Securities Law Blog

Four Canadian men and two Florida residents have been charged by the Securities and Exchange Commission (SEC) for running a $300 million international Ponzi scheme. On June 10, 2010 the SEC complaint stated that Milowe Allen Brost and Gary Allen Sorenson were the two masterminds and primary beneficiaries of the operation that purportedly solicited investments in a successful gold mining operation.

According to the SEC’s complaint, Brost and Sorenson held seminars at which they presented themselves as an independent financial education firm and persuaded more than 3,000 investors in the U.S. and Canada to invest their savings, retirement funds and home equity. The pair allegedly promised investors they could earn 18-36% annual returns and that their investments were fully collateralized by gold.

While investors were told that they were investing in companies involved in gold mining, the SEC claims that the investments were supporting shell companies owned or controlled by Brost and Sorenson. Once an investment was made, the money was purportedly transferred several times through international bank accounts, “then ultimately used for ‘interest payments’ to investors, fund the few unprofitable companies that actually had operations, and personally enrich Brost, Sorenson and others involved in the scheme.

The four companies being charged by the SEC include Syndicated Gold Depository (SGD), Merendon Mining Corp. Ltd., Merendon Mining (Nevada) Inc., and the Institute for Financial Learning Group of Companies, Inc.

The United States Attorney’s Office of the Southern District of New York and The Federal Bureau of Investigation (FBI) announced the unsealing of an indictment charging Steven Kimmel and twelve others for their alleged roles in a $12 million securities and wire fraud scheme that is being deemed a “stock-promoting boiler room operation.”

On June 9, 2010 the indictment was unsealed in Manhattan federal court. Ten of the defendants were arrested, two are expected to surrender at a later date, and one remains at large.

According to the indictment, Kimmel was the owner and chief executive officer of the Miami-based company Realcast. Organized in 1999, Realcast provided live broadcasting and video on demand over the internet. In 2000, Kimmel began publicly selling shares in Realcast. Kimmel employed a New York-based office known as Powercom Energy Services Corp. and Empire Energy Services Corp. (Powercom/Empire) to solicit investors. The defendants employed by Powercom/Empire allegedly aimed at attracting investments from out-of-state and elderly investors who would not be able to personally check up on its operations.

From 2000 until 2010, Realcast allegedly brought in $12 million through use of fraudulent statements and omissions of material facts via Powercom/Empire. During this time, Realcast generated minimal revenue from its business and allocated 40% - 50% of investments to Powercom/Empire to continue to secure outside investments, according to the indictment.

Among its false representations, Realcast allegedly did not disclose to investors that it was siphoning almost half of their money to Powercom/Empire. Nor did they admit to paying commissions to or using broker-dealers after 2004.

In a press release issued by the FBI, FBI Acting Assistant Director-In-Charge George Venizelos stated, “As long as there are prospective victims and a fast buck to be made, the bottom-feeders of the securities industry will try to capitalize…Any investment strategy bears risk, but it ought not to include the risk that the person selling you on it is lying to you.”

If convicted of securities fraud or conspiracy to commit wire fraud, the defendants face as much as 20 years in prison.

On June 2, 2010 a Miami man was charged by the Securities and Exchange Commission (SEC) for allegedly operating a $40 million Ponzi scheme that targeted the local Hispanic community. The SEC claims that Luis Felipe Perez began his scheme in 2006 when he began raising money from investors to purportedly support jewelry businesses and pawn shops.

Perez allegedly set-up “no-risk” loan agreements with investors and promised to pay them guaranteed annual returns of 18 to 120 percent in monthly interest payments. As president and sole owner of Lucky Star Diamonds Inc. and Luis Felipe Jewelry Design Corp., Perez supposedly used his businesses to solicit investments.

According to the SEC complaint, Perez allegedly made several misrepresentations to investors to secure their investment. Some in investors were purportedly told that diamonds had been specifically set aside for them as collateral securing their investments. Investors were provided with access to a bank safety deposit box that held the diamonds, which were later found to be fake. It was reported that in some instances Perez told investors that he added them as beneficiaries on his life insurance policy. Unbeknownst to investors, Perez had missed payments and forced the policy to default. Finally, the SEC claims that Perez falsely assured investors that they would earn monthly returns on their money that was also being used to finance pawn shops in New York, which never existed.

