Enforcement Roundup: Madoff Recovery Total Hits $10 Billion

November 21, 2014 at 04:15 AM

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The Securities Investor Protection Corp. announced another settlement in the Madoff case that, on approval, will bring the total recovery to more than $10 billion.

In addition, among recent enforcement actions by the SEC were charges against a real estate business owner and a former stockbroker for offering fraud; the CEO of a penny stock company in a pump-and-dump scheme and against three promoters in coordinated pump-and-dump schemes; and sanctions against two former government contractor employees for violations of the Foreign Corrupt Practices Act (FCPA).

SIPC Announces $10 Billion Madoff Recovery Milestone

The Securities Investor Protection Corp. (SIPC) has announced that, once it has been approved by the U.S. Bankruptcy Court for the Southern District of New York, a new settlement involving $497 million with the Herald Fund and Primeo Fund will increase the total recovery to date in the Bernard L. Madoff Investment Securities LLC (BLMIS) liquidation proceeding to $10.3 billion. The two feeder funds were primarily invested in BLMIS.

Thus far, the BLMIS trustee has allowed 2,528 claims related to 2,198 Madoff accounts. Of these accounts, 1,131 accounts — or all allowed claims totaling $925,000 or less — now have been fully satisfied in the amount of nearly $6 billion.

The nearly $6 billion in BLMIS distributions to date includes approximately $816.2 million in committed advances by SIPC to satisfy Madoff customers. Since SIPC bears all of the costs of administration, such as legal and accounting fees in the liquidation, all of the assets recovered in litigation and settlements go directly to customers.

Business Owner, Former Broker Spent Investor Money on Ravens Tickets: SEC

Wilfred Azar III, owner of a Maryland-based real estate company, was charged by the SEC with conducting an offering fraud and spending investor money on such personal expenses as his mortgage, country club dues, and season tickets to the Baltimore Ravens. The agency also charged Joseph Giordano, a former stockbroker, for participating in the scheme.

According to the agency, Azar sold investors purported bonds in his company Empire Corp., which he claimed was successful, profitable and with the resources to pay 10% annual returns.

Along with Giordano, Azar and his company raised more than $7 million on such claims, which exaggerated the safety of the bonds. However, Empire Corp. was functionally insolvent.

In addition, Azar used investors' money to pay personal expenses as well as thousands of dollars to Giordano for participating in the fraud.

For his part, Giordano also steered a mutual fund that he managed into purchasing the bonds, even though he knew the company was nearly broke. The scheme collapsed when they ran out of new investors to keep the company going and repay existing investors — who, of course, never got promised returns and in fact lost nearly all their money. The SEC seeks disgorgement plus prejudgment interest and penalties as well as permanent injunction, and is also seeking an officer-and-director bar against Azar. In a parallel case, the U.S. Attorney's Office for the District of Maryland announced criminal charges against Azar.

The SEC's investigation is continuing.

Penny Stock CEO Charged by SEC in Pump-and-Dump

Joseph Noel, CEO of San Francisco-based YesDTCHoldings, a penny stock company, was charged by the SEC with defrauding investors by means of phony press releases that depicted his so-called marketing and infomercial company as successful. That drove the stock price up so he could secretly sell millions of shares into the public market for more than $300,000 in illicit profits.

According to the agency, the deceptive press releases about the company touted exclusive distribution rights, licensing agreements, and certain products supposedly certified by the government. They spiked the stock price and enabled Noel to dump the shares.

To top it off, to evade disclosure of the fact that he was selling them, Noel sold the shares through a company he created in his teenage daughter's name.

The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest and a financial penalty as well as a permanent injunction. The SEC also is seeking an officer-and-director bar and a penny stock bar against Noel. In addition, it has suspended trading in the stock and instituted an administrative proceeding to revoke its registration.

Three Penny Stock Promoters Charged in Pump-and-Dump Scheme

Anthony Thompson, Jay Fung and Eric Van Nguyen were charged by the SEC with conducting pump-and-dump schemes involving stocks they were touting in their supposedly independent newsletters.

According to the agency, Thompson, Fund and Van Nguyen coordinated their efforts to gain control of a large portion of microcap company shares. Then they pushed them in newsletters they sent out to prospective investors. Once they created enough demand to increase the price, they sold out and moved on, leaving the stock prices to collapse and their investors to face significant losses.

The three promoters conducted five separate schemes that brought them more than $10 million in ill-gotten gains. The penny stocks they manipulated were Blast Applications Inc., Smart Holdings Inc., Blue Gem Enterprise Inc., Lyric Jeans Inc., and Mass Hysteria Entertainment Co. Inc.

Thompson, of Bethesda, Maryland, distributed several electronic penny stock promotion newsletters with such names as FreeInvestmentReport.com and OxofWallStreet.com. Fung, of Delray Beach, Florida, distributed his newsletters at such websites as PennyPic.com, and Van Nguyen was typically based in Canada and distributed electronic penny stock promotion newsletters on such websites as UnrealStocks.com and InsanePicks.com.

While the three coordinated their campaigns, they said they "may" or "might" sell shares of those companies, but all along their intent was always to dump the shares—and in some cases they were already doing so. They also neglected to mention all the compensation they got for pushing the stocks, and naturally hid their efforts to boost the prices for their own benefit.

