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Litigation Rel. No. 17245 / November 21, 2001 SEC Obtains Preliminary Injunction Against Broker in Identity Theft and Penny Stock Manipulation Fraud Case.

SEC v. Robert C. Ingardia (United States District Court for the Southern District of New York, C.A. No. 01-CV-8356 (WHP), filed September 6, 2001)

The Commission announced today that, on November 8, 2001, the Honorable William H. Pauley III, United States District Judge for the Southern District of New York, issued a preliminary injunction and granted other ancillary relief against Robert C. Ingardia, a broker most recently affiliated with the New York City-based brokerage firm of Joseph Stevens & Co. ("Joseph Stevens"), based on the Commission's prima facie showing that Ingardia had engaged in violations of the antifraud provisions of the United States securities laws.

The Commission's Complaint alleges that, from at least June 2001 through the date of the filing of the Complaint, Ingardia and certain unknown individuals engaged in an identity theft and penny stock manipulation fraud. According to the Complaint, in late June 2001, Ingardia, who has been employed since 1996 by at least six broker-dealers besides Joseph Stevens, including the now defunct New York City-based Mason Hill & Co. ("Mason Hill"), began making telephone calls to several other brokerage firms, including Fidelity, Charles Schwab and Brown & Co., in which he assumed the identity of at least eight of his present and former Joseph Stevens and Mason Hill customers. The Complaint further alleged that, after he had successfully assumed the identity of his customers, Ingardia would generally, without authorization, change the address to which all correspondence concerning the account, including trade confirmations, should be sent, and then liquidate the account by placing unauthorized orders to sell all or many of the stock positions it contained. Using the cash proceeds of the liquidation, Ingardia would then place unauthorized orders to buy huge quantities of penny stock in either Converge Global, Inc. ("Converge"), a Utah corporation headquartered in Santa Monica, California or Equity Technologies & Resource, Inc. ("ETCR"), a Delaware corporation headquartered in Lexington, Kentucky.

According to the SEC, in the course of this fraudulent scheme, Ingardia and certain unknown individuals working in concert with him made more than $1.1 million worth of unauthorized trades in the brokerage accounts of unsuspecting investors, including liquidating more than $800,000 worth of stock and purchasing more than $230,000 worth of stock in Converge and ETCR. Transactions effected by Ingardia accounted for a large percentage of all shares traded in Converge and ETCR on those days.

The Commission obtained a preliminary injunction restraining Ingardia from committing violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and an order prohibiting the destruction or alteration of documents. In addition to the preliminary injunction and ancillary relief alreadyobtained, the Commission seeks permanently to enjoin Ingardia from violating the aforementioned provisions. The Commission also seeks disgorgement of ill-gotten gains, prejudgment interest and civil monetary penalties. For further information, see Litigation Release No. 17117 (September 6, 2001).

 

LITIGATION RELEASE NO. 17246 / November 21, 2001 SECURITIES AND EXCHANGE COMMISSION v. CHALLENGE REALTY, INC., Civil Action No. 01 C 4689 (N.D. Ill.)

The Securities and Exchange Commission (Commission) today announced that on June 20, 2001, it filed an application in federal district court in Chicago seeking an order requiring compliance with a subpoena issued by the Commission to Challenge Realty, Inc. (Challenge Realty). Challenge Realty is a Nevada corporation with its principal place of business in Longwood, Florida. Challenge Realty's President is David Hampton Tedder, a resident of California and Florida. The subpoena sought documents relating to investments in Challenge Realty and Challenge Realty's operations.

Challenge Realty failed to comply with the subpoena issued by the Commission and the Commission, in its application, argued that Challenge Realty had no valid justification for its failure to comply. In response, Challenge Realty filed a Motion to Quash the subpoena. On July 20, 2001 the Court denied Challenge Realty's Motion to Quash and at hearings held on July 5, 26 and August 23, 2001, granted all of the relief requested by the Commission.

 

Litigation Release No. 17247 / November 27, 2001 Securities and Exchange Commission v. Heartland Group, Inc., Civil Action No. 01-C-1984 (Northern District of Illinois)

The Securities and Exchange Commission announced today that the receiver previously appointed to administer Heartland Group, Inc.'s High-Yield Municipal Bond Fund, Short Duration High-Yield Municipal Fund and Taxable Short Duration Municipal Fund (collectively the Funds) made a partial cash distribution of approximately $4 million to shareholders in the High-Yield Municipal Bond Fund, $1.3 million to shareholders in the Short Duration High-Yield Municipal Fund, and $1.8 million to shareholders in the Taxable Short Duration Municipal Fund. According to the receiver, the distribution was made over a two-day period on November 23 and 26, 2001 and resulted from the sale of securities held by the Funds.

In March 2001, the Honorable Judge Joan Humphrey Lefkow of the United States District Court for the Northern District of Illinois entered an Order enjoining Heartland Group, Inc. from further violations of Sections 30(b), (e) and (g) of the Investment Company Act and Rules 30b2-1, 30d-1(a) and 30d-1(c) promulgated thereunder; freezing the assets of the Funds until further court order; and appointing a receiver to manage the Funds, including, if appropriate, suspending redemptions in and liquidating the Funds. On November 1, 2001 Judge Lefkow approved the receiver's plan to engage in the partial distribution described above.

 

 

Litigation Release No. 17248 / November 27, 2001 SECURITIES AND EXCHANGE COMMISSION v. TEXON ENERGY CORPORATION, LONESTAR PETROLEUM CORPORATION, JAMES E. HAMMONDS aka JAKE HAMMONDS aka JAKE DAVIS, and BARRY V. REED (Case No. CV-01-09706-LGB(MANx) (C.D.Cal.)

The United States Securities and Exchange Commission ("Commission") announced that on November 21, 2001, the Honorable Lourdes G. Baird, United States District Judge for the Central District of California, issued an order of preliminary injunction halting a $1 million securities fraud by Texon Energy Corporation ("Texon"); Lonestar Petroleum Corporation ("Lonestar"); and James E. Hammonds ("Hammonds"), age 60 of Inglewood, California and a recidivist securities violator. The Court: (1) granted the Commission's application for a preliminary injunction and appointment of a receiver; (2) froze the assets of the defendants; (3) prohibited the destruction of documents by the defendants; and (4) ordered accountings from the defendants.

Judge Baird also extended a temporary restraining order against the president of Texon, Barry V. Reed ("Reed"), age 56, of Las Vegas, Nevada. A hearing on whether a preliminary injunction should be issued against Reed is scheduled for November 30, 2001.

The Commission's complaint, filed November 13, 2001, alleges that since 1998, the defendants have raised over $1 million from investors, purportedly for investments in oil and gas wells, and promising investors a monthly dividend equal to 12% per year. In fact, the defendants are operating a Ponzi-like scheme in which they are making payments to existing investors with the money that they raise from new investors. As part of the defendants' sales pitch in September and October 2001, the defendants have tried to capitalize on the September 11th tragedy by telling elderly investors that because of "the War," the demand for and price of oil would increase and Texon is in a "good position" to benefit from all of this because it purchases domestic oil and gas wells. Hammonds is the vice president of Lonestar and in some documents is identified as the vice president of Texon. In 1994, Hammond was enjoined for his part in a similar oil and gas fraud in which investors were also falsely promised a 12% return. SEC v. Southern California Securities, Inc., et al., (CV-94-6156-HLH) (C.D. Cal. November 17, 1994) (LR14794). In 1996, he was barred from the securities industry. In the Matter of Raymond Charles Gross and James Eugene Hammonds, Exchange Act Release No. 36802.

The Commission obtained an order preliminarily restraining Texon, Lonestar, and Hammonds from committing securities fraud in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Court's order also preliminarily restrains the defendants from committing violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. In addition to the interim relief granted on November 21, 2001, the Commission seeks a final judgment against all the defendants enjoining them from future violations of the foregoing securities registration and antifraud provisions, and ordering the defendants to disgorge all ill-gotten gains, and assessing civil penalties against them.

 

 

Litigation Release No. 17249 / November 29, 2001 SEC v. Hitsgalore.com, Inc., Stephen J. Bradford, Life Foundation Trust and Jeanette B. Wilcher, Civil Action No. SACV 01-1133 GLT (ANx) (C.D. Cal.).

On November 28, 2001, the Securities and Exchange Commission filed a complaint alleging securities fraud against Hitsgalore.com, Inc. ("Hitsgalore") and its former president, Stephen J. Bradford ("Bradford"). Hitsgalore was an Internet company located in Rancho Cucamonga, California, that maintained a website providing an Internet search engine and leasing advertising space to consumers. The company has changed its name to Diamond Hitts Productions, Inc. and relocated to Irvine, California. The complaint charges Hitsgalore and Bradford with fraud in connection with several press releases issued by the company in 1999 that contained false and misleading statements about a purported investment in Hitsgalore by a Scottsdale, Arizona, for-profit trust, Life Foundation Trust ("Life Foundation"). The complaint also charges Life Foundation and its trustee and administrator, Jeanette B. Wilcher ("Wilcher"), a resident of Scottsdale, Arizona, with aiding and abetting Hitsgalore's and Bradford's fraud and seeks disgorgement of over $1 million from Life Foundation as a result of its illegal sale of Hitsgalore stock in violation of federal securities registration requirements.

The Commission's action, filed in federal court in Los Angeles, alleges that between April 16 and May 10, 1999, Hitsgalore and Bradford issued three false and misleading press releases regarding: (1) a purported $10 million private placement investment by Life Foundation in Hitsgalore, and (2) an agreement in principle between Life Foundation and Hitsgalore for an additional $100 million investment in Hitsgalore. Bradford drafted all three press releases. Life Foundation's Wilcher conducted all negotiations on Life Foundation's behalf and assisted Bradford in drafting, reviewing and approving the April 16 press release prior to its dissemination. The press releases falsely indicated that Life Foundation would be making immediate payments to Hitsgalore in return for shares in the company, and that Life Foundation would be holding all of its Hitsgalore shares as a long-term investor. However, Life Foundation was not required to make any payments until one year after the agreements, it sold most of its Hitsgalore shares within weeks of the press releases at a profit of over $1 million, and it never paid Hitsgalore any money for the shares. The fraudulent press releases caused a dramatic rise in the price of Hitsgalore's stock, quoted on the OTCBB from $6.3125 to a high of $20.125.

The Commission's complaint alleges that Hitsgalore and Bradford violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, that Life Foundation and Wilcher aided and abetted those violations and that Life Foundation violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933.

The Commission's complaint seeks permanent injunctions against all the defendants, civil penalties against Bradford, Life Foundation and Wilcher, and disgorgement of the approximately $1 million in ill-gotten gains obtained by Life Foundation in connection with the illegal sale of its Hitsgalore stock.

Simultaneous with the filing of the Commission's complaint, Hitsgalore and Bradford settled the action by consenting to a permanent injunction, without admitting or denying the allegations in the complaint, for the violations outlined above.

For tips on how to avoid Internet "pump-and-dump" stock manipulation schemes, visit http://www.sec.gov/investor/online/pump.htm. For more information about Internet fraud, visit http://www.sec.gov/divisions/enforce/internetenforce.htm. To report suspicious activity involving possible Internet fraud, visit http://www.sec.gov/complaint.shtml.

 

 

Litigation Release No. 17250 / November 29, 2001 Accounting and Auditing Enforcement Release No. 1475 / November 29, 2001

SEC v. Maurice B. Newman and Richard A. Gerhart, Civil Action No. SA CV 00-948-GLT (C.D. Cal)

The Securities and Exchange Commission announced that on November 5, 2001, the Honorable Gary L. Taylor, United States District Judge for the Central District of California, granted summary judgment against Richard A. Gerhart, in a financial fraud case that was filed by the Commission last year. Gerhart, the former CFO of Sirena Apparel Group, Inc., was charged with fraud and other provisions of the federal securities laws. In addition to the entry of a judgment of permanent injunction, Gerhart was ordered to pay a $100,000 penalty and prohibited from serving as an officer and director of any company registered with the Commission or that is required to file reports with the Commission.

The Commission alleged in its complaint that, to meet revenue and earnings projections for Sirena, a publicly traded company, Sirena's former CEO, Maurice Newman, and Gerhart caused Sirena to report false financial information in an earnings press release and a quarterly report for the third quarter ended March 31, 1999. The complaint further alleged that Gerhart ordered Sirena personnel to manipulate the company's accounting software to show artificial earnings and made misrepresentations to Sirena's auditors regarding those earnings. On September 20, 2000, Gerhart and Newman were criminally indicted for the same fraud. Earlier this year, both Gerhart and Newman pled guilty to the securities fraud and conspiracy charges in the criminal indictment.

In the Commission's civil case, Judge Taylor concluded that Gerhart violated the antifraud provisions (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder), the books and records provision (Rule 13b2-1 of the Exchange Act), the knowing circumvention of internal controls provision (Section 13(b)(5) of the Exchange Act) and lying-to-an-accountant provision (Rule 13b2-2 of the Exchange Act), as well as aiding and abetting violations of the reporting provision (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder) and the recordkeeping provision (Section 13(b)(2)(A) of the Exchange Act). Judge Taylor specifically found that Gerhart admitted to falsifying the books and records of Sirena, to conspiring with others to inflate the company's revenues, directing company personnel to manipulate the company's computer system to improperly recognize revenue on the sales of merchandise after a quarter closed, and to creating false shipping documents for the company's outside accountants in an effort to hide the fraud.

