Enforcement actions taken this week:
Federal court orders Matthew Marshall Taylor to pay $500,000 for fabricating and concealing trades from Goldman Sachs
Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York entered a final judgment and consent order for permanent injunction against Matthew Marshall Taylor for defrauding Goldman, Sachs & Co. , his former employer, in December 2007, by intentionally concealing from Goldman the true position size, as well as the risk and potential profits or losses associated with the S&P 500 e-mini futures contracts position in a firm account traded by Taylor.
The order finds that Taylor recorded multiple fabricated entries in a manual trade entry system for e-mini futures trades that he never made to conceal and understate the true size of his e-mini futures position and risk in his trading account, as the fabricated sales functioned to offset portions of Taylor’s actual e-mini futures purchases.
Further, Taylor violated the anti-fraud provisions of the Commodity Exchange Act (CEA) by concealing his position, risk and P&L from Goldman and requires Taylor to pay a $500,000 civil monetary penalty. Additionally, the court ordered a permanent trading and registration ban on Taylor and prohibits him from violating the CEA, as charged. Taylor resides in Florida.
In a related criminal proceeding based on substantially the same facts, Taylor pleaded guilty in the U.S. District Court for the Southern District of New York to one count of wire fraud.
CFTC permanently bars Jeannie Veraja-Snelling for failing to properly audit PFG
The U.S. Commodity Futures Trading Commission (CFTC) filed and settled charges against Jeannie Veraja-Snelling, d/b/a Veraja-Snelling & Company, a certified public accountant and sole practitioner from Glendale Heights, Ill., barring her from practicing before the Commission. The CFTC charges Veraja-Snelling with failing to audit Peregrine Financial Group, Inc.
Veraja-Snelling was the auditor for Peregrine, a registered futures commission merchant (FCM). On July 10, 2012, the CFTC charged Peregrine and its sole owner and chief executive officer, Russell Wasendorf, Sr., with fraud, among other violations, within 24 hours after the discovery that Wasendorf had misappropriated millions of dollars in customer funds. Among the violations that were discovered, Peregrine’s 2011 certified financial statements filed with the Commission were fraudulently overstated by more than $215 million. According to the CFTC, Wasendorf deceived Veraja-Snelling and others by manufacturing bogus bank statements that overstated Peregrine’s bank balances and by forging documents sent to Veraja-Snelling that purported to provide bank confirmation of the overstated balances.
According to the CFTC, Wasendorf was able to perpetrate and conceal his fraud in part because Peregrine lacked proper internal accounting controls and was not subject to audits performed in accordance with CFTC regulations. The CFTC found that Veraja-Snelling’s audits of Peregrine’s financial statements were not performed in accordance with generally accepted auditing standards (GAAS) and did not include appropriate review and tests of internal accounting controls and procedures for safeguarding customer assets, as required by CFTC Regulation 1.16.
David Meister, the CFTC’s director of enforcement, stated, “As the Peregrine debacle shows, the importance of the independent accountant’s gatekeeper function cannot be overstated. FCMs and, most importantly, their customers, rely on auditors to approach each and every auditing assignment professionally and with due care. There is no place in the CFTC-regulated world for below-standard audits or auditors who do not have a sufficient understanding of the futures industry.”
The CFTC found that Veraja-Snelling lacked the necessary technical expertise needed to audit an FCM, failed to adequately staff and plan the Peregrine audits, and failed to exercise due care in performing the Peregrine audits. Among other failures, Veraja-Snelling’s review and testing of Peregrine’s internal controls during the Peregrine audits did not identify that Wasendorf had exclusive control over the customer segregated account and its financial reporting, which reflected a material inadequacy in Peregrine’s internal controls, according to the CFTC.
In addition, the CFTC found that Veraja-Snelling improperly conducted the process to confirm bank account balances, which generally entails an auditor sending a confirmation form to a bank for a bank officer to sign and return to the auditor. Here, Veraja-Snelling relied on Peregrine’s accounting staff to prepare the confirmation request and identify the proper recipient. After Peregrine’s accounting staff provided the confirmation request and envelope to Veraja-Snelling for mailing, she sent the confirmation request to a post office box that was secretly controlled by Wasendorf. Wasendorf responded to the request by forging the signature of a bank employee on the form, confirming the false balance amounts.
The CFTC concludes that Veraja-Snelling’s failure to conduct the Peregrine audits in accordance with Regulation 1.16 constituted improper, unprofessional conduct, and permanently bars her from appearing or practicing as an accountant before the Commission. In addition, the order requires her to relinquish her right to receive payment for performing the 2011 audit.
In related actions, the CFTC filed a complaint on June 5, 2013 against U.S. Bank National Association for unlawfully using and holding Peregrine’s customer segregated funds. Wasendorf also was criminally charged by the U.S. Attorney’s office for the Northern District of Iowa, pled guilty, and on Jan. 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution.
