Among recent enforcement actions by the SEC were charges against a California lawyer and two men in Massachusetts for their pump-and-dump scheme to defraud investors in a ticket-brokering business and against India-based operators of a high-yield investment scheme that relied heavily on social media.
Also, FINRA censured and fined Merrill Lynch, Pierce, Fenner & Smith Inc. in two separate instances of failures—one related to recording failures and the other to OATS reporting.
SEC Acts on Ticket Broker Pump-and-Dump Scheme
The SEC has charged Richard Weed, a Newport Beach, California law partner, and Thomas Brazil and Coleman Flaherty, both of Massachusetts, in a pump-and-dump scheme around CitySide Tickets, Inc., a Boston-based ticket-brokering business.
According to the agency, Weed facilitated a scheme to pump and dump the stock of CitySide Tickets, which he helped structure into a publicly traded company through reverse mergers.
Weed created backdated promissory notes and authored false legal opinion letters that enabled Thomas Brazil and Coleman Flaherty to obtain millions of purportedly unrestricted shares of stock in the company.
Investors were then blitzed with a false and misleading promotional campaign touting CitySide Tickets as a budding national leader on the verge of acquiring smaller ticket firms across the country and positioning itself as an attractive takeover target for Ticketmaster.
All the false promotions depicted CitySide as growing and even taking over smaller ticket resellers, when the company was actually in dire financial straits. As the company’s stock price rose on the false hype, Brazil and Flaherty sold their shares to unsuspecting investors for illicit proceeds of approximately $3 million, and Weed made plenty, too, for his part in the scheme.
It didn’t take long until the market for CitySide Tickets stock collapsed, and the company eventually went out of business.
The SEC is seeking disgorgement of ill-gotten gains from the scheme, plus interest and penalties, as well as penny stock bars and permanent injunctions against further violations of the securities laws. In addition, the agency also seeks to bar Weed from serving as an officer or director of any public company.
In a parallel case, the U.S. Attorney’s Office for the District of Massachusetts has announced criminal actions against Weed, Brazil and Flaherty.
SEC Charges India-Based Operators of High-Yield Investment Scheme
The SEC has charged Pankaj Srivastava and Nataraj Kavuri, two India-based operators of an investment scheme that sought to exploit investors through pervasive social media pitches on Facebook, YouTube and Twitter.
According to the agency, Srivastava and Kavuri promised “guaranteed” daily profits in anonymous solicitations for investment in Profits Paradise, their phony investment management company. They created a Profits Paradise website and related social media sites to describe the profits as “huge,” “lucrative” and “handsome,” and they characterized the risk as “minimal.”
Investors were invited to deposit funds that were supposedly to be pooled with money from other investors and then traded on foreign exchanges, as well as in stocks and commodities.
What investors didn’t know was that Srivastava and Kavuri, posting those wildly optimistic promises about returns, were behind postings by the fictitious “Paul Allen” and “Nathan Jones.” In addition, the two had used a fake name and contact information when they registered Profits Paradise’s website address.
The pair used the website and YouTube videos to push three investment plans with terms of 120 business days. The first plan was supposed to yield daily interest of 1.5% on investments of $10–$749; the second, yields of 1.75% on investments of $750–$3,499; the third, 2% on investments of $3,500 and up.
Postings on Profit Paradise’s Facebook page promised investors they could “Enjoy Hassle Free Income” and advertised a “5% Referral Commission.” The scheme also used a Profits Paradise Twitter account to steer potential investors to the Profits Paradise website, and Srivastava and Kavuri created a Google Plus page to promote the investment opportunity.
FINRA Imposes 2 Censures, Fines on Merrill Lynch, Pierce, Fenner & Smith
Merrill Lynch, Pierce, Fenner & Smith was censured and fined by FINRA on two separate issues.
In the first, the firm was fined $300,000 for failure to record and preserve order information required on options order memoranda. According to FINRA, representatives in one branch did not follow the firm’s procedure to complete a paper ticket when options orders were called into the trading desk. As a result, the firm’s order memoranda lacked information reflecting the time the order was received and the identity of any other person who entered or accepted the order on the customer’s behalf.
In addition, FINRA said that the firm failed to adequately enforce its written supervisory procedures requiring that its registered representatives accurately record all required order memoranda information for options orders that were telephoned to the trading desk.
In the second, the firm was fined $72,500 for transmitting Execution or Combined Order/Execution Reports to the Order Audit Trail System (OATS) for which OATS was unable to link the execution reports to the related trade reports in a FINRA transaction reporting system due to inaccurate, incomplete or improperly formatted data; it also transmitted Execution or Combined Order/Execution Reports to OATS for which it failed to append the required Reporting Exception Code.
FINRA also said that the firm transmitted New Order Reports and related subsequent reports to OATS for which OATS was unable to create an accurate, time-sequenced record from the receipt of the order through its resolution because the timestamp for the related subsequent report occurred prior to receipt of the order.
In addition, FINRA detailed a number of other errors in forms that could not be properly processed in OATS either due to missing data, incorrect information, or other inaccuracies, including formatting.
The firm neither admitted nor denied the charges, but consented to FINRA’s actions.
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