Gerhart's co-defendant, Newman, previously settled with the Commission, consenting to a permanent injunction, without admitting or denying the allegations in the Commission's complaint, and agreeing to pay a civil penalty in the amount of $30,000.

 

 

LITIGATION RELEASE NO. 17251 / December 3, 2001. SECURITIES AND EXCHANGE COMMISSION v. C-TECH, L.L.P. AND ROBERT W. SCHLOTTERBECK (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3:01-CV-2542-P)

JUDGE ISSUES EMERGENCY ASSET FREEZE, APPOINTS A RECEIVER AND ORDERS INTERIM ACCOUNTING IN $3.9 MILLION SECURITIES FRAUD CASE FILEDD BY COMMISSION

On December 3, 2001, Judge Jorge Solis of the United States District Court for the Northern District of Texas issued an order freezing the assets of C-Tech, L.L.P. ("C-Tech"), a Comanche, Texas oil and gas firm, and Robert W. Schlotterbeck, its managing partner. C-Tech and Schlotterbeck are accused of engaging in a nationwide securities scam in which almost $4 million was raised from more than 100 investors. The court also appointed a receiver to recover and preserve assets for the benefit of the victims of the scam, ordered an interim accounting of investor funds and ordered that all evidence be preserved.

In its action, the Commission accuses C-Tech and Schlotterbeck of securities fraud in connection with the offer and sale of interests in two oil and gas wells near Beeville, Texas. Schlotterbeck diverted more than $500,000 of the $2.8 million raised in the first offering for his personal use, leaving the well unfinished. In the second offering, the well was never started and C-Tech lost the lease when Schlotterbeck misappropriated more than $450,000 of the $1.1 million raised. It appears that, among other personal uses of investor funds, Schlotterbeck used $311,000 for the purchase of a luxury golf course lot in the Austin area. In the course of offering and selling these interests, C-Tech and its sales staff have engaged in other misrepresentations and omissions concerning, among other things, the probability of drilling a successful well, the anticipated returns to investors, and the compensation paid to the C-Tech sales staff.

The Commission has charged the following defendants in its action:

Defendant C-Tech is a limited liability partnership organized in Texas with its principal place of business in Comanche, Texas. C-Tech was originally founded in 1988 by Schlotterbeck and two other partners, for the purpose of obtaining production prospects and engaging in exploration, development and drilling activities. The company was reorganized as a limited liability partnership in 2000 for the purpose of pursuing the development of medium depth wells in the Beeville, Texas area.

Defendant Robert W. Schlotterbeck is a resident of Round Rock, Texas and a co-founder and Managing Partner for C-Tech. As Managing Partner of C-Tech, Schlotterbeck controls the financial affairs of C-Tech and is a signatory on all bank accounts. In addition, Schlotterbeck established a sole proprietorship known as Millennium Lead Source ("Millennium") to market C-Tech's oil and gas interests through "cold calls" to potential investors. The Commission's complaint charges C-Tech and Schlotterbeck with violating the antifraud provisions found in Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. The complaint seeks an immediate asset freeze, preliminary and permanent injunctions, an interim accounting, disgorgement with prejudgment interest and a civil money penalty against each defendant, as well as the appointment of a receiver over the assets of the defendants. Finally, the Commission also seeks an order prohibiting the movement, alteration and destruction of books and records, and expedited discovery - all of which were granted by the Court today.

 

 

Litigation Release No. 17252 / December 3, 2001 SEC v. BIJ Financial Services d/b/a Molla Investments, New Era Enterprises Company and Brian K. Miles,Civil Action No. 01-Z-2322 (District of Colorado)

Today, the Securities and Exchange Commission filed suit in the United States District Court for the District of Colorado against BIJ Financial Services d/b/a Molla Investments, New Era Enterprises Company and Brian K. Miles, all of Denver. The Commission alleged that, beginning in November 2000 the defendants fraudulently raised at least $200,000 from investors through the sales of "units" in their "Venture Capital Program." The Commission further alleged that the defendants promised investors returns of 20% monthly or 40% quarterly with no risk to their principal. The returns were to be generated through defendant Miles' trading in S&P 500 futures. The Commission alleged that these representations were on their face false and misleading. Additionally, the Commission alleged that the defendants stopped paying investors their promised returns in August 2001. The defendants claimed, the Commission alleged, that they could no longer pay the returns because the Commission had frozen the funds in defendant Molla Investments' Nevada bank account. In fact, the Commission had not brought any type of enforcement action against any of the defendants before this one and had not obtained a freeze of the defendants' assets.

The Commission alleged that the defendants violated the antifraud provisions of the federal securities laws set forth in Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's action seeks permanent injunctions prohibiting future violations of these provisions, disgorgement of the defendants' ill-gotten gains plus prejudgment interest, and civil penalties against each defendant. Additionally, the Commission's action seeks emergency injunctive and equitable relief consisting principally of a temporary restraining order and an order freezing each defendant's assets.

 

Litigation Release No. 17253 / December 3, 2001 SECURITIES AND EXCHANGE COMMISSION v. TEXON ENERGY CORPORATION, LONESTAR PETROLEUM CORPORATION, JAMES E. HAMMONDS aka JAKE HAMMONDS aka JAKE DAVIS and BARRY V. REED (Case No. CV-01-09706-LGB(MANx) (C.D.Cal.)

The United States Securities and Exchange Commission ("Commission") announced that on November 30, 2001, the Honorable Lourdes G. Baird, United States District Judge for the Central District of California, issued an order of preliminary injunction involving a $1 million securities fraud by Barry V. Reed ("Reed"), age 56, of Las Vegas, Nevada, the president of Texon Energy Corporation ("Texon"). The Court: (1) granted the Commission's application for a preliminary injunction; (2) froze the assets of the defendant; (3) prohibited the destruction of documents by the defendant; and (4) ordered an accounting from the defendant.

The Commission's complaint, filed November 13, 2001, alleges that since 1998, Reed, along with Texon, Lonestar Petroleum Corporation ("Lonestar"), and James E. Hammonds ("Hammonds"), raised over $1 million from investors, purportedly for investments in oil and gas wells, and promising investors a monthly dividend equal to 12% per year. In fact, the defendants are operating a Ponzi-like scheme in which they are making payments to existing investors with the money that they raise from new investors. As part of the defendants' sales pitch in September and October 2001, the defendants have tried to capitalize on the September 11th tragedy by telling elderly investors, that because of "the War," the demand and price of oil would increase and Texon is in a "good position" to benefit from all of this because it purchases domestic oil and gas wells.

The Commission obtained an order preliminarily restraining Reed from committing securities fraud in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Court's order also preliminarily restrains the defendants from committing violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act.

The Commission obtained an order of preliminary injunction against Texon, Lonestar, and Hammonds on November 21, 2001.

In addition to the interim relief granted on November 30, 2001, the Commission seeks a final judgment against all the defendants enjoining them from future violations of the foregoing securities registration and antifraud provisions, and ordering the defendants to disgorge all ill-gotten gains, and assessing civil penalties against them

 

Litigation Release No. 17254 / December 4, 2001 SECURITIES AND EXCHANGE COMMISSION v. STEPHEN J. FISCHER, Civil Action No. 01- 10261 GAF(FMOx) (C.D. Cal.)

On November 29, 2001, the Commission filed an injunctive action to enforce an order issued against Stephen J. Fischer ("Fischer") by the Commission in an administrative proceeding in which Fischer was a respondent. Specifically, on April 18, 2001, Fischer was ordered, among other things, to pay a $5,000 civil penalty in a proceeding in which it was alleged that he submitted false bid and ask quotes for The L.L. Knickerbocker Co., Inc. stock in violation of Section 15(c)(2) of the Securities Exchange Act of 1934 and Rule 15c2-7 thereunder. In the Matter of Shamrock Partners, Ltd., James T. Kelly, John R. Doyle and Stephen J. Fischer, Admin. Pro. File No. 3-10344 (April 18, 2001). Even though Fischer consented to the issuance of the order by the Commission, he has failed to pay the $5,000 civil penalty.

For additional information, see Litigation Release No. 15827 (July 30, 1998).

 

Litigation Release No. 17255 / December 5, 2001 SECURITIES AND EXCHANGE COMMISSION v. TLC INVESTMENTS & TRADE CO., TLC AMERICA, INC. dba BREA DEVELOPMENT COMPANY, TLC BROKERAGE, INC., dba TLC MARKETING, TLC DEVELOPMENT, INC., TLC REAL PROPERTIES RLLP-1, CLOUD & ASSOCIATES CONSULTING, INC., ERNEST F. COSSEY, GARY W. WILLIAMS, AND THOMAS G. CLOUD, Civil Action No. SACV 00-960 DOC(MLGx) (C.D. Cal.)

TLC INVESTMENTS & TRADE CO., TLC AMERICA, INC., TLC BROKERAGE, INC., TLC DEVELOPMENT, INC., TLC REAL PROPERTIES RLLP-1 ENJOINED AND ORDERED TO PAY $106.6 MILLION IN DISGORGEMENT

The Securities and Exchange Commission ("Commission") announced that on November 19, 2001, the Honorable David O. Carter, United States District Judge for the Central District of California, entered a Final Judgment of Permanent Injunction and Other Relief Against TLC Investments & Trade Co., TLC America, Inc., dba Brea Development Company, TLC Brokerage, Inc., dba TLC Marketing, and TLC Real Properties RLLP-1 ("TLC Entities"). The Final Judgment enjoins each of them from future violations the registration and antifraud provisions of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5 thereunder. The Final Judgment further orders the TLC Entities collectively to pay disgorgement of $106.6 million and prejudgment interest. The Final Judgment also provides that, in the event the Court-appointed Receiver for the TLC Entities recovers more than $106.6 million in the liquidation of their assets, those funds shall be paid as a civil penalty. The TLC Entities consented to the entry of the Final Judgment of Permanent Injunction without admitting or denying the allegations of the Commission's complaint.

The Commission's complaint alleged that between 1998 and October 2000, the TLC Entities committed securities fraud in connection with a real estate Ponzi scheme, raising over $150 million from more than 1,800 investors, most of whom are senior citizens. The TLC Entities promised investors a safe, liquid investment that would pay guaranteed returns of 8 to 15%. The complaint further alleged that TLC Entities' principals misused at least $28.3 million in investor funds to pay other investors, invest in a prime bank scheme, buy racehorses, make charitable contributions and wire funds overseas.

Prior Litigation Releases dealing with this case: lr16754, lr16789, lr17085, and lr17199.

 

Litigation Release No. 17256 / December 5, 2001 SECURITIES AND EXCHANGE COMMISSION v. JOHN C. WILLY, JR., Civil Action No. EDCV01-979VAP (SGLx)

The United States Securities and Exchange Commission today announced that it has filed a Complaint against John C. Willy, Jr., a Southern California resident, alleging that he violated the federal securities registration and antifraud provisions. Willy promoted an overseas "high-yield" investment program that raised more than $4.5 million from investors. The investment program purportedly provided guaranteed profits of 100 percent per month. In reality, the investment program did not exist and Willy used investor money to pay for his personal expenses.

The Complaint alleges that Willy, purportedly acting on behalf of Temperance Investments Ltd., a Gibraltar company, entered into agreements with two investor groups whereby Temperance would provide investors with access to a purported investment program in which short-term bank-debt instruments could be purchased at a discount and quickly sold at a profit. Willy told the investor groups that their monies would never be placed at risk. Instead, investor monies would remain in separate bank accounts and would generate lines of credit that Temperance would use in the program. In fact, investor monies were commingled and transferred from their account in Gibraltar to any one of several accounts in Europe and the United States that were controlled by Willy.

The lawsuit, which was filed in the United States District Court for the Central District of California, Eastern Division, in Riverside, California, alleges that Willy violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, it alleges that Willy violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. The Commission seeks a permanent injunction, disgorgement, and a civil penalty against Willy.

For more information about prime bank frauds, visit the SEC's website at http://www.sec.gov/divisions/enforce/primebank.shtml.


Litigation Release No. 17257 / December 5, 2001 
SEC v. BIJ Financial Services d/b/a Molla Investments, New Era Enterprises Company and Brian K. Miles, Civil Action No. 01-Z-2322 (District of Colorado)

On December 4, 2001, United States District Court Judge Zita L. Weinshienk issued an ex parte temporary restraining order against BIJ Financial Services d/b/a Molla Investments, New Era Enterprises Company and Brian K. Miles, all of Denver. The order prohibits violations of the antifraud provisions of the federal securities laws set forth in Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order also freezes the defendants' assets and orders them to provide an accounting. A hearing on the Commission's motion for a preliminary injunction against the defendants has been scheduled for December 12, 2001. 

The Commission's complaint alleged that, beginning in November 2000 the defendants fraudulently raised at least $200,000 from investors through the sales of "units" in their "Venture Capital Program." The Commission further alleged that the defendants promised investors returns of 20% monthly or 40% quarterly with no risk to their principal. The returns were to be generated through defendant Miles' trading in S&P 500 futures. The Commission alleged that these representations were on their face false and misleading. Additionally, the Commission alleged that the defendants stopped paying investors their promised returns in August 2001. The defendants claimed, the Commission alleged, that they could no longer pay the returns because the Commission had frozen the funds in defendant Molla Investments' Nevada bank account. In fact, the Commission had not brought any type of enforcement action against any of the defendants before this one and had not obtained a freeze of the defendants' assets. In addition to preliminary injunctions against the defendants, the Commission's action seeks permanent injunctions, disgorgement of the defendants' ill-gotten gains plus prejudgment interest, and civil penalties against each defendant. 