Thompson, Fung, and Van Nguyen are charged with violating the antifraud and anti-touting provisions of the federal securities laws and related rules. The SEC is seeking disgorgement of ill-gotten gains from the schemes plus prejudgment interest and penalties, as well as permanent injunctions against further violations of the securities laws.

In addition, Thompson and Fung were named in a separate SEC case for promoting a penny stock without adequately disclosing either their compensation for doing so or the fact that they were selling their shares. The final judgment required the pair to fork over more than $1 million combined. Two relief defendants have been named in the case against the three to recover funds from the scheme. Thompson's wife, Kendall Thompson, received $200,000 in proceeds from one of the schemes, and John Babikian, who operated a penny stock promotion business primarily from a website named AwesomePennyStocks.com, received $1 million as a result of one of the schemes. Babikian was ordered by the court to pay $3.73 million in sanctions in a separate SEC case focused on different schemes.

SEC Sanctions Two Former Defense Contract Workers for 'World Tour' With Saudi Officials

The SEC has sanctioned Stephen Timms and Yasser Ramahi, two former employees in the Dubai office of FLIR Systems Inc., a U.S.-based defense contractor, for violating the Foreign Corrupt Practices Act (FCPA) by taking government officials in Saudi Arabia on a "world tour" to help secure business for the company. The two employees later falsified records in an attempt to hide their misconduct.

Oregon-based FLIR produces thermal imaging, night vision and infrared cameras and sensor systems. According to the agency, FLIR had a multimillion-dollar contract to provide thermal binoculars to the Saudi government in November 2008.

At the time, Timms, who headed FLIR's Middle East office in Dubai, and Ramahi, who reported to him, were the primary sales employees responsible for the contract, and also were involved in negotiations to sell FLIR's security cameras to the same government officials.

Timms and Ramahi went to Saudi Arabia in March 2009 to meet with five officials to discuss business opportunities. While there, the pair provided the officials with expensive watches, believing them to be important to sales of both the binoculars and the security cameras.

A few months later, the two arranged for key officials, including two who received watches, to take what Timms referred to as a "world tour" of personal travel before and after they visited FLIR's Boston facilities for a factory equipment inspection that was a key condition to fulfillment of the contract. The officials traveled for 20 nights with stops in Casablanca, Paris, Dubai, Beirut and New York City.

There was no business purpose for the stops outside of Boston, and FLIR paid for the airfare and hotel accommodations. Before they had gifted the Saudi officials with the watches and trips, Ramahi and Timms each had taken FCPA training at the company that specifically identified luxury watches and side trips as prohibited gifts.

FLIR's finance department flagged the expense reimbursement request for the watches during an unrelated review of expenses in the Dubai office and questioned the $7,000 cost. Timms and Ramahi substituted a faked invoice showing a cost of 7,000 Saudi riyal (approximately $1,900) instead, and directed FLIR's local third-party agent to back up their story that the original submission was merely a mistake.

Ramahi and Timms also tried to pass off FLIR's payment for the world tour as a billing mistake by FLIR's travel agent, and again used faked documents and FLIR's third-party agent to back them up. Without admitting or denying the SEC's findings of numerous violations, including of antibribery and false records provisions, Timms and Ramahi consented to the entry of the SEC's order and agreed to pay financial penalties of $50,000 and $20,000 respectively.

SEC Charges Unregistered Broker for Fraudulent Day Trading

The SEC has charged Albert Scipione, an unregistered broker outside Tampa, Florida, with stealing investor funds as part of a fraudulent day trading scheme.

Scipione has pleaded guilty to criminal charges in the Middle District of Florida.

According to the agency, Scipione and his business partner solicited investors to establish accounts at Traders Café, their company, for day trading. Scipione touted Traders Café's software trading platform and made phony claims to investors about low commissions and fees, high trading leverage and safety of their assets.

More than $500,000 was raised, about $367,000 of which came from investors across the country and was intended for day trading and $150,000 from a single investor who intended the money be put directly into Traders Café's business. All were assured that funds invested with Traders Café would be segregated and used only for day trading or other specific business purposes.

But when they went to trade, customers ran up against technical service problems that made trading impossible — and in the meantime Scipione and his business partner squandered nearly all the money in investor accounts on personal expenses.

Customers who gave up on trading and attempted to close their accounts, requesting refunds of the remaining balances, were fobbed off with excuses and delays. In the end, less than $1,200 remained after the two spent nearly everything else.

To top it off, Traders Café was never registered with the SEC as a broker-dealer.

The SEC seeks disgorgement of ill-gotten gains, financial penalties, and a permanent injunction for Scipione from future violations of the federal securities laws.

The agency previously charged Scipione's business partner Matthew Ionno, who agreed to settle the case and has been barred from the securities industry. Financial penalties will be decided by the court at a later date.

The U.S. Attorney's Office previously brought a criminal case against Ionno.

SEC Suspends Trading, Warns of Fraud Potential on Ebola

The SEC has suspended trading of four companies and warned of the potential for fraud in the thinly traded stocks of companies that link their future business prospects to the Ebola outbreak.

According to the agency, trading in the shares of microcap companies Bravo Enterprises Ltd., Immunotech Laboratories Inc., Myriad Interactive Media Inc. and Wholehealth Products Inc. has been suspended over concerns that their claims regarding the development of products or services in response to the Ebola outbreak may be inadequate or potentially inaccurate.

— Check out IRS Pushed to Crack Down on 'Mega IRAs' on ThinkAdvisor.

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