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SEC Enforcement: Napkin-Eating Broker Settles; Ponzi Funds Used for Porn.

Byline: Marlene Y. Satter

Among recent enforcement actions by the SEC, the middleman in the Post-It notes insider trading case agreed to settle with the agency; a hedge fund manager admitted wrongdoing and paid $4.5 million in SEC penalties for reporting bad information; and 34 defendants were charged in a scheme to manipulate the market for microcap securities.

Napkin-Eating Broker Agrees to Cooperate With SEC

The SEC has announced that it has reached a settlement with Frank Tamayo, who was previously charged for passing along insider information on napkins and Post-It notes from a law firm clerk to a stockbroker. To destroy the evidence, Tomayo then ate the napkins or Post-It notes on which the ticker symbols of the companies being tipped about were written.

After being charged, Tamayo agreed to cooperate with the agency, and rendered extensive assistance during the SEC's investigation. As a result, the proposed final judgment will order him to disgorge more than $1 million of his ill-gotten gains from the scheme, but that payment would be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case, in which he has pled guilty. He will not be facing a monetary penalty from the SEC.

Under the terms of the agreement, Tamayo must continue to cooperate as a witness in the SEC's ongoing case against the law firm clerk, Steven Metro of Katonah, New York, and the stockbroker, Vladimir Eydelman of Colts Neck, New Jersey. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties and injunctions against them.

Phony Advisor Used Ponzi Scheme Funds on Porn and Travel

The SEC has charged Paul Lee Moore, a phony investment advisor in San Diego, with stealing money from clients for personal use and conducting a Ponzi scheme to pay customers making redemption requests.

According to the agency, Moore and his so-called investment advisory firm Coast Capital Management brought in $2.6 million from clients. But instead of investing their money as promised, Moore spent almost $2 million on pornographic websites, travel expenses and retail goods. The remaining $625,000 of clients' money, which came from new clients, he used to pay off older clients who wanted to redeem their funds.

He kept clients fooled with phony account statements showing securities he never bought and was able to draw in new clients when existing clients showed off those fake statements to family members, friends and business associates. He also lied to clients about his education, employment experience and Coast Capital's supposed assets under management. Coast Capital, which was not registered as an investment adviser with the SEC or any state regulator, is no longer in business.

The SEC seeks a permanent injunction, return of allegedly ill-gotten gains plus prejudgment interest and a penalty. In a parallel action, the U.S. Attorney's Office for the Southern District of California has announced criminal charges against Moore.

Hedge Fund Manager Admits to Providing Bad Data, Pays $4.5 Million

Hedge fund manager OZ Management LP has been charged by the SEC with providing inaccurate trade data to four prime brokers, causing inaccuracies in the brokers' books and records and in data provided to the SEC in investigations.

According to the agency, for nearly six years, ending in December 2013, OZ Management misidentified some trades in data provided to four of its prime brokers. While the data didn't affect trade settlement, it did cause the four prime brokers to inaccurately list approximately 552 million shares in their own books and records. The bad data were also incorporated into data that brokers provide electronically to regulators, resulting in approximately 14.4 million shares being inaccurately reported in response to the SEC's "blue sheet" requests. FINRA made several referrals to the SEC based on the incorrect trade data.

The SEC found OZ's violations during a 2013 investigation, when it found that the firm's own files identified certain trades differently than the blue sheets. The discrepancy arose for trades where OZ did not characterize sales as long or short based on how they were marked when they were sent to the market but filtered them based on other factors, such as the relevant fund's position in the stock at the prime broker.

That meant that sometimes the way trades were identified changed, causing some long sales to be erroneously shown as short sales when OZ provided the data to its prime brokers. OZ has since provided corrected historical information to the affected prime brokers who are working to make their own corrections.

The SEC also found that OZ Management wrongfully purchased stock during a restricted period for a secondary offering in 2011.

The firm has admitted wrongdoing and agreed to pay a penalty of $4.25 million. In addition, it has agreed to return $243,427 of ill-gotten trading gains and prejudgment interest from its trading.

SEC Charges 34 in Microcap Market Manipulation Scheme

The SEC has charged 15 individuals and 19 entities for their parts in schemes to manipulate microcap stock trading. The 34 defendants include six firms alleged to have acted as unregistered broker-dealers catering to customers who tried to conceal their stock ownership and manipulate the market for microcap securities.

Owners and employees at the six firms, several customers, stock promoters and two microcap issuers--Warrior Girl Corp. and Nature's Peak, formerly Everock, Inc.--also are among those charged with fraud, manipulative trading, touting, and registration violations. Nine of the defendants were named in a criminal indictment charging them based on their roles in the stock manipulation scheme.

According to the agency, Costa Rica-based Moneyline Brokers and its founder Harold Bailey "B.J." Gallison II unlawfully operated as a broker-dealer for U.S.-based customers who engaged in "pump and dump" schemes to boost stock prices so they could unload their own shares. Moneyline and some of its employees routinely accepted transfers of microcap stocks from the U.S. customers and had stock certificates reissued in Moneyline's name to conceal the true owners of the shares.

Carl Kruse Sr. and Carl Kruse Jr., both of Miami, conspired with Moneyline and others to manipulate trading in Warrior Girl, a former shell company the Kruses controlled. Warrior Girl's supposed business changed from hydroelectric power (in 2008) to extracting oil from tar sands (in 2009) to online education (in 2010), and the Kruses engaged in multiple manipulations to profit from promotions to boost the stock's price. As a result of those campaigns the Kruses brought in estimated illegal profits of $2.3 million.

Another scheme involved trading in Everock, Inc., a Canada-based mining company that relocated to Nevada and sold sandwich spreads after reorganizing itself with Nature's Peak in 2008. A campaign promoting the mining-turned-condiment company used everything from videos to Facebook postings and brought in more than $2.5 million in profits for defendants Charles Moeller, of Sea Cliff, New York, Mark Dresner, of Dix Hills, New York and Frank Zangara, of Locust Valley, New York.

Pennsylvania Attorney Charged With Insider Trading

The SEC has charged Pennsylvania attorney Herbert Sudfield with insider trading in the stock of Harleysville Group, Inc. in advance of the 2011 announcement of a $760 million merger of Harleysville and Nationwide Mutual Insurance Company.

According to the agency, Sudfeld illegally traded on the news that sent Harleysville's stock price up 87% when the merger of the two insurance companies was announced in September 2011.

At the time, Sudfeld was a real estate partner at a law firm that advised Harleysville on the merger. He was not involved in the merger, but learned that its announcement was imminent from a conversation between an attorney working on the transaction and their shared legal assistant. He took the news and ran, buying Harleysville stock in both his own and his wife's accounts.

He sold all the shares as soon as the merger was announced, and brought in approximately $79,000 of illegal profits.

Mary Jo Sudfield, his wife, is named as a relief defendant by the SEC for the purpose of recovering the money that went into her brokerage account. The SEC seeks a permanent injunction and financial penalties against Sudfeld and return of allegedly ill-gotten gains and prejudgment interest from Sudfeld and Mary Jo Sudfeld. In a parallel action, the U.S. Attorney's Office for the Eastern District of Pennsylvania has announced criminal charges against Sudfeld.

--- Related on ThinkAdvisor:

* Brooklyn Broker Passed Illicit Stock Tips on Napkins

* SEC Enforcement: Scheme Busted Involving Stock Tips on Napkins
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Publication:ThinkAdvisor
Date:Jul 17, 2015
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