July 15, 2014

Oppenheimer Advisor Targets Elderly Widow

With trillions of dollars being manipulated by investment advisors and brokerage firms on a daily or even hourly basis, the magnitude of the influence of financial markets on world economies is nearly incomprehensible. Every developed country in the world has a financial market which bears influence on every other country’s financial market. Each country has specific laws and regulations which are governed by certain regulatory agencies. Here in the U.S., the major securities watchdog agency is the Securities and Exchange Commission (SEC). This system of interconnectedness has fostered the development of investment firms of titanic proportions with global subsidiaries.

Regrettably, the scope upon which these companies operate often makes it quite difficult to regulate. It also opens up investment firms to wide-scale regulatory infractions. Even when regulatory agencies find and address cases of fraud, supervisory failures, and so forth, the penalty for committing these acts results in little more than a fine. Even with fines that stretch into the millions of dollars range, for these gigantic companies the fines amount to nothing more than the cost of doing business. The SEC and other agencies may work diligently to curtail illegal activities by investment firms and financial advisors, but the profits made by committing regulatory infractions is often too great to ignore for many companies. A simple inquiry of the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck or an internet search on any given firm or investment advisor will often reveal incident after incident of malfeasance on the part of many of these firms and advisors.

It is a heinous practice that some firms and advisors commit these acts against companies or extremely wealthy investors who are looking to increase their profits. Yet, when the average investor or, or worse still - the elderly investor, places their trust in these firms only to possibly lose their life’s saving as a result of these inappropriate actions, it is especially egregious. This is exactly what one Oppenheimer & Co., Inc. investment advisor has done.

A recent arbitration action has been filed with FINRA on behalf of an 85-year-old woman. The woman asserts that her investment advisor “churned” her investment accounts. Churning is the act of excessively trading an account so that the advisor can charge higher fees and increase his commission. Although not illegal, churning is not an acceptable or advisable practice on behalf of someone who is retired, elderly, or an investor whose investment objective is conservation.

According to the arbitration Statement of Claim, the claimant states that she needed to maintain the funds that were invested into the accounts of her and her deceased husband. Although the investment advisor was aware of this, he engaged in repeatedly investing their money in risky stocks that lacked diversification with the intent of generating greater personal commissions. Diversifying investments can often mitigate financial losses, so failing to do so on the part of an advisor puts his clients’ funds at great risk. The Statement of Claim continues on to state that the advisor recommended an “alpha” account which presents high risk to the investor as a means to cover up his excessive trading. This advisor’s actions resulted in losses of $700,000 for the elderly woman.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of your Oppenheimer investment advisor or due to other supervisory failures on the part of Oppenheimer & Co., Inc., please give us a call at 1-877-STOCK-LAW for a free consultation.

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July 1, 2014

Barred Investment Advisor Swindles Clients for Nearly $9 Million

Whether it’s stocks, bonds, futures, derivatives, or any other type of security, the process of investing can be quite lucrative. The number of people who have become millionaires as a result their investment practices is incalculable, but there is probably one thing that they all could count on – either the business acuity to make good investment choices for themselves or they had good judgment in selecting an investment advisor. Granted, most of us will never become super-wealthy through our investments, but hopefully we will find an investment advisor who can help us make the right decisions to at least live comfortably in our retirement. This process often relies heavily upon trusting the knowledge and the rectitude of the investment advisor.

Regrettably, this trust is sometimes betrayed, as evidenced by a recent investigation initiated by the Securities and Exchange Commission (SEC). The SEC subsequently sought an emergency enforcement action against Albany, N.Y.-based investment advisor Scott Valente and his firm, The ELIV Group, LLC.

According to the allegations by the SEC, Valente and ELIV enticed 80 or so clients into investing $8.8 million. Valente misrepresented his abilities and the performance of his investment practice history by making claims that these clients would see large, regular returns on their investments. Furthermore, his assurances to clients further belied the truth of the matter in that investments that ELIV had made in the previous three years all failed to yield positive results and in fact, these investments suffered deficits.

The SEC’s complaint which was filed in U.S. District Court for the Southern District of New York, states that Valente boasted a 30-year career of successful investment practices that were “dedicated to the highest standards of service.” In the complaint, he also stated that he created ELIV Group because he felt there “had to be a better way for clients to achieve financial independence” than that as practiced by the corporate financial industry. What he neglected to tell his clients and prospective clients is that not only did he fail in his own personal financial life, (he filed for bankruptcy twice), but he was also forced out of the broker-dealer industry in 2009 by the Financial Industry Regulatory Authority (FINRA). This action by FINRA came on the heels of 21 disputes that were raised against him and his practices.

In addition to these misrepresentations, Valente used a significant portion of his clients’ funds to support his personal expenses. He used large cash withdrawals totaling over $2.6 million to pay for such items as home improvements and mortgage payments, even spending clients’ money on such frivolous and self-serving items as a vacation condo and jewelry. These narcissistic actions in conjunction with his inability to realize profits for his clients made a significant impact on the amount of funds that remain available. The SEC’s request for an emergency freeze is an effort to prevent further taxing of these dwindling funds as Valente is still in the process of garnering new clients through the misrepresentation of his abilities.

