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SEC Says New York Advisors Falsified AUM to Entice Investors: Enforcement

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The Securities and Exchange Commission charged a New York-based investment advisor, Hyaline Capital Management, LLC, and one of its founders, Justin D. Meadlin, with disseminating false information to prospective investors and clients in order to induce them to invest money with them.

The SEC’s complaint, filed in federal court in New York, alleges that beginning in September 2012 and continuing through April 2013, Meadlin disseminated dozens of emails to prospective investors and clients in which he inflated Hyaline’s assets under management. Meadlin claimed that Hyaline managed between $17 million and $25 million when it managed no more than $5.5 million during that time, according to the SEC.

(Related: 12 Worst Financial Advisors in America: 2016)

The complaint also alleges that beginning in January 2013 and continuing to at least June 2014, Meadlin began touting a purported “quantitative” trading strategy and a fictitious Hyaline Capital Quantitative Fund (HCQF) in email solicitations to more than two dozen prospective investors and in subscription hedge fund databases.

Meadlin allegedly claimed that HCQF had as much as $25 million in assets, and claimed historical performance returns dating back to 2009 that were purportedly from a proprietary algorithm, when, in fact, HCQF never existed. According to the SEC, neither Meadlin nor Hyaline had acquired a proprietary algorithm; and the stated performance returns were based almost entirely on paper trades without real capital and exaggerated by approximately 20%.

The SEC says that before July 2013, Meadlin and Hyaline managed no assets in any quantitative strategy at all, and even after July 2013, they never managed more than $3.3 million in AUM in the strategy.

The SEC’s complaint further alleges that Meadlin and Hyaline fraudulently induced investments from at least two clients using the false performance and AUM data.

The SEC’s complaint charges Meadlin and Hyaline with violations of the anti-fraud provisions of the securities laws and seeks injunctive relief, disgorgement and penalties against Meadlin and Hyaline.

SEC Obtains Asset Freeze in Fraudulent Real Estate Investment Scheme

The SEC announced charges against two Fort Worth residents and their company for defrauding investors in a commercial real estate investment scheme. At the SEC’s request, U.S. District Judge Terry R. Means has entered an asset freeze and appointed a receiver over the company.

The SEC’s complaint, filed on April 13, 2017 in Fort Worth federal court, alleges that, since early 2014, Mantford C. Hawkins and David E. Bell – the CEO and COO, respectively, of 4D Circle LLC – raised at least $9 million from 50 investors in seven states and Canada.

The complaint alleges that 4D Circle purported to be “a wealth creation company” focused on acquiring apartment and office buildings, to which it would then apply supposedly proprietary technology and managerial practices to generate “greater profitability [with] less risk for our investors.”

The company’s website and written offering materials allegedly elaborated on these claims, asserting for instance that investors could earn returns of 30% within a 9-month time frame; investments were “bonded”; and investor funds were protected through the use of escrow accounts and third-party oversight. The offering materials also allegedly included “case studies” of particular properties the company had acquired, which purported to demonstrate the profitability of its model.

But, according to the SEC’s complaint, these representations and case studies were false.

SEC Charges Oil & Gas Promoter With Misappropriating Funds

The SEC charged Matthew W. Fox of Plano, Texas and his company, Wayne Energy, LLC, with securities fraud arising from a failed offering of interests in a joint venture formed to rework and recomplete an oil and gas well in Upshur County, Texas.

The SEC’s complaint, filed in federal district court in Sherman, Texas, alleges that Fox raised approximately $950,000 for this joint venture between March 2015 and October 2016. The complaint alleges that Fox had previously operated another oil and gas company – Frisco Exploration Company – but formed Wayne Energy in March 2015, after Frisco Exploration failed. Wayne Energy was to be the manager of the joint venture.

To raise funds for the joint venture, Fox simply recycled offering documents he had used at Frisco Exploration, according to the SEC.

The SEC also alleges that Fox misappropriated most of the funds raised from investors. Rather than use these funds for the Upshur County well, the complaint alleges that Fox spent approximately $500,000 of investor money on personal expenses, including more than $236,000 in casino gambling charges and cash withdrawals and approximately $240,000 on house and car payments, vacations, dining and shopping, and jewelry.

Without admitting or denying the allegations in the SEC’s complaint, Fox and Wayne Energy have agreed to a settlement that requires them to pay disgorgement and prejudgment interest and civil penalties in amounts to be determined by the court upon the SEC’s motion. In addition, Fox has agreed to a preliminary conduct-based injunction prohibiting him or entities he controls, including Wayne Energy, from issuing or selling securities.

SEC Freezes Brokerage Accounts Behind Alleged Insider Trading

The SEC announced an emergency court order to freeze assets in two brokerage accounts used last week to reap more than $1 million in alleged insider trading profits in connection with a merger announcement by telecommunications companies.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, highly suspicious transactions have been detected surrounding last week’s announcement that Liberty Interactive Corp. had agreed to acquire General Communication Inc. 

The traders, who are currently unknown, allegedly used foreign brokerage accounts in the United Kingdom and Lebanon to purchase call option contracts through U.S.-based brokerages and on U.S.-based exchanges in the days leading up to the April 4 public announcement of the acquisition.  The court’s order freezes the foreign accounts’ assets contained in the U.S. brokerages.

CFP Board Imposes Interim Suspension on Michael Breton

Certified Financial Planner Board of Standards, Inc. imposed an automatic interim suspension of Michael Breton’s CFP certification, effective April 14. CFP Board imposed an automatic interim suspension after discovering that Breton was barred by the SEC from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization.

The SEC filed a civil complaint against Mr. Breton and his firm alleging that he, acting through his firm, defrauded at least 30 clients by allocating profitable trades to his own accounts and unprofitable trades to client accounts. The SEC alleged Breton placed over $100 million in securities trades through his firm, but typically did not designate whether the trades would be allocated to client accounts or his accounts.  The SEC alleged Breton “cherry-picked” the profitable trades for his accounts, misleading clients and breaching the fiduciary duty that he and his firm owed to each client. 

The SEC further alleged Breton made more than $1.3 million in profits derived from trades that he fraudulently did not allocate to the client accounts.

In March, Breton pleaded guilty on March 3 in federal district court in Massachusetts to one count of securities fraud in connection with an illegal cherry-picking scheme.

CFTC Charges Purported Hedge Fund and California Residents With Fraud and Misappropriation

The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action in the U.S. District Court for the Central District of California, Eastern Division, against Capitol Equity FX LLC, a purported hedge fund operating in California, and its principals and agents, Robert Leland Johnson IV and Marisa Elena Johnson, both of Chino, California.

The CFTC complaint charges the defendants with commodity futures fraud; off-exchange, leveraged or margined retail foreign currency fraud; commodity pool fraud; and failure to register with the CFTC, as required. The complaint also charges Capitol Equity with engaging in activities prohibited for a commodity pool operator, including commingling customer funds with Defendants’ personal funds.

According to the complaint, from at least May 2012 through May 2015, Defendants fraudulently solicited at least $1,735,750 from members of the public to participate in a pooled fund that traded commodity futures and forex contracts.

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