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SEC Charges Fraudsters-Turned-Pastors in Ponzi Scheme: Enforcement

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The Securities and Exchange Commission announced fraud charges and an asset freeze against the operators of a $25 million Ponzi scheme falsely promising high annual returns with minimal to no risk to investors in the Vietnamese community of Orange County, California.

The SEC alleges in its complaint that Kent R.E. Whitney founded The Church for the Healthy Self three months after being released from federal prison for orchestrating a prior investment scheme involving commodities.

Undeterred by prison, Whitney established a church to defraud more investors after he was released in 2014, according to the SEC. Shortly thereafter, he became an ordained minister through an online program. A month later, he formed The Church for the Healthy Self, purportedly as a nonprofit, religious organization.

The church’s websites provide the facade of a “virtual church.” For example, they provide links to YouTube channels offering religious videos and online prayer request forms. But The Church for the Healthy Self does not hold religious services typically associated with churches. The primary mission of the church appears to be obtaining investor funds, according to the SEC.

According to the SEC, the Church for the Healthy Self’s investment program, CHS Trust, promised investors tax-deductible, guaranteed and insured returns of at least 12%, through reinsurance investments and options trading.

David Lee Parrish, who assisted Whitney’s earlier fraud, joined his friend as a co-pastor of The Church for the Healthy Self and as the purported director of CHS Trust.

Whitney and Parrish primarily targeted Vietnamese investors through extensive radio and television advertisements touting CHS Trust. One such CHS television commercial, in Vietnamese with English subtitles, stated: “Hello, I would like to introduce you to an investment program earning 12% interest from CHS Trust. Safe, effective, and insured by FDIC and SIPC. CHS Trust investment program gives you higher interest than 401(k) or IRA with maximum tax benefits. Register for a free seminar to learn about the 12% interest rate program at CHS Trust every Wednesday at 6 p.m.”

Instead of generating the promised guaranteed profits, Whitney and Parrish stole millions of dollars of investor funds and paid returns through Ponzi payments. According to the SEC, the pair used investor funds to pay credit card bills, student loan bills, title and mortgage companies, jewelers, and a home staging and interior design firm.

Earlier this month, the FBI obtained a criminal seizure of the funds in CHS Trust’s main account, citing potential violations of federal wire fraud and money laundering statutes as the predicate for the seizure. Despite the FBI seizure, Whitney and Parrish continued to solicit investors.

The SEC is seeking permanent injunctions, disgorgement and civil penalties against the defendants.

Unregistered Investment Advisor Stole Millions From Investors: SEC

The SEC charged a Long Beach, California-based investment advisor with stealing millions of dollars from investors to perpetrate a decades-long Ponzi scheme.

The SEC alleges that Carol Ann Pedersen, a former CPA and unregistered investment advisor, raised at least $29 million from 25 investors from 1991 until 2017 and falsely promised to invest their money in securities.

Pedersen told prospective investors that she would place their money in “federally guaranteed” securities with returns typically greater than 8%. Pedersen also solicited investments in the C.A. Pedersen Client Investment Pool, a limited partnership managed by Pedersen that she claimed owned a large and diverse stock portfolio.

According to the complaint, rather than make the promised investments, Pedersen used about $25.6 million to make Ponzi-style payments to investors, and the remaining funds to pay for personal expenses including car payments and home renovation costs.

To conceal her scheme, Pedersen provided investors with fabricated account statements that falsely represented that their money had been invested and was earning a return. Pedersen’s scheme fell apart in 2017 when she began to experience chronic cash flow problems and investors sued her.

In a separate action, the U.S. Attorney’s Office for the Central District of California announced criminal charges arising from the same conduct.

Pedersen has agreed to the entry of a final judgment in which she consents to injunctive relief and to be liable for approximately $2.7 million in disgorgement and interest, which will be deemed satisfied by the anticipated entry of a restitution order against her in the criminal action.

The final judgment also does not order a penalty against Pedersen in light of her anticipated guilty plea and conviction.

Court Fines Wells Fargo Securities Over Video Game Bond Offering

A federal court ordered Wells Fargo Securities to pay more than $800,000 in civil penalties for disclosure failures associated with a municipal bond offering it underwrote to finance a startup video game company, 38 Studios.

The Securities and Exchange Commission charged Wells Fargo, which served as the placement agent for the 38 Studios bond offering, in 2016. The SEC’s complaint alleged that Wells Fargo failed to disclose that the project being financed by the bonds — the development of a video game — could not be completed with the financing the bonds would provide.