“Valente used his one-man advisory firm to fraudulently lure unsuspecting investors in the Albany and Warwick communities to invest millions of dollars with him as advisory clients,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “He said all the right things to make investors believe he was making the right investments and taking the right precautions with their money, but he was merely telling blatant false tales about the safety and success of the investments.”

The allegations by the SEC against Valente and ELIV Group state that clients were assured their principal investments were guaranteed because they were backed by a large money market fund. This was patently untrue and the majority of these investments were illiquid. Valente reassured his clients that he and his company engaged an independent auditor but this was also a falsehood because said auditor never actually existed. Additionally, falsified documents were sent to clients giving them a fictitious accounting of the monthly performance of their investments.

The SEC’s complaint charges Valente and ELIV with violating several sections of the SEC Act of 1934 as well as other violations. It is working to obtain a restraining order which will freeze any assets of Valente or ELIV Group as well as prevent them from continuing to commit such actions. Additionally, it is the aim of the SEC to obtain a final judgment which mandates that Valente and ELIV Group must disgorge any gains obtained through these actions, as well as pre-judgment interest and financial penalties.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Mr. Valente or ELIV Group, please give us a call at 1-877-STOCK-LAW for a free consultation.

(Sources: SEC; FINRA; Investment News)

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June 24, 2014

UBS Continues to Face Controversy over Puerto Rico Muni Bonds

$5 Million Class Action Just One More Headache for Embattled UBS

It is certainly not uncommon to hear about the mishandling of investors’ funds by investment firms. Fraud, whether is it through omission of critical information or misinformation, occurs frequently in the investment industry. Many times acts of fraud are committed by companies few people have ever heard of and at other times, the names of large companies seem to continually arise in relation to misconduct within the investment community.

One such company that we keep hearing about is UBS Puerto Rico. As I discussed in a previous blog, UBS PR was the subject of a Securities and Exchange Commission investigation in 2012. At that time, the SEC determined that in 2008 and 2009, UBS PR had engaged in gross misconduct by misrepresenting the liquidity and value of its closed-end funds (CEF). Two of the company’s high level executives, Juan Carlos Ortiz-Leon and Miguel A. Ferrer, were culpable in obscuring critical information from clients pertaining to these CEFs, including the fact that UBS PR controlled the secondary market. The company also pushed the sale of these funds without revealing to its clients that pricing was set by the trade desk. As a result of this type of nefarious behavior by UBS PR, the SEC has fined the firm nearly $27 million in disgorgement, interest, and penalties as well as an order to cease-and-desist, but the company’s woes don’t end there.

In addition to the issues established by the SEC against UBS PR, another ominous shadow has been cast over the parent company of UBS AG. According to a complaint filed on May 5 in U.S. District Court for the Southern District of New York, a class action has been filed against the titan investment firm on behalf of seven of its investors. This class action, which is seeking more than $5 million in damages, is based upon the claim that UBS AG Wealth Management breached its fiduciary duties through possible conflicts of interest arising from the sale of Puerto Rico municipal bond funds.

These were proprietary products that yielded high commissions for the firm and were touted as tax-free investments that were secure fixed income securities. The investors were also assured that their principal would remain unscathed, yet the funds were largely underwritten by UBS and were intrinsically erratic. According to the complaint, these funds were “cash cows” for the defendants because as the primary or secondary underwriter, UBS gained more than $200 million in underwriting fees in roughly a five-year timespan.

The complaint continues on to say that in addition to the underwriting fees that UBS obtained, the firm also garnered fees for managing the Puerto Rico closed-bond funds which resulted in the company earning additional fees of approximately $50 million. Clients ultimately paid 4.75% in commissions to UBS when they invested in these bonds, a much higher fee than if they had been advised by UBS to invest in individual securities or bonds.

This most recent complaint is just one of many that have been filed regarding these bond funds, as more than 200 arbitration claims have been filed with the Financial Industry Regulatory Authority (FINRA). It is, however, the first time that allegations of breach of fiduciary duty have been the central issue of the complaint, and it is also the first time that the amount of fees that UBS obtained from these transactions have been presented.

“The fee issue in the class actions, and for that matter in arbitrations, will be an extremely important issue,” said one attorney who is representing some of the claimants in these FINRA arbitrations.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you have suffered financial losses as a result of the mismanagement of UBS PR’s CEFs or the breaches of fiduciary duties of UBS AG, please call the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


Sources: Bloomberg News; Silver Law Firm; previous blog; Investment News

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June 20, 2014

Rafferty Capital Markets Enables Unregistered Firm to Engage in Illegal Trades

Company Settles SEC Charges for Almost $850,000

Whenever there is an economic financial crisis it seems that more financial industry regulations are implemented or ones that are in effect tend to become more stringent. Yet there are many detractors in the field of investing that believe that it is an industry that is already far too heavily regulated. Often the argument is that business could flourish more readily with less oversight. The problem with this type of thinking is that such a scenario would allow for many more dubious actions within the financial industry than already exist.

