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Regulation and Compliance > Federal Regulation > SEC

SEC Shuts Down Fake Advisor Who Targeted California Jews: Enforcement

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The Securities and Exchange Commission halted an ongoing investment fraud targeting members of the Jewish community, primarily in the Los Angeles region.

The SEC filed an emergency action in federal court against Motty Mizrahi and MBIG Co., his sole proprietorship, alleging that they defrauded at least 15 advisory clients out of more than $3 million since June 2012.

According to the SEC’s complaint, prospective clients know Mizrahi either from their Los Angeles-area synagogue or were introduced to him through family and friends in the Israeli American community. Mizrahi advertised himself to advisory clients as a professional money manager, licensed broker and certified public accountant. However, Mizrahi has no broker registration, nor a CPA license.

The SEC says Mizrahi falsely claimed that MBIG used sophisticated trading strategies to generate “guaranteed” returns of between2%-3% per month, the investments were risk-free, and clients would not lose their money and could withdraw their funds at any time.

Unbeknownst to his clients, however, MBIG had no bank or brokerage account of its own — rather, clients unwittingly sent money to Mizrahi’s personal bank account.

Mizrahi used the money to fund his personal brokerage account, in which he engaged in high-risk options trading producing losses of more than $2.2 million. From that account, Mizrahi transferred at least $1.4 million to his personal bank account to make payments for personal expenses — notwithstanding that his compensation was to derive from a percentage of trading “profits,” of which he had none, according to the SEC.

The SEC alleges that Mizrahi covered up his fraud by issuing MBIG’s clients fabricated account statements, showing positive account balances and profits from trading. When clients demanded proof of MBIG’s securities holdings, Mizrahi showed them brokerage statements reflecting a multi-million dollar balance for a fictitious MBIG brokerage account.

On March 27, a judge granted emergency relief, including a temporary restraining order against the defendants and an order freezing their assets.

In a parallel action, the U.S. Attorney’s Office for the Central District of California announced it filed wire fraud charges against Motty Mizrahi and another individual.

SEC Charges Maine Resident With Fraud in $3M Christian Concert Scheme

The SEC filed an enforcement action charging concert promoter Jeffrey Wall and his business, The Lighthouse Events LLC, with defrauding over 100 investors he solicited to become “financial partners.”

For more than four years, from approximately January 2014 through October 2018, Wall and Lighthouse raised more than $3 million from approximately 145 investors to promote Christian music concerts and festivals in the New England area, according to the SEC’s complaint.

As alleged, Wall and Lighthouse falsely told potential investors that their funds would be used solely to promote and host Christian music concerts and festivals, claiming that repayment of the investment was “secured” and “guaranteed” within one year of the initial investment.

Instead, they used investor funds for other expenses, including payment of Lighthouse’s existing debt and payments to earlier investors using later investors’ money.

According to the complaint, Wall and Lighthouse also failed to disclose material information to potential investors about Lighthouse’s deteriorating financial condition from declining ticket sales and its growing high-interest debt from short-term loans. Wall and Lighthouse have failed to repay approximately $1.6 million of the money fraudulently collected from investors.

The SEC’s complaint seeks permanent injunctions, civil penalties and disgorgement plus prejudgment interest against Wall and Lighthouse.

New York Broker Who Stole From Investors Sentenced to 7-21 Years in Prison

According to a final judgment obtained by the SEC, a New York-based broker who was charged with orchestrating a $6.5 million offering fraud was sentenced to 7-21 years in state prison, and ordered to pay full restitution to defrauded investors.

Based on conduct similar to that alleged in the SEC’s complaint, a New York State Supreme Court jury found Robert DePalo guilty of criminal charges, which included grand larceny, money laundering, schemes to defraud, and other charges.

In May 2015, the SEC charged Robert DePalo with defrauding more than 20 investors by misrepresenting the value of their investments and use of their funds, including by sending the first $2.3 million of investor funds to his personal bank account. The SEC also alleged that DePalo made false statements to SEC examiners in an attempt to conceal the fraud.

The SEC’s final judgment orders DePalo to pay $6.5 million in disgorgement, which was deemed satisfied by the restitution order in the criminal case. The SEC also issued an order barring DePalo from the securities industry.

SEC Charges Former CEO of Silicon Valley Startup With Fraud

The SEC charged the founder and former chief executive of a Silicon Valley startup with defrauding investors in a private mobile payments company called Jumio Inc. The former CEO, Daniel Mattes, agreed to pay more than $17 million to settle the charges.

According to the SEC’s complaint, filed in federal court in California, Mattes grossly overstated Jumio’s 2013 and 2014 revenues and then sold shares he held personally to investors in the private, secondary market. The complaint alleges that Mattes made approximately $14 million by selling his Jumio shares and hid these sales from Jumio’s board.

According to the complaint, Mattes also falsely told an investor that he didn’t want to sell any of his shares because there was “lots of great stuff coming up,” and that “he’d be stupid to sell at this point.” Jumio restated its financial results in 2015, wiping out most of its revenue, and the shares became worthless after it filed for bankruptcy in 2016.

Without admitting or denying the allegations, Mattes, an Austrian citizen who now heads a private Austria-based company, agreed to be enjoined from future similar violations and barred from being an officer or director of a publicly traded company in the U.S., and will pay more than $16 million in disgorgement and prejudgment interest plus a $640,000 penalty. The settlement is subject to court approval.

SEC Charges 2 Former Officers of a Fintech Company With Accounting Fraud

The SEC announced charges against two former senior officers of Digiliti Money Group Inc. — a now-defunct Minneapolis financial technology firm — for their role in a fraudulent accounting scheme to improperly record revenue on sales with its largest customer.

According to the SEC’s complaint, Jeffrey Mack, Digiliti’s then-CEO, and Lawrence Blaney, Digiliti’s then vice president of sales, induced Digiliti’s largest customer into signing sales contracts worth more than $1.8 million by covertly entering into a series of undisclosed side letters with favorable terms for the customer.

The side letters allegedly gave the customer an unconditional right to cancel the contracts in the future, a contractual term which would preclude revenue recognition under generally accepted accounting principles.

However, according to the complaint, Mack and Blaney concealed the side letters from Digiliti’s finance and accounting personnel, board of directors and external auditor and, as a result, Digiliti improperly recognized revenue on the sales in its financial statements for the third and fourth quarters of 2016 and the first quarter of 2017. During this same period, Digiliti raised more than $18 million from investors.

The SEC’s complaint seeks permanent injunctions, disgorgement with prejudgment interest, a civil penalty and a permanent officer and director bar against Mack and Blaney.

— Check out Ex-UBS Broker Sentenced in Puerto Rico Bond Sales Fraud Scheme: Enforcement  on ThinkAdvisor.


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