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Regulation and Compliance > Federal Regulation > SEC

Enforcement: Fund Manager Paid Barred Nephew’s Bills With Investor Money, SEC Says

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It was a bad week for New Jersey in enforcement proceedings, as a fund manager was charged by the Securities and Exchange Commission with fraud and hit with asset freezes even as, in another case, New Jersey and California traders pleaded guilty to insider trading.

In addition, a San Francisco venture capitalist agreed to settle charges that he stole investor funds; a biotech company was charged with fraud for misleading investors; and a former TV commentator settled with the SEC on penny stock fraud charges.

Fund Manager Charged With Stealing From Investors to Pay Nephew’s Bills

A New Jersey-based fund manager and two firms he controls were charged with fraud by the SEC, and hit with asset freezes on allegations that they stole $5.7 million from investors and diverted millions more to other improper and undisclosed uses.

According to the agency, in marketing shares in promising pre-IPO tech companies in the Bay Area to investors, John Bivona used money raised through Saddle River Advisors and SRA Management Associates to pay off earlier investors, prop up other funds and pay family-related expenses.

Bivona raised more than $53 million from investors, but used so much of that money for his own purposes that his firms were continuously short of the cash needed to buy the shares promised to investors. He secretly steered the great bulk of that money to his nephew Frank Mazzola, who was barred from the securities industry in a prior SEC enforcement action. Mazzola was charged along with Bivona and his firms in this latest action in California.

Bivona kept his scheme going by indiscriminately transferring money among more than a dozen bank accounts associated with an array of different entities. He used investor money to pay Mazzola’s credit card bills, income taxes, a car loan, attorney fees and the mortgage on a Jersey Shore vacation home.

Investors were told they would receive annual financial statements for the funds, but that never happened — no statements were ever prepared. In fact, the offering was never even registered with the SEC.

The SEC seeks permanent injunctions, plus disgorgement with prejudgment interest and monetary penalties, from Bivona and the firms, as well as from Mazzola.

The assets of Mazzola and his wife, a relief defendant, were frozen, and the SEC so obtained a court order to appoint an independent monitor over Saddle River Advisors, SRA Management, the SRA Funds, and other affiliated entities. Bivona, Saddle River Advisors, and SRA Management are also enjoined from raising money from investors.

Traders Plead Guilty to Insider Trading

Farmingdale, New Jersey resident Steven Costantin and Oak Park, California resident Ronald Chernin pleaded guilty to charges of securities fraud and conspiracy to commit securities fraud in a scheme that ran from May 2010 to August 2013.

Costantin and Chernin were charged in 2015 after they were accused of trading in advance of at least 15 stock offerings from public companies, made on the basis of tips from investment bankers that they had agreed to keep secret and not to trade on. Costantin and Chernin were day traders for Steven Fischoff, Costantin’s brother-in-law, and they and other members of the day-trading operation presented the trading entities as legitimate financial management firms of considerable size so that they’d be able to coax investment bankers to invite them to participate in stock offerings. In the course of so doing, they signed confidentiality agreements which they subsequently ignored, trading on the information they received and shorting stocks in anticipation of price drops.

The SEC said the group made more than $4.4 million in the scheme. Costantin and Chernin shared half the illegitimate profits with Fischoff.

The two will be sentenced in July.

SEC Fines Venture Capitalist for Stealing Investor Funds

San Francisco-based biotech venture capitalist G. Steven Burrill has agreed to settle SEC charges that he siphoned money from a fund managed by his firm, Burrill Capital Management, in order to prop up other struggling businesses he owned and finance his lavish lifestyle.

According to the agency, Burrill hid the fact that he took money from the Burrill Life Sciences Capital Fund III under the guise of “advanced” management fees and spent it on family vacations to Saint Barthélemy and Paris as well as jewelry, gifts, car service and private jets. The fund’s investors included state pension funds, public companies and other institutional investors.

Burrill Capital Management’s chief legal officer, Victor Hebert, and controller, Helena Sen, played integral roles in Burrill’s scheme. Hebert led investment committee meetings and agreed to call in additional capital from fund investors, even though he knew the money would be spent on expenses unrelated to the fund.

In addition, Burrill and Sen in at least two instances delayed distribution of payments owed to fund investors so money could instead be used to continue paying Burrill’s personal expenses, as well as the salaries of Hebert and Sen.

Burrill and his firm agreed to the disgorgement of $4.785 million in stolen investor money, plus a $1 million penalty. He also agreed to be permanently barred from the securities industry. Hebert and Sen also agreed to settle the charges, paying penalties of $185,000 and $90,000, respectively. They also are barred from the securities industry.