One safeguard that regulatory agencies implement in effort to prevent questionable activities is by requiring that any investment firm that transacts business within the United States must be registered with the Securities and Exchange Commission. This registration requires companies that offer securities for public sale to reveal financial and other pertinent information about the company. This is to ensure that investors can make informed decisions about the suitability of the company or companies with which they place their investments. This SEC requirement also mandates that even companies that are appropriately registered cannot facilitate securities transactions for any investment firm which is not properly registered.

This issue is the subject of a recent SEC investigation and settlement agreement. A SEC order filed earlier this month states that from May 2009 until February 2010, Rafferty Capital Markets, a registered broker-dealer firm based in New York, illegally aided a non-registered company in transacting approximately $4 million in illicit trades. Rafferty assisted the undisclosed company by agreeing to allow the unregistered company to use the Rafferty name and systems as the broker/dealer on approximately 100 securities trades. Even though Rafferty held the appropriate licensing and handled the trades, the business end of the transactions was governed by the unregistered firm.

Although five of the firm’s staff members were registered representatives of Rafferty, they worked from offices located at the unregistered company which exerted exclusive control over trading decisions and what fees these staffers would receive. Additionally, Rafferty did not maintain communications with its representatives while they were operating from the unregistered company’s offices nor did they engage in appropriate oversight of the company’s record-keeping. As a result, one of their representatives hid two trades which resulted in record-keeping inaccuracies. Although Rafferty exercised no influence over these matters, they did garner 15% of the monies obtained from these trades as commissions in exchange for allowing the unregistered company to use their systems to execute the trades.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

The SEC’s order determined that Rafferty intentionally breached several sections of the Securities and Exchange Act, and also intentionally abetted the unregistered firm to do so, as well. Rafferty did not concede any guilt nor did they refute the charges, but they did agree to surrender the illegally obtained profits of $637,615 that were gained from these transactions. They also agreed to payment of interest in the amount of $82,011 and a financial penalty of $130,000. These amends totaled almost $850,000. The SEC investigation is still underway.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you feel that you have suffered financial losses due to the actions of Rafferty Capital Markets, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


(Sources: SEC press release; SEC complaint; Bloomberg Businessweek; Reuters; RCM website; Rafferty Holdings website)

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June 18, 2014

Private Fund Manager Charged by SEC for Theft of Investor Funds

Develops Ponzi Scheme in an Attempt to Cover His Tracks

When it comes to investing, it is paramount that investors are able to trust their investment advisor. Often when someone chooses an investment advisor, their selection is often based upon advertising saturation, word-of-mouth, or a referral from a friend. A referral from a friend is probably a great way to select an advisor because the friend probably has knowledge of the advisor’s level of trustworthiness. Sadly, a recent Securities and Exchange Commission (SEC) charge leveled against private security fund manager, Gaeton Della Penna of Sarasota, Florida, was the result of one such trusted advisor who preyed upon several personal acquaintances that he knew from his church.

According to the complaint filed by the SEC, Della Penna created and managed three Florida limited liabilities companies, A-G Hedge Group, LLC; The Contrarian Fund, LLC; and The New Economy Fund, LLC, collectively referred to in the SEC complaint as the “Funds.” The complaint alleges that from 2008 until 2013, Della Penna used these three private investment funds to raise $3.8 million by telling investors that their investments would be invested into small companies or traded in securities. He made claims that these investments would realize a 5% annual return along with 80% trading profits. To other investors, he pledged a 10% return on the funds that he claimed to be investing in small companies.

Although Della Penna represented himself to be a savvy trader who consistently garnered profits for his investors, his inability to invest successfully on behalf of his clients resulted in him losing most of the monies with which he had been entrusted. To further exacerbate the losses of his clients, he siphoned off $1.1 million of the money he had gleaned from them and used it for personal gain. He made mortgage payments on his 10,000 square foot home and even gave some of the stolen money to his girlfriend, with whom he lived.

When his fraudulent activities began to come undone, he created a Ponzi scheme by targeting new investors to raise funds to give to previous investors under the guise of returns on their earlier investments. He even went so far as to distribute fake account statements to give to some investors in an attempt to back up his assertions that the investments he made for them were profitable.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

In 2000, Della Penna formed Gaeton Capital Advisors, LLC. The SEC has named this company as a relief defendant because in addition to his making mortgage payments and payments to his girlfriend, he also funneled investor monies into Gaeton Capital.

