Securities Law Blog

Big 5 Asset Management LLC owner Drew “Bo” Brownstein has been sentenced to a year and a day in prison for insider trading. Brownstein admitted to buying shares of Mariner Energy Inc. in April 2010 after learning from a friend that the oil and gas company was going to be acquired by Apache Corp. for $3.9 billion.

Brownstein obtained the insider information from a friend, Drew Peterson, whose father was on the Board of Mariner. Based on the information, Brownstein bought Mariner stock and options for his hedge fund, his personal investment accounts, and his family, without their knowledge.

According to reports Brownstein was required to forfeit $2.4 million in illicit profits, even though he allegedly made more than $5 million. In addition to the prison sentence, the U.S. District Judge for the Federal District Court in Manhattan, also ordered Brownstein to serve six months home confinement, to perform 500 hours of community service, and pay a $7,500 fine on top of the forfeiture of illegal profits.

Three farmers and a cattle-raising operation in Montana have filed a lawsuit against former CEO, Jon Corzine, of the collapsed commodity brokerage MF Global Holdings Ltd. The lawsuit alleges the executives failed to disclose to customers that their money was used to finance MF Global’s bad bets on European sovereign debt. The group seeks to represent a nationwide group of commodities futures customers whose money went missing amid the multi-billion dollar bankruptcy of MF Global.

The lawsuit is one of many filed since the October 2011 bankruptcy filing that was reportedly the result of Mr. Corzine’s $6.3 billion bet on European bonds. Mr. Corzine began at MF Global in March 2010 when he was told he needed to rev up profits fast or face downgrades on the securities firm’s debt. He quickly cut hundreds of employees and hired 1,100 new traders and other employees, and encouraged traders to make larger bets. According to reports, his style included riskier businesses that bet the firm’s own money, increasing the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.

Faced with the short-term pressures of increasing profits, he turned to an investment in high-yielding European sovereign bonds structured as a “repurchase to maturity.” Initially MF Global received a $39 million jolt in revenue from the trade. When FINRA learned of MF Global’s sovereign-debt trades in the company’s annual report in May 2011, the European bet had grown to $6 billion. FINRA told Mr. Corzine that MF’s brokerage unit would have to set aside $150 million in case the trade soured.

As Europe’s financial instability increased in August and September, MF Global shares fell more than 40%. In October the company started selling the bonds to raise cash as customers were fleeing and counterparties wanted more collateral.

According to the bankruptcy trustee of MF Global’s brokerage unit, an estimated $1.2 billion in customer funds remain missing. About 500 employees are left at the company to help wind down MF Global and look for the missing customer money.

The SEC stopped the sale of fraudulent securities before anyone had the misfortune of investing with Illinois-based investment advisor Anthony Fields. Using various social media sites, including LinkedIn, Fields allegedly offered more than $500 billion in fictitious securities. According to the SEC, he used LinkedIn discussions to promote fictitious “bank guarantees” and “medium-term notes.”

Fields is the CEO and Chief Compliance Officer of his companies Anthony Fields & Associates (AFA) and Platinum Securities Brokers. According to the SEC’s complaint, Fields provided false and misleading information concerning AFA’s assets under management, clients, and operational history to the public through its website and SEC filings. Fields also allegedly failed to maintain required books and records, did not implement adequate compliance policies and procedures, and promoted himself as a broker-dealer while he was not registered with the SEC or FINRA.

To combat the exploitation of potential investors through social media sites, the SEC has begun to issue investor alerts. The alerts aim to help investors be better aware of fraudulent investment schemes that use social media, and provide tips for checking the backgrounds of advisors and brokers.

Daniel “Rudy” Ruettiger and twelve others have been charged by the SEC for deceiving investors into buying stock in his sports drink company, Rudy Nutrition. Famous for inspiring the movie “Rudy”, Ruettiger developed Rudy Nutrition and sold a sports drink with the tagline “Dream Big! Never Quit!” to compete with Gatorade in the sports drink market.

According to the SEC complaint, Ruettiger was the principal founder of Rudy Beverage Inc. He and a college friend ran the company out of Indiana until 2007 when Rocky Brandonisio became the company’s president and day-to-day business manager and moved the operation to Las Vegas. The company reportedly struggled financially with few customers, few assets, and no profits. In late 2007, Ruettiger and Brandonisio allegedly hired experienced penny stock promoter Stephen DeCesare to turn Rudy Beverage into a publicly traded company. The SEC claims that what resulted was a classic pump-and-dump scheme.

The SEC alleges that investors were provided false and misleading information about the company in press releases, SEC filings, and promotional materials. The scheme’s participants reportedly made misleading statements about Rudy Nutrition to the public in mailers sent to millions of US investors, messages posted in Internet chat rooms dedicated to penny stocks, and videos placed on the Internet for public viewing. At the same time, the scheme’s promoters allegedly engaged in manipulative trading to artificially inflate the price of Rudy Nutrition stock while selling unregistered shares to investors. In less than a month, Rudy Nutrition stock went from trading 720 shares to more than 3 million shares, and within two weeks the price of the stock climbed from 25 cents to $1.05 per share, according to the SEC’s complaint. While the scheme’s engineers were pumping up the stock, they simultaneously sold millions of shares to the market, generating more than $11 million in illicit profits.

Ruettiger agreed to pay $382,866 to settle the charges. The other participants in the pump-and-dump scheme agreed to settle and the settlements are subject to court approval.

The U.S. Attorney for the District of Massachusetts charged Boston-area money manager, Andrey C. Hicks with committing wire fraud, attempting to commit wire fraud, and aiding and abetting wire fraud. The U.S. Attorney’s charges came shortly after a restraining order had been issued by the Court at the request of the SEC.

In its complaint, the SEC alleged that Hicks and his investment advisory firm, Locust Offshore Management LLC made false representations to create an aura of legitimacy when soliciting individuals to invest in a purported billion dollar hedge fund that Hicks controlled called Locust Offshore Fund Ltd. Hicks and his advisory firm allegedly made false claims about his Harvard education and the $16 million “book of business” he grew while working at Barclays Capital. Hicks and his firm falsely claimed that the firm’s quantitative strategies were based on mathematical models that Hicks developed while at Harvard. Hicks reportedly briefly attended Harvard but never graduated after twice being required to withdraw for failing to perform academically, nor is there any record of his employment at Barclays Capital.

Hicks raised at least $1.7 million from several investors through his misrepresentations about his education, work experience, hedge fund’s auditor, prime broker and custodian, and corporate status.