Pharma Founder Bilked Investors to Fund Restaurant Business, SEC Says: Enforcement

The Securities and Exchange Commission filed charges to stop an alleged fraud by a Massachusetts businessman misusing investments intended for the development of cancer diagnostic tests to instead pay personal expenses and fund his fiancée's restaurant businesses.

According to the SEC's complaint, Patrick Muraca established two pharmaceutical development companies and raised nearly $1.2 million by representing to investors that their money would be used to develop products to detect cancer and other diseases. The SEC has traced the flow of investor funds into Muraca's personal bank account and alleges that at least $400,000 has been used to pay rent for the restaurants and fund other purchases by Muraca, including payments to a casino, automotive shop and cigar shop.

The SEC alleges that investors were never informed of the alternative uses of their investments in NanoMolecularDX LLC and MetaboRX LLC, including the fact that Muraca characterized the businesses as "Serving Food; Restaurant" in separate documents he has filed with the commonwealth of Massachusetts to do business in the state.

The SEC obtained a court order freezing the assets of Muraca and his companies.

"As alleged in our complaint, we're intervening to protect investors because Muraca has veered from his stated intentions and has been using their money for purposes other than the fight against cancer and other diseases," said Paul Levenson, Director of the SEC's Boston Regional Office, in a statement.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Muraca.

PCAOB Fines PwC $1M Over Merrill Compliance Audit

The Public Company Accounting Oversight Board announced that it censured and imposed a $1 million civil penalty against PricewaterhouseCoopers LLP for violations in its examination and audit of Merrill Lynch's compliance with the Securities and Exchange Commission's Customer Protection Rule in fiscal 2014.

"An auditor's attention to a broker's compliance with the SEC's Customer Protection Rule provides critical assurance that the business is protecting customer securities from liens by creditors of the broker," said James R. Doty, PCAOB chairman. "PwC failed to fulfill its obligations during a period when Merrill Lynch exposed billions of dollars of customer assets to claims of its creditors."

The SEC's Customer Protection Rule requires a broker-dealer to hold certain customer securities in lien-free segregated accounts to protect them from creditor claims should the broker's business fail. Merrill Lynch reported that it had complied with the rule in fiscal year 2014 and that its internal control over compliance with the rule was effective.

The Board found that, in February 2015, PwC issued audit and examination reports without obtaining sufficient evidence about Merrill's compliance assertions, as required by PCAOB auditing and attestation standards.

In June 2016, the SEC found that for several years, including fiscal year 2014, Merrill Lynch held tens of billions of dollars of its customers' fully paid and excess margin securities in accounts that were subject to liens by third parties, in violation of the Customer Protection Rule.

PwC consented to the Board's order without admitting or denying the findings.

SEC Charges 2 in $17 Million Manipulation Scheme

The SEC announced fraud and other charges against two individuals and a related company for their roles in a manipulative trading scheme involving Liberty Silver Corp., a penny stock.

The SEC's complaint alleges that Robert Genovese, a Canadian citizen; his company, B.G. Capital Group Ltd.; and Abraham "Avi" Mirman, the former head of investment banking at now-defunct New York broker-dealer John Thomas Financial (JTF), were involved in a scheme concerning Liberty Silver in which Genovese sought to increase dramatically the company's share price and volume and sell millions of shares into the market.

According to the SEC's complaint, between August and October 2012, Genovese schemed with Mirman to sell Liberty Silver shares to JTF's customers in part by agreeing to loan $2 million indirectly to JTF without disclosing the loan to the customers. The complaint alleges that Genovese also touted Liberty Silver in newspaper articles while failing to disclose that he had paid for the articles, that he was dumping millions of shares of Liberty Silver stock, and the financial arrangements between himself and JTF. It further alleged that Genovese engaged in manipulative trading on a particular day, increasing Liberty Silver's share price and creating the false appearance of liquidity and demand for Liberty Silver stock.

Stock Manipulator Fined for Pump-and-Dump Scheme

The SEC announced that an overseas stock manipulator has agreed to pay nearly $800,000 and be permanently barred from involvement in penny stocks after hiding his significant stake in a small oil & gas company while secretly funding a fraudulent promotional campaign that artificially boosted the company's stock price before he dumped his shares.