The SEC also alleged that the defendants did not disclose that even with the proceeds of the loan financed by the bonds, 38 Studios faced a known shortfall in funding.

In addition, the SEC alleged that Wells Fargo and its lead banker on the deal, Peter Cannava, failed to disclose to bond purchasers that Wells Fargo was receiving additional compensation from 38 Studios, totaling $400,000, that was directly tied to the issuance of the municipal bonds.

The final judgment against Wells Fargo orders the firm to pay a $812,500 civil penalty. That money will be transferred to the bond trustee for the benefit of bondholders.

The SEC’s litigation continues against Cannava.

SEC Charges RIA and Former COO With Defrauding Client

The SEC charged registered investment advisor Talimco and Grant Gardner Rogers, the former chief operating officer of the firm, with manipulating the auction of a commercial real estate asset on behalf of one client for the benefit of another.

According to the SEC’s order, in or about April 2015 while selling a commercial real estate asset on behalf of a collateralized debt obligation client, Talimco and Rogers were aiming to acquire the asset for another client, a private fund.

“Talimco and Rogers owed its selling client a fiduciary duty, which included an obligation to take steps to use its best efforts to maximize the price obtained for the asset by identifying willing bidders,” the SEC says.

However, rather than seek out multiple bona fide bidders, the SEC finds that Rogers used the firm’s affiliated private fund client for one bid and persuaded two unwilling bidders to participate in the auction by giving assurances that the bidders would not win the auction.

As a result of this manipulation, Talimco’s private fund client was the highest bidder and acquired the asset, only to then later sell it for a substantial profit. Talimco and Rogers’ conduct deprived the selling client of the opportunity to obtain multiple bona fide bids for the asset and maximize their profit.

Without admitting or denying the findings in the order, Talimco consented to a cease-and-desist order, a censure, disgorgement of its fees of $74,000 plus prejudgment interest of $8,759 and a penalty of $325,000.  Rogers, who also did not admit nor deny the findings, consented to a cease-and-desist order, a 12-month industry suspension, and a $65,000 fine.

SEC Charges Volkswagen, Ex-CEO With Defrauding Bond Investors During “Clean Diesel” Emissions Fraud

The SEC charged Volkswagen AG, two of its subsidiaries, and its former CEO, Martin Winterkorn, for defrauding U.S. investors. According to the SEC, Volkswagen raised billions of dollars through the corporate bond and fixed income markets while making a series of deceptive claims about the environmental impact of the company’s “clean diesel” fleet.

According to the SEC’s complaint, from April 2014 to May 2015, Volkswagen issued more than $13 billion in bonds and asset-backed securities in the U.S. markets at a time when senior executives knew that more than 500,000 vehicles in the United States grossly exceeded legal vehicle emissions limits, exposing the company to massive financial and reputational harm.

The complaint alleges that Volkswagen made false and misleading statements to investors and underwriters about vehicle quality, environmental compliance, and VW’s financial standing. By concealing the emissions scheme, Volkswagen reaped hundreds of millions of dollars in benefit by issuing the securities at more attractive rates for the company, according to the complaint.

The SEC complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. The complaint also seeks an officer and director bar against Winterkorn.

SEC Charges Former Muni Officer With Fraud

The SEC charged Dale Walker, the former County Manager of Macon-Bibb County, Georgia, with misleading three Macon-Bibb County public pension fund boards in connection with their selection of an investment advisor to manage more than $400 million of pension fund assets.

The SEC’s complaint alleges that Walker improperly provided an unfair competitive advantage to one investment advisor due to his romantic interest in an individual associated with the advisor.

According to the complaint, Walker provided the confidential proposals of other investment advisor candidates to the advisor and asked the associated individual to analyze and rank the candidates. The completed analysis ranked the advisor first above all other applicants.

The complaint further alleges that Walker attached the analysis to his memo recommending the adviser to the three pension fund boards, falsely representing that he prepared the analysis. Neither the advisor nor Walker disclosed the conflict of interest inherent in the advisor’s preparation of those materials.

The complaint alleges that each of the pension fund boards followed Walker’s recommendation and selected the advisor as the investment advisor for their respective pension funds.

Without admitting or denying the allegations in the complaint, Walker consented to the entry of a final judgment, which ordered him to pay a $10,000 civil penalty. The final judgment also enjoins Walker from participating on behalf of a government entity in the decision to select or retain an investment advisor or broker-dealer, any involvement with managing any public pensions or making investment recommendations to such entities, and from participating in the selection of underwriters or municipal advisors for any offering of municipal securities.

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