Before Perez’s Ponzi collapsed in June 2009, the SEC claims that he misused new investor funds to pay prior investors. Perez allegedly used the classic Ponzi-style scam to steal at least $6 million to support his extravagant lifestyle and make political contributions to help bolster his image in the local community, according to the SEC complaint.

The SEC complaint charges Perez with violating the antifraud provisions of the federal securities laws. The industry regulator is seeking a permanent injunction, sworn accounting, disgorgement of ill-gotten gains with prejudgment interest, and a financial penalty against Perez.

Pequot Capital Management, Inc. and its Chairman and CEO Arthur Samberg have agreed to pay $28 million to settle insider trading charges filed by the Securities and Exchange Commission (SEC).

The SEC alleged that in April 2001, the Connecticut-based hedge fund manager and Samberg sought information from Microsoft employee David Zilkha, in regards to Microsoft’s earnings estimates for the quarter. Zilkha, who at the time had recently accepted an employment offer with Pequot, allegedly provided Samberg with information that Microsoft would “meet or beat its earnings estimates for the quarter.”

Following the exchange of information, Samberg allegedly traded in Microsoft on behalf of funds managed by Pequot. After the market closed on April 19, 2010, Microsoft announced publicly that it beat its earnings estimates, driving up the price of Microsoft’s stock. According to the SEC complaint, Pequot funds made more than $14 million as a result of the alleged illegal trading practices.

Pequot and Samberg agreed to pay nearly $18 million in disgorgement of trading profits and prejudgment interest as well as $10 million in penalties. Samberg has also agreed to be barred from working as an investment advisor.

The SEC is continuing its insider trading suit against Zilkha, who did not settle with regulators. According to the SEC, Zilkha allegedly lied to SEC staff regarding e-mails with information about Microsoft earnings during a 2005 and 2006 investigation.

Investment advisor to many well-known celebrities and high-profile clients, Kenneth Ira Starr, was arrested by federal prosecutors in New York May 27, 2010 on charges of fraud, money laundering and lying to a federal officer. The Securities and Exchange Commission (SEC) has also charged Mr. Starr with securities fraud.

Starr allegedly used two entities, Starr Investment Advisors LLC (SIA) and Starr & Company LLC, to make unauthorized transfers of money in client accounts that directed funds into Starr’s personal accounts.

According to the SEC’s complaint, Starr and his companies acted as a “self-clearing” adviser. Starr allegedly held certain clients’ assets in a safe in Starr & Company’s offices, even though the firms were not qualified custodians. Starr and SIA allegedly used their power of attorney or signatory over a number of client bank accounts to transfer money from one client’s account to another.

Between April 13 and April 16, 2010 Starr allegedly transferred $7 million from three client accounts without authorization. One client detected the unauthorized transfers and demanded the money be returned. Starr allegedly repaid the client with money siphoned from another client’s account without authorization.

The $7 million in transferred funds allegedly went towards Starr’s purchase of a $7.6 million apartment on the Upper East Side in Manhattan, according to the SEC.

In another instance, Starr began transferring approximately $1.7 million from a client’s personal account and the account of a charity run by the same client in August 2009. The fraudulent transfers went undetected until Starr tried to make a $750,000 transfer from this client’s account in April 2010. The client was notified by the bank and uncovered the previous $1.7 million in unauthorized transfers after a review of the account statements. The client was eventually reimbursed with money that appeared to have come from the bank account of another unrelated party, according to the SEC complaint.

According to SEC findings, from 2006-2009 Starr failed to comply with custodial rules that require an independent public accountant to perform yearly random examinations of client assets in a firm’s custody.

Prosecutors are also accusing Starr of stealing client funds through the operation of a Ponzi scheme. Starr allegedly solicited investments in what he claimed were sure deals, then diverted funds to himself, associates or towards his own risky business investments.

According to the FINRA BrokerCheck website, the SEC began its “fact-finding inquiry” on July 23, 2009.