SEC Enforcement Actions – Part 2

C Charges Former Officers of Sterling Financial Corp. Subsidiary for Conducting Financial Fraud

The Securities and Exchange Commission announced that, on January 6, 2011, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania against Joseph M. Braas, of Lititz, Pennsylvania, and Michael J. Schlager, of Lancaster, Pennsylvania. The Commission’s complaint alleges that Braas and Schlager, two senior officers at Equipment Finance, LLC (“EFI”), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. (“Sterling”), conducted a financial fraud that lasted over five years. Sterling was a publicly traded bank holding company based in Lancaster, Pennsylvania. Without admitting or denying the Commission’s allegations, Braas and Schlager have agreed to settle the matter. The settlements are pending final approval by the court.

The Commission’s complaint alleges that, from at least February 2002 until April 2007, Braas, EFI’s Vice President and Chief Operating Officer, and Schlager, EFI’s Executive Vice President, orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI’s commercial loan portfolio from Sterling’s senior management and auditors.

The Commission further alleges that Braas and Schlager were able to subvert virtually every aspect of EFI’s loan process and internal controls. They created fictitious loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI’s maximum lending limitations. They also deceived Sterling’s internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings, and by recruiting vendors to assist in the circumvention of loan confirmation procedures.

As alleged in the complaint, Braas and Schlager caused EFI to report false financial information to Sterling which, in turn, from 2002 through 2006, filed quarterly and annual reports with the Commission containing materially false and misleading financial statements. As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI’s loan portfolio, and approximately 13 percent of Sterling’s total loan portfolio during the period of the fraud.

Braas and Schlager have consented to the entry of orders permanently enjoining them from violating Section 17(a) of the Securities Act of 1933; Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder; and 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, 13a-1 and 13a-13 thereunder. The orders will bar Braas and Schlager from serving as officers or directors of a public reporting company. Braas will also be ordered to pay disgorgement and prejudgment interest of $1,489,024, and Schlager ordered to pay disgorgement and prejudgment interest of $1,121,302. In view of each defendant’s agreement to pay restitution in conjunction with his guilty plea in a related criminal case filed by the U.S. Attorney’s Office for the Eastern District of Pennsylvania [USA v. Braas, et al., Crim. No. 10-cr-00753-PD (E.D. Pa. Nov. 18, 2010)], the ordered amounts shall be deemed satisfied upon the entry of a restitution order in the criminal case that is equal to or greater than the amounts ordered in the Commission’s case.

Securities and Exchange Commission v. Gendarme Capital Corp., et al., Case No. 2:11-cv-00053-FCD-KJN (E.D. CA filed January 6, 2011)

EC CHarges Investment Firm With Illegally Dumping Billions of Penny Stock Shares

The Securities and Exchange Commission today charged Gendarme Capital Corporation (“Gendarme”) and its two executives with engaging in an illegal stock distribution scheme.

The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. Through its two principals – CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. — Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.

According to the SEC’s complaint, filed today in federal district court in Sacramento, Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for “investment purposes only.” Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets, profiting by more than $1.6 million from its unregistered stock distributions.

The SEC also alleges that Gendarme’s outside attorney — Cassandra Armento of Greenwich, N.Y. — violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme’s activities. Armento repeatedly informed stock transfer agents that Gendarme was not an “underwriter” and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.

In its federal court action, the SEC alleges Gendarme, Rahimi, Lamphere, and Armento violated Sections 5(a) and (c) of the Securities Act of 1933. Against Gendarme, Rahimi, and Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock. The SEC seeks injunctive relief and monetary penalties against Armento.

C v. Michael E. Kelly, et al., Case No. 1:07-CV-4979 in the United States District Court for the Northern District of Illinois

Court Enters Final Judgment Against Bulverde, Texas Resident George “Lin” Phelps

The Securities and Exchange Commission announced today that on December 21, 2010, Judge Elaine Bucklo of the United States District Court for the Northern District of Illinois entered a final judgment against Bulverde, Texas resident George L. Phelps (Phelps), also known as “Lin” Phelps and also doing business under the name “Safe Estate Plans.” The final judgment: (1) enjoined Phelps from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-10 promulgated thereunder; (2) ordered Phelps to pay disgorgement in the amount of $2,002,766.66, plus prejudgment interest of $919,732.93, for a total of $2,922,499.59; and (3) ordered Phelps to pay a civil penalty in the amount of $120,000.

The SEC’s complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Phelps, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Leases. Universal Lease investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC’s complaint alleges that from 1999 until 2005, Kelly and others, including Phelps, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Phelps, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC’s complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme, its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants, including Phelps, failed to disclose key facts about the Universal Lease investment, including the risks of the investment and that Kelly was paying commissions as high as 27 percent to the selling brokers. The SEC’s action against the remaining defendants is pending.

