Insider trading, pyramid and Ponzi schemes—one involving $600 million—and illegal penny stock sales were among the enforcement actions taken by the SEC recently. Also active were FINRA, which took action against a broker-dealer, and the Department of Labor, which ordered the restoration of millions to a pension fund.
SEC Busts Investing Site's $600 Million Ponzi Scheme
The SEC announced an emergency asset freeze and the filing of fraud charges surrounding a website that promised customers ways to earn money but that in reality was, according to the agency, a Ponzi scheme on the verge of collapse.
ZeekRewards.com, the brainchild of online marketer Paul Burks of Lexington,N.C., and his company Rex Venture Group, was launched in January of 2011, promising its Internet customers numerous ways to earn money through its rewards program. Two of those methods involved the purchase of securities in the form of investment contracts, and neither was registered with the SEC.
SEC allegations say that investors were collectively promised up to 50% of the company's daily net profits through a profit sharing system in which they accumulate rewards points that they can use for cash payouts. However, the company was not profitable but instead relied on cash inflows from new investors to fund payouts to older ones.
The emergency asset freeze, said the agency, was to help investors recover more of their money; last month, it said, ZeekRewards took in approximately $162 million while total investor cash payouts were approximately $160 million.
The SEC's complaint said that ZeekRewards has paid out nearly $375 million to investors to date and holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds will be frozen under the emergency asset freeze. Meanwhile, Burks has personally siphoned several million dollars of investors' funds while operating Rex Venture and ZeekRewards, and he distributed at least $1 million to family members.
Burks has agreed has agreed to settle the SEC's charges against him without admitting or denying the allegations, and agreed to cooperate with a court-appointed receiver. He is to relinquish his interest in the company and its assets and also pay a $4 million penalty. The receiver will collect, marshal, manage and distribute remaining assets for return to harmed investors.
New Charges Brought on Insider Trading by Pro Baseball Player, CEO
The SEC has filed a second round of charges in an insider trading case that involves former professional baseball players and the former top executive at a California-based medical eye products company that was the subject of the illegal trading.
Originally, the SEC had charged former professional baseball player Doug DeCinces and three others of insider trading on confidential information ahead of an acquisition of Advanced Medical Optics. DeCinces and his three tippees made more than $1.7 million in illegal profits, and agreed to pay more than $3.3 million to settle the SEC's charges.
Now the source of those tips is being charged: DeCinces's close friend and neighbor James V. Mazzo, who was the chairman and CEO of Advanced Medical Optics. Also charged in this new round are two others who traded on inside information that DeCinces tipped to them: DeCinces' former Baltimore Orioles teammate Eddie Murray, and another friend, David L. Parker, a businessman living in Utah. According to the SEC's complaint, filed in U.S. District Court for the Central District of California, Murray made approximately $235,314 in illegal profits after Illinois-based Abbott Laboratories publicly announced its plan to purchase Advanced Medical Optics through a tender offer. The total unlawful profit resulting from Mazzo's illegal tipping was more than $2.4 million.
Mazzo tipped DeCinces with confidential information about the upcoming transaction, and DeCinces began to purchase Advanced Medical Optics stock in several brokerage accounts. DeCinces bought more and more shares as the deal progressed and as he continued communicating with Mazzo. DeCinces tipped at least five others who traded on the inside information, including Murray, Parker and the three traders who settled their charges along with DeCinces last year: physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.
Murray, without admitting or denying the SEC's allegations, agreed to settle the SEC's charges by paying $358,151. The SEC's case continues against Parker and Mazzo, the latter of whom was directly involved in the tender offer and tipped the confidential information to DeCinces along the way.
Puerto Rico-Based Ponzi Scheme Targeted Evangelicals, Factory Workers
The SEC charged a Puerto Rico resident and his company with conducting a Ponzi scheme that targeted evangelical Christians and factory workers in Puerto Rico.
According to the SEC's complaint filed in U.S. District Court for the District of Puerto Rico, Ricardo Bonilla Rojas and his firm, Shadai Yire, raised at least $7 million from as many as 200 investors living primarily in Puerto Rico but also on the U.S. mainland in states including Florida, New York and North Carolina.
The complaint alleges that Rojas actively solicited investors through personal discussions with individuals both over the phone and in person, and he also marketed the investment opportunity in presentations to evangelical Christian groups and factory workers who were often inexperienced investors. He hired some sales agents to help him solicit investors, and paid commissions based on a percentage of the investor funds they raised.
Rojas and his sales agents pitched the investment opportunity to individuals as a risk-free way to earn high returns in a short period of time. Rojas also created phony account statements that were sent to investors to hide his misuse of investor money and lead them to believe their investments were growing.
Falsely assuring investors that their principal contributions were "100% guaranteed" and promising returns up to 50%, Rojas said he'd be investing their money in commodities. However, he used new contributions to pay earlier investors, in classic Ponzi fashion, and kept $700,000 for himself.