The SEC is seeking the surrender of the illegally obtained profits, pre-judgment interest, other financial penalties, and a permanent injunction against Della Penna to prevent him from committing any further such violations. Additionally the U.S. Attorney’s Office for the Middle District of Florida has filed criminal charges against him.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you feel that you have suffered financial losses due to the acts of fraud committed by Mr. Della Penna, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


(Sources: SEC press release; SEC complaint)

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June 17, 2014

FINRA Castigates Prodigious Morgan Stanley Smith Barney for Supervisory Failures

Ambiguous IPO Sales Terminology Costs Firm $5 Million

The use of language can be a powerful thing especially in the business world where concise communication is fundamental. With the steadily increasing liabilities associated with conducting business, it requires hyper-vigilance in saying what you mean, meaning what you say, and following the rules. In the field of investments, there can be a lot of paperwork generated in the interest of full disclosure, and the way to transact business is clearly defined and closely monitored by regulatory agencies. This is to ensure that the interests of investors are protected and that all parties involved in the investment industry are following the same practices. It is the responsibility of each broker, advisor, and investment firm to understand the language set forth in the rules that govern the industry and to strictly abide by them. When they don’t, sooner or later, it is likely one regulatory agency or another will be slapping them with fines, penalties, and/or even criminal charges.

Such was the case with Morgan Stanley Smith Barney last week. The Financial Industry Regulatory Authority (FINRA) fined the mega-firm $5 million for failing to accurately supervise many of its brokers who were using the terms “indication of interest” and “conditional offer to buy” interchangeably. For a powerhouse brokerage firm that has been around for more than 75 years and has more than $1.65 trillion in client assets that it manages, they should have known better.

According to a recent FINRA press release, from February 16, 2012 until May 1, 2013 Morgan Stanley Smith Barney enticed investors to purchase shares in 83 initial public offerings (IPOs). Unfortunately, the company fell short in establishing appropriate policies, procedures, and training guidelines for its sales staff to help them delineate the difference between the two terms when offering the IPO shares to perspective clients.

An indication of interest (IOI) can be offered before the registration date of an IPO because it is not a binding commitment, as it is illegal to sell a security before it is fully registered. The IOI will only become irrevocable if the purchase is approved by the client after the completion of the IPO registration. A conditional offer to buy, however, becomes effective as a purchase after the registration of the IPO and upon acceptance by the firm unless the client takes action to revoke it. The problem for Morgan Stanley Smith Barney arose when in February, 2012 the company instituted a policy that began allowing its staff to use these terms synonymously. Consequently, sales of the shares were being processed without getting reaffirmation from their clients.

FINRA’s stance is that since the firm failed to provide the appropriate training to its financial advisors, it is conceivable that neither the sales staff nor the clients were aware of what kind of commitment they were making. The regulatory agency also found that the firm did not ensure that its policies were being adhered to and failed to institute procedures to make sure that conditional offers were being conducting in a manner consistent with federal securities laws and FINRA regulations. FINRA did state that on May 1, 2013, Stanley Smith Barney clarified its policy to advisors, and they have begun reaffirming all customer orders after the final pricing terms became available.

Approximately 68,000 investors purchased shares in the firm’s biggest offering, however, a FINRA spokesperson stated that there isn’t any evidence to indicate that any of the firm’s clients were negatively effected by these supervisory insufficiencies.

FINRA executive, Brad Bennett, said, "Customers must understand when they are entering a contract to buy shares in an IPO. This starts with the firm's duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. There must not be ambiguity regarding the customer's obligations given the significant legal differences between an indication of interest and a conditional offer to buy."

Although Morgan Stanley Smith Barney neither admitted nor denied the charges, the firm did consent to the entry of FINRA's findings.

If you feel that you have been negatively impacted as a result of Morgan Stanley Smith Barney’s supervisory failures, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


Sources: FINRA.org; Investmentnews.com; Wikipedia.com; Investopedia.com


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June 13, 2014

Feds, SEC Tag Qualcomm Managers for Insider Trading

Three Implicated; Two Face Criminal Charges

It seems like insider trading has become rampant within the investment community lately. Go to any investment news source or regulatory agency site, and you will probably read of yet another incident of insider trading. Often you will see a joint effort among regulatory agencies and sometimes even the feds get involved. The ramifications for these illegal actions are often fines, penalties, and maybe even time in jail, yet the temptation seems too great for a lot of people to resist. The scope of those who engage in this activity is vast. It may be an investment advisor or broker, a law clerk working in the office of attorneys who handle mergers and acquisitions, or occasionally it’s the spouse or friend of one of these people who happen to be privy to conversations regarding non-public information. These people stand to realize substantial sums by buying or selling shares based upon information they glean, and don’t see anything wrong with doing so. Surely anyone who is involved in investing knows it’s wrong, but maybe don’t understand why it’s wrong. The fact is that the investment industry is strictly monitored and its laws enforced to ensure that everyone stands to gain or lose funds based upon a fair market. When someone has “inside” information, they inherently have an unfair advantage over the majority of investors.

A recent investigation by the Securities and Exchange Commission (SEC) revealed that three such advantaged sales managers at San Diego, Ca.-based Qualcomm, Inc. exploited their positions within the wireless technology company by engaging in insider trading. According the SEC complaint, on January 3, 2011, Derek Cohen and Robert Fleischli attended a meeting during which a high-level executive within the company discussed a “target” as being Atheros Communications. It was clearly conveyed that this company was the subject of an impending acquisition, and the attendees of this meeting were reminded that this was a confidential matter.

