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SEC, FINRA Enforcement: Fake Hedge Fund Manager Seeks His Perfect Match

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The Financial Industry Regulatory Authority censured and fined a broker-dealer for failing to conduct sufficient due diligence regarding private placement offerings that it recommended to accredited investors.

Also, among its recent enforcement actions, the Securities and Exchange Commission charged a so-called hedge fund manager with stealing investor funds, shut down a pyramid scheme by two Colorado operators, and charged a brokerage firm and its CEO with fraud in CDO liquidation auctions.

SEC: Fake Hedge Fund Manager Bilked Investors to Go to Harvard, Find His Match

The SEC has charged Moazzam “Mark” Malik, the manager of a bogus hedge fund most recently called Wolf Hedge LLC with stealing the money he raised from investors. He then used it for his own purposes, including Harvard classes and membership in a matchmaking site, and even faked his death to at least one investor.

According to the agency, Malik claimed that he operated a hedge fund with approximately $100 million in assets under management. He promised would-be investors consistently high returns to lure them in.

While he raised $840,774 from investors, the so-called fund never made real investments and never held more than $90,177 in assets; instead, Malik continually pulled out the cash and spent it as his own on such expenses as dining out, jewelry, luxury travel and even continuing education classes at Harvard and membership in a matchmaking website.

Despite repeated demands from investors for the return of their money, Malik has flatly refused or delayed most of their redemption requests. He allegedly went so far as to create a fictitious fund employee who sent one investor an email claiming that Malik had died.

Despite investor redemption requests, Malik has continued to solicit investors, and has also changed the name of the so-called fund several times since he created it in 2010. He first called it Wall Street Creative Partners, then changed it to Seven Sages Capital LP, then to American Bridge Investment Group LLC, before renaming it Wolf Hedge LLC. He has described the fund as “a privately held Global Investment Management firm dedicated to the individuals and institutions around the world.”

He has also created a fictitious “Amanda Ebert” who was identified with a title of “Investor Relations, Wolf Hedge LLC” in email communications with several investors. Those e-mails included a photograph, supposedly of the nonexistent Ebert, that Malik pulled from the Internet — of a real woman who is not Amanda Ebert, does not know Malik and never gave him authorization to use her image in the emails.

The SEC is seeking a temporary restraining order to freeze the assets of Malik and his fund, as well as a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest and penalties. Its investigation is continuing.

SEC Shuts Down Colorado Pyramid Scheme Boasting ’3-D Matrix’

The SEC has charged two operators of a pyramid and Ponzi scheme based in Colorado with fraud, and has also obtained an emergency asset freeze against them.

According to the agency, Kristine Johnson of Aurora, Colorado, and Troy Barnes of Riverview, Michigan, have raised more than $3.8 million since April 2014 from investors they enticed into buying positions in their company Work With Troy Barnes Inc., which is doing business as “The Achieve Community.”

The pitch, made via Internet videos and other Web promotions promised extraordinary returns of 700% through a purported “triple algorithm” and “3-D matrix.” According to the pitch, “you and anyone you know can make as much money as you want” by purchasing positions that cost $50 each. As “investors” progressed through the matrix of the scheme, the promotion claimed that they would receive a $400 payout on each position within three to six months.

Barnes claimed to have hired a seasoned programmer to perfect the triple algorithm investment formula supposedly generating the extraordinary returns. But there was no programmer, and earlier investors have only been paid with the money sent in by later investors.

In addition, the SEC said that the pair’s company has no legitimate business operations. Meanwhile, Johnson and Barnes have been making cash withdrawals of investor funds for such personal uses as buying a new car and paying credit card bills.

Achieve International LLC has been named as a relief defendant for the purpose of recovering ill-gotten gains from the scheme in its accounts. The SEC’s investigation is continuing.

FINRA Censures, Fines LaSalle Street Securities on Due Diligence Failures

FINRA has censured LaSalle Street Securities, LLC (LSS) and fined the firm $175,000 over failure to perform adequate due diligence and other supervisory failures on several offerings it recommended to accredited investors.

According to the agency, its staff found during two routine examinations that the firm had, over a four-year period, recommended a private placement offering involving Seat Exchange Corp. without performing adequate due diligence. It also sent out a private placement offering for Revitalight Operators, LCC, that used faulty methods to determine potential ROI and omitted material facts.

In addition, the firm failed to adequately supervise the involvement of one of its registered representatives in another offering, of Platinum Wealth Partners Inc., as well as failing to make sure that offering documents were appropriately filed with FINRA. Another representative of the firm was also inadequately supervised for participating in private securities transactions away from the firm, and last but not least, representatives were allowed to send inadequately supervised consolidated reports to customers.

One of the firm’s failures was, in effect, to disclaim its own responsibility for due diligence by sending out a statement in the Acknowledgment of Additional Risks section of the offering that said, “LSS is not aware of any third-party due diligence investigation of SEC or the Offering and is relying on the due diligence information provided by CIG.” It did this rather than conduct its own due diligence after an affiliate reviewing the documentation found that the offering company’s disclosures were inadequate and inaccurate.

Brokerage Firm, CEO Fined for CDO Auction Fraud

The SEC has charged New York-based VCAP Securities and its CEO Brett Thomas Graham with fraud after they deceived other market participants while conducting auctions to liquidate collateralized debt obligations (CDOs).

According to the agency, under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions. But that didn’t stop the firm, or Graham.

Instead, they lied to the CDOs’ various trustees, saying they would not participate in the auctions. Then they got a third-party broker-dealer to secretly bid at those auctions on behalf of their affiliated investment advisor to acquire certain bonds to benefit the funds it managed. VCAP had access to all of the confidential bidding information as the liquidation agent, and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders. VCAP’s investment advisor affiliate then immediately bought the bonds from its secret bidder.

Once the auctions were done, VCAP provided the various trustees with documents that did not disclose that its investment advisor affiliate was actually the winning bidder. VCAP’s scheme enabled the investment advisor affiliate to obtain a total of 23 bonds during five auctions.

Without admitting or denying the charges, VCAP and Graham agreed to pay nearly $1.5 million combined to settle. VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599 while Graham agreed to pay disgorgement and prejudgment interest of $127,733 plus a penalty of $200,000. The firm has been censured, and Graham is barred from the securities industry for at least three years.

— Check out 6 Big Hack Attacks Targeting Financial Data: 2015 on ThinkAdvisor.