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8 Oddest Enforcement Cases of 2014

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Sometimes, you just can’t make this stuff up.

Every week at ThinkAdvisor, we pore over dozens of enforcement cases from the Securities and Exchange Commission, the Financial Industry Regulatory Authority and other regulators.

Some are small fines for minor bookkeeping matters. Some are giant settlements for bribery or busts of massive insider trading rings. But other cases are more notable for their details, the reminders that even the driest corners of finance are not immune from human weirdness.

There are the advisors and brokers who find, shall we say, innovative ways of making money, some of which pan out better than others. Others use the lure of Hollywood to draw investors into movie-related frauds. And others misused their clients’ money and trust to fund a string of offbeat ventures, from litter boxes to reality TV shows.

(Related on ThinkAdvisor: 12 Worst Financial Advisors in America: 2014)

Here are eight of the oddest enforcement cases we saw in 2014.

Broker Fired for Stealing $1M in Printers, and Office Equipment

1. Schwab Broker Fired for Stealing and Reselling Office Equipment

A former Schwab financial consultant was permanently barred in November by the Financial Industry Regulatory Authority for allegedly stealing and reselling $1 million in office equipment.

The broker, Jeffrey Brian Grove, was fired from Schwab in August after using the firm’s procurement system to buy office equipment, which he then removed from the branch office and sold to “different individuals,” according to FINRA’s BrokerCheck.

Grove is also facing criminal charges for conspiracy to traffic in oxycodone and using a two-way communication device to commit a crime, according to BrokerCheck.

Cat in cat litter box

2. Lawyer Bilked Client, 90, to Fund Litter Box Invention

A California elder law attorney was accused in August of bilking a 90-year-old client and his daughter to fund a cat litter box system he had invented.

The lawyer, Delbert Joe Modlin, 63, advised the client to sell all of his assets and invest the $120,000 in the litter box system, according to court papers cited by The Sacramento Bee.

“Modlin told (the daughter) he would double her investment in four years,” The Bee reported.

But he omitted several important details: He was not licensed to sell securities in California, was awaiting a federal trial, had filed for bankruptcy protection in 2004 and 2012 and had a severe gambling problem.

Modlin was charged with financial elder abuse, grand theft and securities fraud. He agreed to stop practicing law until the criminal proceedings were completed.

In December, the California Department of Business Oversight filed a desist and refrain order against Modlin. When asked by The Bee about the order, he said, “I’m not aware of anything like that. I don’t consider [what he sold to the client] securities. I had three investors.”

The patent for the improved litter box was first filed in 2008. It purports to take away the messy scooping aspect from cleaning cat litter by using a litter box bag with mesh in its center, and has “peripheral” drawstrings to remove each bag individually.

Napkin with stock information

3. Tipster Wrote Illicit Stock Info on Napkins, Then Ate Them

Some white-collar criminals act like they are in a movie. That seemed to be the case with three men charged with running a $5.6 million insider trading scheme the SEC busted in New York in March.

According to the SEC, Steven Metro, the managing clerk at law firm Simpson Thacher & Bartlett in New York, tipped Frank Tamayo of Brooklyn during meetings at a New York coffee shop. Tamayo then passed the tips to his broker, Vladimir Eydelman, a mutual friend.

Tamayo would meet Eydelman near the clock and information booth in Grand Central Terminal, where he would reveal the relevant ticker symbol written on a Post-It Note or napkin. He would then destroy the evidence by chewing up and sometimes eating the note.

Eydelman worked at Oppenheimer and Co. and in 2012 moved to Morgan Stanley, which paid him a $3 million promissory note bonus.

Tamayo pleaded guilty in federal court in September to one count of conspiracy to commit securities and tender offer fraud, one count of securities fraud, and one count of tender offer fraud. He was fined $1 million and ordered to forfeit certain property, including the contents of two brokerage accounts and an Audi Q7.

Eydelman and Metro were charged in federal court with conspiracy, securities fraud and tender offer fraud. A FINRA arbitration panel ordered Eydelman to repay the $3 million note to Morgan Stanley, which fired him over the allegations. Metro was also fired.

Jean-Claude Van Damme promoting the film "The Expendables 2" in Madrid, Spain. (Photo: AP)

4. Investors Bilked for Fake Movie Not Starring Jean-Claude Van Damme

Three California men, Samuel Braslau, Rand Chortkoff and Stuart Rawitt, were charged in February with luring 60 people into investing a total of $1.8 million in a fake movie.

According to the SEC, Braslau, an attorney, set up two companies, Mutual Entertainment and Film Shoot, to raise funds. Mutual Entertainment spent $25,000 to purchase the rights to “Marcel,” an unpublished story set in Paris during World War II. After that, Mutual Entertainment began raising investor money through a boiler-room operation that Chortkoff ran out of Van Nuys.

Rawitt and  other salespeople used high-pressure tactics to lure more than 60 investors with promises that big-name actors like Donald Sutherland and Jean-Claude Van Damme would appear in the movie (not true, of course). They promised investors a 300% return, along with returns on action figures and other tie-ins to the movie, which was at first called “Marcel” and later “The Smuggler.”