After an exchange of phone calls that included sales manager Robert Herman, all three men purchased stock in Atheros on January 4, 2011, although none of them had previously invested in this company. Within hours of making their investments, news of the impending merger was apparently leaked to the New York Times driving the stock price up by more than 20%. The following day, Qualcomm purchased Atheros for more than $3 billion. When the news of the acquisition became public, the men quickly sold their newly acquired stock, gleaning profits of more than $200,000 for Cohen, nearly $30,000 for Herman, and just over $3,000 for Fleischli.

“As alleged in our complaint, Qualcomm placed trust in these sales managers who proceeded to exploit the confidential information shared with them and conduct insider trading for their personal gain,” said Michele Wein Layne, director of SEC’s Los Angeles Regional Office.

The indictment against Cohen and Herman states that initially the men told Qualcomm attorneys that they only purchased the stock after they read the leaked story in the New York Times. Each of the men, however, eventually conceded that he was aware that Qualcomm’s code of business conduct strongly emphasized that insider trading was illegal and grounds for termination. Consequently, all three men were terminated last September when Qualcomm became aware that they had traded on the confidential information.

Qualcomm spokeswoman, Christine Trimble, said, "We have been fully cooperating with the government's investigation, and these matters will now be addressed through the legal system."

The SEC is seeking the surrender of the illegally obtained profits, pre-judgment interest, other financial penalties, and permanent injunctions against the men to prevent them from committing any further such violations.

The U.S. Attorney’s Office for the Southern District of California has filed criminal charges against both Cohen and Herman. The U.S. attorney’s office stated that Cohen was arrested at Los Angeles International Airport on May 10th. He pleaded not guilty when he appeared in court on May 12th and was to be released on a $100,000 bond. The U.S. attorney’s office also said that as of May 12th, Herman was still at large.

If you feel that you have been negatively impacted due to the insider trading committed by Cohen, Fleischli, or Herman, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


Sources: www.sec.gov (press release, complaint); www.google.com/finance (online news article); www.justice.gov (press release)

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June 12, 2014

Judge Orders Asset Freeze as SEC Charges Advisory Firm with Fraud

As a stock fraud attorney, I see a lot of dishonorable actions occur in the world of investing, but one of the things that always gets under my skin is when I hear about investment firms who intentionally mislead clients. These firms and their representatives are often entrusted with the life savings of their clients and have not only a fiduciary obligation to uphold, but a moral one, as well. Unfortunately, a recent Securities and Exchange Commission investigation uncovered blatant acts of falsification of information by an investment firm and two of its executives.

Aphelion Fund Management, an investment firm located in New York that acts as the investment advisor and general partner for two unregistered hedge funds, has been found complicit in the fraud charges leveled against two of its executives. Vineet Kalucha, the majority owner, managing partner, and chief investment officer, managed one of the company’s investment accounts which was being audited by an outside audit firm. When Kalucha received a performance report from the audit firm showing a 3% loss over a 15-month period, he took it upon himself to alter the report so that it reflected a 30% gain over an 18-month period. He then provided the falsified report to perspective investors as enticement to garner their business, and he did so with the full knowledge of Aphelion’s chief financial officer, George Palathinkal.

In addition to the dissemination of the falsified report to the company’s investors, the SEC investigation also determined that Aphelion, Kalucha, and Palathinkal also misrepresented the scope of the assets under Aphelion’s management. In 2013, the company never managed any more than $5 million in assets at any one time, yet both Kalucha and Palathinkal stated to investors on several occasions that the company handled more than $15 million in assets.

The SEC allegations continue on to include that Kalucha committed additional acts of fraud by providing investors with false statements regarding his litigation history. He stated on the company’s due diligence questionnaire that he had never been involved in legal proceedings. In what surely was an attempt to cover any discrepancies should investors dig too deeply, he added a rambling statement pertaining to a civil proceeding. In fact, the U.S. Department of Labor had brought a case against him for breaching his fiduciary duties. The case resulted in a consent judgment which bars Kalucha and Aphelion from engaging in investment advising for certain retirement plans. The intentional ambiguity of Kalucha’s response regarding his litigation history denied investors the opportunity to make an informed decision as to whether Aphelion was the best choice for their investment funds.

The complaint further states that from 2013 until March 2014, Aphelion, Kalucha, and Palathinkal raised $1.5 million by indicating to investors that the monies raised would be used to support the operating expenses of the company. Instead, Kalucha spent a significant amount of the funds raised in 2013 for his personal expenses such as settling a personal breach of contract dispute, a down payment on a luxury vehicle, and paying for his personal taxes and accounting services. Working in collusion, Palathinkal approved each of these expenditures.

“We allege that on multiple occasions, Aphelion, Kalucha, and Palathinkal intentionally overstated the success of their investment strategy,” said Robert J. Burson, associate director of the SEC’s Chicago Regional Office. “Kalucha also has been using investor money as his own, and emergency action was necessary to protect the interests of investors.”

