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SEC Enforcement: Fake Brokers Charged With Taking $5M From Clients, Going to Prada

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Among recent enforcement actions by the Securities and Exchange Commission were the suspension of an accountant for conducting a faulty audit that failed to uncover a fraud; an asset freeze against three unregistered brokers accused of stealing client money to go shopping; and a settlement with a South America-based airline for its violations of the Foreign Corrupt Practices Act.

SEC Freezes Assets After Investor Funds Used for Shopping Sprees

The SEC has frozen the assets of three men who aren’t registered to sell investments, but raised more than $5 million from investors they claimed would be used to develop a resort. Instead, the three went on lavish shopping sprees.

According to the agency, Matthew White, Rodney Zehner, and Daniel Merandi fraudulently issued $1 billion in unsecured corporate bonds out of a shell company they own, claiming that the money would be used to fund the resort project. But they never came close to raising the funds necessary to start the project, and in the meantime they pocketed the $5.6 million they did raise and used it for personal purchases at Saks Fifth Avenue, Gucci, Louis Vuitton, Prada and Versace.

“We allege that these men stole millions of dollars from investors for personal use and orchestrated sham transactions to prop up the price of the worthless, expired bonds at the center of the fraud,” said William Hicks, associate director of the SEC’s Atlanta regional office.

The SEC seeks permanent injunctions, disgorgement and penalties against all of the defendants. The court order freezes defendants’ cash held in a brokerage account and freezes the bonds held in a separate brokerage account.

Ex-Brokers Took $5M From Clients, SEC Says

The SEC has frozen the assets of two former brokers with disciplinary histories who raised more than $5 million from clients and proceeded to use the money for their own purposes.

According to the agency, James Hugh Brennan III and Douglas Albert Dyer sold phony shares in eight similarly named companies to more than 240 investors since 2008 without ever registering the stock as they promised. Instead, Brennan and Dyer transferred investor funds into their personal accounts or those belonging to their wives.

The SEC also said that Brennan and Dyer continue to solicit investors while touting their securities industry experience and hiding the facts that Brennan was banned from the brokerage industry and Dyer suspended and fined for executing unauthorized transactions in customers’ accounts.

Neither Brennan nor Dyer has been registered to sell investments as a broker since the late 1990s — a fact that could have been found in an online search, as the SEC points out.

The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions, as well as penny stock and officer-and-director bars against Brennan and Dyer. The court’s order freezes the assets of Brennan, Dyer and their company Broad Street Ventures. In addition, their spouses are named as relief defendants for the purposes of recovering ill-gotten gains deposited in their accounts.

Accountant Suspended by SEC for Faulty Audit

Accountant Nicholas Bottini was permanently suspended by the SEC for conducting a faulty audit of the financial statements of a public company that was committing fraud, and the firm where he was a partner at the time, New York-based accounting firm EFP Rotenberg LLP, has been prohibited from accepting new public company clients for one year.

According to the agency, the failed audit pertained to Illinois-based ContinuityX Solutions Inc., a publicly traded company that claimed to sell internet services to businesses and whose executives have since been charged by the SEC for allegedly engineering a scheme to grossly overstate the company’s revenue through fraudulent sales.

During the audits of ContinuityX, the SEC said, EFP Rotenberg and Bottini did not conduct sufficient procedures to uncover the fraudulent sales in the company’s financial statements. EFP Rotenberg and Bottini also failed to obtain sufficient audit evidence over revenue recognition and accounts receivable, identify related party transactions, investigate management representations that contradicted other audit evidence, perform procedures to resolve and properly document inconsistencies and exercise due professional care.

In the settled administrative proceeding in which the firm and Bottini neither admitted nor denied the SEC’s findings, EFP Rotenberg LLP has agreed to pay a $100,000 penalty to settle the SEC’s charges, and it can only begin accepting new public company clients again next year after an independent consultant certifies that the firm has corrected the causes of its audit failures. The accountant, Nicholas Bottini, agreed to pay a $25,000 penalty in addition to being 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.

LAN Airlines Fined for Approving Bribes to Union Officials

South America-based LAN Airlines has agreed to pay more than $22 million to settle parallel civil and criminal cases related to improper payments it authorized during a dispute between the airline and its union employees in Argentina.

According to the agency, when LAN had trouble negotiating labor agreements with the unions, it was contacted by a consultant from Argentina who offered to negotiate on the company’s behalf — for a fee. The consultant made clear that payments would be made to third parties who had influence over the unions.

LAN’s CEO approved $1.15 million in payments to the consultant through a phony contract for a purported study of existing air routes in Argentina. The CEO knew that no actual study would be performed, and that it was possible the consultant would pass some portion of the money to union officials in Argentina to settle the wage disputes.

The SEC charged LAN with failure to keep accurate books and records and maintain adequate internal accounting controls. In settling with the agency, LAN agreed to pay $9.4 million in disgorgement and prejudgment interest.

In a deferred prosecution agreement with the U.S. Department of Justice, LAN agreed to pay a $12.75 million penalty. Under the settlement, LAN must retain an independent compliance monitor for a period of not less than 27 months. In reaching the settlement, the SEC considered LAN’s remedial acts and general cooperation with the investigation.

Earlier this year, the SEC charged Ignacio Cueto Plaza, LAN’s chief executive officer, with FCPA violations; he settled the charges.

— Check out State Street to Pay $382M Over Hidden Markups in Foreign Currency Trades on ThinkAdvisor.


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