SEC enforcement investigators uncovered the fraud by peeling back layer upon layer of shell companies and nominee owners to reveal that Joe Yiu Cheung controlled United American Petroleum Corp. (UAPC).

According to the SEC's order, Cheung utilized an elaborate network of overseas bank and brokerage accounts mostly in bank secrecy jurisdictions to conceal his UAPC ownership. He also did not file required reports that would have publicly disclosed his burgeoning ownership of UAPC stock.

Cheung paid for the issuance of promotional materials to 2.2 million U.S. residents, inducing investors, with rosy falsehoods about UAPC's operations and prospects. The SEC's order finds that while UAPC's stock price was rising as more investors bought in, Cheung secretly ordered his foreign brokers to dump his shares. He did not file required reports that would have revealed his sizable sales to investors, including those purchasing the stock.

Without admitting or denying the findings in the SEC's order, Cheung has agreed to cease and desist from further violations and must pay more than $542,000 in disgorgement plus $94,000 in interest and a $150,000 penalty. He agreed to a penny stock bar and a 10-year officer-and-director bar.

SEC Obtains Final Judgment Against Orchestrator of Pump-and-Dump Scheme

The SEC announced that it obtained a final judgment against Andrew I. Farmer, whom the SEC charged with orchestrating a pump-and-dump scheme involving a company that purportedly developed revolutionary technology to enable environmentally friendly oil and gas production.

The final judgment orders Farmer to pay approximately $7.2 million in disgorgement and prejudgment interest and a civil penalty of approximately $2 million. The final judgment also imposes permanent penny stock and officer-and-director bars.

The court's entry of judgment, which follows an October 2015 grant of summary judgment to the SEC on all its claims against Farmer, resolves the SEC's litigation in its entirety.

Man Who Traded Pharma Stock on Tips From Wife Faces Criminal Charges

Harold Altvater, a defendant in a pending SEC action, was indicted on July 20 for insider trading in the stock of Cambridge-based Ariad Pharmaceuticals based on nonpublic information he received from his wife, an Ariad employee at the time.

The criminal charges arise from the same conduct alleged in the SEC's complaint against Altvater in a civil action filed on June 27. The SEC alleges that that Altvater traded in Ariad's stock in advance of announcements about Food and Drug Administration decisions that affected the sales and marketing of the company's main product, a drug to treat cancer.

By purchasing shares ahead of a positive announcement, and selling shares ahead of negative announcements, Altvater allegedly obtained insider profits and avoided losses of more than $102,000. The SEC's complaint alleged that Altvater also advised a friend to trade Ariad stock on the basis of the material nonpublic information Altvater misappropriated from his wife, enabling the friend to obtain profits of approximately $4,000.

The SEC's action, which is pending, seeks an injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.

CEO of Oil and Gas Company Caught Using Investor Funds for School Tuition and Entertainment

The SEC announced that a Texas-based oil and gas company and its CEO have agreed to pay $750,000 for misleading investors about amounts spent on commission payments to sales agents and administrative expenses, and for misappropriating investor funds for personal expenses.

According to the SEC's complaint, from approximately November 2014 through July 2016, 7S Oil & Gas, LLC and William Alexander "Gilligan" Sewell raised almost $7 million from at least 70 investors nationwide through a series of unregistered offerings in oil and gas projects.

The SEC alleges that 7S and Sewell lured investors primarily through a network of sales agents and also a series of YouTube videos including one in which Sewell claimed that "for sure you will get some type of return because there's no such thing as a dry hole," as well as another video depicting oil gushing out of a well with Sewell commenting that "you got back gold coming out of that well."

The SEC also alleges that 7S' offering documents told investors that no more than 10% would be spent on marketing costs, commissions to sales agents, and salaries and that 85% of investor funds would be spent on oil and gas operations. In reality, as alleged in the complaint 7S paid commissions as high as 35% to its sales agents out of investor proceeds and applied only at most 57% of investor funds toward operating the wells. Sewell and 7S also allegedly used more than $90,000 in investor funds to pay tuition for his children, entertainment expenses, and other personal expenses. The SEC also alleges that 7S paid out sham "royalty payments" to some investors, which led investors to believe 7S was making a return on their investment based on oil sold to an independent third party.

The settlements are subject to approval by the court.

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