LITIGATION RELEASE NO. 17258 / DECEMBER 5, 2001 
SECURITIES AND EXCHANGE COMMISSION V. RICHARD COLLINS ET AL. (United States District Court for the Northern District of Illinois, 01C-3085)

The United States Securities and Exchange Commission ("Commission") announced that on November 17, 2001, the Honorable Matthew F. Kennelly of the United States District Court for the Northern District of Illinois entered an Order of Permanent Injunction and Other Equitable Relief against Jerome Coppage ("Coppage"), a resident of Schererville, Indiana, for his participation in a widespread fraudulent "prime bank" scheme known as The Gateway Association ("Gateway"). Without admitting or denying the allegations in the complaint, Coppage consented to the entry of an Order that enjoins him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and orders him to disgorge his ill-gotten gains and pay civil penalties in an amount to be determined in a separate hearing by the Court. 

On April 30, 2001, the Commission filed a complaint against Coppage and others based on their participation in raising over $10 million in the Gateway prime bank scheme. The Commission's complaint alleges that from about November 1997 through about March 1999, the Gateway investment scheme raised approximately $10 million from at least 400 investors who were told that their money would be invested in a purported overseas bank debenture trading program. At numerous meetings held across the country, Coppage and others promised investors a 1,250% rate of return on a ten-month, $100,000 investment. In reality, the promised high rate of return lacked a reasonable basis, since, among other things, prime bank securities described by Coppage do not exist and are inherently fraudulent. To date, Gateway has not paid investors their promised rates of return. Nor have investors received their money back. None of the investment proceeds were used to purchase or sell financial instruments. In fact, most of the money raised from investors has been spent or wired to offshore bank accounts. 

LITIGATION RELEASE NO. 17259 / December 5, 2001

SECURITIES AND EXCHANGE COMMISSION V. GEORGE P. MATUS AND PETER T. MATUS, CIVIL ACTION NO. 4:01CV359-PB, (USDC/Eastern District of Texas)

On December 4, 2001, the Commission filed an insider trading case against a senior officer of Carreker Corporation and his brother. Named as defendants were George P. Matus, a senior vice president of Carreker and his brother, Peter T. Matus, a licensed stockbroker. According to the Commission's Complaint, the Matus brothers obtained $209,940 in illegal trading profits by trading on inside information concerning Carreker's May 22, 2001, announcement that the company would miss its first-quarter earnings estimate.

The defendants are:

     

  • George P Matus, age 33, a resident of Allen, Texas, and Senior Vice President of Investor Relations at Carreker, a Dallas, Texas, based company traded on the Nasdaq stock market.

     

  • Peter T. Matus, age 27, a resident of Holladay, Utah, and brother of George Matus. Peter Matus is a registered representative with a brokerage firm.

The case was filed in the United States District Court for the Eastern District of Texas, Sherman Division, and has been assigned to Judge Paul N. Brown.

Specifically, the SEC alleges that George Matus had advance knowledge of Carreker's negative earnings news and participated in both the drafting of the press release announcing the negative news and the decision as to when to release the news. However, rather than maintain the confidentiality of the news and abstain from trading in Carreker stock, George Matus conveyed the confidential negative information to his brother and transferred $50,000 to him in order to trade in Carreker securities and profit from the non-public information. Pursuant to their plan, Peter Matus then used his brother's funds to purchase 750 Carreker put options, effectively betting that the price of Carreker shares would decline once the negative news was made public. Predictably, upon release of the negative news, the price of Carreker stock declined-- by approximately 28%. When brother Peter sold the options a week later, the price had declined more than 40%, netting the brothers a profit of over $200,000.

In its lawsuit, the SEC is seeking a permanent injunctions, disgorgement of illegal profits and pre-judgment interest, a penalty under the Insider Trading Sanctions Act, against George Matus and Peter Matus for violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in connection with illegal insider trading while in the possession of material, non-public information. The SEC is also seeking an officer-and-director bar against George Matus, to prohibit him in the future from serving as an officer or director of any publicly traded company.

 

Litigation Release No. 17260 / December 6, 2001 SEC v. Devin A. Danehy, (U.S.D.C. W.D. Kentucky, Civil Action No. 3:01CV555, filed September 21, 2001)

The Securities and Exchange Commission ("Commission") announced that on November 19, 2001, it filed a civil contempt action against Devin A. Danehy, a resident of Orlando, Florida in federal court in Louisville, Kentucky.

These proceedings are based on Danehy's alleged violation of a Final Judgment and Order of Permanent Injunction and Other Relief ("Final Judgment") entered against him in a settled insider trading case on September 25, 2001, by the Honorable John G. Heyburn II, U.S. District Judge for the Western District of Kentucky. The Final Judgment, in part, required Danehy to pay his first installment of $50,000 of a total of $134,327 in disgorgement and prejudgment interest by October 25, 2001. Danehy did not make any payment.

The Final Judgment was based on the Commission's complaint filed on September 21, 2001. The Commission's Complaint alleged that from July 22, 1998 through October 9, 1998, Danehy engaged in insider trading in the securities of Tricon Global Restaurants, Inc. ("Tricon"), a company headquartered in Louisville, Kentucky. Danehy was a manager in the Business Analysis Group at Tricon and in this capacity, participated in the preparation of confidential internal Tricon documents reporting Tricon's financial results and forecasts of its financial results for the third and fourth quarter of 1998. Against Tricon's insider trading policies, Danehy purchased 210 Tricon call options on July 22, August 17 and 18, and October 8 and 9, while in possession of this information. Danehy subsequently sold those options after significant, positive public announcements about Tricon's financial results were made and gained a profit of $110,301.

Without admitting or denying the allegations in the Commission's Complaint, Danehy consented to entry of the Final Judgment, which permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and orders him to disgorge $110,301 in trading profits, including an additional $24,026 in prejudgment interest.

Danehy has filed for Chapter 13 bankruptcy and a hearing on the Commission's motion for an or order of civil contempt has been set for January 4, 2002.

 

Litigation Release No. 17261 / December 7, 2001 SEC ALLEGES FRAUD AGAINST POMPANO BEACH COMPANIES THAT RAISED $1.9 MILLION IN CONNECTION WITH UNREGISTERED SECURITIES OFFERING

SECURITIES AND EXCHANGE COMMISSION V. WORLD CLASS LIMOUSINES, INC., 1-800-GET-LIMO, INC., AND ANTHONY P. CALIENDO, JR., Case No. 01-7834-CIV-JORDAN (S.D. Fla., filed Dec. 5, 2001).

The Securities and Exchange Commission ("SEC" or the "Commission") announced that on December 5, 2001 it filed an emergency federal civil action against World Class Limousines, Inc. ("WCL"), 1-800-GET-LIMO, Inc. ("GET-LIMO") and Anthony P. Caliendo, Jr. ("Caliendo"), WCL and GET-LIMO's founder, president, chief executive officer and chairman (collectively, "defendants"). WCL and GET-LIMO are Pompano Beach, Florida companies that provided limousine services and were purportedly developing a nationwide Internet limousine reservation network. On the next day, the Honorable Adalberto Jordan, United States District Judge for the Southern District of Florida entered, among other things, a temporary restraining order and an asset freeze to halt the alleged on-going unregistered offering of securities by WCL, GET-LIMO and Caliendo. The Court also entered an order appointing a Receiver over WCL and GET-LIMO.

According to the SEC's complaint ("complaint"), WCL, GET-LIMO and Caliendo have been offering securities to investors both across the country and internationally. The complaint alleges that WCL and GET-LIMO have raised approximately $1.9 million dollars from at least 89 investors to develop its limousine businesses but that 32% of these funds were actually used for risky stock trading by Caliendo. Moreover, the complaint alleges, Caliendo has misappropriated at least $55,350 in investor funds for his own personal use. In addition, the complaint alleges that, unbeknownst to investors, WCL and GET-LIMO paid its sales representatives commissions totaling at least $160,000. The SEC further alleged that WCL and GET-LIMO, among other things, misled the public about the security and safety of the investment, the rate of return on the investment, the time frame in which it expected to engage in an initial public offering and about the existence of a purported joint venture which was critical to their Internet strategy.

As a result, the Commission charges WCL, GET-LIMO and Caliendo with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is also seeking in its lawsuit preliminary and permanent injunctions, disgorgement of ill-gotten profits and a civil money penalty against Caliendo.

 

Litigation Release No. 17262 / December 7, 2001. Accounting and Auditing Enforcement Release No. 1477

FORMER CEO OF DIGITAL LIGHTWAVE, INC. SETTLES SEC CHARGES FOR AIDING AND ABETTING COMPANY'S VIOLATIONS OF FEDERAL SECURITIES LAWS

Securities and Exchange Commission v. Digital Lightwave, Inc. and Bryan J. Zwan, Civil Action No. 8:00-CV-614-T-26F (M.D. Florida, filed March 29, 2000)

The Securities and Exchange Commission (Commission) announced that the United States District Court for the Middle District of Florida issued an order enjoining Bryan J. Zwan, founder and former Chief Executive Officer of Tampa, Florida based Digital Lightwave, Inc. (Digital), from violating or aiding and abetting violations of certain of the federal securities laws. Among other things, the order enjoins Zwan from violating the provision of the securities laws prohibiting making materially false statements to auditors, and from aiding or abetting books and records violations by public companies. Zwan consented to the entry of the injunction without admitting or denying the allegations of the Commission's complaint. In conjunction with the entry of the injunction, the Court ordered Zwan to pay a $10,000 civil money penalty.

The Commission's settlement with Zwan was the last outstanding action of several matters related to a fraudulent earnings management scheme, books and records violations, and other violations, that the Commission's complaint alleged had taken place at Digital during two quarters in 1997. Without admitting or denying the Commission's allegations, Digital previously consented to an injunction against violating the antifraud, books and records, and other provisions of the federal securities laws. Other individuals who are or had been officers of Digital previously settled administrative proceedings brought by the Commission, without admitting or denying the Commission's findings.

On October 23, 2001, the United States District Court entered a Final Judgment of Permanent Injunction and other Relief as to Bryan J. Zwan ("Final Judgment"). The Final Judgment enjoins Zwan from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and from violating Rule 13b2-2 promulgated under the Exchange Act. The Final Judgment also orders Zwan to pay a $10,000 civil money penalty.

See also LR-16491A; In the Matter of Seth P. Joseph, Securities Exchange Act of 1934 Release No. 34-42588; Accounting and Auditing Release No. 1244 and In the Matter of Beth A. Morris and Steven H. Grant, Securities Exchange Act of 1934 Release No. 34-42587; Accounting and Auditing Release No. 1243.

 

LITIGATION RELEASE NO. 17263 / December 7, 2001 SUMMARY JUDGMENT ENTERED AGAINST PRESIDENT OF INVESTMENT ADVISER

SECURITIES AND EXCHANGE COMMISSION V. TANDEM MANAGEMENT INC., WILLIAM F. BRANSTON, EUGENE B. DEVENEY, AND PETER S. ALSOP, 95-CIV-8411 (S.D.N.Y.)

The Securities and Exchange Commission announced that, on November 13, 2001, the Honorable John G. Koeltl, United States District Judge for the Southern District of New York, entered summary judgment against William F. Branston ("Branston") of Tandem Management Inc. ("Tandem") in a civil injunctive action filed by the Commission on October 2, 1995 against Tandem, and its principals, Branston, Eugene B. Deveney ("Deveney"), and Peter S. Alsop ("Alsop"). At the time the Commission filed its complaint, Tandem was a registered investment adviser and Branston was Tandem's President and Chief Investment Officer. The Commission alleged that Branston misappropriated over $1 million in client assets, principally in the form of "soft dollar" credits and commission rebates; distributed false information concerning Branston's past performance returns and Tandem's performance returns and assets under management to clients, investors in a limited partnership fund advised by Tandem, and a national money management ranking publication; filed false Forms ADV; and failed to keep required books and records. The judgment permanently enjoined Branston from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 204, 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940, and Rules 204-2, 206(4)-1, and 206(4)-4 thereunder. On September 24, 1999, Branston was criminally convicted of a 16 count indictment based upon the same facts in the Commission's civil injunctive action and is currently serving a term of 37 months imprisonment. The Court previously entered a final judgment on consent against defendant Alsop on August 18, 1997 and a default judgment against defendant Tandem on May 11, 2001. This case, which had been suspended without prejudice due to Branston's criminal proceedings, was restored to the active docket in January 2001 and is pending against remaining defendant Deveney.

See Lit. Rel. Nos. 14670, 15447, 17006.

 

Litigation Release No. 17264 \ December 10, 2001 SEC CHARGES INVESTMENT ADVISERS WITH CREATING FALSE ACCOUNT STATEMENTS THAT OVERSTATED THE VALUE OF CLIENTS' ASSETS BY OVER $139 MILLION

Securities and Exchange Commission v. Yehuda Shiv, Sagam Capital Management Corporation and Sagam Capital LLC, Civil Action No. 01 Civ. 11282

On December 10, 2001, the Securities and Exchange Commission filed an injunctive action in the United States District Court for the Southern District of New York alleging that from approximately 1995 through 2001, Yehuda Shiv ("Shiv"), and two registered investment advisers that Shiv controls, Sagam Capital Management Corp. ("Sagam Corp.") and Sagam Capital LLC ("Sagam Capital"), created and sent false account statements to clients that overstated the net value of assets in their accounts by at least $139 million.

