Securities Law Blog

The owner and four employees of Gryphon Holdings Inc. were arrested April 20, 2010 for allegedly operating an internet-base scam that misled investors into paying fees for phony stock tips and investment advice. The president of the Staten Island financial advisory firm, Kenneth Marsh, and four others have been charged with conspiracy to commit securities fraud and wire fraud and a single count of wire fraud. If convicted they could each face up to 20 years in prison, according to the U.S. Attorney’s office in Brooklyn, NY.

The Securities and Exchange Commission (SEC) also filed civil charges against the firm, Marsh, and the four employees.

The SEC alleges that since at least 2007 Gryphon used numerous material misrepresentations to lure clients to purchase its services. Gryphon allegedly fabricated advisor credentials, including possessing valuable experience with major Wall Street firms and degrees from prestigious academic institutions. The firm allegedly claimed to have offices around the world, when in reality they operated their dealings from a Staten Island strip mall.

According to prosecutors, the majority of the victims are reported to being elderly retirees who received unsolicited emails and telephone calls promoting the firm’s services.

The advisory firm allegedly charged between $99 and $250,000 for securities recommendations which the SEC said were falsely claimed to have been based on “sound research and successful strategies of trading experts with superior knowledge.”

According to the SEC complaint, over the course of the past three years, Gryphon acquired more than $17.5 million for fees and services.

The Securities and Exchange Commission (SEC) filed civil fraud charges against Goldman Sachs & Co. and one of its vice presidents in federal court in Manhattan on April 16, 2010. The SEC alleges that Goldman Sachs defrauded investors by misstating and failing to disclose key information about a financial product tied to subprime mortgages.

The claim alleges that Goldman Sachs was paid $15 million by one of the world’s largest hedge funds, Paulson & Co., for structuring and marketing a synthetic collateralized debt obligation (CDO), known as ABACUS 2007-AC1 (ABACUS). This complex investment vehicle was based on the performance of subprime residential mortgage-backed securities (RMBS).

According to the complaint, Paulson “played a significant role” in picking which RMBS should make up the portfolio. Allegedly “Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs & Co. to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future.”

The SEC alleges that marketing materials for ABACUS represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. Goldman Sachs allegedly failed to disclose to investors that Paulson, which was in-line to benefit should the RMBS default, played a considerable role in the makeup of the portfolio.

The industry regulator alleges that Goldman Sachs Vice President Fabrice Tourre, 31, was “principally responsible” for ABACUS. It claims that Tourre structured the transaction, prepared the marketing materials and communicated directly with investors.

The $15 million deal between Paulson and Goldman Sachs to begin the structuring and marketing of ABACUS allegedly began April 26, 2007. According to the complaint, by October 2007, 83% of the RMBS in the portfolio had been downgraded, and by Jan 2008, 99% had been downgraded.

Investors in the mortgage securities are alleged to have lost more than $1 billion, while the sinking market gave Paulson a profit of about $1 billion.

The Quadrangle Group LLC has agreed to pay $12 million to settle the Securities and Exchange Commission’s (SEC) claim that the investment firm was linked to a widespread multi-billion dollar kickback scheme to obtain investments from the $130 billion New York State pension fund.

The SEC alleges that Quadrangle secured a $100 million investment from the New York State Retirement Fund after former executive Steven L. Rattner arranged for an entertainment company, owned by Quadrangle, to distribute the DVD for a low-budget film produced by former New York State Deputy Comptroller, David J. Loglisci, and his brother.

According to the SEC’s complaint, filed in federal district court in Manhattan, Rattner worked with Henry Morris, top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi , to obtain investments from the Retirement Fund.

Allegedly Morris presented the idea of helping Loglisci’s brother to distribute his film “Chooch” through Quadrangle’s connections at Good Times Entertainment (GT). Following several failed attempts by Loglisci’s brother to convince GT Entertainment’s CEO to distribute the film, Rattner allegedly emailed the CEO with instruction to “dance along” with Loglisci’s brother while he figured out whether Quadrangle “needed” the distribution deal in order to secure an investment from the Retirement Fund.

The SEC alleges that three weeks after GT Entertainment agreed to distribute the DVD, Loglisci notified Rattner that the Retirement Fund would be investing $100 million in the Quadrangle fund. Since the fund’s investment in 2005, Quadrangle has received $5 million in management fees.

Without admitting or denying wrongdoing, Quadrangle has agreed to pay $7 million to the pension fund and $5 million to the SEC.