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SEC Freezes Assets of Unknown Traders in Suspected Insider Trading: Enforcement

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The Securities and Exchange Commission obtained an emergency court order on Feb. 24 to freeze the assets of certain unknown traders using brokerage accounts in London and Singapore to reap more than $3.6 million in potentially illegal trading profits in advance of the announcement after the market close on Feb. 14 that Japan-based Softbank Group agreed to acquire Fortress Investment Group.

The SEC’s emergency action to freeze the proceeds of the traders’ highly suspicious transactions within days of the public announcement ensures that the profits cannot be removed from the accounts while the agency’s investigation of the trading continues.

According to the SEC’s complaint filed in federal court in New Jersey, Softbank announced that it had agreed to acquire Fortress for approximately $3.3 billion in cash. Under the terms of the agreement, Softbank would pay $8.08 per share, a premium of 38.6% over Fortress’ closing price on Feb. 13. Fortress, whose shares closed at $6.21 on Feb. 14, closed at $7.99 on Feb. 15.

The SEC alleges that certain unknown customers of a Singapore-based broker-dealer and a U.K.-based broker-dealer were in possession of material nonpublic information about the impending acquisition when they purchased Fortress derivative securities known as contracts for difference in the days leading up to the public announcement.

The customers of the Singapore-based BD purchased 950,000 shares of Fortress common stock on Feb. 14 before the market close and entered orders to sell those shares the next morning before markets opened for a profit of approximately $1.7 million.

The customers of the U.K.-based BD purchased Fortress contracts for difference between Feb. 10 and Feb. 14, representing 1.055 million shares of Fortress. The vast majority of those contracts were closed on Feb. 15 for a realized profit of approximately $1.9 million.

The emergency court order obtained by the SEC freezes the unknown traders’ assets and prohibits the traders from destroying any evidence. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest and pay financial penalties, along with a permanent injunction from future violations.

Court Fines Promoter, Recipients of Illicit Proceeds From Pyramid Scheme Targeting Latinos

The SEC announced that on Feb. 24 the federal court in Boston entered final judgments against defendant Andrew Arrambide of Sandy, Utah, and relief defendants Uninvest Financial Services Corp. (“Uninvest”), RST5 Investments LLC (“RST5″), Parkway Real Estate LLC (“Parkway”) of Florida, and Paulo Hideki Koga of Brazil, in a previously filed enforcement action.

In February 2015, the SEC charged two Portuguese companies operating under the name Wings Network, plus three company officers and 12 promoters, including Arrambide, with perpetrating an international pyramid scheme targeting Latino communities in the U.S.

The judgment ordered Arrambide to pay more than $106,000 in disgorgement of ill-gotten gains, prejudgment interest and a civil penalty, and the judgements against the relief defendants ordered Uninvest to pay a total of $4.8 million, RST5 to pay $2 million, Parkway to pay a $312,000, and Koga to pay $528,000 in disgorgement plus prejudgment interest. The court’s entry of the final judgments concludes the SEC’s litigation of this matter. 

SEC Obtains Favorable Jury Verdict Against Racetrack Exec

On Feb. 22, a federal jury in Miami returned a verdict against Christopher J. Hall, the former chairman of a public company that operated a horse racetrack, finding him liable for violating the antifraud provisions of the federal securities laws.

The SEC’s complaint – filed on Sept. 17, 2015 – alleged that, from 1999 through 2008, Hall obtained tens of millions of dollars in margin loans from brokerage firm Penson Financial Services, mainly to purchase municipal bonds and to fund the racetrack’s operating expenses. When the collateral underlying Hall’s margin loans plummeted in value in the wake of the financial crisis, Hall pledged additional collateral to support his margin debt. Hall repeatedly lied to Penson about liens on his additional collateral while obtaining fraudulently more than $5.5 million in additional loans and other payments from the firm.

Following a seven-day trial, the jury found Hall liable for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933.

The court will determine remedies against Hall at a later date. The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest, penalties, an officer-and-director bar and a permanent injunction.

SEC Wins Judgment After 300 Investors Bilked in Oil, Gas Offerings

On Feb. 21, Judge Dean D. Pregerson of the U.S. District Court for the Central District of California entered a final judgment against Harrison Schumacher and his two companies, Quantum Energy LLC and Quaneco LLC, and other related companies who were charged as relief defendants.

The SEC charged Schumacher, Quantum and Quaneco with defrauding more than 300 investors nationwide in purported investments in oil and gas projects. Harrison Schumacher raised approximately $12.4 million in five offerings that were not registered with the SEC. (The SEC later amended its complaint to allege a sixth unregistered, fraudulent offering.) Schumacher used these funds to cover undisclosed corporate business overhead expenses, his compensation and for personal expenses, all of which were contrary to representations he and his companies made to investors.

As part of the settlement, Schumacher, Quantum and Quaneco each admitted wrongdoing.

The final judgment imposes on Schumacher permanent injunctions against future violations of the antifraud provisions of the federal securities laws, a conduct-based injunction, an officer and director and penny stock bar, and orders him to pay approximately $554,000 in disgorgement, prejudgment interest and a penalty.

The final judgment also orders Quantum, Quaneco and the relief defendant companies to pay approximately $12.9 million in disgorgement and prejudgment interest, which will be deemed satisfied by transfer of funds to a potential court-ordered distribution, and transfer of all other assets to Quaneco which, after Schumacher divests himself, will be solely owned by investors.

— Check out FINRA Bars Rep for $15M of ‘Unsuitable Trades’ in Retiree Account on ThinkAdvisor.


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