The Commission filed the action against the following defendants:

Yehuda Shiv, age 71, is an Israeli citizen and a resident of New York, New York. Shiv is the President of Sagam Corp. and Sagam Capital and makes investment decisions for all Sagam Corp. and Sagam Capital client accounts.

Sagam Corp. is an investment adviser with its principal place of business in New York, New York.

Sagam Capital is an investment adviser with its principal place of business in New York, New York. In this action, the Commission alleged the following. Until late 1994, Shiv utilized a trading strategy in clients' accounts that involved borrowing foreign currencies to purchase mortgage-backed securities, which provided clients with sizeable returns. In late 1994, Shiv's trading strategy became unprofitable and clients suffered substantial losses. Because Shiv did not want to disclose the losses to his clients, Shiv began creating false account statements to clients. Shiv sent false account statements to approximately ten clients from 1995 through 2001, which showed that the trading in their accounts had been, and was continuing to be, profitable. By October 31, 2001, Shiv had overstated the net value of clients' assets by over $139 million.

Shiv, Sagam Corp. and Sagam Capital profited from their fraudulent conduct. Shiv charged his clients management and performance fees based upon the artificially inflated value of the clients' portfolios.

Additionally, to conceal his fraud, Shiv made unauthorized transfers of assets between clients' accounts. For instance, if a client requested a withdrawal from his account and there were insufficient funds, Shiv would withdraw funds from another client's account and transfer the funds to the client who had originally requested the withdrawal.

The Commission charged Shiv, Sagam Corp. and Sagam Capital with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, civil penalties.

Additionally, today the Court granted the Commission's application for a preliminary injunction and other emergency relief, including an asset freeze and the appointment of a receiver to take control of the two corporations. The defendants consented to the entry of the preliminary injunction and other relief.

 

Litigation Release No. 17265 / December 11, 2001 Securities and Exhange Commission v. Spectrum Brands Corp., Saverio (Sammy) Galasso III, David Hutter (a/k/a David Green), Charlie Dilluvio and Michael J. Burns, Civil Case No. CV-01-8257 (Seybert, J.; Boyle, M.J.) (E.D.N.Y. filed December 11, 2001)

SEC Sues Spectrum Brands Corp. for Fraudulent Claims for Anthrax Protection Device ___________ President and Three Promoters Charged For Manipulating Stock

The Securities and Exchange Commission ("Commission") today filed a civil action involving an ongoing fraudulent scheme to exploit the nation's fear of anthrax and bio-terrorism. The Commission's complaint, which was filed in the United States District Court for the Eastern District of New York, alleges manipulation of the stock of a publicly traded shell company, Spectrum Brands Corp. The Complaint alleges that Spectrum Brands, nominally of Hauppauge, New York, is secretly owned and controlled by a group of stock promoters located in Hicksville, New York. These undisclosed principals include two individuals -- Saverio (Sammy) Galasso III and David Hutter (a/k/a David Green) -- who recently pled guilty to unrelated felony charges and are awaiting sentencing, and an associate, Charlie Dilluvio. Also charged was the sole officer and director of Spectrum Brands, Michael J. Burns. All four individuals (Galasso III, Hutter, Dilluvio and Burns) were arrested today on criminal charges relating to the Spectrum Brands stock fraud.

According to the Complaint, on or before November 5, 2001, Spectrum Brands posted on its website that it had a hand-held device called the "DeGERMinator" capable of "WIP[ING] OUT SURFACE GERMS IN LESS THAN 5 SECONDS, INCLUDING ANTHRAX." The closing price of Spectrum Brands' common stock tripled on this news, shooting up from approximately $4 on November 1, to $7 on November 2, to $11.75 on November 5, with an intra-day high of $14 on November 5. Meanwhile, according to the Complaint, the Hicksville promoters engaged in a series of transactions designed to create artificial volume in the market for Spectrum Brands securities and sold stock into the inflated market. The company has made certain corrective disclosures on its website, but continues to tout in recent press releases and spam e-mails its supposed progress in combating "bio-terrorism" and "cyber-terrorism." These include a spam e-mail dated November 29 touting the company's management and predicting a "$15.00 stock price! Over a 10 fold move!" No disclosure has been made of the substantial ownership positions and management roles of the Hicksville promoters. Thus, unbeknownst to the investing public, Spectrum Brands continues to be owned and operated in secret by Galasso and Hutter, both of whom are convicted felons.

The Commission charges Spectrum Brands, Saverio (Sammy) Galasso III, David Hutter (a/k/a David Green), Charlie Dilluvio and Michael J. Burns with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and seeks permanent injunctions, restitution, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from all defendants and an officer and director bar against Burns.

The Commission acknowledges assistance provided by NASD Regulation Inc., the United States Attorney's Office for the Eastern District of New York and the United States Postal Inspection Service in this matter. The Commission's investigation is ongoing.

 

Litigation Release No. 17266 / December 12, 2001 United States v. Alan Bond, 01-CR-1140 (S.D.N.Y.)

On December 7, 2001, the United States Attorney's Office for the Southern District of New York (USAO) indicted Alan Bond (Bond), charging him with investment advisory fraud, mail fraud, and false statements on Forms ADV. The indictment is based on allegations that Bond, through his money management firm, Albriond Capital Management, LLC (Albriond), defrauded clients through an unlawful trade allocation scheme. Bond had previously been indicted by the USAO and sued by the Securities and Exchange Commission (Commission) in December 1999 on a different scheme in which he allegedly received millions of dollars in brokerage commission kickbacks.

The new indictment alleges that from approximately March 2000 to July 2001, while trading for his own personal account and the accounts of three institutional clients, Bond allocated the vast majority of profitable trades to his own personal account, while allocating the vast majority of unprofitable trades to client accounts. According to the indictment, Bond directed approximately 2,293 separate purchases of securities, of which 1,168 were profitable, and 1,125 were unprofitable, at the close of the trading day on which they were purchased. Bond allegedly allocated more than 93% of these profitable trades to his own account, but less than seven percent of the profitable trades to client accounts. Further, Bond allegedly allocated less than 17% of the unprofitable trades to his own account, but more than 83% of the unprofitable trades to client accounts. Consequently, during this 17-month period, Bond's clients allegedly lost nearly $57 million, representing investment losses ranging from 64% to 73%. In contrast, during the same period, Bond allegedly personally gained approximately $6.6 million, representing an investment return of approximately 5,487%.

In August 2001, based on the same allegations in the USAO's indictment, the Commission obtained an order temporarily restraining Bond and Albriond from violating the antifraud provisions of the securities laws and freezing their assets with an allowance for reasonable living expenses and attorneys fees. In October 2001, the Commission obtained an order preliminarily enjoining Bond and Albriond from violating the antifraud provisions of the securities laws and continuing the asset freeze, subject to certain provisions. The Commission is seeking permanent injunctions and civil money penalties against Bond and Albriond, and disgorgement from Bond. The Commission's case against Bond and Albriond is stayed pending resolution of the criminal case. [Securities and Exchange Commission v. Alan Brian Bond, Robert I. Spruill and Albriond Capital Management, LLC, Civil Action No. 99 Civ. 12092 (RO) (S.D.N.Y.)]

 

Litigation Release No. 17267 / December 12, 2001 Securities and Exchange Commission v. John Freeman, James Cooper, Benton Erskine, Anthony Seminara, Norman Lehrman, Linda Karlsen, Timothy Siemers, Norman Grossman, Lawrence Schwartz, Michael Akva, Robert Fricker, Richard Zelman, Bradley Burke, Benjamin Cooper, Chad L. Conner, Deon Benson, Gordon K. Allen, Jr., Jon Geibel, and William H. Borders II, 00 Civ. 1963 (VM) (Southern District of New York)

SEC SETTLES CLAIMS INVOLVING INSIDER TRADING AGAINST SIX DEFENDANTS

The Securities and Exchange Commission ("Commission") today announced that on December 7, 2001, the Honorable Victor Marrero of the United States District Court for the Southern District of New York entered individual Final Judgments of permanent injunction and other relief against defendants John Freeman ("Freeman") of Brooklyn, New York, Lawrence Schwartz ("Schwartz") of New York, New York, Anthony Seminara ("Seminara") of Long Beach, New York, Bradley Burke ("Burke") of New York, New York, Benton Erskine ("Erskine") of Charleston, West Virginia, and Benjamin Cooper ("Cooper") of Bowling Green, Kentucky. These judgments settle the Commission's claims against these six defendants in a civil action filed by the Commission on March 14, 2000, alleging that from 1997 through January 2000, these six defendants and others engaged in a widespread insider trading scheme that produced over $8 million in illegal profits from trading in the securities of 23 public companies.

At the time of the unlawful conduct alleged in the Complaint, Freeman was a part-time word processor who was assigned by the temporary agency where he worked to two Wall Street investment banking firms, Goldman Sachs & Co. Inc., and Credit Suisse First Boston Corporation. According to the Complaint, as a temporary employee at the two firms, Freeman was able to gain access to material nonpublic information regarding numerous merger and acquisition transactions. Freeman and two individuals he met in an Internet chat room, Erskine and James Cooper, launched the insider trading scheme. Erskine traded in advance of sixteen transactions. James Cooper tipped his brother, Benjamin Cooper, who traded in advance of fourteen transactions. Schwartz, a friend of Freeman and one of the most active traders, purchased securities in advance of twenty-two transactions. Seminara, a co-worker of Freeman, traded in advance of eight transactions. Burke, who worked with Freeman as a temporary employee at Credit Suisse, provided information he received at Credit Suisse to Freeman to pass to Freeman's network of tippees.

Without admitting or denying the allegations in the Complaint, the defendants consented to the entry of Final Judgments that permanently enjoin them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and with the exception of Burke, violations of Section 14(e) of the Exchange Act and Rule 14e-3. Freeman was ordered to pay disgorgement in the amount of $3,734,795 with pre-judgment interest in the amount of $429,658.84, but payment was waived for the amount exceeding $22,000 based upon his sworn Statement of Financial Condition. Schwartz was ordered to pay disgorgement in the amount of $786,402 with pre-judgment interest in the amount of $97,689, and a civil penalty of $786,402 plus postjudgment interest within eighteen months. Burke was ordered to pay disgorgement in the amount of $345,066 with pre-judgment interest in the amount of $63,247.72, but payment of the full amount was waived based upon his sworn Statement of Financial Condition. Erskine was ordered to pay disgorgement in the amount of $363,464 with pre-judgment interest in the amount of $41,813.68, but payment was waived for the amount exceeding $25,000 based upon his sworn Statement of Financial Condition. Seminara was ordered to pay disgorgement in the amount of $40,748 with pre-judgment interest in the amount of $7,468.77, but payment was waived for the amount exceeding $25,000 based upon his sworn Statement of Financial Condition. Cooper was ordered to pay disgorgement in the amount of $149,623 with pre-judgment interest in the amount of $18,310.56, but payment was waived for the amount exceeding $11,000 based upon his sworn Statement of Financial Condition. Civil penalties were not imposed against defendants Freeman, Burke, Erskine, Seminara, and Cooper based upon each defendant's sworn Statement of Financial Condition. Each of the six defendants previously pleaded guilty in parallel criminal proceedings filed by the United States Attorney's Office for the Southern District of New York.

See also: L.R. 16469 (March 14, 2000).

 

 

Litigation Release No.17271 / December 13, 2001 SECURITIES AND EXCHANGE COMMISSION v. GOING PLATINUM, INC. AND ALAN H. CATALAN, NO. 01-MC-222 (RK) (E.D. PA)

SEC OBTAINS CONSENT ORDER ENFORCING SUBPOENAS AGAINST GOING PLATINUM, INC. AND ALAN H. CATALAN

On December 10, 2001, the Honorable Robert F. Kelly approved a consent order under which the Securities and Exchange Commission ("Commission") obtained the relief it had sought in a subpoena enforcement action against Respondents Going Platinum, Inc. and Alan H. Catalan. Immediately prior to the December 6, 2001 hearing on the Commission's application the Respondents consented to the entry of an order requiring them to produce responsive documents. The documents relate to the Commission's investigation into whether Going Platinum, Inc. and Catalan have engaged in a fraudulent scheme to sell unregistered securities over the Internet.

The Commission's application to enforce the two subpoenas was filed on November 14, 2001. [SEC v. Going Platinum, Inc. et al., No. 01-MC-222 (RK) (E.D. PA)].

 

Litigation Release No. 17272 / December 13, 2001 SEC BRINGS CHARGES AGAINST FRAUDULENT INTERNET OFFERING IN PURPORTED SPORTS BETTING OPERATION

Securities and Exchange Commission v. Invest Better 2001 and John and Jane Does 1 through 10, 01 Civ. 11427 (BSJ) (S.D.N.Y. Dec. 13, 2001)

The Securities and Exchange Commission announced today that it has filed an enforcement action charging Invest Better 2001 ("IB2001") and unidentified persons behind IB2001 with perpetrating a fraudulent, unregistered, ongoing offering of securities over the Internet. The Complaint alleges that IB2001 offers purportedly "guaranteed" and "risk-free" investment programs in which IB2001 pools investor funds to bet on sporting events, and promises to repay investors between 125% to 2500% of their principal within specified periods ranging from three days to several weeks, depending on the program selected. The Complaint, filed in the United States District Court for the Southern District of New York, charges the defendants with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder.

