Among recent enforcement actions by the Securities and Exchange Commission were charges against two California men and their investment firms for operating a Ponzi scheme targeting middle-class investors; against a Nashville investment advisory firm and its owner for collecting extra fees from hedge funds; against a mortgage company and six former executives for fraud; against an investment manager for failure to prevent misuse of material nonpublic information by consultants; against an investment banker and a plumber for insider trading; and against a brokerage firm for anti-money laundering failures.
Meanwhile, the Financial Industry Regulatory Authority censured and fined E-Trade $900,000 on supervisory violations.
SEC: Fake Advisors Stole $2.8M in Tech Stock Ponzi Scheme
The SEC has charged Jaswant “Jason” Gill and Javier Rios and their investment firms after it said they were operating a Ponzi scheme, claiming to specialize in serving middle-class investors and securing exorbitant returns by investing in hot pre-IPO stocks. The agency got an asset freeze against them, to keep them from disposing of client funds, and an order to prevent them from raising additional investor money.
According to the SEC, instead of using the firm’s supposed proprietary trading models and investing in pre-IPO shares of well-known tech companies like Uber, Alibaba and Airbnb as they promised investors they would, Gill and Rios instead pocketed at least $2.8 million in investor funds.
The two used some of the money to pay for excursions to high-end restaurants and luxury retail stores, as well as jaunts to Las Vegas casinos, gentlemen’s clubs and professional sporting events. They never actually invested in any pre-IPO shares, and paid earlier investors any supposed returns out of funds they got from new investors.
They have raised approximately $10 million through their firm, JSG Capital Investments, and related entities, by catering to average retail investors and promising them exclusive investment opportunities “previously only available to the one-percenters,” with guaranteed annual returns of up to 60%.
Gill, in particular, has trumpeted phony credentials, telling investors he founded his firm after serving as a managing director at Morgan Stanley. He also boasted partnerships with several Silicon Valley venture capital firms. Gill, Rios and JSG Capital Investments are not registered with the SEC or any state regulator. Rios’ background is in food service.
In a parallel action, the U.S. Attorney’s Office for the Northern District of California has announced criminal charges against Gill and Rios.
The agency seeks permanent injunctions, plus disgorgement and monetary penalties, from Gill, Rios, JSG Capital Investments and related entities.
SEC Fines Brokerage Firm in First SAR Case
Wall Street-based Albert Fried & Co. was found, after an SEC investigation, to have failed to file suspicious activity reports (SARs) with bank regulators for more than five years. This was in spite of red flags tied to its customers’ high-volume liquidations of low-priced securities.
More than once, an AF & Co. customer’s trading in a security on a given day exceeded 80% of the overall market volume. In other occurrences, customers were trading in stocks issued by companies that were delinquent in their regulatory filings or involved in questionable penny stock promotional campaigns. Some customers also were the subject of grand jury subpoenas received by the firm.
While the SEC has charged other firms with anti-money laundering failures under the federal securities laws, this is the first case against a firm solely for failing to file SARs when appropriate.
Without admitting or denying the charges, AF & Co. agreed to be censured and pay a $300,000 penalty. The SEC credited the firm for its cooperation and for remedial measures already undertaken.
Hedge Fund Firm Charged by SEC With Taking Extra Fees
Nashville, Tennessee-based Hope Advisers Inc. and its owner, Karen Bruton, have been charged by the SEC with scheming to collect extra monthly fees from a pair of hedge funds they managed.
According to the agency, the activity was found during an examination of the firm. The SEC said that, to get around the funds’ fee structure — under which the firm is only entitled to fees if the funds’ profits that month exceed past losses — Hope Advisers and Bruton have been orchestrating certain trades that enable the funds to realize a large gain near the end of the current month while basically guaranteeing a large loss to be realized early the following month. Without those trades, Hope Advisers would have received almost no incentive fees since October 2014.
The two private hedge funds managed by Hope Advisers and Bruton, named Hope Investments LLC and HDB Investments LLC, have more than $175 million in net asset value. The only compensation Hope Advisors gets for managing those funds is an incentive fee, calculated as a 10% or 20% share of the profits earned in the funds’ accounts each month.
But Hope Advisers and Bruton launched an ongoing pattern of trading that inflated that compensation. The way trades were conducted not only delayed realization of losses but intentionally sized some trades so the funds realized a profit every month.
The scheme allowed Hope Advisers to avoid realization of more than $50 million in losses in the hedge funds while earning millions of dollars in fees to which they were not entitled.
The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions; its complaint also names Bruton’s charity, Just Hope Foundation, as a relief defendant for the purposes of returning money it received out of the fees to which the firm was not entitled. The complaint does not allege that the Just Hope Foundation participated in the wrongdoing.
Hope Advisers and Bruton have consented to an interim order that restricts them from accessing $7 million of their own investments in the funds, prohibits them from collecting any further fees unless they satisfy the high-water mark in the funds’ fee structure and restricts them from taking additional investments in the fund. Without admitting or denying the allegations, Hope Advisers and Bruton also are preliminarily enjoined from violating federal antifraud statutes.
Mortgage Company Fined for Claiming Good Mortgages Were Bad
A California-based mortgage company and six former executives were charged by the SEC in a scheme to defraud investors in the sale of residential mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae).
According to the agency, First Mortgage Corp. (FMC), a mortgage lender, issued Ginnie Mae RMBS backed by loans it originated. But from March 2011 to March 2015, FMC and its senior executives pulled current performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly issued RMBS.