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February 06, 2014 at 05:44 AM
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