The Complaint names as defendants:

IB2001 is an entity that until Monday, December 3, 2001, operated a website, hosted by a server in New York City, and that and continues to operate a bulletin board at the MSN Networks Communities website. On its website and the MSN bulletin board, IB2001 has held itself out as "the #1 investment service in existence."

Defendants John and Jane Does 1-10 are unknown individuals or groups of individuals responsible for, or controlling, the Investment Programs offered by Defendant IB2001, the IB2001's website or bulletin board. According to the Complaint:

Since at least November 14, 2001, the Defendants, through the IB2001 website and bulletin board, have offered, and are continuing to offer, investments into four Investment Programs: (a) the "125% 3 Day Ongoing Program," through which IB2001 promises a supposed 125% return after a three-day investment; (b) the "250% 1 Week Ongoing Program," through which IB2001 guarantees a supposed 250% return after one-week; (c) the "1250% 1 Month Program," through which IB2001 guarantees a supposed 1250% return after a one-month investment; and (d) the "2500% Christmas Miracle Program" through which IB2001 guarantees a supposed 2500% return beginning December 26, 2001 on funds invested between November 10, 2001, and December 15, 2001. The Defendants, through the IB2001 website and bulletin board, represent to investors that the investments in, and returns from, the four Investment Programs are "safe" and "guaranteed." The Defendants further represent that IB2001 generates profits for the Investment Programs by pooling investors' money and placing "safe bets" with three online sportsbooks.

These representations are materially false and misleading. Among other things, gambling by its very nature requires the undertaking of risk, and IB2001 cannot provide risk-free exorbitant returns on investments in the Investment Programs by betting on sporting events. In addition, it is economically not feasible for an issuer of fixed-instruments to provide exorbitant short-term financial returns, in an open-ended offering, which are "risk-free."

The litigation is pending.

SEC Complaint in this matter.

 

Litigation Release No. 17273 / December 13, 2001 COMMISSION MOVES TO ENFORCE INVESTIGATIVE SUBPOENA

SEC v. Charles B. Nelson, Case No. 1:01MS00468 (D.D.C. Dec. 13, 2001).

On December 13, 2001, the Commission filed an application in the United States District Court for the District of Columbia for an order to enforce an investigative subpoena served on Charles B. Nelson of Rancho Mirage, California. The subpoena sought documents and testimony from Nelson relating to his employment at and dealings with Platforms International Corporation, also known as Platforms Wireless International Corporation, an Oklahoma corporation headquartered in Los Angeles, California.

The Commission's application alleges that Nelson has not complied with the subpoena. In its application, the Commission argues, among other things, that Nelson has no valid reason for failing to comply with the subpoena. A hearing on the Commission's motion has not yet been scheduled.

 

Litigation Release No. 17274 / December 13, 2001 Securities and Exchange Commission v. Manu B. Shrivastava, Civil Action No. C 00-04048 CRB (N.D. Cal.)

The Securities and Exchange Commission ("Commission") today announced it has obtained a judgment against Manu B. Shrivastava ("Shrivastava") imposing civil penalties for illegal insider trading in the securities of nVidia Corporation.

On December 5, 2001, U.S. District Court Judge Charles R. Breyer entered final judgment for the Commission and ordered Shrivastava to pay $250,000 plus post-judgment interest as a civil penalty pursuant to Section 21A of the Securities and Exchange Act of 1934, 15 U.S.C. 78u-1. Judge Breyer entered the substantial civil penalty in order to deter both Shrivastava and other potential insider traders.

As described in the Commission's court filings, on Sunday, March 5, 2000, nVIDIA and Microsoft entered into an agreement providing for nVIDIA to design and manufacture the 3D computer graphics and multimedia sub-system for Microsoft's planned video game console, the X-Box. That evening, nVIDIA's president and chief executive officer sent an email entitled "X is Ours!" to all nVIDIA employees, informing them of the agreement and its huge revenue impact on nVIDIA. The next morning, March 6, nVIDIA's vice president of marketing sent an email to all nVIDIA employees entitled "xbox shhhhhh...", reminding them that news of the X-Box agreement was confidential.

On the morning of March 6, 2000, after reading both emails, Shrivastava began to acquire short-term nVIDIA call option contracts through an Internet brokerage account. In all, he spent $30,825 acquiring 100 nVIDIA option contracts.

From March 7 through March 9, 2000, nVIDIA's share price soared, as rumors about the X-Box contract circulated on the Internet and in the press. After Microsoft announced the X-Box agreement to the public on the morning of March 10, 2000, nVIDIA shares continued to rise, closing that day at $118 per share, more than twice the closing price on March 6. Shrivastava sold all 100 nVIDIA call option contracts between March 7 and March 10, realizing illegal profits of $446,724.

The Commission filed its lawsuit against Shrivastava on September 28, 2000. Also on that date, the U.S. Attorney for the Northern District of California filed criminal insider-trading charges against Shrivastava. In the criminal action, Shrivastava pled guilty to one count of securities fraud, forfeited his illegal profits of $446,724 plus his initial investment of $30,825, and was fined $20,000 and sentenced to one year of home detention and five years of probation. As a result of the December 5 court order in the Commission's action, Shrivastava must pay an additional civil penalty of $250,000.

In a related matter, on November 19, 2001, the Commission filed lawsuits against 15 other people for trading in nVIDIA securities in March 2000 prior to the public announcement of the X-Box contract. The actions allege that the defendants (including 11 nVIDIA employees and four tippees) earned more than $1.7 million in illegal profits. Simultaneous with the filing of the complaints, the Commission also announced settlements with two of the defendants. Litigation against the remaining defendants is pending.

 

Litigation Release No. 17275 / December 17, 2001 United States v. Patrick H. McCarthy III, Criminal No. 01760 (E. D. Pa. December 13, 2001)

PATRICK H. MCCARTHY, III CHARGED CRIMINALLY WITH OBSTRUCTION OF PROCEEDINGS BEFORE THE COMMISSION

On December 13, 2001, the United States Attorney's Office for the Eastern District of Pennsylvania announced the filing of a one-count information against Patrick H. McCarthy III, a former partner at a Philadelphia law firm, charging him with obstruction of proceedings before the Securities and Exchange Commission in violation of 18 U.S.C. 1505. McCarthy is charged with destroying, altering and concealing documents after receiving a subpoena issued in a Commission investigation that involved, among other things, two Commonwealth of Pennsylvania refunding bond offerings. McCarthy is also charged with concealing the extent of his involvement in the two transactions during his investigative testimony under oath before the Commission staff. If convicted, McCarthy faces a maximum sentence of 5 years imprisonment, a three year period of supervised release, $250,000 fine and a $100 special assessment.

In November 1999, the Commission filed a civil injunctive action against McCarthy, charging him with violations of the antifraud provisions of the federal securities laws. McCarthy, a fund raiser and advisor to a former Pennsylvania State Treasurer, was charged with arranging for his law firm to receive undisclosed compensation for influencing the selection of a securities dealer in the two Pennsylvania refunding bond offerings. Without admitting or denying the allegations in the Commission's complaint, McCarthy agreed to the entry of an injunction against future violations and paid a civil penalty of $100,000. SEC v. Patrick H. McCarthy, Litigation Release No. 16356 (November 17, 1999).

 

Litigation Release No. 17276 \ December 17, 2001 SECURITIES AND EXCHANGE COMMISSION v. PETER W. CHABOT, CHABOT INVESTMENTS, INC., SIRENS INVESTMENTS, INC., SIRENS SYNERGY AND THE SYNERGY FUND, LLC, Civil Action No. 01 CV 9976 (AGS)(S.D.N.Y.)(filed November 13, 2001).

SEC OBTAINS PRELIMINARY INJUNCTION AGAINST FRAUDULENT HEDGE FUND MANAGER

The Securities and Exchange Commission announced today that on December 10, 2001, the United States District Court for the Southern District of New York entered a preliminary injunction prohibiting Peter W. Chabot ("Chabot"), Chabot Investments, Inc., Sirens Investments, Inc., Sirens Synergy, and The Synergy Fund LLC from engaging in the fraudulent offer and sale of securities. The injunction also freezes the defendants' assets. All of the defendants consented to the relief requested.

The Court previously entered a temporary restraining order and an asset freeze against Chabot and the other defendants on November 13, 2001. The Commission's complaint alleges that from 1999 onwards Chabot, individually and through his entities, raised over $1.2 million from approximately 14 investors by making material misrepresentations and omissions to them concerning an alleged hedge fund. Chabot claimed he was an experienced trader and that he had developed a mathematical model to predict when to buy stocks. In fact, according to the complaint, Chabot did not buy stocks or other securities with the investors' funds, but instead spent the money for his personal expenses.

The preliminary injunction enjoins Chabot and his co-defendants, during the pendency of this action, from violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 206(1) and 206(2) of the Investment Advisers Act of 1940. For additional information, see L.R. 17227 (November 13, 2001).

The Commission wishes to thank the U.S. Attorney for the Southern District of New York and the Federal Bureau of Investigation for their cooperation in this matter.

 

Litigation Release No. 17277 / December 17, 2001 SEC SUES PRESIDENT OF PACKAGE DELIVERY COMPANY, OWNER OF BROKER-DEALER, AND TWO SALES AGENTS FOR OFFERING FRAUD. SEC ALLEGES MASSIVE THEFT OF INVESTOR FUNDS.

SECURITIES AND EXCHANGE COMMISSION V. PAUL R. JOHNSON, ET AL., Case No. 01-7874-CIV-HURLEY (S.D. Fla., filed December 12, 2001)

The Securities and Exchange Commission (SEC) announced that on December 12, 2001, it filed a complaint against the president of a South Florida package delivery company, the owner of a Florida-based broker-dealer, and two sales agents for their roles in an allegedly fraudulent stock offering that raised over $15.5 million from nearly 400 investors. The SEC's complaint alleges that defendants Paul R. Johnson, John Cook, Emanuele Cardaci, and Scott Schoenbauer raised funds for Link Express Delivery Solutions, Inc. ("Link").

Along with its complaint, the SEC sought and obtained an asset freeze against Johnson and relief defendants Caterina Johnson (Johnson's mother) and J & J Management Consulting ("J & J").

According to the SEC's complaint, Link, which was based in Deerfield Beach and Ft. Lauderdale, Florida, and ceased operations in March 2000, was created to provide express package delivery services to commercial and individual accounts and compete with package delivery companies such as United Parcel Service and FedEx. Between October 1997 and March 2000, Link conducted a series of five fraudulent private placement offerings, which raised over $15.5 million from nearly 400 unsuspecting investors. During that period, Johnson was Link's president and Chief Executive Officer. Johnson, a Canadian citizen, resides in South Florida.

The SEC's complaint alleges that Johnson and Cook provided investors and potential investors with false and misleading offering documents and made material misrepresentations and omissions to investors concerning the use of investor funds, Link's projected revenues and anticipated returns, Johnson's business experience, and Johnson's control over Argus Securities, Inc. ("Argus"), a broker-dealer that sold certain Link securities. Among other things, the SEC's complaint alleges that

Link's offering materials stated that Link would use investor funds for business purposes relating to its delivery service operations, including transportation and sorting equipment, facilities, software development, and other operational costs. The materials also falsely claimed investor funds would be used to pay J & J and others for consulting services. In contrast to Link's representations, Johnson diverted at least $2.3 million of Link investor funds for his own use to purchase Argus, support family and friends, and live a lavish lifestyle, replete with limousines, bodyguards and a personal valet.

In addition, Johnson sold his own unregistered Link stock and raised about $3.4 million. Johnson commingled the proceeds of his personal stock sales with Link investor funds and continued his spending spree, using at least $3 million of the commingled funds for non-Link purposes, such as leasing and renovating a South Beach nightclub.

Link projected sales of over $1.6 million when it began operations. Link's revenues, however, did not meet those projections. In fact, Link's total revenues were only $752,862, of which it collected only $254,000. Nonetheless, Link's offering materials, which were distributed to prospective and actual investors, continued to state that Link would earn extraordinary revenues in excess of $14.8 million.

Link's offering materials also misleadingly touted Johnson's business experience and suggested that he had relevant experience in the delivery service industry. In fact, Johnson's prior experience consisted of operating a fast-food pick-up service and working as a bookkeeper of a forklift company.

Potential investors were solicited to invest in the Link offerings by registered representatives and sales agents hired by Johnson and Cook. The solicitations and sales of one of Link's offerings was handled exclusively by Argus, a broker-dealer purportedly owned by Cook, which was actually controlled by Johnson. According to the SEC, Johnson used Cook and Argus to support a fiction of broker independence, and to promote an image that Link securities were a viable investment.

Cardaci and Schoenbauer were among the top-producing sales agents for the Link offerings, and received commissions of between 8 and 11% of the total amount invested by their clients in Link. They solicited investors and collected commissions on their sales while not associated with any registered broker-dealer. Upon the SEC's motion, the Honorable Judge Daniel T. K. Hurley of the United States District Court of the Southern District of Florida entered an order freezing the assets of Johnson, Caterina Johnson, and J & J.

 

Litigation Release No. 17278 / December 18, 2001 Securities and Exchange Commission v. Patricia A. Bugenhagen, James L. Shisler, James R. Gallagher, Estate of Timothy P. Gallagher, Richard J. Merman, John P. Dougherty, and Fred D. Shapiro, 01 Civ. 6538 (E.D.PA.)