Judge Jed S. Rakoff issued a temporary restraining order, froze all assets, and temporarily forbid the defendants from pursuing additional investors or from soliciting any further funds from their current clients. On May 15, Judge Richard M. Berman will preside over a hearing on the SEC’s motion for a preliminary injunction.

If you feel that you have suffered financial losses as a result of the acts of fraud committed by Mr. Kalucha, Mr. Palathinkal, and/or Aphelion Fund Management, please give us a call at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.

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June 5, 2014

Barred Stock Broker Dupes Investors in Florida Real Estate Deal

I have been a stock fraud attorney for a long time, and I’ve worked in the industry for an even longer period of time. I made the move from being a stock broker because I could no longer stomach the abuses that I saw brokers/dealers perpetrate against investors. Witnessing these illicit actions were the impetus that made me choose to go to work for a regulatory agency because I feel like sometimes, the good guys can win.

Such is the case with recent Securities and Exchange Commission (SEC) investigation into the actions of a former stock promoter, Robert J. Vitale. It is reprehensible enough that Vitale defrauded many investors in a Florida real estate scam, and it is unconscionable that many of those that he defrauded were elderly clients. What is most appalling is that he committed these acts of fraud years after he was permanently barred from dealing in securities by both the SEC and the Financial Industry Regulatory Authority (FINRA).

According to a recent complaint filed by the SEC in U. S. District Court in the Southern District of Florida, Vitale’s acts of fraud included selling unregistered securities while representing himself as a registered broker/dealer. He had, in fact, been suspended as a registered broker/dealer in 2007 for failing to comply with an arbitration award and failed to comply with a request for information about the status of compliance. This compliance failure stemmed from a 2005 regulatory action in which he was implicated in a “pump-and-dump” scheme. He and brokers in his charge purchased stocks at an extremely low price and then in turn, sold them to retail customers at an inflated price. At that time, he was barred from association with any firm affiliated with National Association of Securities Dealers (NASD) which has since become FINRA.

Vitale told his investors that the reason for his success was his “great honesty and integrity,” yet the SEC’s investigation revealed a man of somewhat less character. In this most recent regulatory action, Vitale and his firm, Realty Acquisitions & Trust, Inc., told investors that their investments in a Florida real estate enterprise were 100% protected, which they were not. Additionally, he also misrepresented his educational background by stating that he had a business degree from Notre Dame when he had never actually attended university.

As I said, sometimes the good guy win – Vitale is currently serving a two-year prison term for deceiving SEC investigators. In September 2013, he was convicted for this deception and for obstruction of justice by impeding the SEC investigation that brought about this most recent round of charges. It is the goal of the SEC to have it mandated that Vitale return the funds it alleges he scammed from investors, plus interest and penalties, as well have a permanent injunction against him. In this action, the SEC also named Coral Springs Investment Group, Inc. as a relief defendant in the belief that this company retains assets that were gleaned from Vitale’s victims.

“Vitale hid the truth from investors just as he tried to hide his assets during our investigation,” said Stephen L. Cohen, associate director of the SEC’s Division of Enforcement. “When individuals barred from the industry continue their wrongdoing, we pursue them aggressively and seek to return their ill-gotten gains to investors.”

If you feel like you have suffered financial losses as a result of the fraud committed by Robert, J. Vitale or Realty Acquisitions & Trust, Inc., please call us at the Blum Law Group at 1-877-STOCK-LAW for a free consultation.

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May 20, 2014

SEC Landmark Non-prosecution Deal in Insider Trading Racket

Six Charged, Many Others Suspected

Often being in a position of power just presents too much temptation for some people to withstand and then abuses of power manifest in a variety of ways. Whether it’s mistreating employees or slipping a twenty dollar bill out of a cash drawer, some people just take advantage of their position. Such is the case with a recent Securities and Exchange Commission (SEC) investigation into acts of insider trading by former GSI Commerce executive, Christopher Saridakis.

In March, 2011, negotiations were underway for a merger between GSI Commerce and eBay. As the chief operating officer for the marketing solutions division of GSI, Saridakis was privy to information about the acquisition and even attended a meeting regarding the action. In holding that position, he was well-aware that GSI was diligent in trying to keep the merger covert, yet prior to the acquisition by eBay, he informed two of his family members of the impending deal. Not only did he continue to advance by becoming president of the company, eBay Enterprise, after the merger, the family members in whom he confided traded on the information he gave them to a profit of $41,060.

Saridakis’s actions took on the type of frenzy that was promoted in that 1980’s shampoo commercial. First, he told the two family members about the merger and then also revealed the same information to two of his friends in the weeks prior to the merger. One such friend, according the SEC’s complaint, is long-time acquaintance, Jules Gardner. Saridakis kept Gardner abreast of the machinations of the merger through a series of text messages. One of these text messages was sent a week prior to the announcement of the merger by Saridakis to Gardner urging him to purchase GSI shares. True to the strategy of that 1980’s viral shampoo marketing concept, Gardner talked to friends about the text messages he had received from Saridakis. Those friends then also traded and profited on the information.

