Home Articles SEC Enforcement Actions – XII

SEC Enforcement Actions – XII



Daniel Filho, Fugitive Operator Of Pyramid/Ponzi Scheme, Arrested

The SEC announced federal authorities have arrested Daniel Fernandes Rojo Filho of Orlando, Florida, after evading arrest for more than two weeks. The U.S. Attorney for the District of Massachusetts charged Filho on June 30, 2015, with wire fraud in connection with an investment fraud he operated under the name DFRF Enterprises.

The criminal charges against Filho relate to the same fraid charged in a civil enforcement action filed by the SEC in June, 2015, against Filho, DFRF Enterprises, and others. Those charges were filed in connection with the Commission's request for an immediate asset freeze, which the federal court in Boston, Massachusetts, ordered on June 30 The asset freeze secured approximately two million dollars, and prevented the further use of investor assets. On July 13, 2015, the Court extended the asset freeze to all defendants: Filho; two DFRF Enterprises companies based in Massachusetts and Florida; Wanderley M. Dalman of Revere, Massachusetts; Gaspar C. Jesus of Malden, Massachusetts; Eduardo N. Da Silva of Orlando, Florida; Heriberto C. Perez Valdes of Miami, Florida; Jeffrey A. Feldman of Boca Raton, Florida; and Romildo Da Cunha of Brazil.

The SEC alleges that DFRF Enterprises ― named for its founder Daniel Fernandes Rojo Filho ― claimed it operated more than 50 gold mines in Brazil and Africa, but the company's revenues came solely from selling membership interests to investors. According to the SEC's complaint, DFRF and several promoters lured investors false promises, including:

  1. Filho copytheir money would be fully insured,
  2. DFRF has a line of credit with a Swiss private bank,
  3. one-quarter of DFRF's profits are used for charitable work in Africa.

The SEC alleges that the scheme raised more than $15 million from at least 1,400 investors. New members were recruited in pyramid scheme fashion to keep the fraud afloat, and commissions were paid to earlier investors in Ponzi-like fashion for their recruitment efforts. The SEC further alleges that Filho withdrew more than $6 million of investor funds to buy a fleet of luxury cars, among other personal expenses.

The SEC alleges that Filho and others began selling "memberships" in DFRF during 2014 through meetings with prospective investors primarily in Massachusetts hotel conference rooms, private homes, and businesses. According to the SEC's complaint, DFRF promoted the investment opportunity through online videos in which Filho falsely claimed that the company had registered with the SEC and its stock would be publicly traded. As DFRF began marketing more widely, membership sales dramatically increased from under $100,000 in June 2014 to more than $4 million in March 2015.

SEC Settles Civil Action Against Convicted Insider Trader

The SEC announced that a judgment order has been entered against defendant Timothy J. McGee, a convicted insider trader.

The SEC's amended complaint alleged that co-defendants Timothy J. McGee and Michael W. Zirinsky are both former registered representatives at Ameriprise Financial Services, Inc., illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on non-public information about the company's impending merger with Tokio Marine Holdings, Inc. The complaint alleged that McGee got the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement and tipped Michael W. Zirinsky, who also traded and tipped others.

McGee-Timothy copyMcGee consented to the entry of a final judgment that permanently enjoins him from violating the Securities Exchange Act of 1934 and orders him to pay back $292,128 in ill-gotten gains, together with prejudgment interest in the amount of $70,576, for a total of $362,704.

In May 2015, the Court entered a final consent judgment against McGee's co-defendant, Zirinsky, that permanently enjoined him from violating the Securities Exchange Act of 1934 and ordered him to pay back his ill-gotten gains from the illegal insider trading, pay prejudgment interest, and a civil penalty, for a total of $249,372.

The SEC previously entered into consent judgments with two other defendants and five relief defendants with recoveries totaling over $1.8 million.

In a separate criminal proceeding in November, 2012, McGee was convicted of securities fraud, based on his insider trading in PHLY stock, and perjury for testifying falsely under oath before the Commission in its investigation. The court sentenced McGee to a six-month term of imprisonment, two years of supervised release, and ordered him to pay a $100,000 fine and a $200 special assessment.

Appeals Court Affirms SEC’s Finding: Investment Advisers Violated Anti-Fraud Provisions by ‘Marking the Close’

In a July 14 decision, the U.S Court of Appeals for the District of Columbia Circuit largely affirmed Koch1 copya May 16, 2014 SEC order that found that investment advisers Donald L. Koch and Koch Asset Management, LLC (KAM) violated the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 by "marking the close." Marking the close involves manipulating the closing price of certain stocks held in client portfolios on the last trading date of consecutive quarters.

The court also affirmed the Commission's finding that Koch and KAM violated the Advisers Act by failing to implement policies and procedures reasonably designed to prevent violations of that Act. In reaching its decision, the Court rejected the Petitioners' claims that the Commission's order was not supported by substantial evidence, and that Koch could not be charged as a primary violator of the Advisers Act.

Finally, the court upheld the barring of the Petitioners from involvement with investment advisers, brokers, dealers, municipal securities dealers, and transfer agents.

$250 Million Default Judgment Entered Against Former Company Executives In Puda Coal Fraud

Zhao copyThe SEC announced that final judgments by default have been entered against defendants Ming Zhao (Zhao), the Chairman of Puda Coal, Inc. (Puda) and Liping Zhu (Zhu), Puda's former CEO. Both defendants are Chinese nationals.

In addition to ordering permanent injunctions against future antifraud and related violations, the court ordered both defendants to pay $116,000,000, along with prejudgment interest of $17,582,250.84.

Zhao was also ordered to pay an additional $33,471.50 representing his additional ill-gotten gains, along with prejudgment interest of $5,224.71, and a penalty of $116,000,000.