SEC CHARGES SEVEN WITH INSIDER TRADING

The Securities and Exchange Commission today filed an injunctive action in the United States District Court for the Eastern District of Pennsylvania, alleging that Patricia A. Bugenhagen, a former employee of BetzDearborn Inc., James L. Shisler, her brother-in-law, James R. Gallagher, Timothy P. Gallagher (now deceased), Richard J. Merman, John P. Dougherty, and Fred D. Shapiro, engaged in illegal insider trading in advance of the July 30, 1998 announcement that BetzDearborn Inc. and Hercules Inc. had agreed to merge. The complaint alleges that, in total, the defendants reaped illegal profits of $270,200.

The complaint alleges that Bugenhagen, an executive assistant at BetzDearborn, learned of the impending merger around June 30, 1998, at which time she reallocated a portion of her retirement account to purchase BetzDearborn securities. At the same time, Bugenhagen tipped Shisler, who purchased 100 shares of BetzDearborn. Bugenhagen subsequently purchased BetzDearborn securities for herself using her brother-in-law's account. On July 17, 1998, through Shisler's account, Bugenhagen purchased 300 shares of BetzDearborn for $38.50 per share, for a total cost of $11,550 - her first-ever purchase of common stock outside of her 401(k) plan. After her investments, Bugenhagen had 81% of her liquid assets tied up in BetzDearborn stock.

The complaint further alleges that Bugenhagen tipped her close friend, defendant James R. ("Bob") Gallagher ("Bob Gallagher"), about the impending merger, and he in turn tipped his brother, Timothy P. Gallagher. On July 8, 1998, Tim Gallagher bought 50 shares and 40 call options of BetzDearborn. Tim Gallagher in turn tipped three friends who belonged to his informal weekly investment group about the impending takeover of BetzDearborn by Hercules. These three individuals, Merman, Dougherty, and Shapiro, purchased BetzDearborn securities in advance of the merger announcement. On July 9, 1998, Dougherty purchased 20 BetzDearborn call options. On July 14, 1998, Shapiro bought 300 shares of BetzDearborn. On July 15, 1998, Merman bought 50 BetzDearborn call options.

On July 30, 1998, BetzDearborn and Hercules announced that they agreed to merge and that Hercules would pay $72 per share for all outstanding BetzDearborn shares. After the announcement, BetzDearborn common stock opened at $68.25 per share, an increase of $32.375, or approximately ninety percent (90%), over the prior day's closing price.

The Commission alleges that as a result of the conduct described above, Bugenhagen, a former employee of BetzDearborn Inc., Shisler, Bob Gallagher, Tim Gallagher, Merman, Dougherty, and Shapiro violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In its action, the Commission is seeking permanent injunctions, disgorgement of the illegal trading profits, prejudgment interest, and civil penalties.

Bugenhagen, age 47, resides in Skippack, Pennsylvania; Shisler, age 54, resides in Buffalo, New York; Bob Gallagher, age 57, resides in Flourtown, Pennsylvania; Timothy P. Gallagher died on May 4, 2001, at the age of 65, while a resident of Philadelphia; Merman, age 63, resides in Wayne, Pennsylvania; Dougherty, age 63, resides in Springfield, Pennsylvania; and Shapiro, age 49, resides in Bala Cynwyd, Pennsylvania.

Without admitting or denying the facts alleged in the complaint, the defendants have agreed to settlements under which they will disgorge $270,200 in total. The settlements filed with the court for court approval are as follows:

(1) Bugenhagen, Shisler, Bob Gallagher, Merman, Dougherty, Shapiro consent to entry of final judgments permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and

(2) The defendants have agreed to pay the following:

Bugenhagen, $9,325 disgorgement, prejudgment interest, and $9,325 in civil penalties;

Shisler, $2,556 disgorgement, prejudgment interest, and $2,556 in civil penalties;

Bob Gallagher $10,000 in civil penalties;

Merman, $109,750 disgorgement, prejudgment interest, and $55,000 in civil penalties;

Dougherty, $36,250 disgorgement, prejudgment interest, and $36,250 in civil penalties;

Shapiro, $ 9,750 disgorgement, prejudgment interest, and $9,750 in civil penalties; and

In addition, the Estate of Timothy P. Gallagher is disgorging $102,569 plus prejudgment interest. The Commission acknowledges the assistance provided by the Pacific Stock Exchange in the investigation of this matter. This is the Commission's third insider trading case concerning trading before the merger of BetzDearborn and Hercules. See SEC v. Rodolfo Luzardo, et al., 01 Civ. 9206 (DC) (S.D.N.Y.) (filed October 18, 2001) (Litigation Release No. 17197) and SEC v. Joseph F. Doody IV, et al., 01 Civ. 9879 (JK) (S.D.N.Y.) (filed November 8, 2001) (Litigation Release No. 17225). The Commission's investigation into insider trading before the announcement of the merger of BetzDearborn and Hercules is continuing.

 

Litigation Release No. 17279 / December 19, 2001 SECURITIES AND EXCHANGE COMMISSION v. SEAN R. PRICE AND BENJAMIN J. MALDONADO III Case No. 1:01CV02624 (D.D.C.) (ESH) (filed December 19, 2001)

SEC CHARGES SENIOR VICE PRESIDENT OF BALTIMORE-BASED SAFENET, INC. AND FORMER MERRILL LYNCH STOCKBROKER WITH INSIDER TRADING

On December 19, 2001, the Securities and Exchange Commission filed a settled insider trading action in federal court in Washington, D.C. against Sean R. Price, a Senior Vice President at Safenet, Inc. (formerly known as Information Resource Engineering, Inc., or IRE), and Benjamin J. Maldonado III, a former stockbroker in the Washington, DC office of Merrill Lynch, Pierce, Fenner & Smith, Inc. Safenet is an Internet security company based in Baltimore, Maryland, and its stock is traded on the NASDAQ National Market under the symbol SFNT. Without admitting or denying the allegations in the Complaint, Maldonado and Price consented to the entry of a final judgment that would permanently enjoin each of them from violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Maldonado will disgorge $38,489.80 in losses avoided, plus prejudgment interest, and will pay a civil penalty of $38,489.80. Price will pay a civil penalty of $38,489.80 based on Maldonado's avoided losses.

The SEC's Complaint alleges that Price tipped Maldonado in advance of IRE's October 4, 1999 announcement that the company expected to report third quarter financial results below analysts' expectations. According to the Complaint, during the week immediately before the announcement, Price tipped Maldonado with confidential information about IRE's adverse financial results, and Maldonado then sold 29,500 shares of IRE that Maldonado and his family members owned. Price and Maldonado have known each other since their early teenage years, and Maldonado was the stockbroker assigned to Price's accounts at Merrill Lynch. As a result of his illegal sales, Maldonado and his family avoided losses of more than $38,000.

As part of the settlement, Maldonado also consented, without admitting or denying the Commission's findings, to the entry of an administrative order pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 barring him from associating with any broker or dealer with a right to reapply after five years.

The Commission acknowledges the assistance of the NASD Regulation, Inc. in this matter.

 

LITIGATION RELEASE NO. 17280 / December 19, 2001 Securities and Exchange Commission v. Maria Iacovelli, Richard Morrisey, Individually, as Custodian for Chelsea Adair Morrisey, as Custodian for Eric Ryan Morrisey, and as Custodian for Andrew Jason Morrisey, Jerry Thornthwaite, and Marvin Kogod, Civil Action No. 1:01CV00344(GK) (D.D.C.)

GEORGIA ACCOUNTANT SETTLES SEC CHARGES OF INSIDER TRADING AND SELLING UNREGISTERED SYSTEMS OF EXCELLENCE SECURITIES

The Securities and Exchange Commission today announced that on December 14, 2001 the Honorable Gladys Kessler of the United States District Court for the District of Columbia entered a final judgment against Richard Morrisey, a Georgia accountant, permanently enjoining him from violations of the antifraud and registration provisions of the federal securities laws and requiring him to pay disgorgement and prejudgment interest. The Commission has now obtained settlements from all four defendants in this action.

The Commission's complaint, filed on February 15, 2001, charged that Morrisey, who performed in-house bookkeeping services for Systems of Excellence ("SOE") in 1995 and 1996, learned in detail certain aspects of the SOE fraud in August and September 1996. Thereafter, but before public disclosure had been made, Morrisey resold 95,000 SOE shares while in possession of material, non-public information, in violation of the antifraud provisions contained in Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5. Additionally, before learning of the fraud, Morrisey resold another 220,000 SOE shares in violation of the strict-liability registration provisions contained in Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"). In total, Morrisey realized illegal profits of $272,182 on the resale of these 315,000 shares.

Morrisey, without admitting or denying the SEC's allegations, consented to the entry of a court order that: (i) permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 5(a) and (c) of the Securities Act; and (ii) requires him to disgorge $272,182 plus prejudgment interest of $132,540, provided that all shall be waived but for the payment of $35,100, prejudgment interest of $14,083, and the surrender of 200 shares of Texas Instruments stock to the Court-appointed receiver, and no penalties assessed based on his inability to pay.

On October 4, 1996, the Commission suspended trading in the securities of SOE for a ten-day period pursuant to Section 12(k) of the Exchange Act, in part, because of questions regarding the illegal distribution and resale of millions of unregistered SOE shares. Prior to the trading suspension, Morrisey had illegally resold 315,000 shares (of the 325,000 SOE shares he had acquired) into the manipulated market.

The Commission has filed nine separate enforcement actions resulting from this investigation, assisted in obtaining four criminal convictions, deregistered the securities of SOE, and recovered in excess of $15 million for defrauded SOE investors. The Court-appointed receiver will begin distributing these funds to victims of the SOE fraud in the coming months.

The Commission previously has made several announcements concerning these matters. See Lit. Rel. 16901 (February 15, 2001); Lit. Rel. 16881 (January 31, 2001); Lit. Rel. 16804 (November 20, 2000); Lit. Rel. 16695 (September 11, 2000); Lit. Rel. 16632a (July 21, 2000); Securities Exchange Act Rel. 42616 (April 4, 2000); Lit. Rel. 16343 (October 27, 1999); Lit. Rel. 15996 (December 9, 1998); Lit. Rel. 15906 (September 24, 1998); Lit. Rel. 15888 (September 18, 1998); Lit. Rel. 15617 (January 14, 1998); Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571 (November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Lit. Rel. 15286 (March 12, 1997); Lit. Rel. 15237 (January 31, 1997); Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7, 1996); Securities Exchange Act Rel. No. 37791 (October 7, 1996).

 

LITIGATION RELEASE NO. 17281 / December 19, 2001 SECURITIES AND EXCHANGE COMMISSION v. LYTLE E. FOGELSONG, THOMAS GREGORY COOK, JAMES H. MALBAFF, and MALBAFF & COOK, No. 5:01CV00104 (Wilson, C.J.) (U.S.D.C., W.D. Va.)

COMMISSION FILES "PRIME BANK" SECURITIES FRAUD CASE AGAINST VIRGINIA DEFENDANTS

On December 19, 2001, the Commission filed a securities fraud case in the United States District Court for the Western District of Virginia charging four defendants from Virginia with promoting fraudulent "prime bank" investment schemes. The defendants are Lytle E. Fogelsong of Winchester, Virginia; Thomas Gregory Cook of Haymarket, Virginia; James H. Malbaff of Haymarket, Virginia; and Malbaff & Cook, a Virginia partnership.

The Commission's complaint alleges that the defendants collectively raised in excess of $1.1 million from more than 30 investors by promoting several fraudulent investments that featured purported "high-yield" trading programs. According to the complaint, the programs were represented to generate returns of as much as 13,000% from the trading of bank debentures, medium terms notes, and other instruments resembling the fictitious "prime bank" securities that have been the subject of dozens of Commission enforcement actions over the past decade. The Commission charges that defendant Fogelsong skimmed at least $70,000 of the investors' funds for his own personal use, and that most of the remaining investor funds were misappropriated by the remote operators of the fraudulent programs in Utah and California. The Commission further alleges that in soliciting investors, Fogelsong, Malbaff, and Cook each made numerous material misrepresentations concerning, among other things, the views of the SEC, the Federal Reserve, and other agencies regarding these investment programs; their own due diligence; the safety of the programs; and the use of investor funds. According to the complaint, even after they learned that their investors' funds had been misappropriated by remote operators of the programs, the defendants joined together to lull their investors into inaction rather than disclosing the truth to them.

The Commission's complaint charges each of the defendants with securities fraud in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rule 10b-5, and charges Fogelsong, Cook, and Malbaff with acting as unregistered brokers in violation of Exchange Act Section 15(a). The Commission is seeking injunctions, disgorgement of ill-gotten gains (with interest), and civil penalties against all defendants.

In a related matter, the United States Attorney's Office for the Western District of Virginia announced the indictment and arrest of Fogelsong on 25 criminal counts including securities fraud, wire fraud, mail fraud, money laundering, and obstruction of justice in connection with his role in the same investment schemes. United States v. Lytle E. Fogelsong, No. 1:01CR00076 (W.D. Va.).

The Commission wishes to thank the United States Attorney's Office for the Western District of Virginia, the Federal Bureau of Investigation, and the Virginia State Corporation Commission for their assistance in connection with this matter.

The Commission's investigation is continuing.

