Securities Law Blog

Four industry professionals were charged by the SEC for a fraudulent penny stock scheme that produced around $17 million in illegitimate profits, all the while claiming false federal securities laws exceptions. The SEC defines penny stocks as low-priced (below $5), speculative securities of small companies that are generally quoted over the counter on the OTC Bulletin Board or in the Pink Sheets but may also be traded on the securities exchange.

The SEC press release alleged the four industry professionals acquired somewhere between 30 to 60 percent of the market price, more than one billion unregistered shares, in microcap companies at very deep discounts. Microcap companies are those smaller, public companies with a market capitalization under $250 million. The press release further alleges the four professionals charged told the companies they intended to hold the shares for investment purposes yet instead they quickly sold the shares unregistered. The SEC asserts that they did so claiming to rely on certain state law exceptions that would permit such a sell. The SEC further contends the four charged set up virtual corporations in numerous states to feign the appearance that the exception was valid.

The Director of the SEC's New York Regional Office stated that the four charged allegedly, "repeatedly violated the registration provisions and in the process also committed securities fraud." The penny stock scheme is said to have started in 2007 and went until 2010. The four charged had previously worked in the securities industry as registered representatives, providers of investment management or provided financial advisory services.

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Harry Tanner with American Precious Metals, Andrea Tanner and Sam J. Goldman agreed to pay a $24 million settlement after FTC charged they tricked customers to purchase high risk precious metals on credit without disclosing the risks associated with these purchases, according to the Federal Trade Commission's article. This settlement stems from an FTC investigation that started in May, 2011.

The FTC complaint alleged that consumers were unaware that their investments were financed and loans were taken out for up to 80% of the price of the precious metals. The persons who invested in these precious metals were also unaware that their investments were subject to equity calls; to prevent their investments from being liquidated, they might have to pay more money.

While the investigation and litigation has progressed, the court barred the defendants from misrepresenting the risk and earning potential of their investment offers and required clear disclosure of all the total costs and risks before consumers agreed to invest, pending resolution of the case.

In addition to the settlement, Mr. Tanner and Mr. Goldman are also permanently banned from marketing any investment opportunities. Mrs. Tanner is banned from marketing precious metals investments. In addition, all three of them must fully and honestly disclose all material terms about any goods or services they offer consumers in the future and they cannot disclose or benefit from their future customers' personal information.

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The assets of Aubrey Lee Price, the missing Georgia investor charged with a $40 million dollar investment fraud scheme, have been frozen according to an SEC press release. Mr. Price was allegedly selling an unregistered investment fund PFG that he managed without telling investors that it was tied up in illiquid investments and South American real estate. The press release  stated that Price admitted to using fraudulent methods to cover with investors. According to the quote from Price's letter in the SEC press release, he "falsified statements with false returns" in order to conceal between $20 million and $23 million in investor losses. Aubrey Lee Price's whereabouts are currently unknown.

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Goldman Sachs has been trying to overturn the $20.5 million arbitration award arising from the 2005 collapse of the hedge fund manager Bayou Group. The NY Times Dealbook article explains that the now defunct Bayou Group accused Goldman Sachs of helping to perpetrate a Ponzi scheme. The United States Court of Appeals for the Second Circuit upheld the award to the creditors of Bayou last Tuesday, according to the article. The Bayou Group's former chief executive is serving a 20 year sentence for his role in the fraud. He pleaded guilty to misrepresenting the value of Bayou's funds and defrauding clients of more than $400 million.

If this large arbitration award is upheld, it may have broader ramifications on Wall Street. The article stated that Goldman Sachs and firms similar to Goldman Sachs, who clear billions of dollars in trades a year and have long-held that their job is simply to clear those transactions, have held that they did not have a duty to police the clients.  This arbitration award and its symbolism to other Wall Street establishments has caused some experts to argue that the award could force a higher duty on Wall Street.

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The Los Angeles Times reported that Philip Falcone and his firm, Harbinger Capital Partners, are facing charges of civil fraud and bond price manipulation. The article stated that Falcone and his firm allegedly manipulated the market for high yield and high risk bonds. Falcone used Maxx Holdings to buy up a great portion of Harbinger Funds to shrink the availability in the market and drive up prices.

Falcone and his firm were also accused of letting only certain investors know when they should cash out their holdings, without giving any warning to their other investors. Three other firms were linked to the fraud and bond manipulation and paid $1 million dollar fines.

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A Federal District Court Judge in Manhattan refused to dismiss the investor lawsuit alleging that Goldman Sachs made misleading statements regarding its ethical standards, the New York Times' Dealbook reported. The alleged misleading statements and disclosures were about conflict of interests between Goldman Sachs and other companies.

The article discussed one such example, a deal called Abacus, where Goldman Sachs was partnered with Paulson & Company, though this was not disclosed to investors. Paulson & Company eventually settled their SEC case by paying a $500 million penalty and admitting to making a mistake with its disclosure.

The next step in the Goldman Sachs case in the Federal Court is the discovery stage. In discovery, corporate documents will be requested, as well as depositions with the three executives also named in this case.

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Morgan Keegan must repay over $470,000 in financial losses of a group of RMK Fund investors, according to the June 13, 2012 Order of an arbitration panel of the Financial Industry Regulatory Authority (FINRA). The three person arbitration panel heard the case in Birmingham, AL.

The Claimants are among thousands of investors who lost money as a result of Morgan Keegan's fraudulent conduct in connection with the RMK (Regions Morgan Keegan) family of bond funds.  The claimants alleged that the funds were unsuitable investments for them and were misrepresented by Morgan Keegan as being much safer than they actually were.  The claimants were represented by attorneys Howard Prossnitz of Chicago, IL and Richard S. Frankowski and Robert E. Norton and of the firm Burke, Harvey & Frankowski in Birmingham, AL.

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