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Hedge Fund Fined for Taking Investor Money to Support Other Funds: Enforcement

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A federal court in Connecticut ordered a hedge fund manager and his investment advisory businesses to pay nearly $13 million in a case where the Securities and Exchange Commission alleged he illegally diverted investor money for use by other hedge funds that were illiquid and in need of cash.

The court found Steven Hicks of Ridgefield, Connecticut, liable on the SEC’s claim that he misappropriated investor funds. The SEC has been actively litigating the case since filing its complaint in 2010 against Hicks and his firms Southridge Capital Management LLC and Southridge Advisors LLC.

The SEC argued that investors were defrauded because they were not told about the transfers of hedge fund assets while they were taking place. According to the SEC’s complaint, Hicks later sent a letter to investors admitting that certain legal and administrative expenses had been improperly allocated between funds, but rather than repaying the money, he transferred certain illiquid securities to the funds.

The court’s order requires the Southridge entities and Hicks to pay approximately $7.9 million in disgorgement and prejudgment interest. Hicks also must pay a $5 million penalty.

The ruling is a partial final judgment. The SEC’s litigation continues with respect to allegations that Hicks and the Southridge entities also overvalued the largest position in the funds and made misrepresentations regarding the liquidity of funds they managed.

FINRA Hits Wells Fargos Securites with a $3.25 Million Fine

Wells Fargo Securities was censured, fined $3.25 million and required to review its supervisory systems and processes, according to the Financial Industry Regulatory Authority’s August disciplinary actions.

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to report all of its reportable conventional options positions for an unknown but significant period of time because of the firm’s erroneous belief that the positions were not reportable.

After determining that the firm would begin reporting these positions, the firm failed to develop and implement a Large Options Position Report (LOPR) system, FINRA says.

After identifying and remediating the firm’s failure to report reportable conventional options positions to LOPR, FINRA determined that the firm still failed to accurately report an unknown but significant number of conventional options positions to the LOPR.

The findings also stated that the firm and a customer exceeded the over-the-counter position limit by 25% for at least 461 trading dates in options related to one security, and by 40% for two trading dates in options related to another security.

The firm had not detected these violations because of its LOPR-related deficiencies.

SEC Charges Operator of $5.7 Million Ponzi Scheme Involving Cars With Display Ads

The SEC charged a Las Vegas resident with operating a $5.7 million Ponzi scheme that claimed to generate profits from display advertisements on cars.

According to the SEC’s complaint, Robert Cortez Marshall raised at least $5.7 million from approximately 200 investors residing in several states in an unregistered offering of the securities of his company, Adz on Wheelz.

Marshall allegedly told investors that Adz would buy cars to display advertisements on large computer monitors installed into the car’s doors, roof and trunk. The SEC alleges that Marshall and Adz promised investors “guaranteed weekly royalty” payments totaling over 200% a year and told them that they could receive a full refund at any time.

However, according to the SEC, the company almost immediately ran into technical issues with the display monitors, and Adz sold few, if any, advertisements. The SEC further alleges that, because Adz derived minimal revenue, Marshall made royalty payments to existing investors with new investors’ money, thereby operating a Ponzi scheme.

The SEC also alleges that Marshall stole $1.63 million of investor funds, which he used to make cash payments to himself and for merchandise, meals and entertainment expenses.

The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus interest, and civil penalties.

SEC Charges Two Brothers With Conducting an Offering Fraud

The SEC charged two brothers with conducting an offering fraud.

According to the SEC’s complaint, Michael and Brian Quigley convinced overseas investors to send money to U.S. bank accounts for purported investments in various securities, including well-known issuers, investment funds and penny stock companies. They also claimed to be associated with entities that did not in fact exist, including fictional broker-dealers, according to the SEC.

The SEC alleges that the Quigleys did not make any investments with the money, and instead simply stole the investors’ funds. According to the complaint, they used various methods to continue to defraud investors after their initial investments, including sending phony account statements, using a fake firm name similar to the name of an existing firm, making up numerous phony excuses for their failure to return funds, manufacturing stock certificates, falsely claiming on various occasions to be helping the investor recover previous losses, and requiring payment of bogus transfer agent fees purportedly to obtain the investors’ stock certificates.

The SEC seeks permanent injunctions and penny stock bars against both Quigley brothers, and additionally seeks civil penalties and disgorgement plus interest from Michael Quigley.

SEC Bars, Fines Former Bankrate Execs for Fraud

The SEC has obtained final judgments against two former executives of Bankrate Inc.

In September 2015, the SEC charged Edward DiMaria and Matthew Gamsey with fraudulently manipulating the company’s financial results to meet analyst expectations. The SEC also alleged that DiMaria sold Bankrate stock at a price that was artificially inflated because of the accounting manipulation.

The final judgments order DiMaria, former chief financial officer, to pay $231,000 in civil penalties, disgorgement and prejudgment interest and Gamsey, former director of accounting, to pay a civil penalty of $60,000. The judgements also bar DiMaria from serving as an officer or director of an SEC-registered company for five years. DiMaria and Gamsey consented to the entry of the judgments without admitting or denying the SEC’s allegations.

DiMaria and Gamsey also separately consented to the entry of SEC orders that suspend them from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. The SEC’s orders permit DiMaria and Gamsey to apply for reinstatement after five and three years, respectively.

Court Holds Former TV Commentator in Contempt for Violating Judgment in SEC Case

A federal court has issued an order holding former market analyst and business news contributor Tobin Smith and his company in contempt for failing to pay monetary sanctions and participating in another penny stock offering after he was barred in an SEC enforcement action last year.

In 2016, Smith consented to an SEC complaint alleging that that he and his company NBT Group fraudulently promoted a penny stock to investors. Smith and NBT agreed to be barred from involvement in any future penny stock offerings and pay disgorgement and interest of $182,793 and a $75,000 penalty.

Smith and NBT Group have since violated the court’s judgment by touting another penny stock offering based on misleading representations while receiving undisclosed compensation, according to the SEC’s contempt filings. The court order requires Smith and NBT Group to account for and repay all funds received in connection with the latest penny stock offering they touted, and to pay the delinquent disgorgement and interest. If they fail to comply within 10 days, the order imposes a $1,000 daily fine and a warrant for Smith’s arrest.

Court Orders Oil-and-Gas Fraudster to Pay More Than $4 Million

The SEC has obtained a final judgment against Sameer Sethi, against whom the SEC previously obtained an asset freeze and appointment of a receiver in connection with fraudulent oil and gas investment offerings.

The final judgment orders Sethi to pay more than $4 million in disgorgement and prejudgment interest and a civil penalty of $160,000. The final judgment also permanently enjoins Sethi from the purchase or sale of securities.

The court previously found Sameer Sethi; his father, Praveen; and their associate, attorney John Weber in contempt for violating the court’s preliminary injunction against Sameer. The court found that Weber and the Sethis created a new company, Cambrian Resources LLC, for the purpose of evading the court’s injunction in order to raise additional investor funds. The court instructed Weber and the Sethis to cease and desist from offering or selling securities and operating Cambrian, and ordered them to return investment funds to Cambrian’s investors. The Sethis and Weber cured their contempt by ceasing operations at Cambrian and returning the money they had raised.

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