 

Litigation Release No. 17282 / December 19, 2001 SECURITIES AND EXCHANGE COMMISSION v. DOUGLAS M. GLOFF, United States District Court for the Northern District of California, Civil Action No. C01-4984 JL , Filed December 19, 2001

SEC FILES INSIDER TRADING ACTION AGAINST DOUGLAS M. GLOFF

On December 19, 2001, the Securities and Exchange Commission filed civil fraud charges in the United States District Court for the Northern District of California against Douglas M. Gloff, alleging that Gloff illegally traded in the securities of Acuson Corporation prior to the public announcement on September 27, 2000 that Siemens Medical Engineering Group was making a tender offer for Acuson. The complaint alleges that Gloff's illegal insider trading yielded profits of $137,485.91.

The Commission's complaint alleges that, prior to the public announcement of the tender offer, Gloff learned from one of Acuson's outside directors that Acuson was going to be acquired. According to the complaint, Gloff, while in possession of this material, non-public information, purchased 200 Acuson call options on September 21, 2000. On September 27, the day of the public announcement, Acuson shares closed at $22.55, up 43% from the previous trading day. On the same day, Gloff sold all 200 of the call options he had previously purchased, thereby realizing profits of $137,485.91. The complaint further alleges that on October 3, after being contacted by the Commission staff, Gloff met with the Acuson director and suggested that the director deny that he knew Gloff if he was asked that question.

The complaint alleges that Gloff violated Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3 thereunder and seeks an order enjoining Gloff from future violations of those provisions, the disgorgement of illegally-obtained profits and prejudgment interest, and the imposition of a civil money penalty.

Also on December 19, 2001, the U.S. Attorney for the Northern District of California announced the filing of a criminal complaint against Gloff charging him with insider trading and obstruction of justice. The Commission wishes to acknowledge the assistance provided by the Pacific Stock Exchange and the New York Stock Exchange in connection with this matter.

 

Litigation Release No. 17283 / December 19, 2001 SECURITIES AND EXCHANGE COMMISSION V. SAVE THE WORLD AIR, INC., JEFFREY ALAN MULLER, AND BILLY BLACKWELDER, Civil Action No. 01 CV 11586 (Judge Daniels) (S.D.N.Y.)

On December 19, 2001, the Securities and Exchange Commission ("SEC") filed civil charges in federal district court in New York, New York, against Save the World Air, Inc. ("STWA"), Jeffrey Alan Muller ("Muller"), and Billy Blackwelder ("Blackwelder"), alleging that they engaged in a fraudulent scheme to manipulate the market for stock in STWA, a public company controlled by Muller. The Defendants used the Internet to facilitate the fraud.

The defendants named in the Commission's action are:

STWA, a Nevada corporation headquartered in Australia with its principal offices in New York, New York. STWA's business purportedly involves the manufacture, licensing, and distribution of a device called the "Zero Emission Fuel Saver" ("ZEFS") device. According to STWA's public statements, the ZEFS device reduces emissions and improves fuel economy in motor vehicles. Until July 20, 2000, when the SEC temporarily suspended trading, STWA's stock was quoted on the over-the-counter bulletin board ("OTCBB") under the ticker symbol ZERO. Currently, STWA's common stock is quoted on the pink sheets.

Muller, who is Australian and a resident of Queensland, Australia. He served as the president and CEO of STWA.

Blackwelder, who is a resident of San Diego, California. Blackwelder served as a marketing consultant for STWA beginning in or about July 2000. The SEC's complaint alleges that from at least February 1999 through at least April 2001, STWA and Muller carried out a fraudulent promotional campaign using press releases, Internet postings, an elaborate Internet website, and televised media events to disseminate false and materially misleading information about STWA's product and commercial prospects. STWA's and Muller's actions led to the artificial inflation of the price and trading volume of STWA stock, causing its market capitalization to be as much as $218,728,062. The promotional information distributed by STWA and Muller included: (1) announcements of significant licensing agreements and other important business developments, and (2) announcements concerning public automotive demonstrations that purportedly proved or would prove that the ZEFS materially reduces emissions and improves fuel economy in motor vehicles. In fact, the purported licensing agreements and other purported business events simply did not exist, and the ZEFS demonstrations did not prove that the ZEFS actually worked as represented. At the same time he publicly promoted STWA, Muller privately sold millions of shares of restricted STWA stock that, if sold at then-prevailing market prices, would have provided him with over $9 million in personal profits. He concealed these sales by failing to disclose in Commission filings, as required, any changes in his beneficial ownership in STWA. Finally, STWA and Muller made at least nine SEC filings that contain false financial statements and disclosures. For example, STWA reported $125,000 in revenue for the sale of a license that in fact it never sold, thus causing its revenues (which otherwise never were reported to be more than $10,000 throughout the entire relevant period) to be materially overstated.

The complaint further alleges that Blackwelder engaged in at least part of the manipulative scheme. He prepared and arranged to have issued at least one false press release announcing a major licensing deal, when in fact no such deal existed. Blackwelder also posted positive messages on Raging Bull, an Internet message board, without making required disclosures about compensation he received from STWA for his promotional activities.

The complaint charges STWA and Muller with violations of the antifraud and reporting provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933 ("Securities Act"); Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 ("Exchange Act"); and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. The complaint also alleges that Muller violated Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 thereunder. The complaint charges Blackwelder with violations of the antifraud provisions, Section 17(b) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.

In a separate proceeding, the SEC issued a cease-and-desist order on consent against former STWA promoter Dennis Wilson of Longwood, Florida. Wilson, whom the Commission found to have made Internet postings touting STWA without making required disclosures concerning his compensation for such activity, agreed, without admitting or denying the Commission's findings, to cease and desist from committing violations of Section 17(b) of the Securities Act.

 

LITIGATION RELEASE NO. 17284 / December 19, 2001 SEC v. Hoover and Hoover Capital Management, Inc., Civ. A. No. 01 CV 10751 (RGS) (D. Mass.)

SEC OBTAINS PRELIMINARY INJUNCTION AGAINST FORMER BOSTON-AREA MONEY MANAGER STEVIN R. HOOVER FOR THEFT OF CLIENT FUNDS

The Securities and Exchange Commission (the "Commission") announced today that money manager Stevin R. Hoover and his registered investment advisory firm, Hoover Capital Management ("HCM"), have consented to the entry of a preliminary injunction against future violations of the antifraud provisions of the Investment Advisers Act of 1940 ("Preliminary Injunction") pending the resolution of the Commission's action against them. The Preliminary Injunction also freezes Hoover and HCM's assets (except for funds unrelated to the fraud acquired after November 21, 2001).

In its motion for a Preliminary Injunction, which was filed on November 15, 2001, the Commission claimed that between at least May 2000 and September 18, 2001, Hoover, HCM and an unregistered adviser that Hoover controls, Chestnut Management LLC, withdrew more than $470,000 out of the Chestnut Fund LP, a domestic hedge fund managed by Chestnut Management, and improperly used these funds for personal and business expenses. The motion was filed in the Commission's pending action SEC v. Hoover and Hoover Capital Management, Inc., Civ. A. No. 01 CV 10751 (RGS) (D. Mass.), in which it is alleged, among other things, that Hoover and HCM had misappropriated $475,000 from HCM clients between 1995 and 1998. Previously, the court had entered a temporary restraining order against Hoover and HCM on November 19, 2001.

For more information see Litigation Release No. 17240, November 19, 2001; Litigation Release No. 17236, November 16, 2001; and Litigation Release No. 16983, May 2, 2001.

http://www.sec.gov/litigation/litreleases/lr17284.htm

 

Litigation Release No. 17285 / December 20, 2001 Securities and Exchange Commission v. Vestron Financial Corp., et al., Case No. 01-4269-CIV-SEITZ (USDC/SD FL)

The Securities and Exchange Commission ("SEC") announced that on November 6, 2001, the SEC filed with the United States District Court for the Southern District of Florida an Application for an Order to Show Cause why Relief Defendant Rainbow Bridge Investments, LLC ("Rainbow Bridge") should not be held in contempt for failure to comply with the Court's Orders. The application alleged that Rainbow Bridge failed to provide a sworn accounting or a written description of repatriated funds in accordance with Court Orders entered on October 25, 2001 and November 2, 2001.

In its Complaint filed on October 16, 2001, the SEC alleged that Defendants Vestron Financial Corporation, Salman Shariff, Vestron Investment Club, Crescent Capital Partners, LP and Crescent Capital Offshore Fund (collectively referred to as "Defendants") were violating the anti-fraud, registration, investment company and investment advisor provisions of the federal securities law. The SEC alleged that Defendants perpetrated a massive fraud, which duped hundreds of unsuspecting investors nationwide out of over $11 million. The SEC also named North Coast Holdings, Ltd and Rainbow Bridge as Relief Defendants because they purportedly received proceeds from Defendants' fraudulent scheme.

On October 25, 2001, the Court entered an Order granting a Temporary Asset Freeze and Other Relief as to all Defendants and Relief Defendants. On November 2, 2001, the Court entered an Order Freezing Assets and Other Relief. The Court's Orders required Rainbow Bridge to provide the Court and the SEC with a sworn accounting of all monies received from Defendants within five business days. The Orders also required Rainbow Bridge to repatriate any offshore monies received from Defendants and to provide the SEC and the Court with a written description of any repatriated funds.

http://www.sec.gov/litigation/litreleases/lr17285.htm

 

Litigation Release No. 17286 / December 20, 2001 Securities and Exchange Commission v. Dunyasha M. Yetts, Worldwide Financial Group, Inc, World Wide Sports Group, Inc. and Gordon Yocom, Civ. Act. No. C2-01-1263 (S.D. Ohio).

Securities and Exchange Commission v. Dunyasha M. Yetts, Adv. Proc. No. 01-0441 (In re: Dunyasha M. Yetts, Case No. 01-58883 (Chapter 7) (S.D. Ohio)).

SEC CHARGES OHIO MAN WITH DEFRAUDING INVESTORS AND OPERATING UNREGISTERED BROKERAGE; SEC ALSO ACTS TO PREVENT BANKRUPTCY DISCHARGE

The Securities and Exchange Commission announced that today it filed a civil injunctive action in federal district court in Columbus, Ohio accusing Dunyasha M. Yetts and his unregistered broker-dealer, Worldwide Financial Group, Inc., of defrauding at least fourteen investors of approximately $1.8 million from 1998 through early 2001. In a related action, the Commission also today filed a separate complaint in United States Bankruptcy Court in Columbus, Ohio, where Yetts is a debtor, seeking to prevent the discharge of a substantial portion of Yetts' indebtedness, approximately $1.8 million, incurred through securities fraud.

The Commission's district court complaint names:

Dunyasha M. Yetts, a.k.a. Danyasha M. Yetts, 31, of Dublin, Ohio. Yetts solicited investors using his own name and the name of Worldwide Financial Group, an unregistered broker-dealer.

Worldwide Financial Group, Inc., an Ohio corporation that Yetts operated from his home. Yetts used Worldwide Financial to solicit investor funds from about March 1999 through early 2001.

World Wide Sports Group, Inc., an Ohio corporation that Yetts used to operate his sports agency business.

Gordon L. Yocom, 33, of Powell, Ohio, a former business associate of Yetts. The Fraudulent Conduct

According to the Commission's complaint in district court:

Yetts defrauded at least 14 customers of approximately $1.8 million in investment schemes that continued from 1998 through early 2001. Conducting business individually and later through Worldwide Financial, Yetts fraudulently induced customers to entrust him with funds by falsely representing that he would invest their money in the stock market and other securities. Instead of investing those funds, Yetts misappropriated or diverted the money for other purposes, including paying personal and business expenses, making payments to earlier investors, and buying and selling securities for his own account or for other accounts he controlled, including accounts maintained in the name of his sports agency business, World Wide Sports. In an attempt to conceal his misconduct, Yetts provided customers with materially false and misleading periodic account statements that represented that Worldwide Financial had bought and sold specific securities for their account. When various customers demanded the return of their funds, Yetts falsely claimed that he had transferred their funds (unbeknownst to them) to a supposed money management firm in California, and that he was unable to retrieve their money. Through his fraudulent conduct, Yetts exploited inexperienced and financially unsophisticated customers who relied on Yetts's purported superior knowledge and expertise. The Commission's district court complaint charges that Yetts and Worldwide Financial acted as unregistered securities broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and that both Yetts and Worldwide Financial defrauded customers in violation of Section 17(a) of the Securities Act of 1933; Sections 10(b) and 15(c) of the Exchange Act and Exchange Act Rules 10b-3, 10b-5 and 15c1-2. The district court complaint further alleges that, as a control person of Worldwide Financial, Yetts is also individually liable for all of that firms' misconduct.

The district court complaint does not charge Gordon L. Yocom or World Wide Sports Group with substantive violations of the federal securities laws. Rather, because Yocom and World Wide Sports each received investor funds as a result of Yetts' misconduct, Yocom and World Wide Sports are liable as relief defendants for the return of those monies.

http://www.sec.gov/litigation/litreleases/lr17286.htm

 

LITIGATION RELEASE NO. 17287 / December 20, 2001 S.E.C. v. Skyline Group, Inc., Robert L. Sheets, and Mary A. West (D. Minnesota, Case No. 1355 JMR-FLN filed June 1, 2000.)