Securities and Exchange Commission v. Pharma Holdings, Inc., Edward Klapp IV and Edward Klapp Jr. Civil Action No. 10-cv-81615 (S.D. Fla., filed December 22, 2010)

The Securities and Exchange Commission today charged Jupiter, Florida-based Pharma Holdings, Inc., its CEO Edward Klapp IV, and its CFO Edward Klapp Jr., with violations of the anti-fraud provisions of the federal securities laws. The SEC’s complaint alleges that from 2005 through September 2009, Pharma Holdings, purportedly in the pharmaceutical supply business, and the Klapps raised approximately $5 million from at least 80 European investors, primarily residing in the United Kingdom, through the fraudulent offer and sale of Pharma Holdings stock.

The SEC’s complaint alleges that Pharma Holdings and the Klapps engaged various sales offices and agents to conduct Pharma Holdings’ offerings, and also directly offered shares in later offerings to existing shareholders. According to the SEC’s complaint, in connection with its stock offerings, Pharma Holdings issued false press releases and made false postings on its website overstating Pharma Holdings’ sales revenues and net profits, and touting non-existent business agreements with multinational corporations.

The complaint further alleges that Pharma Holdings and its sales agents repeatedly told investors and prospective investors, both in written materials from Klapp IV and on the company’s website, that Pharma Holdings would soon conduct an IPO or be bought out by a large corporation or mutual fund. The complaint also alleges that Klapp Jr. falsely promised investors an imminent IPO. Further, the complaint alleges that Pharma Holdings and the Klapps failed to disclose that Edward Klapp IV had been criminally convicted of a felony involving fraud.

The SEC’s enforcement action charges Pharma Holdings and the Klapps with 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, thereunder. The SEC is seeking permanent injunctions, disgorgement and financial penalties against Pharma Holdings, Klapp IV and Klapp Jr., and the imposition of officer and director bars against Klapp IV and Klapp Jr.

Ex-Wachovia Brokers William Harrison and Eddie Sawyers are Accused of Defrauding Clients

December 16, 2010

Two former Wachovia Securities brokers tricked dozens of mostly elderly clients into investing in what were supposed to be can’t-miss opportunities, only to lose roughly $8 million, according to a lawsuit filed by the Securities and Exchange Commission.

The SEC complaint charges William Harrison and Eddie Sawyers of misrepresenting the investment strategies they were selling to at least 42 clients in 2007 and 2008, guaranteeing 35 percent returns while using the money to trade securities in risky online deals.

“Instead of safeguarding their customers’ investments through suitable investments and prudent recommendations, these two brokers crossed the line with a scheme that victimized unsuspecting investors,” said William Hicks, the SEC’s associate regional director for enforcement in its Atlanta office, in a statement.

Harrison, 33, lives in Pilot Mountain, and Sawyers, 45, lives in Mount Airy. A phone message left at Sawyers’ home was not immediately returned Thursday. A message left with Harrison’s lawyer also was not immediately returned. Both men resigned from Wachovia in October, 2008.

The SEC accuses the two of recruiting Wachovia investors to a new business venture they called Harrison/Sawyers Financial Services, which they billed as offering an essentially foolproof investment plan guaranteed to make money regardless of market conditions.

The lawsuit, filed Wednesday in federal court in Charlotte, contends the brokers misrepresented the riskiness of their plans as well as what they were actually doing with clients’ money.

In one case, according to the SEC, Harrison and Sawyers told a husband and wife who had invested $100,000 that their money had “maxed out” by achieving a 35 percent return, when in fact it ultimately lost about $84,000.

“All of the brokerage customers Harrison and Sawyers solicited were unsophisticated investors,” the lawsuit says. Most customers were over 50, and an unspecified number were retired and living on fixed incomes.

The lawsuit contends that the two brokers set up online brokerage accounts in some clients’ names, while pooling the investment money from other clients into accounts set up in the name of Harrison’s wife and in a joint account held by the Harrisons.

The brokers then obtained permission to trade securities using their clients’ personal accounts, designating Harrison’s wife as each client’s agent, the lawsuit says. The SEC argues they did this to conceal their conduct, and that they didn’t notify Wachovia of what they were doing.

The brokers’ investment plans initially made money, according to the SEC, but when the economy began to collapse in 2008, things quickly went sour. In Harrison’s letter of resignation from Wachovia, he “confessed his wrongdoing, stating that he had ‘misdirected’ $6.6 million of his clients’ money,” the lawsuit says.

