Among recent enforcement actions by the SEC were an $18 million settlement with a Tennessee-based animal feed company over accounting fraud charges; charges against a former hedge fund manager for fraud; charges against an IT employee for insider trading; and an asset freeze against a Turks and Caicos company for a Ponzi scheme.
In addition, the Consumer Financial Protection Bureau went after for-profit Corinthian Colleges for predatory lending.
Animal Feed Company Settles SEC Charges for $18 Million
Tennessee-based AgFeed Industries, which is currently in Chapter 11 bankruptcy, has agreed to repay $18 million in illicit profits to settle SEC charges of accounting fraud after it was charged in March with accounting fraud. The company neither admitted nor denied the charges.
According to the agency, the company repeatedly reported fake revenues from its China operations so that it could meet financial targets and prop up its stock price.
The company got the illicit profits from stock offerings sold to investors at inflated prices as a result of the accounting scheme. The agency also said that despite the fact that U.S. managers found out about the fraud, they did not take adequate action to investigate or to disclose it to investors.
The settlement is subject to court approval by the bankruptcy court as well as the district court in Tennessee where the case was filed.
Meanwhile, the SEC’s case against five former company executives and a former audit committee chair continues.
Former Hedge Fund Manager Charged With Pocketing Extra Fees to Buy Porsche
Sean Cooper, a former hedge fund manager for San Francisco-based investment advisory firm WestEnd Capital Management LLC, has been charged with fraud by the SEC for taking excess management fees from the accounts of fund clients and using their money to remodel his multimillion-dollar home and buy a Porsche.
According to the agency, Cooper took more than $320,000 from client accounts, far in excess of the 1.5% annual management fees that WestEnd had disclosed to them, and put the money into personal accounts. He started in March 2010, and characterized the withdrawals from client accounts as management fees in the fund’s books and records.
However, the amount of his withdrawals had nothing to do with the actual fees earned by the fund. He had sole authority to transfer money out of the fund, and there was no mechanism in place at the firm to stop him. In addition to spending the money on other things, Cooper bought himself a $187,000 Porsche. This went on for two years; he only stopped when the SEC began to examine WestEnd in April 2012.
Although it expelled Cooper and reimbursed the hedge fund, WestEnd Partners L.P., WestEnd was also charged for failing to supervise Cooper effectively once it found out what he was up to. The firm has agreed to pay $150,000 to settle the SEC’s charges.
IT Employee Charged With Insider Trading by SEC
Dimitry Braverman, a senior information technology professional in the IT department of international law firm Wilson Sonsini Goodrich & Rosati, was charged by the SEC with insider trading ahead of several mergers and acquisitions involving firm clients being advised on the deals.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Braverman.
According to the agency, Braverman had access to nonpublic information in the firm’s client-related databases and used it, beginning around 2010, to make about $300,000 on trades executed before merger announcements. He would sell the stocks or exercise the options he’d bought shortly after the news went public.
He also tipped his brother to two of the deals, and his brother made approximately $1,800.
Braverman made trades on four companies before he was scared off from trading in his own name by an SEC investigation into a lawyer at his own firm in an unrelated insider trading case in 2011. He sold off all the stocks and sat tight.
But in late 2012 he started up again, this time using a brokerage account held in the name of Vitaly Pupynin, a relative living in Russia. Pupynin had come to visit him in San Mateo during the summer. The strategy did him no good, however, and the SEC found him out. He’d used the same email account to open the Pupynin account that he’d already used twice to open brokerage accounts.
Later on he created a new e-mail address that used Pupynin’s first name, and switched the brokerage account over to the new e-mail address. Although Pupynin had left the U.S. in October 2012, Braverman continued trading into 2013, and the suspicious pattern was traced back to him.
Pupynin is named as a relief defendant for the purposes of recovering Braverman’s ill-gotten gains in the trading account held in Pupynin’s name. The SEC’s investigation is continuing.
SEC Freezes Assets of Turks and Caicos Company for Ponzi Scheme
The SEC announced an emergency asset freeze against Turks and Caicos-based Abatement Holding Co. Ltd., in connection with its operation of a south Florida-based Ponzi scheme.
According to the agency, Abatement Corp. and its now-deceased principal, Joseph Laurer, who commonly used the name Dr. Josef V. Laurer, promised investors safe, guaranteed returns; meanwhile, they were perpetrating an offering fraud and Ponzi scheme from November 2004 until Laurer’s death on May 15, 2014.Brenda Davis, Laurer’s widow, and another Laurer-controlled company, International Balanced Fund, were named as relief defendants because they received investor funds.
Through Abatement Corp., Laurer brought in more than $4.6 million from approximately 50 investors residing primarily in south Florida. Laurer was a member of the City of Homestead’s General Employee Pension Board and president of the South Dade chapter of AARP, and played on those positions to convince investors to give him money.
He claimed that the money would go into Abatement Corp.’s purported bond fund that invested in triple-A rated corporate and government bonds. He also told investors that the fund would pay a guaranteed fixed return, with no risk to principal because of insurance from either or both the FDIC and SIPC.
However, by at least 2007, Laurer was operating a full-fledged Ponzi scheme. Whatever investor funds came in were never invested, but instead were used to pay returns to earlier investors, fund investor withdrawals and pay personal expenses.
When Laurer died, there was only about $900,000 in Abatement Corp.’s bank account in the Turks and Caicos Islands, and another $82,000 remains in a domestic bank account held by International Balanced Fund. The SEC also said that Laurer used investor funds for the benefit of his wife, including paying premiums with investor funds on a half-million-dollar life insurance policy that paid off when he died.
Davis has agreed to a temporary freeze on some of her assets, pending a determination of the SEC’s claim against Davis for disgorgement. In addition to seeking an asset freeze, the SEC also seeks an order directing Abatement Corp. and the relief defendants to pay disgorgement with prejudgment interest and provide a sworn accounting of all proceeds received and an order directing repatriation of any funds held at any offshore bank or other financial institution not subject to the jurisdiction of the court.
CFPB Sues Corinthian Colleges for Predatory Lending
The CFPB has brought a lawsuit against for-profit chain Corinthian Colleges, which numbers among its schools Heald, Everest and WyoTech, charging it with predatory lending practices, lying to consumers about job prospects and harassing debt collection methods.
According to Richard Cordray, director of the CFPB, the college chain is one of the largest for-profit, post-secondary education companies in the country, with more than 100 campuses across the U.S. Its most recent student numbers totaled about 74,000. And it is drowning its students in debt.
The Department of Education is working with Corinthian to close down some campuses and sell off others, and Veterans Affairs agencies in a number of states have cut off GI Bill benefits for new students at the chain. The CFPB is, according to a statement by Cordray, “seeking to protect the tens of thousands of students who have already been saddled with Corinthian’s private student loans — and the new students that Corinthian continues to bring in.”
According to the CFPB, the schools used “lies and bogus advertising” to create an illusion of successful graduates pursuing “careers” that lasted as little as a day, all the while reneging on promised job placement services that turned out to be Craigslist postings and shaming and harassing anyone who couldn’t start paying off Corinthian’s student loans for expensive tuition when they had only just begun classes.
The CFPB is “seeking forgiveness of the $569 million that consumers still owe on Corinthian’s outstanding loans … [a]nd … redress for all of the Genesis loans made since July 2011, including those that have been paid off.”
Check out SEC Enforcement: Balmy Belize No Refuge for Stock Scammers on ThinkAdvisor.