MINNESOTA CORPORATION AND OFFICERS SETTLE OFFERING FRAUD CASE

The Securities and Exchange Commission announced today that it has reached a settlement with Skyline Group, Inc. ("Skyline"), a Minnesota corporation, its President, Robert L. Sheets ("Sheets") and its C.F.O. Mary A. West ("West") (collectively referred to as "the defendants"), Sheets and West are married to each other and reside in Shoreview, Minnesota.

The Commission filed a Complaint in the U.S. District Court for the District of Minnesota against the defendants on June 1, 2000, alleging that they violated the registration and antifraud provisions of the federal securities laws while raising funds to finance a Native American tribe's request to the Department of the Interior for return of land in the Chicago area for the possible development of a casino.

The Complaint alleged that Skyline issued unregistered promissory notes to investors pursuant to private placement memoranda which provided that substantially all of the investment proceeds would be expended on project expenses, including land reclamation, casino development and working capital needs. In return, Skyline claimed it would share any profits generated by a casino with investors. The Complaint also alleged that over the four-year period from August 1995 to at least November 1999, Skyline, through Sheets and West, raised over $3 million by selling unregistered promissory notes to the investing public. The Complaint further alleged that instead of using all of the offering proceeds to finance the tribe's application, Sheets and West purportedly borrowed over 40% of the $3 million raised to cover their own personal expenses. Sheets and West claim to have taken the loans from Skyline in lieu of compensation. The Commission did not allege that the Native American tribe engaged in any wrongdoing, that the tribe was a victim of the alleged fraud, or that there was any wrongdoing associated with the tribe's application to the Department of Interior.

The defendants have agreed to withdraw their denials and defenses to the Complaint and to settle the Commission's action. The defendants have consented, without admitting or denying the allegations of the Complaint, to the entry of a judgment that permanently enjoins them from any future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The judgment orders the defendants to pay $1.43 million in disgorgement and prejudgment interest, but waives payment of such disgorgement and prejudgment interest, and does not assess a civil penalty, based upon the defendants' sworn statements demonstrating their inability to pay. The judgment also orders Sheets and West to pay Skyline investors back their investment fully from any future profits Sheets and West receive from the casino development stage of the Skyline project.

http://www.sec.gov/litigation/litreleases/lr17287.htm

 

LITIGATION RELEASE NO. 17288 / December 20, 2001 SECURITIES AND EXCHANGE COMMISSION v. RICHARD T. TAYLOR, INDIVIDUALLY AND DOING BUSINESS AS TRANSWORLD BANKERS, AND KEVIN M. DEVOTO, INDIVIDUALLY AND DOING BUSINESS AS FIRST FIDELITY FINANCIAL, ET AL. (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3:01-CV2683-X)

On December 20, 2001, Judge Kendall of the United States District Court for the Northern District of Texas, issued a temporary restraining order halting an on-going securities scam which targeted senior citizens and involved the sale of bogus certificates of deposit. The Court also issued an order freezing the assets of one of the defendants and a company, which he controlled. Named in the Commission's lawsuit are:

Defendant Richard T. Taylor, age 50, a resident of Spring, Texas. Taylor does business as Transworld Bankers and is the sole shareholder, director, officer and control person of GRI Group, Inc. The Court has frozen his assets.

Defendant Kevin M. Devoto, age 39, a resident of Dallas, Texas. Devoto does business as First Fidelity Financial. He sold the bogus CDs on behalf of Taylor.

Relief Defendant GRI Group, Inc., a Texas corporation with its principal place of business in Spring, Texas. GRI is controlled by Taylor and received at least $100,000 of investor funds from him. The Court has frozen its assets. In its action, the Commission accuses Taylor and Devoto of offering bogus CDs to the general public through newspaper advertisements. Taylor and Devoto lured their investors with promises of above-market rates on 30-month CDs purportedly issued by either Chase Bank (now J.P. Morgan Chase) or NationsBank (now Bank of America). In fact, Taylor either did not purchase the CDs or he purchased short-term CDs with much lower interest rates, which he subsequently liquidated, transferring the funds into accounts that he controlled. Taylor also used investor funds to make ponzi payments of interest and principal to investors. He still owes at least $1 million in principal, plus accrued interest, to investors. During the course of the scheme, over $7 million was raised from investors throughout the country.

The Commission's complaint charges Taylor with violating the antifraud provisions found in Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Taylor and Devoto are charged with violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. Devoto is further charged with violations of Section 15(a) of the Exchange Act, by acting as unregistered broker. The complaint seeks a temporary restraining order, preliminary and permanent injunctions, an asset freeze (only as to Taylor and GRI), interim accounting, disgorgement with prejudgment interest and a civil money penalty against each defendant and the relief defendant. Finally, the Commission also seeks an order prohibiting the movement, alteration and destruction of books and records, and expedited discovery. In addition to the TRO and asset freeze orders, the Court also today granted the Commission's request for an interim accounting, expedited discovery and for a prohibition against moving, altering and/or destroying evidence.

The Commission would like to thank the Texas State Securities Board, the Dallas offices of the United States Attorney, United States Postal Inspection Service and the Federal Bureau of Investigation for their assistance in the investigation of this matter.

 

 

LITIGATION RELEASE NO. 17289 / December 21, 2001 SECURITIES AND EXCHANGE COMMISSION v. EARL A. ABBOTT, RICHARD L. STALVEY, GLENN PERDUE, ROBERT E. GERWIN, KENNETH C. NUNN AND THOMAS J. O'KEEFFE (United States District Court for the Middle District of Florida, C.A. No. 6:01-CV-364-ORL-31-KRS)

The Commission announced today that on December 13, 2001, a judgment by consent was entered in the United States District Court for the Middle District of Florida against Glenn Perdue of Indianapolis, Indiana. The Commission's complaint in the matter, filed on March 22, 2001, alleged that Perdue acted as a sales agent for Earl A. Abbott, a Titusville, Florida businessman by selling $3 million of non-existent prime bank securities to investors. Perdue, the complaint alleged, entered into joint venture agreements promising investors a weekly return of 2% over forty weeks, or 80%. The complaint alleged that Perdue told investors that the profits would be earned by trading in "medium term bank debentures" of the "top 25'' western European Banks. Further, the complaint alleged that Perdue assured investors that Abbott was honest and trustworthy, and told them Abbott had invested $1 million of his own funds in the purportedly risk-free trading program. The Commission further alleged there were no bank debentures and no trading and that Perdue made material misrepresentations to his investors concerning: (i) the existence of the trading program; (ii) the use of investor funds; (iii) the promised return; and (iv) the safety of the funds invested.

Defendant Perdue has agreed, without admitting or denying the Commission's allegations, to settle the action by agreeing to the entry of an injunction against future violations of the securities and broker-dealer registration provisions as well as the general antifraud provisions of the federal securities laws. The Commission's complaint did not allege that Perdue received any sales commission or profits and accordingly, the Commission did not seek disgorgement. Based on Perdue's sworn representations in his statement of financial condition and other documents submitted to the Commission, the Commission is not imposing a civil monetary penalty against Perdue.

The Commission's complaint alleged that, in connection with this scheme, Perdue engaged in transactions, acts, practices and courses of business which constituted violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder, Section 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The Commission's litigation continues against Abbott and the purported London, England program manager, Kenneth C. Nunn, as well the purported prime bank trader, Thomas J. O'Keeffe of Ireland, who was named as a relief defendant.

For further information on the action, see Litigation Release Nos. 16940 and 17198.

 

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LITIGATION RELEASE NO. 17290 / December 21, 2001. SECURITIES AND EXCHANGE COMMISSION v. ROBERT R. DILLIE and MID-AMERICA FOUNDATION, INC., Defendants, and MID-AMERICA FINANCIAL GROUP, INC., Relief Defendant (U.S.D.C., District of Arizona, Phoenix Division, Civil Action No. CV-01-2493-PHX-JAT)

On December 20, 2001, Judge James A. Teilborg of the United States District Court for the District of Arizona (Phoenix Division), issued a temporary restraining order halting a securities scam which sold purported Charitable Gift Annuities (CGAs) to elderly investors. The Commission sought the TRO and other relief in its civil action, also filed on December 20th. In its action, the Commission alleges that, among other things, an estimated $54 million was raised from the sale of these CGAs and that the monies were misappropriated by defendants to support a lavish lifestyle and pay gambling debts. The Court also issued orders freezing the assets of, and appointing a receiver for, named defendants and the one named relief defendant.

Named in the Commissions lawsuit are:

Defendant Robert Roy Dillie, a resident of Phoenix, Arizona currently living in Westport, South Dakota. Dillie was recently arrested on Nevada felony charges in connection with numerous bad checks given to Las Vegas casinos.

Defendant Mid-America Foundation, Inc. (Mid-America Foundation), a Delaware not-for-profit corporation with its principal place of business in Scottsdale, Arizona. The company issued the CGAs and most of the investor funds were deposited in bank and brokerage accounts in the name of Mid-America or its affiliates.

Relief Defendant Mid-America Financial Group, Inc. (Mid-America Financial), a Delaware corporation, formerly wholly owned by Dillie. In February 2001, Dillie supposedly sold the corporation to his niece, but retained control until at least October 2001. Mid-America Financial was the marketing arm for the sale of the Mid-America Foundation CGAs. It presently holds assets and property of Mid-America Foundation. In its action, the Commission accuses Dillie and Mid-America Foundation of fleecing elderly investors of an estimated $54 million, since 1997, from the sale of CGAs. Dillie and Mid-America Foundation claimed, among other things: that the CGAs offered investors a safe, steady income, tax benefits, and a means to effect charitable donations; and that the CGAs were backed by funds invested in stocks, bonds, money market funds, and federal obligations. Rather than investing the funds as promised, defendants misappropriated and used the funds to pay personal, and often extravagant, expenses, including aircraft charters, gambling debts, personal residences, a ranch and child support.

The Commission's complaint charges Dillie and the Foundation with violating the antifraud provisions found in Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a temporary restraining order, preliminary and permanent injunctions, an asset freeze, interim accounting, disgorgement with prejudgment interest and a civil money penalty against each defendant, as well as the appointment of a receiver over the assets of the defendants and relief defendant. In addition, the complaint also seeks disgorgement against the relief defendant. At the same time as it issued its TRO, asset freeze and appointment of receiver, the Court also ordered an interim accounting, expedited discovery and the preservation of all evidence.

The Commission would like to acknowledge the assistance of the Securities Division of the Arizona Corporation Commission with whom it has closely worked in bringing this action.

 

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Litigation Release No. 17291 / December 27, 2001 Accounting and Auditing Enforcement Release No. 1480 / December 27, 2001

SECURITIES AND EXCHANGE COMMISSION V. NELSON BARBER (United States District Court for the District of Columbia, C. A. No. 1:01CV02670).

On December 27, 2001, the Securities and Exchange Commission filed a civil injunctive action in U.S. District Court against Nelson Barber, the former Chief Financial Officer of Fine Host Corporation, alleging that Barber caused Fine Host to engage in an extensive financial fraud. Fine Host, a provider of food and beverage services to sports arenas, prisons, and schools, was at that time a public company with common stock listed for trading on the Nasdaq National Market System and a market capitalization that reached approximately $390 million. When the fraud was detected, the stock lost essentially all of its value. Fine Host subsequently entered a reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code, from which it emerged as a private company.

According to the Commission's complaint:

The fraud predated Fine Host's June 1996 initial public offering by several years and continued through the third quarter of the fiscal year ended December 31, 1997;

The primary mechanism of the fraudulent scheme was the improper capitalization of millions of dollars of company expenses as assets;

Barber also caused Fine Host to manipulate acquisition reserve accounts, income from vendor rebates, and other items for the purpose of managing reported earnings;

In February 1998 Fine Host issued a restatement of its financial statements indicating that from 1992 through the third quarter of 1997, Fine Host overstated its pretax income by over $49 million. For fiscal years 1994, 1995 and 1996, Fine Host overstated its pretax income by 149%, 213%, and 197%, respectively. For the first, second, and third quarters of fiscal 1997, the Company overstated its pretax income by 324%, 320%, and 170%, respectively. The Complaint alleges that Barber, through the conduct described above, violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1, and 13b2-2, promulgated thereunder, and aided and abetted Fine Host's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.

In settlement of the Commission's claims, Barber, without admitting or denying the allegations of the Complaint, consented to the entry of a Final Judgment of the District Court: 1) permanently enjoining him from violating or aiding and abetting violations of each of the above provisions of the securities laws; 2) permanently barring him from acting as an officer or director of any public company; and 3) ordering him to pay a $20,000 civil penalty, pursuant to Section 21(d)(3) of the Exchange Act.

In related matters, the Commission issued settled administrative actions against three certified public accountants: Rachel Eckhaus, the former assistant controller of Fine Host; Jeffrey Bascik, the engagement partner for the Deloitte & Touche audits of Fine Host's financial statements for the affected periods; and Barbara Horvath, the Deloitte & Touche manager on certain of those audit engagements. Without admitting or denying the Commission's findings, each respondent consented to the entry of a Commission Order finding, among other things, that the respondent engaged in improper professional conduct for purposes of Rule 102(e)(1) of the Commission's Rules of Practice. The Order in Horvath's case censures her and the Orders in Eckhaus's and Bacsik's cases deny them both the privilege of appearing or practicing before the Commission as an accountant, with the right to request reinstatement after two years.

For further information on the related matters, see Exchange Act Release Nos. 34-45195, 34-45196, 34-45197.

SEC Complaint in this matter.