All agreed to the settlements without admitting or denying the SEC’s findings. In addition to their industry bars, Burrill, a former audit partner, and Sen are permanently suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. Hebert is permanently suspended from appearing and practicing before the SEC as an attorney.

The SEC’s investigation is continuing.

SEC Charges Biotech Company With Misleading Investors

The SEC has charged Massachusetts-based biotechnology company AVEO Pharmaceuticals and three former executives, Tuan Ha-Ngoc, chief executive officer David Johnston, chief financial officer; and William Slichenmyer, chief medical officer. All are charged with misleading investors about the company’s efforts to obtain Food and Drug Administration (FDA) approval for its flagship developmental drug to treat kidney cancer. According to the agency, AVEO hid the FDA’s level of concern about Tivozanib in public statements to investors, hiding the FDA’s recommendation for a second clinical trial to address concerns about patient death rates during the first trial. AVEO raised $53 million in a public offering of its stock in January 2013 while hiding that FDA recommendation, which was explicitly made during a May 2012 meeting.

Months later, the FDA made that second trial recommendation public, and the company’s stock price dropped 31%. AVEO did design an additional trial and present those designs to the FDA, but it never actually conducted the trial. The FDA later refused to approve Tivozanib.

In corporate communications, AVEO and its officers suggested they intended to satisfy the FDA by presenting new analyses of the data from the previous clinical trial. That masked the level of concern at the FDA about the drug’s impact on patient survival.

Ha-Ngoc and Johnston knowingly approved and certified a press release and public filings that said nothing about a second trial, while Johnston also made public statements during investor conferences suggesting the FDA staff had asked only for an explanation of the survival results.

Slichenmyer misled investors in an investor conference call when he said he could not “speculate” on what the FDA “might be thinking” and “might want [AVEO] to do in the future.” He knew the FDA staff had recommended the second trial.

Without admitting or denying the SEC’s charges, AVEO agreed to pay a $4 million penalty to settle. The case continues against Ha-Ngoc, Johnston and Slichenmyer. The settlement with AVEO is subject to court approval. The SEC seeks disgorgement plus interest and penalties as well as permanent injunctions and officer-and-director bars against Ha-Ngoc, Johnston and Slichenmyer.

Former TV Commentator Settles Fraud Charges

Former market analyst and TV news commentator Tobin Smith has agreed to settle SEC charges that he and his company fraudulently promoted a penny stock to investors.

According to the agency, Smith and NBT Group Inc. were paid to prepare and disseminate emails, online blogs, articles and other communications touting the stock of IceWEB Inc., a data storage company. Smith and NBT did not fully disclose their compensation to investors, hiding the fact that part of Smith’s and NBT’s pay was tied to a sustained increase in IceWEB’s share price. The promotional material also contained false and misleading statements intended to artificially increase the trading volume and share price of IceWEB’s stock.

Smith entered into two separate agreements on NBT’s behalf to promote IceWEB and its stock in exchange for $330,000 in cash and IceWEB stock, with NBT poised to earn incentive fees of more than $250,000 if the marketing campaigns boosted the share price.

Smith and NBT never told investors about the incentive fees they would get if the stock price increased above a certain amount. In fact, Smith and NBT lied to subscribers, claiming Smith discovered IceWEB when he was “searching for a solution” to his own company’s “rapidly growing cloud data storage problem.” The truth was that Smith only “found” IceWEB after he was hired to promote the company, and did not actually use IceWEB for NBT data storage.

Smith and NBT also falsely claimed IceWEB “provides the cheapest storage box and more important the lowest cost/highest performance solution to” public and private data storage centers including “Amazon cloud drive, Dropbox, Evernote, iCloud, Microsoft SkyDrive, Google Drive, SugarSync” and Facebook. Smith didn’t know whether any of these companies were actually IceWEB customers.

Smith claimed he could “easily make the case” for “10X return — $200 million valuation” on IceWEB given “what has been already paid for its competitors.” But he knew IceWEB was in poor financial condition, and also knew no company was considering buying it.

Neither Smith nor NBT admitted or denied the charges, but agreed to settle and be barred from involvement in any future penny stock offerings, as well as to pay disgorgement of $165,900 plus $16,893 in interest. Smith also must pay a $75,000 penalty. The settlement is subject to court approval.

— Check out NASAA to Launch Senior$afe Program to Fight Elder Fraud on ThinkAdvisor.


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