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SEC Halts Lottery Ticket Boiler Room Scheme: Enforcement

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The Securities and Exchange Commission announced charges against a Florida-based company, its CEO and its top sales agent accused of conducting a boiler room scheme that solicits investments in a business purportedly facilitating online and cell phone sales of lottery tickets in various states.

The SEC has obtained an emergency court order freezing the assets of LottoNet Operating Corp., David Gray and Joseph A. Vitale. The SEC’s complaint alleges that they misrepresented to investors that their money would be used to develop and market LottoNet and that sales agents did not receive commissions. 

However, according to the SEC, at least 35% of investor proceeds were allegedly paid to boiler room sales agents in the form of commissions, and LottoNet allegedly siphoned investor funds for personal spending on clothing, wedding-related expenses and strip clubs.

“As alleged in our complaint, little did investors know they were being duped with a script based on misrepresentations while investor funds were being spent in strip clubs,”  Eric I. Bustillo, director of the SEC’s Miami Regional Office, said in a statement.

According to the SEC’s complaint, which was unsealed in federal court on Monday, among the pitches used in sales agent scripts prepared for cold calls to investors was “you’re looking at a monthly dividend payout of $8,500 every month” on a $25,000 investment if LottoNet reaches 1% market share. 

The scripts also allegedly touted the purported safety of the investment, noting a 60% return as a “worst case” scenario if the company was ever sold. 

The SEC alleges that while LottoNet has raised a total of approximately $4.8 million from investors, the company had only paid $10,500 in investment returns to investors through the end of February. Sales agents allegedly have been paid more than $1.1 million out of investor funds.

The SEC’s complaint further alleges that Vitale, who personally raised at least $1.4 million from investors, used the alias Donovan Kelly in an apparent attempt to hide from investors that he is permanently barred by the Financial Industry Regulatory Authority.

Former TelexFree President Sentenced to 6 Years in Prison for Operating Pyramid Scheme

James M. Merrill, the former president of TelexFree Inc. and TelexFree LLC, was sentenced to six years in federal prison and three years of supervised release for his role in operating a pyramid scheme through TelexFree.

On May 9, 2014, Merrill, of Ashland, Massachusetts, and another defendant, Carlos N. Wanzeler, who is a fugitive located in Brazil, were charged in a federal criminal complaint with conspiracy to commit wire fraud.

The criminal charges against Merrill arose out of the same fraudulent conduct alleged by the SEC in a complaint filed in April 2014. The SEC’s complaint alleged that TelexFree, Merrill, Wanzeler, and other defendants claimed to run a multilevel marketing company that sold telephone service based on “voice over Internet” (VoIP) technology but actually were operating an elaborate pyramid scheme.

In addition to charging Merrill and the company, the SEC charged several other TelexFree officers and promoters, and named several entities related to TelexFree as relief defendants based on their receipt of ill-gotten investor funds.

The SEC’s action, which remains pending against all parties, seeks injunctions against each of the defendants from further violations of the charged provisions of the federal securities laws, disgorgement of ill-gotten gains, and civil monetary penalties, among other things.

SEC Obtains TRO and Asset Freeze in Investment Scheme Involving Seniors

The SEC announced an emergency asset freeze and temporary restraining order against a Chicago-based investment advisor and his financial management company accused of scamming elderly investors out of millions of dollars.

The SEC alleges that Daniel H. Glick and his unregistered investment advisory firm Financial Management Strategies (FMS) provided clients with false account statements to hide Glick’s use of client funds to pay personal and business expenses, purchase a Mercedes-Benz, and pay off loans and debts among other misuses.

According to the SEC’s complaint, Glick was barred by FINRA in 2014 and had his Certified Financial Planner designation and Certified Public Accountant license revoked for conduct unrelated to these SEC charges.

The SEC’s complaint also names Glick Accounting Services, Glick’s business partner David B. Slagter, and Glick’s business acquaintance Edward H. Forte as relief defendants for the purposes of recovering client funds that Glick transferred or paid them in the form of advances or loans.

The court issued a temporary restraining order against Glick and FMS at the SEC’s request, and issued an order freezing the assets of Glick, FMS and Glick Accounting Services.