SEC v. Joshua Konigsberg, Louis Fischler, and MediSys Corp., Civil Action No. 10-cv-62364 (U.S. District Court for the Southern District of Florida)

The Securities and Exchange Commission today charged penny stock promoters Joshua Konigsberg and Louis Fischler with securities fraud for their roles in various illicit schemes to manipulate the volume and price of four microcap stocks and illegally generate stock sales. The SEC also charged microcap company MediSys Corp., of which defendant Konigsberg is the president and chief executive officer, in connection with one of those schemes.

The SEC worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation as the schemes were uncovered through FBI undercover operations conducted so that no investors suffered harm. The U.S. Attorney today announced criminal charges against the same two individuals facing SEC civil charges.

The SEC’s complaint, filed in the United States District Court for the Southern District of Florida, alleges that Konigsberg and Fischler sought to manipulate the volume and price of four different microcap stocks and to generate stock sales through the payment of illegal kickbacks and bribes. Konigsberg and Fischler thought they were paying-off a corrupt pension fund employee, stockbroker, and middlemen. In reality, the pension fund employee and the stockbroker were fictitious persons, and the middlemen were an undercover FBI agent and a cooperating witness.

According to the SEC’s complaint, two of the schemes involved Konigsberg and Fischler paying kickbacks to a purported corrupt pension fund employee to buy restricted shares of stock in two microcap companies, MediSys Corp. and Casino Management of America, Inc., n/k/a Crosslands Energy Corp. The SEC’s complaint alleges Konigsberg and Fischler understood they needed to disguise the kickbacks as payments to a phony consulting company that they knew would perform no actual work. According to the complaint, in two other schemes, Konigsberg and Fischler paid bribes to a purported corrupt stockbroker, who in return would use his clients’ accounts to purchase the publicly traded stock of microcap issuers Pavillion Energy Resources, Inc. and Xtreme Motorsports International, Inc. The fraudulent buying would create the false impression in the market that these companies were developing active trading supporting a rising stock price.

The SEC’s complaint charges the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC is seeking permanent injunctions, financial penalties, and disgorgement plus prejudgment interest against all three defendants, and penny stock bars against Konigsberg and Fischler.

Previously, on October 7, 2010, the SEC filed eight separate civil actions stemming from the FBI undercover operation, charging a dozen penny stock promoters and their companies for their roles in schemes to manipulate the volume and price of various microcap stocks and illegally generate stock sales. The same day, the U.S. Attorney’s Office for the Southern District of Florida announced the filing of criminal charges against the same individual defendants stemming from the same conduct underlying the SEC’s actions.

SEC Sues Ken Starr Lawyer for Helping Steal $25M of Adviser’s Clients Money

December 16, 2010

The U.S. Securities and Exchange Commission sued an attorney for Kenneth Starr, claiming he helped the former New York money manager steal more than $25 million from investors.

Jonathan Bristol, a former partner at Winston & Strawn LLP, funneled stolen investor funds to Starr through attorney trust accounts from November 2008 through May of this year, the SEC said today in a lawsuit filed at federal court in New York. Starr pleaded guilty in September to defrauding his clients of as much as $50 million.

Bristol, 55, never disclosed the existence of the attorney trust accounts to his law firm, and monthly account statements listing the names of Starr’s clients as the source of funds were sent to Bristol’s home instead of the law firm, according to the lawsuit.

“Bristol had a legal and professional responsibility not to assist Ken Starr in conduct he knew was unlawful,” George Canellos, director of the SEC’s New York regional office, said in a statement. “Bristol crossed the line from lawyer to conspirator when he failed to safeguard funds entrusted to him, helped Starr steal client money, and lied to the victims to perpetuate the scheme.”

Bristol lied to one of Starr’s victims after being confronted about an unauthorized $1 million transfer, the SEC said in its complaint. He told the investor the funds were being bundled with other clients’ money for an investment when in reality it had been used to pay a multimillion-dollar legal settlement with another former client, the agency said.

Gerard Hanlon, an attorney for Bristol at Hanlon, Dunn & Robertson, didn’t immediately return a call seeking comment.

Starr, who handled a roster of celebrity clients including actors Sylvester Stallone and Wesley Snipes, could face more than 12 years in prison when he is sentenced Feb. 2.

Texan Indicted in Alleged $17M Investment Scam

December 16, 2010

A Houston man already facing federal charges in Virginia for his role in an alleged life insurance scam has been indicted by a federal grand jury in Texas.

The U.S. Attorney’s Office in Dallas said Wednesday that Adley Husni Abdulwahab was indicted on five counts of securities fraud and one count of conspiracy in connection with an alleged $17 million investment scam.

