INVESTMENT FRAUD UPDATE: SEC FILINGS AND SCUM IN THE GULF

Summer is upon us, and as predictable as summer showers, the criminal element in our society continues to rain down their latest renditions on old themes of investment related thievery. However, law enforcement authorities have been gearing up for the occasion and are actively filling up court dockets around the nation with criminal complaints. Here is a review of recent activities to thwart the deceptive designs of the unscrupulous.

SEC Update

In a highly publicized press conference back in January, the Director of Enforcement for the SEC, Robert Khuzami, responded to growing pressure to correct the ills of Wall Street by announcing significant new steps that he had taken to accelerate and improve the law enforcement activities of the Securities and Exchange Commission. His reorganized investigative division would be comprised of five new chiefs, each having served many years for the SEC. Each chief would head a specialized investigation unit equipped with additional incentives and guidelines for cooperating witnesses. The units were to be forward-looking and beefed up with additional resources, including technological support and personnel with industry knowledge and market expertise.

Months of investigative work by Khuzami and his merry band of investigators have resulted in high profile court filings for Goldman Sachs and Kenneth Starr, an alleged “Ponzi Scheme” artist in New York, and several other fraud related cases. On the mortgage-backed security front, the SEC filed papers this past Monday accusing New York financial services firm ICP Asset Management and its founder of defrauding investors in a series of complex collateralized debt obligations (CDOs) for their own benefit.

According to the complaint filed in federal court in Manhattan, ICP and its founder, Thomas Priore, “fraudulently managed” four multibillion-dollar CDO security pools, deriving enormous fees for the firm and compensation for its founder. “ICP and Priore made trades at intentionally inflated prices and made prohibited investments on behalf of the CDOs without proper approval or disclosure to investors”, the SEC claimed. The improper trades resulted in millions of dollars in losses for ICP’s clients and investors as the mortgage markets collapsed in 2007, as detailed in the court filing.

The case is the first attempt by the SEC to address a CDO collateral manager and is part of a broad sweeping examination, targeting about 50 investment advisers related to CDOs, mortgage-backed securities and other vehicles often blamed for the market collapse of subprime mortgages. These words were courtesy of George Canellos, director of the SEC’s New York regional office, in response to a call with reporters on Monday.

In a separate action, the SEC charged Lee Farkas, former chief executive officer and chairman of Taylor, Bean & Whitaker (TBW) Mortgage Corporation, with engaging in “a pattern of fraudulent conduct for the purpose of selling at least $1.5 billion of fictitious and impaired residential mortgage loans to Colonial Bank”. Colonial Bank then falsely reported these loans in order to obtain $550 million in TARP funds. TBW principally serviced mortgages on behalf of Freddie Mac and eventually became the largest non-despository mortgage lender in the country.

The comedy of financial errors began back in 2002. Farkas began running up huge overdrafts at Colonial Bank and began selling fake mortgage loans, as well as impaired assets and loans owned by other banks to Colonial. By the end of 2007, the level of the scheme, facilitated by co-conspirators within the bank, had reached $1 billion. Both TBW and Colonial BancGroup filed for bankruptcy and shut down lending operations in August 2009.

“Pump-and-Dump” News

Another favorite investment fraud scheme is alive and well and attempting to profit off the misery in the Gulf of Mexico. SEC officials, in concert with several state attorney generals, are warning investors to be especially skeptical of the potential for “pump-and-dump” stock fraud schemes this season. It appears that scam artists see gold in the oil-drenched Gulf and hope to profit from it by duping unsuspecting victims in the stock market.

Greg Zoeller, Indiana’s Attorney General, said in a prepared statement that investors should be extremely skeptical of “Pump-and-dump stock scams by companies claiming to have, or be in the process of obtaining, contracts with BP or government agencies pertaining to the oil spill in the Gulf of Mexico.” The warnings particularly apply to micro-cap and penny stocks where price manipulation is easiest to accomplish.

Signs of foul play may include the following:

• Any claims of proficiency in cleaning up oil spills;
• Any assertion of contracts or contract discussions with BP about oil cleanup;
• Claims of supporting the efforts of BP, the EPA, the Coast Guard or any other government agency;
• Press releases touting enormous revenue growth;
• High pressure sales tactics to invest immediately.

“Ponzi Scheme” Update

As the old expression goes, “A receding tide always exposes the rocks beneath.” The “silver lining” of this recession, although that is a bit of a stretch, is the exposure of an incredibly high number of Ponzi schemes active across the nation and well into Canada. On one website that tracks this activity in the press, no less than forty separate articles were cited over the past five days pertaining to prosecutions, court filings and rulings regarding a broad range of these clever ruses to defraud.

One amusing side note had to do with the wife of Scott Rothstein, recently sentenced to a 50-year prison term for his $1.2 billion Ponzi scheme. While Kimberly Rothstein accepts that the government has a right to seize her husband’s assets, she has filed a complaint in court to retrieve jewelry and other “trinkets” received by her over the years from her husband “based on their personal friendship and relationship.” It appears she needs these items to pay claims for another suit alleging that she also received compensation and payments on credit cards in excess of $900,000 for “shoes, spa visits and plastic surgery.” Sounds as if she might be a distant cousin of Imelda Marcos. Such is life for a convicted felon’s wife.

Chris Lee

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