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SEC Enforcement: Phony Hedge Fund Manager Charged With Duping Small Businesses Out of $4M

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Among recent enforcement actions, the Securities and Exchange Commission charged Computer Sciences Corp. and former executives with accounting fraud, with the company to pay a $190 million penalty to settle.

The agency also went after several entities for manipulation of Avon stock; a Canadian trader for short selling violations; a biotech employee and two stockbrokers for insider trading; and a phony hedge fund manager for stealing money invested by small businesses.

Phony Hedge Fund Manager Bilked Small Businesses to Buy a Car and Jewelry: SEC

The SEC has charged Nicholas Lattanzio of New Jersey with posing as a hedge fund manager so that he could defraud small companies looking to invest. Lattanzio got more than $4 million out of his “clients.”

According to the agency, Lattanzio promised small businesses that he would arrange project financing for them and generate substantial returns on money they invested in his Black Diamond Capital Appreciation Fund. He told them they could withdraw their money if the promised project financing didn’t materialize, and he claimed his fund had as much as $800 million under management and a proven track record of producing double-digit returns.

The reality was that the fund never had more than about $5 million, because Lattanzio simply took investor money and spent it on himself and his family. Fund assets paid for his million-dollar family home in Montclair; a $124,000 luxury car; and $100,000 worth of merchandise from Tiffany & Co. He also paid off more than $760,000 in credit card debt, withdrew approximately $570,000 in cash or checks written to himself and his girlfriend, paid more than $30,000 to a yacht broker, and funded his children’s private school tuition and his membership at an exclusive golf club.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey has announced criminal charges against Lattanzio, and the New Jersey Bureau of Securities within the State Attorney General’s Division of Consumer Affairs also announced sanctions against him.

The SEC’s complaint charges Lattanzio, Black Diamond Capital Appreciation Fund and three other Lattanzio-controlled entities with securities fraud in violation of the Securities Act of 1933 and Securities Exchange Act of 1934. The complaint also charges Lattanzio and some of the entities with investment adviser fraud in violation of the Investment Advisers Act of 1940. The SEC’s investigation is continuing.

CSC, Former Execs Charged by SEC With Accounting Fraud

Computer Sciences Corp. and former executives were charged by the SEC with manipulating financial results and hiding significant problems with the company’s biggest, highest-profile contract. In addition, the SEC charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to boost reported profits. Five of the total of eight executives have agreed to settle, with cases proceeding against the other three; the company also agreed to settle and to pay a $190 million penalty, but those settling neither admitted nor denied the charges. According to the agency, CSC’s accounting and disclosure fraud began after the company learned it would lose money on a contract with the United Kingdom’s National Health Service (NHS) because it couldn’t meet certain deadlines. To avoid the large hit to its earnings that CSC was required to record, Robert Sutcliffe, who was CSC’s finance director for the NHS contract, added items to CSC’s accounting models that artificially increased its profits but were completely faked.

CSC, with former CEO Michael Laphen’s approval, kept stalling the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract. However, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work.

Using the rejected proposals for its models instead of the facts, the company managed to avoid recording significant earnings reductions in 2010 and 2011. Laphen and former CFO Michael Mancuso ignored rules requiring them to disclose this situation to investors, and in fact made public statements regarding the NHS contract that disguised CSC’s performance. In addition, Mancuso hid a prepayment arrangement allowing CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate. He told investors that CSC was hitting its targets “the old-fashioned hard way.”

Aside from the NHS contract, the SEC also found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions. The agency said that Edward Parker, who served as controller in Australia, along with regional CFO Wayne Banks overstated the company’s earnings by using “cookie jar” reserves and failing to record expenses as required. They overstated CSC’s operating results by more than 5% in Q1 of fiscal year 2009; that let CSC meet analysts’ earnings targets during that period.

In CSC’s Nordic region, under finance director Paul Wakefield, the SEC found a variety of accounting manipulations to boost operating results as finance executives there tried to meet U.S. management-set budget targets. Among other things, they tried improperly accounting for client disputes, overstating assets, and capitalizing expenses. The tactics overstated CSC’s consolidated pretax income in Denmark as much as 7%. CSC’s finance manager Claus Zilmer was involved in violations of the financial reporting and books and records provisions of the securities laws.