Federal court orders Sidney J. Charles, Jr. and The Borrowing Station, to pay over $600,000 to settle CFTC forex fraud action
The CFTC obtained a federal court consent order of permanent injunction requiring defendants Sidney J. Charles, Jr., formerly of Bowie, Md, and his company, The Borrowing Station, LLC, jointly and severally to pay $254,236 in restitution and a $350,000 civil monetary penalty in connection with an off-exchange leveraged foreign currency Ponzi scheme.
The order, entered on Aug. 23, 2013, by Judge Paul W. Grimm of the U.S. District Court of the District of Maryland, also imposes permanent registration and trading bans against both defendants and prohibits them from further violations of the CEA and CFTC regulations, as charged. The court’s order stems from a CFTC complaint filed on April 23, 2012, that charged defendants with solicitation fraud, misappropriation, issuing false statements, and registration violations .
The CFTC charges that, from at least October 2009 through at least July 2011, defendants fraudulently solicited $369,326 from 18 individuals or entities for participation in a pooled investment vehicle managed by Borrowing Station, through Charles, that traded forex. According to the CFTC, defendants solicited pool participants directly and through a website. In their solicitations, defendants promised substantial investment returns such as 25% per year or 10% per month, and falsely claimed that pool participant funds were guaranteed against trading losses. According to the CFTC, defendants deposited only a portion of pool participant funds into trading accounts and lost a majority of those funds unsuccessfully trading forex.
The order also finds that defendants issued checks to pool participants that represented purported “monthly returns” or “return on investment.” However, any purported profits that defendants paid to pool participants came from the principal of other pool participants in the manner of a Ponzi scheme. In addition, the CFTC charges that Charles misappropriated pool participant funds to pay for personal expenses and to fund Borrowing Station’s operations and failed to register as a commodity pool operator and associated person.
Velocity Futures to pay a $300,000 penalty to settle charges that it failed to comply with its minimum financial requirements
The CFTC settled charges against Velocity Futures, LLC, a registered FCM, headquartered in Houston, Texas, for failing to comply with the minimum financial requirements for FCMs.
According to the CFTC, Velocity failed to meet its minimum adjusted net capital requirement because it failed to properly account for certain events relating to two arbitration awards issued by the National Futures Association (NFA) on June 16, 2011, against Velocity and its CEO, and Velocity’s subsequent settlement of those awards for $2 million. Pursuant to that settlement, Velocity agreed to pay a $1 million lump payment, and Velocity’s CEO agreed to pay the remaining $1 million over 24 months. According to the CFTC, Velocity paid and properly accounted for the original $1 million lump sum payment. However, Velocity also paid the remaining installments on behalf of its CEO pursuant to the CEO’s indemnification claims. According to the CFTC, it was reasonable and probable, under generally accepted accounting principles, that the $1 million in deferred payments owed by Velocity’s CEO was, in fact, a liability of Velocity and should have been recorded as such on Velocity’s financial statements.
The CFTC further finds that Velocity received an $800,000 cash infusion from its parent company that it improperly classified as a subordinated loan. Under CFTC Rules, proceeds from a subordinated loan may be included in a company’s assets in calculating adjusted net capital. Velocity’s classification of this cash infusion was improper, because it was not made pursuant to a valid subordinated loan agreement that was approved by NFA, as required by CFTC Rules. Consequently, the cash infusion should have been treated as a non-subordinated loan and should not have been counted towards Velocity’s adjusted net capital requirements
According to the CFTC, once Velocity properly accounted for these events, it failed to meet its minimum adjusted net capital requirement for 264 days, from June 16, 2011 to March 6, 2012.
The CFTC imposes a $300,000 civil monetary penalty and a cease and desist order on Velocity for these violations.
SEC sanctions portfolio manager for forging documents, concealing personal trades
The Securities and Exchange Commission (SEC) sanctioned a former portfolio manager at a Boulder, Colo.-based investment adviser for forging documents and misleading the firm’s chief compliance officer to conceal his failure to report personal trades.
An SEC investigation found that Carl Johns of Louisville, Colo., failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics at Boulder Investment Advisers (BIA). Johns concealed the trades in quarterly and annual trading reports that he submitted to BIA by altering brokerage statements and other documents that he attached to those reports. Johns later tried to conceal his misconduct by creating false documents that purported to be pre-trade approvals, and misled the firm’s chief compliance officer in her investigation into his improper trading.
To settle the SEC’s charges – which are the agency’s first under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO) – Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years.
“Securities industry professionals have an obligation to adhere to compliance policies, and they certainly must not interfere with the chief compliance officers who enforce those policies,” said Julie Lutz, Acting Co-Director of the SEC’s Denver Regional Office. “Johns set out to cover up his compliance failures by creating false documents and misleading his firm’s CCO.”
According to the SEC’s order instituting settled administrative proceedings against Johns, the Investment Company Act required him to submit quarterly reports of his personal securities transactions and annual reports of his securities holdings. His firm’s code of ethics contained further restrictions on when and how Johns could trade in securities, and required his transactions to be pre-cleared by the firm’s chief compliance officer. From 2006 to 2010, Johns failed to comply with these obligations and did not pre-clear or report approximately 640 trades. These included at least 91 trades involving securities held or acquired by the funds managed by the firm. The code of ethics restricted trading in securities that the funds were buying or selling.