Overseas Traders Paying Back All Profits Plus Penalties in Insider Trading Case

The SEC announced that three Peruvian traders have agreed to settle a pending case alleging that they traded on nonpublic information prior to the merger of two mining companies.

The SEC filed its complaint in September 2016, and the settlements were approved on March 24 in U.S. District Court for the Southern District of New York.

Nino Coppero del Valle, the alleged tipper who worked at one of the companies, agreed to pay full disgorgement of more than $53,000 plus interest of $5,000. His close friend and fellow attorney Julio Antonio Castro Roca agreed to pay full disgorgement of $59,000 plus $5,500 in interest and a $59,000 penalty. The other trader, Ricardo Carrion, agreed without admitting or denying the allegations to pay full disgorgement of $54,000 plus $5,800 in interest and a $54,000 penalty.

The final judgments also obtain permanent injunctive relief from each of the three defendants.

CFTC Fines Former Citi Traders for Spoofing in U.S. Treasury Futures Markets

The Commodity Futures Trading Commission issued two separate orders filing and settling charges against Stephen Gola and Jonathan Brims for spoofing — bidding or offering with the intent to cancel the bid or offer before execution — in U.S. Treasury futures markets while trading for Citigroup Global Markets Inc.

The CFTC previously issued an order against Citigroup for its related violations of the Commodity Exchange Act and Regulations.

In the orders, CFTC requires Gola to pay a $350,000 civil monetary penalty and Brims to pay a $200,000 civil monetary penalty. Both traders are banned from trading in the futures markets until 6 months after each trader has made full payment of his respective penalty. In addition, Gola and Brims are ordered to cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing, as charged.

The orders find that, between July 16, 2011, and Dec. 31, 2012, Gola and Brims each engaged in the disruptive practice of spoofing more than 1,000 times in various Chicago Mercantile Exchange U.S. Treasury futures products. According to the orders, Gola’s and Brims’s spoofing strategy involved placing bids or offers of 1,000 lots or more with the intent to cancel those orders before execution.

SEC Charges Publisher With Pushing Ponzi Scheme in Editorials

The SEC charged Keith Laggos, formerly the publisher of the Network Business Marketing Journal for his involvement in and unlawful promotion of the ZeekRewards fraudulent scheme.

The SEC alleges that – from at least June 2011 through July 2012 – Laggos, through the Journal and while acting a paid consultant for ZeekRewards, was paid at least $64,000 for publishing several editorials providing crucial publicity to the ZeekRewards scheme.

These publications promoted ZeekRewards as the “company of the month” and touted, among other things, the scheme’s supposed record earnings and opportunity to generate income for participants. Laggos failed to disclose the fact that he was paid for the favorable editorial coverage, the amount that he was paid, and that he was a paid consultant for ZeekRewards.

The SEC further alleges that Laggos’ favorable editorials of the scheme contained material misstatements and omissions. Laggos published theses misstatements despite being made aware of their inaccuracy and otherwise being in a position, as a paid consultant for ZeekRewards, to know of their falsity.

SEC Obtains Asset Freeze in Suspected Insider Trading on Mobileye N.V. Acquisition

The SEC obtained an emergency court order to freeze the assets of two Israeli traders who used brokerage accounts in the U.S. to reap nearly $5 million in trading profits in advance of the March 13 announcement that Intel Corp. had agreed to acquire Israel-based Mobileye N.V.

The SEC alleges that Ariel Darvasi and Amir Waldman were in possession of material nonpublic information about the impending acquisition when they purchased Mobileye securities.

The SEC’s emergency action to freeze the proceeds of the traders’ highly suspicious transactions ensures that the potentially illegal 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 York, before market opening on Monday, March 13, Intel announced that it had agreed to acquire Mobileye through a tender offer for approximately $15.3 billion, or $63.54 per share. The announced purchase price was a 34.4% premium over Mobileye’s closing price on Friday, March 10, of $47.27 per share. After the announcement, Mobileye opened at its high for the day, $61.51, and closed at $60.62 per share, a 28% increase over its March 10 closing price.

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