Suken Shah was one of the friends that benefitted from Saridakis’s penchant for sharing information. After the March 11 eBay meeting that Saridakis attended, he discussed the matter with Shah who then traded on the information, earning $9,838 from the insider information. Shah then also shared the tip with his brother, Shimul Shah, and a friend. This resulted in a separate administrative proceeding against Shimul Shah who had tipped several other people while he attended a dinner with friends. It was at this dinner that the individual who entered into the non-prosecution agreement learned of the insider trading information.

As often happens when people talk excessively, the SEC was able to disentangle this web of insider trading, in large part, due to wide-spread collaboration from some of the participants who had received the tips either from Saridakis or those with whom he shared the non-public information. Five of these traders have also been charged by the SEC. In the case of one trader in particular, the SEC has entered into a non-prosecution agreement because the information that this particular trader provided was integral in helping the regulatory agency uncover many of the details of the insider trading scheme. This is a historic event for the SEC as it is the first time the agency has entered into such an agreement. This pact may yield even greater assistance to the SEC as it continues to investigate other individuals who may have traded on this non-public information.

The Penalties
In light of the fact that many of those who benefitted from these acts of insider trading have helped the SEC in its investigation, most of the traders received nothing more than monetary penalties. The five traders who were involved as well as the individual who the SEC chose not to prosecute will have to pay more than $490,000. These penalties range from disgorgement only to reduced penalties for those who were willing to assist the SEC in their investigation, yet some traders were required to pay two or three times the amount that they profited by their involvement.

As for Saridakis, he resigned from his position as president of eBay Enterprises, and he has agreed to pay $664,822 which includes disgorgement on behalf of his family members and penalties. In settling the SEC charges against him, he has also agreed to an officer-and-member bar. Additionally, the U.S. Attorney’s Office has announced criminal charges against him.

In a separate action concerning insider trading of GSI stock, the SEC settled administrative proceedings against two other traders who are unrelated to the Saridakis matter. The investigation determined that the spouse of an insider at GSI learned of the proposed merger and divulged the information to a friend. This friend then informed Oded Gabay who passed the information along to Aharon Yehuda. Both of these individuals acted upon the information by trading in GSI stock. Although Gabay agreed to pay almost $47,000 in disgorgement, interest, and penalties, the SEC reduced this amount to just over $22,000, 50% of his and Yehuda’s trading profits, because he cooperated in the investigation. Yehuda agreed to settle the charges by paying $43,146 in disgorgement, interest, and penalties.

The Blum Law Group specializes in helping people who have been victimized by brokers/firms. If you believe you have suffered financial losses as the result of the practices of any of these insider traders, please give us a call at 1-877-STOCK-LAW for a free consultation.

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May 16, 2014

Widespread “Expert Networks” Investigation by SEC Snags Dozens for Insider Trading

Nvidia Corp. Account Manager Latest Head to Roll

If it seems like there has been a lot of chatter in investment news lately regarding insider trading, it is probably due to the concentrated efforts of the Securities and Exchange Commission. In a huge push to more closely examine the practices of “expert networks,” the SEC has uncovered a large number of insider trading incidents among investment professionals, corporate employees, and hedge funds. This series of investigations has revealed that when it comes to insider trading, it is seldom one guy tipping off one of his buddies, but more likely a matter pervasive complicity within the investment industry. When you examine who tells what non-public information to whom, it’s like mapping a spider web; one that has amassed about $430 million in ill-gotten gains.

A recent example of the far-reaching effects of insiders’ failures to uphold their fiduciary responsibilities is Nvidia Corp., a California-based technology company. Last month, the SEC filed charges against Chris Choi, a former accounting manager at Nvidia. In 2009 and 2010, Choi shared information that pertained to the financial performance of Nvidia with a friend prior to the release of the company’s quarterly earnings reports. This started the ball rolling in a massive illegal trading scheme among hedge fund traders, but it was not the only incident of indiscretion perpetrated by Choi. On several occasions, he communicated other Nvidia private information to his friend that pertained to such matters as calculations of revenues and gross profit margins.

That friend, Hyung Lim, then divulged the same information to Danny Kuo, a hedge fund manager at Whittier Trust Company. Kuo took advantage of the situation by trading on the non-public information on behalf of his firm and even passed it along to analysts at Diamondback Capital Management, Level Global Investors LP, and Sigma Capital Management. These analysts then provided their portfolio managers with the information which resulted in trades that effected Nvidia securities, and the illicit trades garnered millions of dollars in profits for the traders.

Choi is the 45th person that the SEC has charged in their expert networks investigation, which is still ongoing. The complaint that the regulatory agency filed against Choi states that his actions not only helped others avoid losses, but bolstered their success when they traded on his information to a profit of $16.5 million. Lim, Kuo, Diamondback, Level Global, and Sigma Capital were all previously charged for exploiting the non-public information they had received as a result of Choi’s professional irresponsibility and lack of integrity.