According to the SEC, Johns submitted inaccurate quarterly and annual reports and falsely certified his annual compliance with the code of ethics. Johns physically altered brokerage statements, trade confirmations, and pre-clearance approvals before submitting them to the firm along with these reports. For example, he manually deleted securities holdings listed on his brokerage statements before submitting them in order to avoid disclosing securities purchases that were not pre-cleared.
The SEC also found that Johns created several documents that purported to be pre-clearance requests approved by the firm’s CCO, who had never actually reviewed or approved such trades. Johns created these false pre-clearance approvals to cover up instances in his annual report when securities transactions were not pre-cleared. Johns also altered the trade confirmations that he submitted to BIA by backdating the dates of the transactions, and he backdated trade confirmations to make it falsely appear as though pre-clearances were granted in advance of the transactions.
According to the SEC’s order, the firm’s CCO in late 2010 identified irregularities in the documents that Johns submitted to BIA detailing his personal securities transactions. The irregularities prompted the CCO to make inquiries about his compliance with the firm’s code of ethics, and Johns misled the CCO in response. Johns falsely told the CCO that he had closed certain brokerage accounts when in fact they remained open and were involved in trading that was not pre-cleared as required. Johns also accessed the hard copy file of his previously submitted brokerage statements and physically altered them to create the false impression that his trading was in compliance.
In settling the SEC’s charges, Johns has agreed to pay disgorgement of $231,169, prejudgment interest of $23,889, and a penalty of $100,000. Without admitting or denying the SEC’s findings, Johns consented to a five-year bar and a cease-and-desist order.
SEC charges Indiana resident with conducting Ponzi scheme targeting retirement savings
The SEC alleges that John K. Marcum touted himself as a successful trader and asset manager to raise more than $6 million through promissory notes issued by his company Guaranty Reserves Trust. Marcum helped investors set up self-directed IRA accounts and gained control over their retirement assets, saying he would earn them strong returns on the promissory notes by day-trading in stocks while guaranteeing the safety of their principal investment. Yet Marcum did little actual trading and almost always lost money when he did. Throughout his scheme, Marcum provided investors with false account statements showing annual returns of more than 20%. Meanwhile, he used investor funds to pay for his luxurious personal lifestyle and finance several start-up companies.
The SEC obtained an emergency court order to freeze the assets of Marcum and his company.
“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, acting director of the SEC’s Chicago regional office. “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”
According to the SEC’s complaint filed in federal court in Indianapolis, Marcum began his scheme in 2010. Investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts or by transferring their taxable assets directly to brokerage accounts that Marcum controlled. Marcum and certain investors co-signed the promissory notes, and Marcum then placed them in the IRA accounts.
The SEC alleges that Marcum assured investors he could safely grow their money through investments in widely-held publicly-traded stocks, and he promised annual returns between 10% and 20%. Marcum also told a number of investors that their principal was “guaranteed” and would never be at risk. He falsely told at least one investor that her principal would be federally insured. In the little trading he has done, Marcum has suffered losses amounting to more than $900,000. He has misappropriated the remaining investor funds for various unauthorized uses.
According to the SEC’s complaint, Marcum used investor money as collateral for a $3 million line of credit at the brokerage firm where he used to work. He took frequent and regular advances from the line of credit to fund such start-up ventures as a bridal store, a bounty hunter reality television show, and a soul food restaurant owned and operated by the bounty hunters. None of these businesses appear to be profitable, and Marcum’s investors were not aware that their money was being used for these purposes. Marcum used nearly $1.4 million of investor money to make payments directly to the start-up ventures and other companies. He also used more than $500,000 to pay personal expenses accrued on credit card bills, including airline tickets, luxury car payments, hotel stays, sports and event tickets, and tabs at a Hollywood nightclub.
According to the SEC, Marcum did not have the funds needed to honor investor redemption requests, so he provided certain investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors. Marcum had a phone conversation with three investors in June 2013 and admitted that he had misappropriated investor funds and was unable to pay investors back. During this call, Marcum begged the investors for more time to recover their money. He offered to name them as beneficiaries on his life insurance policies, which he claimed include a “suicide clause” imposing a two-year waiting period for benefits. He suggested that if he is unsuccessful in returning their money, he would commit suicide to guarantee that they would eventually be repaid.
The SEC’s complaint alleges that Marcum and Guaranty Reserves Trust violated the antifraud provisions of the federal securities laws. The SEC sought and obtained emergency relief including a temporary restraining order and asset freeze. The SEC additionally seeks permanent injunctions, disgorgement of ill-gotten gains and financial penalties from Marcum and Guaranty Reserves Trust, and disgorgement of ill-gotten gains from Marcum Companies LLC, which is named as a relief defendant.
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