The three men pleaded not guilty in federal court to charges of mail fraud and making false statements. A fourth, salesman Robert Matias, who was not named in the SEC statement, fled.  The authorities found him in July at a relative’s house in Los Angeles, and he was arrested and charged.

Bond Investors Burned in Effort to Build Hollywood in the Midwest

5. Bond Investors Burned in Effort to Build Hollywood in the Midwest

In another movie-related case, a former mayor and city administrator of a Detroit suburb were charged by the SEC in November with defrauding bond investors who thought they were supporting the construction of a movie studio.

Then-Mayor Gary Burtka of Allen Park, Michigan, was a vocal backer of the planned movie studio, hoping to spur much-needed economic development. But by the time the bonds to fund it were issued, the plans had deteriorated into building and operating a vocational school instead. Eventually, the project collapsed entirely. Bond investors were left in the dark about these developments, the SEC said.

The SEC said that offering documents provided to investors during the city’s sale of $31 million in general obligation bonds contained false and misleading statements about the scope and viability of the movie studio project, as well as on Allen Park’s overall financial condition and ability to service the bond debt. It said the city administrator, Eric Waidelich, was in a position to control those bond issuances.

Burtka and Waidelich were barred from participating in future bond offerings and neither admitted nor denied the SEC’s charges. The regulator fined Burtka $10,000.

Accountant Took Loan From Casino Client Then, Naturally, Went Gambling

6. Accountant Took Loan From Casino Client Then, Naturally, Went Gambling

To avoid conflicts of interest, accountants are forbidden from doing other business with audit clients. Former Chief Risk Officer James T. Adams of accounting giant Deloitte essentially took a loan from a casino client, used the funds to gamble at the casino, and then defaulted on part of the loan, according to the SEC.

As the advisory partner on the audit of a casino gaming company by subsidiary Deloitte & Touche, Adams accepted casino markers from the firm, which allowed him to draw from a line of credit at one of the firm’s casinos, in 2009. When he was removed from the audit for unrelated reasons in 2010, he left $110,000 in debt to the casino outstanding, the SEC said.

In May, the SEC suspended Adams from auditing public companies for two years. He agreed to the suspension without admitting or denying the SEC’s findings.

Advisor Barred for Hiding Active Management Strategy—the Kind Based on Astrology

7. Advisor Barred for Hiding Active Management Strategy—the Kind Based on Astrology

In May, the Securities and Exchange Commission barred an investment advisor who based his investment strategy on cycles of the moon and the gravitational attraction between the earth and the moon, but failed to disclose that fact to clients.

Gurudeo Persaud was already serving a three-year prison term for fraud when he agreed to be barred from the industry. He had run a Ponzi scheme and used client money to pay his own expenses, the SEC said.

Persaud had started his own company, White Elephant Trading Co., while still with Money Concepts Capital Corp., and used White Elephant to solicit investments of more than $1 million. Half of this went to pay his own expenses, and what he did invest was based on lunar cycles and gravitational forces rather than more conventional investment strategies. He promised returns of between 6% and 18%, and of course failed to deliver on those promises.

The SEC charged him with fraud in 2012; after he pleaded guilty in 2013, he was ordered to pay almost $1 million in restitution.

Broker Looted IRAs to Fund: A) Bounty Hunter Show, B) Bridal Shop, C) Soul Food Restaurant, or D) All of the Above

8. Broker Looted IRAs to Fund: A) Bounty Hunter Show, B) Bridal Shop, C) Soul Food Restaurant, or D) All of the Above

In December, a federal grand jury indicted a broker who used $6 million of clients’ IRA money to fund a bridal shop, a reality TV show about bounty hunters and other ventures, and to fund his lifestyle. He even gave some of their money to charity. 

Broker John Marcum of Guaranty Reserves Trust passed himself off as a successful trader and investor. In reality, he failed wildly at both, according to the SEC.

According to the regulator, which froze Marcum’s assets in 2013, the Noblesville, Indiana-based broker helped investors set up self-directed IRA accounts and then borrowed money from them, telling them he would day-trade with the money and promising steep returns with little risk.

He went on to lose about $900,000 while trading, the SEC said. He also used the accounts as collateral for a $3 million line of credit to fund ventures as diverse as a bridal shop, a bounty hunter reality TV show and a soul food restaurant run by the bounty hunters — none of which appeared to be making a profit. (He also put $1.4 million of client money directly into the ventures).

Marcum used more than $500,000 to pay for his personal expenses, and, according to the Indianapolis Star, gave some client money to a charity that provided jobs for ex-convicts.

Meanwhile, he provided clients with phony statements showing 20% returns.

The whole scheme started to collapse when Marcum did not have the funds needed to honor investor redemption requests.

When he finally admitted to three clients that he’d misappropriated their money, he tried to sell them on giving him more time. If he failed to bring in enough to pay them off, he said, he would name them as beneficiaries on life insurance policies and, after the purported two-year “suicide clause” on the policies was satisfied, would repay their funds by killing himself so that they could collect.

The grand jury indicted Marcum on charges of wire fraud, securities fraud and money laundering, according to The Star. The SEC is seeking permanent injunctions, fines and disgorgement.

(Marlene Y. Satter, Melanie Waddell, Janet Levaux and Sabrina Bachai contributed reporting.)

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