The Securities and Exchange Commission recently charged an advisor with cheating three pro athletes out of $30 million; won a settlement from the former chief executive officer of a charter school operator on muni bond fraud charges; charged a medical device manufacturer for violations of the Foreign Corrupt Practices Act; and charged a U.K.-based trader for an account intrusion scheme.
Pro Athletes Mark Sanchez, Jake Peavy and Roy Oswalt Bilked by Advisor: SEC
Investment advisor Ash Narayan of Newport Coast, California, was the target of an SEC asset freeze, after the agency charged Narayan along with The Ticket Reserve Inc., its CEO, Richard Harmon; and Chief Operating Officer John Kaptrosky with a scheme defrauding athletes.
Former New York Jets quarterback Mark Sanchez and Major League Baseball pitchers Jake Peavy and Roy Oswalt were defrauded out of about $30 million, Bloomberg reported.
According to the SEC, Narayan, a managing director in the California office of Dallas-based investment advisory firm RGT Capital Management, transferred more than $33 million from clients’ accounts to The Ticket Reserve, typically without their knowledge or consent and often using forged or unauthorized signatures.
In addition to not telling his clients what he was doing, Narayan also hid the fees he was receiving for the unauthorized transfers and the conflict of interests inherent in the transactions: Not only was Narayan a member of The Ticket Reserve’s board of directors, he owned more than 3 million shares of company stock. Narayan also falsely claimed to be a CPA.
Harmon and Kaptrosky participated in the scheme by making undisclosed finder’s fee payments to Narayan out of his clients’ funds and covertly describing them as “director’s fees” and “loans” in various company documents.
Harmon and Kaptrosky approved and executed Ponzi-like payments, falsified and backdated documents, and created sham promissory notes between The Ticket Reserve and Narayan in attempts to further conceal the scheme.
The Ticket Reserve became dependent on the cash Narayan funneled to it from his unsuspecting clients to stay in business; in exchange, Narayan got nearly $2 million in hidden compensation from the company, most of it directly traceable to funds stolen from his clients.
The Ticket Reserve also made Ponzi-like payments to existing investors using money from new investors. Since being fired from the investment firm where he worked and losing access to the clients’ accounts, Narayan is alleged to have been redirecting to The Ticket Reserve the sham fees he received out of the money taken from client accounts. The SEC secured the court-ordered asset freeze before Narayan could make a planned financial transaction on May 31.
The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as preliminary and permanent injunctions.
Former Charter School Operator CEO Settles Muni Bond Fraud Charges
Juan Rangel, the former president of UNO Charter School Network Inc. and former CEO of United Neighborhood Organization of Chicago, has agreed to settle with the SEC for his role in a misleading $37.5 million bond offering to build three charter schools.
According to the agency, Rangel negligently approved and signed a bond offering statement that omitted the charter schools’ multimillion-dollar contracts with two brothers of UNO’s chief operating officer. The latter were conflicted transactions that could have threatened UNO’s ability to repay bond investors.
“We allege that Juan Rangel signed off on the offering document without even reading it,” said David Glockner, regional director of the SEC’s Chicago regional office.
UNO entered into grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three charter schools. Rangel signed the agreements, which required UNO to certify that no conflict of interest existed and to immediately notify IDCEO in writing if any conflicts subsequently arose. If UNO breached the requirements, IDCEO could suspend the grant payments and recover grant funds already paid to UNO.
UNO did breach the agreement when, at Rangel’s direction, it contracted with its COO’s brothers, agreeing to pay approximately $11 million to one brother’s window company and approximately $1.9 million to another brother for services during construction.
However, UNO never notified IDCEO in writing about either transaction, and its offering statement disclosed only the $1.9 million contract, not the larger $11 million contract. In addition, the offering document never mentioned that a breach by UNO meant that IDCEO could seek to recover the grants, requiring UNO to liquidate its charter schools to repay them and losing the assets it depended on to repay bond investors.
Without admitting or denying the charges, Rangel agreed to pay a $10,000 civil penalty and to be barred from participating in municipal bond offerings, other than for his personal account. The settlement is subject to court approval. UNO settled with the SEC in 2014 for defrauding investors in the same 2011 bond offering.
Medical Device Manufacturer Fined for Funneling Cash to Foreigners
Massachusetts-based medical device manufacturer Analogic Corp. and its wholly owned Danish subsidiary BK Medical ApS were charged by the SEC with violations of the Foreign Corrupt Practices Act after the agency found that the latter engaged in hundreds of sham transactions with distributors that funneled about $20 million to third parties, including individuals in Russia and apparent shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles.
According to the agency, from at least 2001 through early 2011, at the direction of its distributors, BK Medical participated in hundreds of highly suspicious transactions that posed a significant risk of bribery or other improper conduct, such as embezzlement or tax evasion.
At its distributors’ request, BK Medical would issue fake and inflated invoices to the distributors and direct the overpayments it received to third parties identified by the distributors. BK Medical did not have a relationship with the third parties and did not know if the payments had any business purpose.
BK Medical’s Russian distributor accounted for at least 180 payments totaling more than $16 million. BK Medical participated in similar arrangements, but to a lesser degree, with distributors in Ghana, Israel, Kazakhstan, Ukraine and Vietnam, for which BK Medical acted as a conduit for at least 80 payments totaling approximately $3.8 million.
Lars Frost, BK Medical’s former chief financial officer, who was BK Medical’s CFO from 2008 to 2011, personally authorized approximately 150 conduit payments and submitted false quarterly subcertifications to Analogic.
Analogic has agreed to pay $7.67 million in disgorgement and $3.8 million in prejudgment interest to settle charges that it failed to keep accurate books and records and maintain adequate internal accounting controls. In determining the settlement, the SEC considered Analogic’s self-reporting, remedial acts, and general cooperation with the SEC’s investigation. BK Medical has agreed to pay a $3.4 million criminal fine in a nonprosecution agreement announced by the U.S. Department of Justice.
Frost, a Danish citizen, consented to the SEC’s order without admitting or denying findings that he caused Analogic’s violations and that he violated provisions of the federal securities laws and a related SEC rule that prohibit the knowing circumvention of internal controls and knowing falsification of books and records.
SEC Freezes Assets of U.K.-Based Trader for Account Intrusion Scheme
The SEC has frozen the assets of U.K.-based trader Idris Dayo Mustapha, who it says hacked into the online brokerage accounts of numerous U.S. investors so that he could make stock trades that let him make a profit on trades in his own account.
According to the agency, Mustapha placed stock trades without the customers’ knowledge and then traded in the same stocks through his own brokerage account.
In one case, he hacked into a brokerage account, then quickly purchased shares at increasing prices. He then then profited by selling his own shares of the stock in his brokerage account. Mustapha’s scheme made at least $68,000 in profits for himself and caused losses in the victims’ accounts of at least $289,000.
The emergency asset freeze covers more than $100,000 of Mustapha’s assets; the order also prohibits him from destroying evidence. The SEC seeks return of allegedly ill-gotten gains with interest and financial penalties.