Two co-defendants in the case have pleaded guilty to a single count of securities fraud and face up to five years in prison.

Abdulwahab remains in custody in the Eastern District of Virginia for his alleged role in an alleged $100 million life insurance scam and couldn’t be reached for comment. Federal court records do not list an attorney for Abdulwahab in the Texas matter.

Brewer Financial

The Securities and Exchange Commission announced that, on October 28, 2010, it filed a civil action in the United States District Court for the Northern District of Illinois, Eastern Division, against Brewer Financial Services, LLC (“BFS”), a registered broker-dealer, Brewer Investment Advisors, LLC (“BIA”), a registered investment adviser, Brewer Investment Group, LLC (“BIG”), their parent holding company, and their managing principals/officers, Steven Brewer and Adam Erickson, for allegedly participating in a fraudulent offering of promissory notes. BFS, BIA, and BIG are based in, and Brewer and Erickson reside in, Chicago, Illinois.

The Complaint alleges that, from June 2009 through at least September 2010, the defendants raised approximately $5.6 million from 74 investors who invested in promissory notes issued by an Isle of Man company. Although investors were told that their money would be used to repay certain debts of the issuer’s parent company, and thereby release assets that would be used to secure their promissory note obligations, the Complaint alleges that nearly all of the offering proceeds were transferred to BIG and its subsidiaries. According to the Complaint, in addition to misrepresenting the manner in which the offering proceeds would be used, the defendants failed to tell investors that BIG and its subsidiaries were in a precarious financial state. In addition to sustaining substantial operating losses from the inception of the offering through the present, BIG had failed to make required interest payments to investors by July 1, 2010, and had failed to meet its own payroll obligations by August 2010. The Complaint alleges that, notwithstanding, and without disclosing, this material information, the defendants continued selling promissory notes to new investors for at least three additional months. According to the Complaint, the note offerings were not registered with the Commission.

The Complaint claims that, based on this conduct, all of the defendants violated 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 (“Exchange Act”) and Rule 10b-5 thereunder. The Complaint also claims that BFS violated, and Brewer and Erickson aided and abetted the violation of, Exchange Act Section 15(c), and that BIA violated, and Brewer and Erickson aided and abetted the violation, Sections 206(1) and 206(2) of the Investment Advisers Act. On the Commission’s motion, and upon the consent of all defendants, the Court issued Preliminary Injunctions and an Order Imposing Asset Freeze and Other Ancillary Relief (“Order”) on October 29, 2010. Among other things, the Court’s Order froze certain bank accounts of defendants BIG and BFS.

Byron Brown Sentenced to 15 Years for Bilking Investors

A former Maryland resident has been sentenced to 15 years in prison for bilking online investors out of more than $17 million.

Thirty-four-year-old Byron Brown of Vienna, Va., was sentenced Tuesday in U.S. District Court in Baltimore. In addition to the prison term, he was ordered to pay $9.8 million in restitution.

U.S. Attorney Rod Rosenstein says Brown used the Internet to make it look like he was running an investment management business for wealthy clients. In reality, Rosenstein says Brown was stealing millions of dollars and using it to buy a fleet of luxury cars.

According to testimony, Brown ran a series of websites with names like In God We Trust Financial Services. He presented himself as an experienced investment manager, but prosecutors say he was running a Ponzi scheme.

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Securities and Exchange Commission v. Raymond P. Morris, E&R Holdings, LLC, Wise Financial Holdings, LLC, Momentum Leasing, LLC, James L. Haley, Cornerstone Capital Fund, LLC, Vantage Point Capital, LLC, Jay J. Linford, Freedom group, LLC, and Luc D. Nguyen, Civil No. 2:11-cv-00021-BSJ (USDC Utah, filed January 6, 2011)

The Securities and Exchange Commission announced the filing of a complaint in federal district court against Raymond P. Morris (Morris), James L. Haley (Haley), Jay J. Lindford (Lindford), attorney Luc D. Nguyen (Nguyen), E&R Holdings, LLC (E&R Holdings), Wise Financial Holdings, LLC (Wise Financial), Momentum Leasing, LLC (Momentum), Cornerstone Capital Fund, LLC (Cornerstone), Vantage Point Capital, LLC (Vantage Point) and Freedom Group, LLC (Freedom Group), alleging unregistered fraudulent offers, sales and purchases of securities that bilked at least 90 investors out of no less than $60 million.

