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Regulation and Compliance > Federal Regulation > SEC

Enforcement: Advisor Steered $11.5M of Client Money to His Own Companies

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Among recent enforcement actions by the SEC were charges against an advisor for defrauding investors; against a foreign exchange trader for fraud; against two childhood friends for insider trading; against Ethiopia’s electric utility for selling unregistered bonds in the U.S.; and barred one executive and suspended another for phony accounting.

Advisor Charged With Steering Investor Funds to His Own Companies

Richard Davis Jr. was charged with fraud by the SEC for defrauding investors by secretly steering portions of real estate-related investments into deals with companies that he owned or operated himself.

According to the agency, Davis breached his fiduciary duty, kept the truth from clients and made no attempt to avoid or ameliorate conflicts of interests when he sold interests in two unregistered pooled investment vehicles named DCG Commercial Fund I LLC and DCG Real Assets LLC. He defrauded at least 85 people who invested a total of approximately $11.5 million.

He told Commercial Fund investors that their money would be used to fund short-term fully secured loans to real estate developers, but hid the fact that two of the four projects invested in by the fund were his own companies. The loans were never paid in full, but Davis never told the investors; instead, even after he declared one loan to be in default, he never reappraised the value of the loan and reflect that change in the shareholder’s account statements.

He also failed to inform Real Assets investors that he transferred to his own entities at least $7.7 million of the $9.8 million he raised from them. From there the money was spent or transferred to additional entities he owned or controlled until the entire $7.7 million was gone.

Instead of coming clean with investors, he told them that their investments were growing in value year after year, and falsely claimed that the Real Assets fund held more than $10 million in assets. But his claims were based on his own valuations of the fund’s assets, not any tabulation of the fund’s true net asset value.

Without admitting or denying the charges, Davis has agreed to a settlement subject to court approval, with disgorgement plus interest and penalties to be determined by the court at a later date; the SEC’s investigation is continuing.

Childhood Friends Charged With Insider Trading

Two Rhode Island men who were friends since childhood have been charged by the SEC with insider trading in the securities of deal targets being pursued by the pharmaceutical company where one of them worked.

According to the agency, Michael Maciocio used confidential nonpublic clinical and business data about other pharmaceutical firms being considered by his company for potential acquisitions and business relationships to trade in the stocks of those firms. Maciocio made approximately $116,000 on trades of such pharmaceutical companies as Medivation Inc., Ardea Biosciences, and Furiex Pharmaceuticals.

But Maciocio went further than trading; he tipped his friend, stockbroker David Hobson, who used the information to bring in at least $187,000 in illicit trading profits for himself and $145,000 for his customers.

“We allege that Maciocio and Hobson engaged in a multiyear insider trading scheme by repeatedly using the confidential information of Maciocio’s employer to place illicit trades,” Joseph Sansone, co-chief of the SEC enforcement division’s market abuse unit, said in a statement. Sansone added, “Given his years of experience in the securities industry, Hobson’s misuse of this highly sensitive corporate deal information represents an especially egregious violation of the law.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Maciocio and Hobson.

Forex Trader Charged With Fraud, Hid Losses

New York City-based foreign exchange trader Haena Park was charged by the SEC with defrauding investors out of millions of dollars by misrepresenting her investment track record, the profitability of her investments, and her use of investor funds.

According to the agency, Park touted her supposedly profitable futures and foreign currency trading strategy when soliciting friends, family, former Harvard classmates, and individuals with connections to them. She pooled the investor funds she received, then ran up heavy trading losses month after month in the futures and forex markets.

But she kept telling investors that their investments were profitable, even sending monthly account statements showing fictitious profits. At times she used new investor funds to make Ponzi-like payments to earlier investors. She raised at least $14 million from more than 30 investors since 2012, and has suffered more than $16 million in trading losses during that period.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has brought criminal charges against Park. The SEC’s investigation is continuing.

Ethiopian Electric Utility Settles on Charges of Selling Unregistered Bonds

Ethiopia’s electric utility has agreed to settle SEC charges that it offered and sold bonds that it failed to register to U.S. residents of Ethiopian descent.

According to the agency, Ethiopian Electric Power (EEP) conducted the unregistered bond offering to help finance the construction of a hydroelectric dam on the Abay River in Ethiopia. EEP held a series of public road shows in major cities across the U.S., and marketed the bonds on the website of the U.S. Embassy of Ethiopia as well as through radio and television advertising aimed at Ethiopians living in the U.S.

The utility raised approximately $5.8 million from more than 3,100 U.S. residents from 2011 to 2014 without ever registering the bond offering with the SEC.

EEP has admitted the registration violations, and agreed to pay $5,847,804 in disgorgement and $601,050.87 in prejudgment interest. The distribution of money back to investors is subject to the SEC’s review and approval.

SEC Bars Corporate VP, Suspends Controller for False Accounting

After finding that they were behind the false accounting used to make it look as if a subsidiary of New York-based IEC Electronics Corp. was performing better, the SEC has barred former executive vice president of operations Donald Doody and the then-controller of the subsidiary Ronald Years.

According to the agency, when the subsidiary wasn’t performing well financially, Doody and Years inappropriately inflated the work-in-process inventory in order to meet budgeted gross profit margins. That resulted in IEC improperly overstating the company’s profits in financial statements.

Without admitting or denying the findings, IEC, Doody, and Years consented to the SEC’s order instituting a settled administrative proceeding. IEC agreed to pay a $200,000 penalty, Doody agreed to pay $29,204.48 in disgorgement and interest plus a $25,000 penalty, and Years agreed to pay a $40,000 penalty. In addition, Doody is barred from serving as an officer or director of a public company for five years, and Years is permanently suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.

IEC’s former CEO William “Barry” Gilbert was not accused of any wrongdoing, but has voluntarily returned $42,072 in incentive-based compensation and stock sale profits as well as 19,616 shares of company stock.


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