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Regulation and Compliance > Federal Regulation > SEC

SEC Enforcement: Golf Buddies Charged in Insider Trading Ring

By Marlene Y. Satter

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A Florida-based attorney has been ordered by the SEC to pay nearly $4 million that will be returned to investors in an investment scheme he dreamed up, and the agency has followed up a sting operation last week in its pursuit of microcap fraud with charges against another microcap company and four individuals in charge, as well as others in a separate pump-and-dump scheme.

Also, a group of amateur golfers were among those charged in an insider trading ring and Ernst & Young faced charges on lobbying.

SEC Thwarts Insider Trading by Amateur Golfing Group

Golf wasn’t the only game a group of friends was playing when they got together. The SEC has charged the seven, six of them amateur golfers, with profiting off insider information obtained from an executive in the group.

According to the SEC, Eric McPhail got inside information from a close friend and member of the same country club who was an American Superconductor executive. From July 2009 through April 2011, the executive told McPhail about American Superconductor’s expected earnings, contracts, and other major pending corporate developments, expecting that the information would go no further.

However, McPhail instead either told or emailed other friends about the inside information, and together the seven made more than $554,000 of illegal profits from trading on it.

McPhail, who lives in Waltham, Massachusetts, spread the information to Douglas Parigian of Lowell, John Gilmartin of Andover, Douglas Clapp of Walpole, and James “Andy” Drohen of Granville, all also in Massachusetts; Drohen’s brother, John Drohen, of Cranston, Rhode Island; and nongolfer but longtime friend Jamie Meadows, of Springfield, Massachusetts. They all used the information to trade.

in April 2011, McPhail tipped Parigian and Meadows shortly before American Superconductor announced that it expected Q4 and fiscal year-end results to fall due to a deteriorating relationship with its primary customer, China-based Sinovel Wind Group Co., Ltd. Parigian and Meadows bought options to bet on a decline in price, and it paid off when the stock fell 42%. That gave Parigian a boost of $278,289 from gains and avoided losses just on this single tip, while Meadows profited by $191,521.

McPhail passed along other tips to various group members on quarterly earnings announcements in July and September 2009, and again in January 2010. In the fall of 2009, he also told them about a contract worth $100 million, and in November 2010 about a probable drop in AMSC’s share price; the drop happened a few days later when the company announced a secondary stock offering.

McPhail, Parigian, Gilmartin, Clapp, the Drohens, and Meadows are charged with violating federal antifraud laws and the SEC’s antifraud rule. In addition to enjoinment, the SEC is seeking return of ill-gotten gains with interest and financial penalties of up to three times gains. Gilmartin, Clapp and the Drohens agreed to settle, without admitting or denying the allegations, and consented to permanent enjoinment from further violations. The judgments also order Gilmartin to return $23,713 in trading profits plus prejudgment interest of $4,034 and a civil penalty of $23,713, for a total of $51,460; Clapp to return $11,848 in trading profits plus prejudgment interest of $1,767 and a civil penalty of $11,848, for a total of $25,463; Andy Drohen to return $22,543 in trading profits plus prejudgment interest of $3,845 and a civil penalty of $22,543, for a total of $48,931; and John Drohen to return $8,972 in trading profits plus prejudgment interest of $1,511 and a civil penalty of $8,972, for a total of $19,455.

Ex-Governor of New Mexico, 3 Others Charged in Microcap Scheme

In yet another operation designed to protect investors from being scammed when trying to invest in microcaps, the SEC has charged four individuals and a microcap company for hiding the fact that the company was being run by two lawbreakers.

Toney Anaya, who was CEO of the company for about three years, was a Democratic governor of New Mexico from 1983 to 1987 and the state’s attorney general from 1975 to 1978.

Following its sting operation last week with the FBI, the SEC charged James Cohen, Joseph Corazzi, Toney Anaya and Erik Perry for their involvement in the scheme surrounding the micrpcap Natural Blue Resources Inc.

Natural Blue was purported to create, acquire or otherwise invest in environmentally friendly companies, including an initiative to locate, purify and sell water recovered from underground aquifers in New Mexico and other areas with depleting water resources.

What investors didn’t know, and weren’t told, was that Cohen and Corazzi had previously been in trouble with the law. Cohen had been jailed for financial fraud, while Corazzi had previously been charged with violating securities laws and was permanently barred from acting as an officer or director of a public company.

To top it off, under the guise of serving as outside “consultants,” the two made all the decisions regarding the company’s operations despite the fact that Anaya, a former New Mexico governor and attorney general, and then Perry were nominally in charge of Natural Blue.

In addition, Natural Blue and Perry also made various material misrepresentations about the company, its contracts and its anticipated revenue in a February 2011 press release, as well as on a website and verbally to investors.

Anaya, who was Natural Blue’s CEO from August 2009 to January 2011, has consented to a cease-and-desist order without admitting or denying the charges. He will be barred from participating in any offering of a penny stock for at least five years. Any financial penalties will be determined at a later date.

