Apollo Global Management:
The SEC today announced that four private equity fund advisers affiliated with Apollo Global Management have agreed to a $52.7 million settlement for misleading fund investors about fees and a loan agreement and failing to supervise a senior partner who charged personal expenses to the funds. The Apollo advisers failed to adequately disclose the benefits they received to the detriment of fund investors by accelerating the payment of future monitoring fees owed by the funds’ portfolio companies upon the sale or IPO of those companies. The lump sum payments received by the Apollo advisers essentially reduced the portfolio companies’ value prior to their sale or IPO and reduced amounts available for distribution to fund investors. One of the Apollo advisers failed to disclose certain information about interest payments made on a loan between the adviser’s affiliated general partner and five funds. The purpose of the loan was to defer taxes on carried interest due the general partner. The loan agreement obligated the general partner to pay interest to the funds during the course of the loan, and the funds’ financial statements disclosed that interest was accruing as an asset of the funds. But that interest was instead ultimately allocated solely to the general partner, which made the disclosures in the financial statements misleading. Apollo’s supervisory failures pertain to a then-senior partner at the firm who was twice caught improperly charging personal items and services to Apollo-advised funds and their portfolio companies. Apollo took no real remedial or disciplinary steps on either occasion. A firm-wide expense review eventually revealed even more personal expenses the partner improperly charged to fund clients, and this led to the partner’s separation from the firm.. Ante up Apollo: $37.527 million in disgorgement to affected investors, $2,727,552 in interest, and a $12.5 million penalty. Apollo agreed to distribute the disgorgement and interest amounts to affected fund investors. Dante’s Heat Index: 5
Ticket Fraud:
Richard Weed, Coleman Flaherty III, and Thomas Brazil were sentenced for their roles in defrauding investors in CitySide Tickets Inc., a Massachusetts-based ticket brokering business. Weed, a partner in a Newport Beach, California law practice, was sentenced by U.S. District Judge Douglas Woodlock to 4 years in prison and three years of supervised release and ordered to pay a fine of $100,000 and to forfeit $90,000. Restitution to be paid by Weed will be determined at a later date. Flaherty was sentenced by Chief U.S. District Judge Patti Saris to one year of probation, to be served in home confinement, and ordered to pay a fine of $10,000. Restitution to be paid by Flaherty comes later. Flaherty was previously ordered to forfeit $1,350,734. Brazil was sentenced to one day in prison, three years of supervised release, and ordered to pay restitution in the amount of $231,140. Brazil was previously ordered to forfeit $1,519,213. Crimes included were Conspiracy, securities fraud and wire fraud, securities fraud, and seven counts of wire fraud. The presumably now or soon to be former lawyer, Weed apparently helped structure CitySide into a publicly traded company through reverse mergers, created backdated promissory notes and authored false legal opinion letters that enabled Flaherty and Brazil to obtain millions of purportedly unrestricted shares of stock in the company. Investors were then blitzed with a false and misleading promotional campaign touting CitySide Tickets as a budding national leader on the verge of acquiring smaller ticket firms across the country and positioning itself as an attractive takeover target for California-based Ticketmaster Entertainment LLC, a large company in the business of selling and reselling tickets to entertainment events. As the company’s stock price increased on the false hype, Flaherty and Brazil sold their shares to unsuspecting investors for illicit proceeds of approximately $3 million. Shortly thereafter, the market for CitySide Tickets stock collapsed and the company eventually went out of business. Dante’s Heat Index: 5
Municipality “Don’t Tell” List:
The Securities and Exchange Commission today announced enforcement actions against 71 municipal issuers and other obligated persons for violations in municipal bond offerings. The SEC found that from 2011 to 2014, the 71 issuers and obligated persons sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations. The parties agreed to cease and desist from future violations, to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC. SO, who are they: Check our website, https://somebodyelsesmoney.com/ to see if your municipality made the “Don’t Tell” list. Dante’s Heat Index: 3
Secured Income Reserve, Inc. and Former Officers Fraud Charge:
The SEC charged Secured Income Reserve, Inc and three of its former officers alleging that Secured, Ilona A. Mandelbaum of Palm Beach Gardens, Fla., David A. Zimmerman of Boca Raton, Fla., and Matthew H. Sage of West Palm Beach, Fla. with defrauding investors when they raised $1.45 million in offerings of Secured shares. They apparently made material misrepresentations and omitted material facts in Secured’s Private Placement Memorandum (PPM) concerning the use of investor proceeds, the SEC-related disciplinary histories of the former officers, and Zimmerman’s retention and compensation. Mandelbaum, it is charged, engaged in a scheme to defraud investors through the misuse of Secured investor proceeds, including funneling $131,000 of investor proceeds to Mandelbaum’s daughter, Jennifer Austin of Palm Beach Gardens, FL, towards the purchase of a home, and diverted Secured investor funds to HSC Holdings, LLC (HSC), an entity controlled by Mandelbaum, and by using investor proceeds to fund the operations of another entity, Sarben Holdings, Inc. The complaint also alleges that Zimmerman made misrepresentations and omissions to Secured investors regarding the risks of investing in Secured, engaged in a scheme to defraud investors in connection with the sale of approximately $1 million in shares in another company, Filewarden.com Corp.
