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Firm, CEO Fined in Ponzi-Like Scheme Involving Life Settlements: Enforcement

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The SEC announced that a New Jersey-based firm and its CEO have agreed to pay more than $4 million to settle charges that they used new investor money to repay earlier investors in Ponzi-like fashion and tapped investor funds for the CEO’s personal use.

According to the SEC’s complaint, Verto Capital Management and William Schantz III raised approximately $12.5 million selling promissory notes to purportedly fund Verto Capital’s purchase and sale of life settlements, which are life insurance policies sold in the secondary market. 

“As alleged in our complaint, investors were told that the life settlement-backed notes were short-term investments with an unlikely event of default. Schantz and Verto misled investors about the company’s past performance and the value of the collateral, and they diverted significant investor funds for Schantz’s personal use,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office, in a statement.

The SEC alleges that they misrepresented to investors that Verto Capital was a profitable company and investor funds would be used for general working capital purposes. Verto Capital and other Schantz businesses had been unprofitable for several years, according to the SEC’s complaint, and Schantz resorted to taking disproportionately large distributions of investor funds for himself and using new investor money to repay earlier investors. 

The SEC alleges that the promissory notes were primarily sold through a group of insurance brokers in Texas, and religious investors were targeted. A Fair Fund will be created to return money collected in the settlement to harmed investors. Schantz and Verto Capital agreed to pay disgorgement of $3.4 million plus interest of nearly $125,000 and a penalty of $600,000.

SEC Charges EB-5 Operator With Securities Fraud

The Securities and Exchange Commission announced that an Idaho man has agreed to pay back several million dollars he siphoned away for personal use rather than investing it as promised to create U.S. jobs through the EB-5 Immigrant Investor Program.

The SEC alleges that Serofim Muroff raised more than $140.5 million in EB-5 offerings to Chinese investors through his companies Blackhawk Manager and ISR Capital for the intended purposes of acquiring and developing luxury real estate in McCall, Idaho, and investing in gold mining ventures in Idaho and Montana. 

Muroff allegedly misappropriated more than $5 million in investor funds for such unrelated uses as an investment in a zip line operation as well as his purchase of two personal residences, a Range Rover and a BMW.

“As alleged in our complaint, Muroff secretly enriched himself with millions of dollars in EB-5 investor funds that should have gone into job-creating enterprises,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

In the settlement, which is subject to court approval, Muroff and his companies agreed to pay disgorgement of more than $5 million plus interest totaling $865,000 and a penalty of $2 million. Muroff also agreed to be prohibited from conducting EB-5 offerings, acting as an officer or director of a public company, and associating with any investment advisor. 

Muroff’s bookkeeper and administrative assistant Debra L. Riddle, who was charged in the SEC’s complaint along with Muroff and his companies, agreed to pay disgorgement of $503,000 plus more than $81,000 in interest and a penalty of $100,000. They neither admitted nor denied the allegations in the SEC’s complaint.

Whistleblower Award of More Than Half-Million Dollars for Company Insider

The SEC announced that a company insider has earned a whistleblower award of more than $500,000 for reporting information that prompted an SEC investigation into well-hidden misconduct that resulted in an SEC enforcement action.

“This company employee saw something wrong and did the right thing by reporting what turned out to be hard-to-detect violations of the securities laws,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, said in a statement.

The whistleblower award is the second announced by the SEC in the past week. Approximately $154 million has now been awarded to 44 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.

Semiconductor Company and Former CFO Settle Accounting Fraud Charges

The SEC announced that a South Korea-based semiconductor manufacturer and its former CFO have agreed to settle charges related to an accounting scheme to artificially boost revenue and manipulate the financial results reported to investors.

The SEC’s order finds that MagnaChip Semiconductor Corp. overstated revenues for nearly two years in response to immense pressure placed on employees each quarter to meet revenue and gross margin targets that had been communicated to the public. Then-CFO Margaret Sakai directed or approved several fraudulent accounting practices to make it falsely appear the company had met those targets. For example, MagnaChip recognized revenue on sales of incomplete or unshipped products, and the company delayed booking obsolete or aged inventory to manipulate its reported gross margin. MagnaChip also engaged in roundtrip transactions to manipulate accounts receivable balances, and concealed from auditors that there were side agreements with distributors to induce them to accept products early.

Without admitting or denying the findings in the SEC’s order, MagnaChip agreed to pay a $3 million penalty and Sakai agreed to pay a $135,000 penalty. Sakai also agreed to be barred from serving as an officer or director of a public company and from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.

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