“Insiders at public companies who are entrusted with confidential information are duty-bound to protect it,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “Choi violated that sacred duty by regularly tipping his friend with non-public financial data that hedge fund traders exploited for millions of dollars in illegal profits.”

Although Choi did not admit to the charges leveled against him, he has conceded to pay a $30,000 fine, and he will not be able to serve as an officer of a public company for five years. Additionally, he has acquiesced to the SEC’s requirement that he be forbidden from engaging in future violations of federal securities laws, but these SEC mandates are subject to court sanction.

If you feel that you have been financially impacted by the actions of Mr. Choi or any of the other traders or firms associated with these acts of insider trading, please give us a call at the Blum Law Group at 1-877-STOCK-LAW for a free consultation.

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May 7, 2014

SEC and Homeland Security Squash TelexFree Pyramid Scheme

Embattled Massachusetts Telecommunications and Marketing Firm Tapped Immigrants

By some accounts, the history of TelexFree, LLC is a bit of a Cinderella story gone awry. When Brazilian immigrant, Carlos Wenzeler, came to the United States in 1988, he was just looking for a job so he took whatever low-paying employment he was able to find. Eleven years later he found his future business partner, James Merrill, while leafing through a phonebook in search of a cleaning job for himself and his family. This chance meeting ended up turning the fairy tale into a multimillion dollar pyramid scheme that laid to waste the hopeful dreams of many other immigrants who became the target of the scam.

Although TelexFree’s beginnings seem innocuous enough; its genesis came about from Wenzeler complaining about the high cost of making phone calls to Brazil so, he and Merrill then hatched a plan to start selling long-distance calling service by using “voice over Internet” (VoIP) . Part of their strategy was to develop a multi-level marketing approach which eventually recruited thousands of people on the premise that these investors only had to, “…place your ads every day and everyone gets paid,” according to Sanderly Rodrigues de Vasconcelos in a TelexFree promotional video on YouTube. He continues his enticement by also stating, “I am not the first USA millionaire. I am the first multimillionaire — $3 millions.”

A recent Securities and Exchange Commission investigation focuses on the information that TelexFree failed to provide to their investors. The SEC charges TelexFree, Inc. and TelexFree, LLC with operating a multi-layered marketing scam under the guise of selling the VoIP telephone service. Not only were TelexFree’s co-owners James Merrill and Carlos Wenzeler named in the SEC complaint, but so were several others. These include CFO, Joseph H. Craft, and international sales director, Steve Labriola. Additionally, four promoters of the program, Sanderley Rodrigues de Vasconcelos, Santiago De La Rosa, Randy N. Crosby, and Faith R. Sloan were also charged. Other entities were implicated by the SEC as relief defendants as they were also in receipt of investor funds.

The SEC complaint filed in federal court in Massachusetts purports that the defendants peddled securities labeled as “memberships” in TelexFree. They assured investors that they would yield returns of more than 200% annually if these investors recruited additional members and placed TelexFree ads on free Internet sites. The complaint goes on to state that from August 2012 until March 2014, the VoIP revenues only totaled roughly $1.3 million. This is barely 1% of the $1.1 billion required to offset the payments owed to TelexFree’s promoters. This created a pyramid scheme environment as it forced TelexFree to meet this debt through the use of funds garnered from new investors.

Even as concerns about the company began to surface on websites, investors continued to sink funds into the scheme. The allure of the touted astronomical returns was just too great a temptation for many investors to resist. As the number of investors continued to expand, more government agencies including the FBI and Homeland Security, as well as authorities in several other countries, began conducting investigations against TelexFree. Money laundering is just one in a long list of allegations of wrongdoing by the company. Secretary of State, William F. Galvin, stated that just in Massachusetts alone, the alleged victims of TelexFree had lost $90 million, and the SEC estimates that the company garnered $300 million from victims in 21 states. In light of the charges by the SEC and other regulators, TelexFree is still enlisting new investors, but now requires them to actually sell the VoIP products in order to receive compensation.

Furthermore, the complaint alleges that over the last few months, the company has transferred approximately $30 million in investor funds from their operating accounts to those of affiliates or individual defendants. In fact, an article in the Boston Globe reported that the company’s chief financial officer, Joseph Craft, also a defendant in this case, was trying to abscond with $38 million worth of cashier’s checks during a raid by the Department of Homeland Security. He was, however, detained by the local sheriff’s department. The article continues on to state that by the time the FBI and Homeland Security executed a search warrant on the Massachusetts office, it is thought that the company owed more than $1 billion to its investors.

On Wednesday, April 16, a U.S. District Court judge in Boston approved the SEC’s request to freeze TelexFree’s assets, as well as those of the company owner’s and others implicated in the scheme.

The SEC complaint seeks injunctions against the primary defendants from committing further infractions of the laws of which they have been accused. Additionally, it seeks disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties. The SEC also requests disgorgement of funds and pre-judgment interest from the three entities named as relief defendants.

If you feel that you have suffered financial losses due to the pyramid scheme perpetrated by TelexFree or its affiliates, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.

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