The Blotter: ICAP hit with yen Libor charges

Also, Vision Financial Markets fined for failure to properly segregate funds

 The CFTC requires Newbridge to pay restitution of $1,517,930.66 to its customers.  In addition, the CFTC order imposes permanent registration and trading bans against Newbridge and requires the firm to cease and desist from violating Section 4(a) of the CEA, as charged. 

As explained, financed transactions in commodities with retail customers, like those engaged in by Newbridge, must be executed on, or subject to, the rules of an exchange approved by the CFTC. The CFTC found that, from February 2012 through February 2013, Newbridge solicited retail customers to buy and sell precious metals on a financed basis.  

Newbridge telemarketers typically represented that a customer could purchase a desired quantity of precious metals with a 25% deposit, and that the customer could borrow the remaining 75%. The customer would then pay Newbridge a finance charge on the loan, a service charge, and a maximum commission of 15%. 

If a customer agreed to the transaction, the customer sent the deposit, finance charge, and commission to Newbridge.  Newbridge confirmed the transaction and ultimately transferred the funds to Hunter Wise Commodities, LLC (Hunter Wise), the Order finds.  Hunter Wise subsequently remitted to Newbridge a portion of the customer commissions and fees, with Newbridge ultimately receiving $1,517,930.66 in commissions and fees for the retail financed precious metals transactions executed through Hunter Wise, the order states. 

However, according to the order, neither Newbridge nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither company actually delivered any precious metals to any customer. Because Newbridge’s transactions were executed off exchange, they were illegal.  

The CFTC sued Newbridge’s clearing firm, Hunter Wise, in federal court in Florida on Dec. 5, 2012.  The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations. On Feb. 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets. 


SEC charges China-based executives with fraud and insider trading

The Securities and Exchange Commission (SEC) charged the former CEO of an education services provider based in China with stealing tens of millions of dollars from investors in a U.S. public offering, and charged another executive with illegally dumping his stock in the company after he helped steal valuable company assets.

The SEC alleges that ChinaCast Education Corporation’s former CEO and chairman of the board Chan Tze Ngon illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50% ownership stake.  From there, Chan transferred investor funds to another entity outside ChinaCast’s control.  Chan also secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast. None of the transactions were disclosed in the periodic and other reports signed by Chan and filed with the SEC.

The SEC further alleges that Jiang Xiangyuan, ChinaCast’s former president for operations in China, avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of company’s revenue-generating colleges before it was publicly disclosed by a new management team.  ChinaCast had a market capitalization of more than $200 million before these alleged frauds came to light.  After Chan and Jiang were terminated and their misconduct was publicly disclosed by new management, ChinaCast’s market capitalization dropped to less than $5 million.

“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in federal court in Manhattan, ChinaCast entered the U.S. capital markets through a reverse merger in December 2006, and its common stock was listed on the NASDAQ from Oct. 29, 2007 to June 25, 2012. ChinaCast conducted multiple public stock offerings in the United States, with the second one occurring in December 2009 when ChinaCast represented that the proceeds would be used for “working capital, future acquisitions, and general corporate purposes.”  Chan instead directed and engaged in the transactions that moved investor funds outside ChinaCast’s corporate structure for his personal benefit. He did so without seeking or obtaining the approval of ChinaCast’s board of directors, and the transactions were not publicly disclosed until ChinaCast’s new management prompted the company to file a Form 8-K on Dec. 21, 2012, disclosing Chan’s misconduct.

The SEC alleges that ChinaCast falsely stated in multiple SEC filings signed by Chan that the company indirectly owned 98.5 percent of ChinaCast Technology (HK) Limited – the purported subsidiary to which Chan first transferred investor funds.  However, ChinaCast actually held only an indirect 49.2% interest while Chan personally owned 50 percent.  Chan also signed a number of periodic reports falsely stating that offering proceeds were under ChinaCast’s control and falsely including those funds in amounts that ChinaCast reported as cash and cash equivalents.  Chan also defrauded shareholders and prospective investors by secretly pledging ChinaCast’s existing term cash deposits as collateral to secure debts incurred by various third parties that had nothing to do with ChinaCast’s business. Chan signed periodic reports falsely stating that ChinaCast’s cash and cash equivalents were completely unencumbered. 

“Chan orchestrated the systematic looting of ChinaCast and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York office.  “Officers and directors who misuse their access to the U.S. capital markets will be held accountable for their insidious behavior.”

According to the SEC’s complaint, Jiang was a member of the senior management group headed by Chan. Jiang engaged in illegal trading based on inside information by selling his shares on March 28, 2012, at $4.59 per share. After Chan’s management group lost control of the board, they transferred ownership of ChinaCast’s three profitable brick-and-mortar colleges away from ChinaCast to Jiang and the dean of one of the colleges. They were later sold to others. At least one of the colleges was transferred to Jiang and the dean three weeks before Jiang’s March 28stock sale.  Jiang was terminated on March 29, and NASDAQ suspended trading in ChinaCast onApril 2 due to its failure to file an annual report for 2011.  ChinaCast was later delisted.  When over-the-counter trading resumed on June 25 after multiple disclosures made by new management about former management’s misconduct, the stock opened at 55 cents per share and closed at 82 cents.  ChinaCast’s stock is currently trading at 10 cents per share.

Chan is charged with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as violations of various corporate reporting, recordkeeping, and internal controls provisions. Jiang is charged with illegal insider trading in violations of the same antifraud provisions.  The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, permanent injunctions, and officer-and-director bars.

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