So far:
• Secured has agreed to pay $588,243 in disgorgement, $55,233.12 in prejudgment interest, and a $775,000 civil penalty.
• Mandelbaum has agreed to pay $392,752 in disgorgement, $36,877.48 in prejudgment interest, and a $320,000 civil penalty.
• Zimmerman has agreed to pay $148,350 in disgorgement, $9,150.88 in prejudgment interest, and a $320,000 civil penalty.
• Sage has agreed pay a $240,000 civil penalty.
• Tamda has agreed to pay $148,350 in disgorgement, $9,150.88 in prejudgment interest, and a $148,350 civil penalty. HSC, a relief defendant in the action, consented to settle the charges against it and has agreed to pay $296,100 in disgorgement and $27,802.36 in prejudgment interest. Dante’s Heat Index: 6 each
Former Banco Santander Official Ordered to Pay More Than $1.1 Million for Insider Trading in Potash Call Options:
On August 20, 2016, the SEC obtained a final judgment against Cedric Cañas Maillard (“Cañas”), a Spanish citizen and former executive advisor to Santander’s CEO for insider trading. The SEC’s complaint alleges that Cañas learned confidentially that the investment bank had been asked by one of the world’s largest mining companies, BHP Billiton (“BHP”), to advise and help underwrite its proposed acquisition of Potash Corporation of Saskatchewan (“Potash”), one of the world’s largest producers of fertilizer minerals. Cañas coordinated with a close friend to purchase Potash call options in a Switzerland-based brokerage account, of which Cañas was the sole beneficial owner, on August 16, 2010-the day before Potash announced that it had rejected BHP’s acquisition bid. Potash stock rose more than 27% after that announcement, and Cañas sold the Potash call options three days after he purchased them for illicit net profits of $278,156.97, a gain of more than 1,400%. Cañas disgorged $278,156.97 in ill-gotten gains from the illegal Potash trading plus prejudgment interest of $56,543.99. Cañas also was ordered to pay a civil penalty in the amount of $834,470.91. Dante’s Heat Index: 5
F-Squared and 13 Others:
The Securities and Exchange Commission today penalized 13 investment advisory firms for spreading the false claims made by F-Squared Investments about its AlphaSector strategy for investing in exchange-traded funds (ETFs) outperforming the S&P Index for several years. The firms repeated many of F-Squared’s claims while recommending the investment to their own clients without obtaining sufficient documentation to substantiate the information being advertised. Unfortunately, Fsquared used only backtested data. “When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.
SEC Orders and Penalties:
AssetMark – $500,000
BB&T Securities – $200,000
Banyan Partners – $200,000
Congress Wealth Management – $100,000
Constellation Wealth Advisors – $100,000
Executive Monetary Management – $100,000
HT Partners – $100,000
Hilliard Lyons – $200,000
Ladenburg Thalmann Asset Management – $200,000
Prospera Financial Services – $100,000
Risk Paradigm Group – $100,000
Schneider Downs Wealth Management Advisors – $100,000
Shamrock Asset Management – $200,000
Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2(a)(16) and 206(4)-1(a)(5). The now Chapter 11 F-Squared last year paid $35 million in disgorgement and penalties. Dante’s Heat Index: 8 each
ENVIRO (Is that like ENRON?):
The SEC charged Enviro Board Corporation and its co-chairmen/CEOs Glenn Camp and William Peiffer raised approximately $6 million from investors during a two-year period by using documents predicting company earnings ranging from $18 million to $95 million per year, without any reasonable basis for such estimates amid persistent manufacturing problems plaguing the company since its inception. Enviro Board claimed its green materials had already been used in residential and commercial construction projects, yet the company has never developed a commercially viable mill to manufacture its products. Among other alleged misrepresentations to investors were claims to have secured $161 million in financing from a “vendor” that turned out to be nothing more than an entity created by Peiffer that lacked the resources to actually make such a loan. Meanwhile, according to the SEC, Camp and Peiffer and their primary salesman Joshua Mosshart have paid themselves approximately $2.6 million in compensation out of investor funds. Dante’s Heat Index: 9
Stay Tuned and keep your hands on your wallet!