Laphen has agreed to settle, and to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty. Mancuso has agreed to settle and to return $369,100 in compensation and pay a $175,000 penalty.

Wakefield and Zilmer have agreed to settle, with Wakefield agreeing to accept an officer-and-director bar of at least three years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least three years. Banks has agreed to settle and pay disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years.

The SEC’s case continues against Edwards, Sutcliffe and Parker.

SEC Charges Bulgarian Trader, Entities in Avon Stock Manipulation

The SEC has announced an emergency asset freeze of two U.S. brokerage accounts containing nearly $2 million that were used in a manipulation of Avon stock, and has also charged Bulgarian trader Nedko Nedev in the scheme.

The agency says it tracked an EDGAR filing last month about a false Avon tender offer to a foreign entity using an IP address located in Sofia, Bulgaria. Nedev controlled at least one of the two now-frozen accounts, and his account held a substantial position in Avon contracts-for-difference (CFDs) that had been losing value recently. After the EDGAR filing caused the stock to increase by 20% on May 14, Nedev brought in approximately $5,000 in excess profits by selling almost half of that account’s CFDs at the higher price. In addition to Nedev, the SEC also charged Strategic Capital Partners Muster Ltd. and Strategic Wealth Investments Inc., which each own one of the brokerage accounts, and PTG Capital Partners LTD, which made the EDGAR filing containing the fake Avon tender offer.

Also charged is similarly named PST Capital Group LTD, behind a false EDGAR filing in a 2012 scheme involving the stock of Rocky Mountain Chocolate Factory. The defendants also are charged with a similar scheme in 2014 involving Tower Group International Ltd., which involved a false press release instead of an EDGAR filing. They all followed a similar pattern—accounts with substantial declining holdings that rose after phony filings or press releases originating from Bulgaria. The two accounts profited by more than $20,000 combined from the Tower Group manipulation.

The SEC seeks disgorgement, penalties, and other related relief. Its investigation is continuing.

Canadian Trader to Pay $1 Million for Short Selling Scheme

A Canadian trader has agreed to settle SEC charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally bought shares in the follow-on offerings to lock in significant profits with little to no market risk.

Andrew Evans, through his firm Maritime Asset Management, engaged in such practices nearly a dozen times, from December 2010 to May 2012. By buying cheaper shares in the follow-on offerings that he could use to cover his short sales, he made $582,175 in illegal profits.

Evans has agreed to settle without admitting or denying the charges. The settlement, which is subject to court approval, requires him to pay disgorgement of $582,175, prejudgment interest of $63,424, and a penalty of $364,389 for a total of $1,009,988.

Biotech Employee, Stockbrokers Charged by SEC With Insider Trading

The SEC has charged Michael Fefferman, senior director of information technology at Ardea Biosciences Inc., his stockbroker brother-in-law Chad Wiegand and another stockbroker, Akis Eracleous, with insider trading after Fefferman passed along nonpublic information in advance of major public announcements related to two pharmaceutical trials, a licensing agreement for a cancer drug and eventually the acquisition of the company by AstraZeneca PLC.

Wiegand not only bought Ardea stock in various customer accounts based on the information he got from Fefferman, he also tipped his friend Eracleous so he could similarly buy stock on behalf of his customers. The alleged insider trading occurred from April 2009 to April 2012 and resulted in illegal profits of approximately $530,000, according to the SEC.

One of Eracleous’s customers, his cousin, has been named as a relief defendant in the SEC’s complaint to recover insider trading profits in his brokerage account. The cousin has agreed to pay back the entire amount of illicit profits in his account totaling $219,175 in disgorgement and interest.

Fefferman, Wiegand and Eracleous have agreed to settlements that are subject to court approval. Disgorgement, prejudgment interest and penalties will be determined at a later date. Wiegand and Eracleous have agreed to be barred from the securities industry.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California has announced criminal charges against Wiegand and Eracleous. The SEC’s investigation is continuing.

— Check out  SEC Loses Fraud Case Against Robare Group on ThinkAdvisor.