The complaint alleges that from at least March 2007 through January 2009, Morris, through his entities E&R Holdings, Wise Financial and Momentum, offered and sold unregistered promissory notes to investors and in doing so made misrepresentations and omissions designed to convince investors that they were purchasing high yield notes that were risk free. Morris told investors that their funds would be deposited into a secure account and would be used only to verify deposits. Instead of using the funds as represented Morris used investor funds to support his extravagant lifestyle and to make Ponzi payments to certain investors.

The complaint further alleges that Haley, Linford and Nguyen assisted Morris in the fraud, soliciting funds from investors through misrepresentations, recklessly repeating Morris’ misrepresentations.

The Commission’s complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings, Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group 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 (Exchange Act) and Rule 10b-5 thereunder. The complaint also charges Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The complaint seeks an injunction, disgorgement and civil penalties.

The Commission acknowledges the assistance of the United States Attorney’s Office for the District of Utah, the Federal Bureau of Investigation and the Utah County Attorney’s Office in this matter.

Holdings, LLC, Wise Financial Holdings, LLC, Momentum Leasing, LLC, James L. Haley, Cornerstone Capital Fund, LLC, Vantage Point Capital, LLC, Jay J. Linford, Freedom group, LLC, and Luc D. Nguyen, Civil No. 2:11-cv-00021-BSJ (USDC Utah, filed January 6, 2011)

The Securities and Exchange Commission announced the filing of a complaint in federal district court against Raymond P. Morris (Morris), James L. Haley (Haley), Jay J. Lindford (Lindford), attorney Luc D. Nguyen (Nguyen), E&R Holdings, LLC (E&R Holdings), Wise Financial Holdings, LLC (Wise Financial), Momentum Leasing, LLC (Momentum), Cornerstone Capital Fund, LLC (Cornerstone), Vantage Point Capital, LLC (Vantage Point) and Freedom Group, LLC (Freedom Group), alleging unregistered fraudulent offers, sales and purchases of securities that bilked at least 90 investors out of no less than $60 million.

The complaint alleges that from at least March 2007 through January 2009, Morris, through his entities E&R Holdings, Wise Financial and Momentum, offered and sold unregistered promissory notes to investors and in doing so made misrepresentations and omissions designed to convince investors that they were purchasing high yield notes that were risk free. Morris told investors that their funds would be deposited into a secure account and would be used only to verify deposits. Instead of using the funds as represented Morris used investor funds to support his extravagant lifestyle and to make Ponzi payments to certain investors.

The complaint further alleges that Haley, Linford and Nguyen assisted Morris in the fraud, soliciting funds from investors through misrepresentations, recklessly repeating Morris’ misrepresentations.

The Commission’s complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings, Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group 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 (Exchange Act) and Rule 10b-5 thereunder. The complaint also charges Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The complaint seeks an injunction, disgorgement and civil penalties.

The Commission acknowledges the assistance of the United States Attorney’s Office for the District of Utah, the Federal Bureau of Investigation and the Utah County Attorney’s Office in this matter.

Securities and Exchange Commission v. Warren D, Nadel, Warren D. Nadel & Co. and Registered Investment Advisers, LLC, Civil Action No. 11-CV-0215 (DRH) (E.D.N.Y. January 13, 2011)

On January 13, 2011, the Securities and Exchange Commission filed a civil action in the United States District Court for the Eastern District of New York against Warren D. Nadel, his broker-dealer, Warren D. Nadel & Co. (“WDNC”), and his investment advisory firm, Registered Investment Advisers, LLC (“RIA”). The Commission alleges that these Defendants fraudulently induced clients to invest tens of millions of dollars in a purported investment program in order to receive over $8 million in commissions and fees from 2007 through 2009. Defendants deliberately overstated the value and liquidity of client holdings in the Strategy, by misrepresenting and concealing critical information about the way they were supposedly executing it. Although Defendants informed clients repeatedly that they were executing open-market transactions on the clients’ behalf, the vast majority of transactions, however, were not executed on the open market. Most simply consisted of trades between advisory client accounts controlled by Defendants at inflated prices made up by Nadel himself. Defendants thus created the false impression that there was a liquid market for these securities and that the market prices for the securities were consistent with the inflated values that Defendants reported to their clients.

The complaint alleges that the Defendants violated the anti-fraud provisions of the federal securities laws, specifically Defendants Nadel, WDNC and RIA violated 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; Defendant WDNC violated and Defendant Nadel aided and abetted violations of 17(a) of the Exchange Act and Rules 10b-10 and 17a-4 thereunder; Defendants Nadel and RIA violated Sections 206(1), (2) and (3) and 207 of the Investment Advisers Act of 1940 (“Advisers Act”); Defendant RIA violated and Defendant Nadel aided and abetted violations of Sections 204 of the Advisers Act and Rule 204(2)-(a)(3) thereunder.