Among recent enforcement actions by the SEC were a pair of cases against companies and then-executives involving accounting fraud, as well as another case against a litigation marketing company and its co-founders that the agency said was preying on retirees.
In addition, it barred and fined the principal of a registered investment advisor for securities fraud.
Company Charged With Bilking Retirees
Los Angeles-based litigation marketing company PLCMGMT LLC, also referred to as PLC or Prometheus Law, and its cofounders James Catipay and David Aldrich were charged by the SEC with defrauding retirees and other investors.
According to the agency:
Catipay, Aldrich and PLCMGMT claimed that investors’ money would be used to help gather plaintiffs for class-action and other lawsuits and that they would earn hefty investment returns from settlement proceeds.
While Catipay and Aldrich raised $11.7 million from approximately 250 investors, many of them elderly, during the past three years, just $4.3 million was actually used to locate prospective plaintiffs for lawsuits, and the company has brought in little revenue from any settlements.
Instead, Catipay and Aldrich diverted millions in investor funds to pay personal expenses. The 100–300% returns promised to investors have never materialized; in fact, PLC is obligated to pay investors at least $31.5 million.
Investors were told their funds would be used for marketing and advertising to locate plaintiffs for cases involving failed prescription drugs or medical devices. Each investor’s money would be associated with a specific potential plaintiff. PLC would refer the potential plaintiffs to a contingency-fee attorney and use proceeds of lawsuit settlements to pay investor returns.
Such a setup supposedly enabled investors, who were mostly non-attorneys, to split legal fees with the lawyer who actually litigated a particular lawsuit. That action is generally prohibited.
PLC, Catipay and Aldrich lured investors, claiming the investments were safe and “guaranteed,” but they knew perfectly well that those investments were highly speculative and risky. Only certain potential plaintiffs would qualify as actual plaintiffs, and even if a case was filed there was no guarantee they would win the lawsuit.
In addition to lying to investors, PLC, Catipay and Aldrich misused $5.6 million in investor funds, including diverting more than $1 million to pay Aldrich’s personal income taxes and another million to buy a residential condominium in the name of Aldrich’s privately held company. Aldrich and Catipay also took large salaries and admitted to SEC investigators that they have made Ponzi payments to several PLC investors.
The SEC seeks the appointment of a receiver over the company, an asset freeze and financial penalties and disgorgement plus interest, as well as other relief.
Advisor Barred, Fined by SEC for Cherry Picking Trades
The SEC has sanctioned, fined and barred Bruce Hartshorn for fraudulent trade allocations, saying in its order of settled proceedings that Hartshorn, via his firm Hartshorn & Co., was “cherry-picking” trades.
According to the agency’s order, Hartshorn disproportionately allocated profitable trades to proprietary accounts and unprofitable trades to client accounts, bringing in a sizable profit in doing so.
From approximately January 2010 through March 2011, Hartshorn purchased securities for both proprietary and client accounts through an omnibus trading account. But he waited until later in the day to allocate trades to the accounts, checking first to see whether the securities had appreciated.
He then allocated the profitable trades to proprietary accounts and the unprofitable trades to client accounts. Eighty-five percent of the block trades Hartshorn allocated solely to proprietary accounts were profitable trades. Conversely, 100% of the block trades he allocated solely to the firm’s clients were unprofitable trades. In addition, when block-purchased securities had positive first-day returns, Hartshorn allocated 68% of those securities to proprietary accounts. Conversely, when block-purchased securities had negative first-day returns, Hartshorn allocated 81% of those securities to client accounts.