Perry, who replaced Anaya and served as CEO until June 2011, also consented to a cease-and-desist order without admitting or denying the charges. Perry, who previously resided in Massachusetts and currently lives in Bulgaria, agreed to pay a $150,000 penalty and be permanently barred from serving as an officer or director of a public company and from participating in any offerings of penny stock.

Natural Blue, Cohen, and Corazzi face numerous charges in court.

The FBI assisted in the case, as it did in last week’s sting operation. Federal Judge Fines Attorney $4 Million for Bilking Investors

Bernard Butts has been ordered to fork over almost $4 million after he duped investors. The Miami-based attorney, who claimed he was acting as an escrow agent for an international trading program that never actually existed, had been charged by the SEC for the scheme in September of 2013.

At the time, the agency obtained an emergency freeze order against Butts and his companies, Bernard H. Butts Jr. PA and Butts Holding Corp., so that assets couldn’t be dispersed. Instead of investing the $3.5 million he’d gotten from would-be investors, Butts had been in the habit of keeping the money for himself and his cronies, Fotios Geivelis Jr. and sales agents the two hired to promote the scheme.

According to the judge’s order, Butts and his companies are to pay $1,691,608 in disgorgement and $96,232.99 in prejudgment interest as well as a penalty of $2,059,284.19. Butts and his wife, Margaret Hering, also must pay an additional $100,000 in disgorgement and $4,570.82 in prejudgment interest.

The SEC will submit a plan to the court for distribution of recovered money to investors, and will return the money to investors through a fair fund. More than $1.9 million already has been deposited from accounts belonging to Butts and his companies into the registry of the court after last year’s asset freeze. This latest order also requires the transfer to the court of more than $2 million, seized by the Secret Service, from accounts belonging to Butts and his companies.

Butts has consented to be barred from the securities industry or offering penny stock, and suspended from practicing as an attorney on behalf of any entity regulated by the SEC.

SEC Charges Five in Pump-and-Dump Scheme

Five individuals were charged and trading on one microcap company was halted as the SEC pursued yet another scheme involving microcap companies, this one a pump-and-dump ring.

According to the SEC, the stock market manipulation ring included two self-described bankers, a pair of dishonest brokers, and a corrupt company executive who issued misleading press releases.

The CEO and president of a purported merchant banking firm — Abraxas “A.J.” Discala and Marc Wexler  — teamed up with brokers Matthew Bell and Craig Josephberg as well as Ira Shapiro, CEO of the Pennsylvania medical education company CodeSmart, to run up the company’s stock price and cash in.

They acquired 3 million restricted shares of CodeSmart stock following its reverse merger into a public shell company in May 2013, then flooded the market with the shares as though they were unrestricted. After that, Shapiro put out phony press releases about CodeSmart that were sometimes edited by Discala, in a campaign to hype the stock. In the meantime, Bell and Josephberg invested their brokerage clients in CodeSmart, often using their retirement funds to buy the shares. Once Discala and Wexler reduced their trading and Bell and Josephberg dumped their own shares on the market, CodeSmart’s stock price crashed from a peak of nearly $7 per share to its current trading price of less than 10 cents.

Discala and Wexler made millions from the operation, while Bell and Josephberg each made more than $500,000. Not content with that, they followed up the CodeSmart operation with similar schemes involving two other penny stock companies: Cubed Inc. and The Staffing Group Ltd., this time using text messages to coordinate their trades to simulate market activity. However, the SEC halted trading of Cubed stock before they could dump their shares.

The SEC seeks a permanent injunction and disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and penny stock bars against the five, as well as officer-and-director bars against Discala, Wexler and Shapiro.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York has announced criminal charges against Discala, Wexler, Bell, Josephberg, and Shapiro.

The SEC’s investigation is continuing.

Ernst & Young to Pay $4 Million on Lobbying Charges

Ernst & Young LLP has been charged by the SEC with violations of auditor independence rules that require firms to maintain their objectivity and impartiality with clients, after a subsidiary lobbied congressional staff on behalf of two audit clients.

Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements.

According to the SEC, the subsidiary, Washington Council EY (WCEY), sent letters signed by a senior executive of an Ernst & Young audit client to congressional staff, urging passage of certain legislation. It also asked congressional staffers to insert language into a bill that was favorable to the business interests of an Ernst & Young audit client; met with congressional staffers to defeat legislation detrimental to an audit client’s business interests; asked third parties to approach a U.S. senator in order to seek support for a legislative amendment sought by a client; and marked up a draft of a bill by inserting an Ernst & Young audit client’s language and sending it to congressional staffers.

The agency said that, although Ernst & Young had issued a written independence policy intended to provide guidance on the provision of legislative advisory services to audit clients, it failed to provide WCEY with formal, in-person training specifically tailored to the policy.

Ernst & Young has agreed to settle. After taking into account the firm’s remedial acts and its cooperation during the investigation, the SEC, among other things, ordered the firm to cease and desist from violations of the auditor independence rules; censured the firm; and ordered payment of $4.07 million in monetary sanctions, including disgorgement of $1.24 million, prejudgment interest of $351,925.98, and a penalty of $2.48 million.

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Check out The FBI Ran an Ultimate Fighting Pump-and-Dump Scam on ThinkAdvisor.

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