Babbish, Hofmeister and Fourslides engaged in a series of prohibited transactions involving the Fourslides pension plan. La Courciere and Babbish were alleged to have caused the transfer of plan assets to Fourslides and the payment of excessive fees to service providers, while La Courciere also entered into a prohibited loan of nearly half the plan’s assets to a party-in-interest. Hofmeister, meanwhile, was alleged to have directed each of the companies that engaged in the improper loan, benefited from the loan, and took no action to remedy these prohibited transactions.

The DOL has also filed separate lawsuits seeking to recover losses to other pension plans sponsored by companies related to Lexington-based Revstone Industries LLC, an affiliate of Fourslides. Fourslides, Revstone and their affiliated companies design, engineer and manufacture components for use in the transportation and heavy-truck industries.

Revstone and its various affiliates, including Fourslides, were directed by Hofmeister and owned by the irrevocable trusts of Hofmeister’s children. These separate suits allege many other ERISA violations, including the prohibited use of plan assets for the purchase and lease of company property, the prohibited purchase of customer notes from affiliated companies, the prohibited transfer of assets in favor of a party-in-interest, payment of excessive fees to service providers and payment of fees on behalf of the affiliated companies.

Check out CFP Board Looks to New Campaign, Exam Structure to Boost Certificants on ThinkAdvisor.