Zhu was also ordered to pay an additional $108,248 representing his additional ill-gotten gains, along with prejudgment interest of $16,264.73, and to pay a penalty of $1,200,000.

In total, the court ordered over $250 million to be paid for the defendants' securities law violations. In addition, the Court permanently prohibited both defendants from serving as an officer or director of any public issuer.

In February, 2012, the Commission filed a civil injunctive action charging Zhao and Zhu with securities fraud for the theft and sale of Puda’s primary asset. Puda held an indirect 90% ownership stake in Shanxi Puda Coal Group Co., Ltd (Shanxi Coal), a coal mining company located in the Shanxi Province of the People's Republic of China (PRC). In September 2009, just weeks before Puda announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao, with Zhu's knowledge and complicity, transferred Puda's 90% stake in Shanxi Coal to himself.

In July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co. Ltd. (CITIC Trust), a Chinese private equity fund controlled by CITIC Group, which is reportedly the largest state-owned investment firm in the PRC. CITIC Trust placed its 49% stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. In addition, Zhao caused Shanxi Coal to pledge 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion ($516 million) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212 billion preferred shares in the trust. None of these asset transfers were approved by Puda's board or its shareholders or disclosed in Puda's various SEC filings.

Puda also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in the coal company, Puda's sole source of revenue. Thus, at the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling U.S. investors that Puda owned a 90% stake in that company. All told, Puda raised $116 million in net offering proceeds from the two offerings. As a result of the defendants' fraud, Puda became little more than a shell company, with no ongoing business operations.

SEC Files Amended Complaint Seeking Payment Of Ill-Gotten Gains From Relief Defendant

The SEC announced that it filed an amended complaint against Gregory W. Gray, Jr. and his firms Archipel Capital LLC and BIM Management LP, in a case pending in the U.S. District Court for the Southern District of New York.

Securities-Fraud-2In its original complaint, filed in February, 2015, the Commission alleged that Gray and his firms Archipel and BIM fraudulently used money from three investment funds to pay fictitious returns to investors in a different fund. In its amended complaint, the Commission added Gray’s wife, Cynthia Gray, as a relief defendant, and included a claim seeking payment of ill-gotten gains from all relief defendants. The Commission also announced that, subject to approval by the U.S. District Court, Cynthia Gray has agreed to settle the Commission’s claims. Without admitting or denying the allegations of the amended complaint, Cynthia Gray has consented to the entry of a final judgment against her, ordering that, while she is liable to pay back $159,500, representing ill-gotten gains to which she has no legitimate claim, plus prejudgment interest, this obligation is satisfied by her agreement to forego:

  1. her interest in a property owned by her and Gregory W. Gray in Buffalo, New York, less a sum equal to the lesser of one-half the equity interest in such property when sold, or $75,000,
  2. all other interest in any asset of the estate

Court Imposes $50,000 Civil Penalty On Former Broker And Sales Agent

The SEC has announced a $50,000 civil penalty has been entered against Thomas Kevin Keough for his role in the unlawful promotion and sale of unregistered securities issued by Inofin, Inc., a subprime auto-financing company.

Inofin copyPreviously, the court had entered judgment ordering Kevin Keough (and his wife) to pay a total of over $350,000 in payment of ill-gotten gains.

Kevin Keough was a defendant in a lawsuit brought by the Commission against Inofin, its former executives, and its sales agents, alleging they illegally raised at least $110 million from hundreds of individual investors through the sale of unregistered Inofin notes. The Commission’s suit also alleged that Inofin and its executives lied about the company's financial performance and how Inofin was using its investors' money.

The Commission alleged that Kevin Keough unlawfully earned commissions by promoting and selling Inofin's unregistered securities, and that he concealed his activities from his broker-dealer employers by directing Inofin pay his illegal commissions to his wife, Nancy, who was named as a relief defendant in the Commission's action for the purpose of recovering these funds from her.

In February 2015, Keough agreed to the entry of a consent judgment in partial settlement of the claims against him. Entered by the court in February, 2015, the consent judgment ordered Keough to pay back $368,430 in illegal commissions, to pay an additional $44,500 in interest and permanently enjoined him from violating the Securities Exchange Act of 1934 and the Securities Act of 1933. In a related action, the Commission issued an Order on March 3, 2015, barring Kevin Keough from certain parts of the securities industry, with the right to apply for reentry to the industry after three years.

As part of the February 2015 consent judgment, the Commission and Kevin Keough agreed that the court should decide whether to impose a civil penalty on him. After presentation of the evidence by both sides, the court ruled on August 5, 2015 that Kevin Keough should pay a civil penalty in the amount of $50,000. As a result, on August 12, 2015, the court supplemented its judgment to impose the additional $50,000 civil penalty upon Kevin Keough.

The Commission previously obtained final judgments by consent against Inofin's former executives Michael J. Cuomo of Plymouth, Massachusetts, Kevin Mann, Sr. of Marshfield, Massachusetts and Melissa George of Duxbury, Massachusetts and against another Inofin sales agent, David Affeldt of Potomac, Maryland. The SEC's action remains pending against bankrupt Inofin.

Final Judgments Obtained Against George Charles Cody Price and ABS Manager, LLC

The SEC announced that it obtained final judgments against ABS Manager, LLC and George Charles Cody Price.

In February 2013, the Commission sued Price and ABS Manager, alleging that from 2009 through 2013, Price and ABS Manager defrauded investors by making material misrepresentations and omissions to investors regarding:

  • the risks associated with investing in three investment funds they managed,
  • the rates of return generated by the funds,
  • the assets under management,
  • Price’s background.

Without admitting or denying the allegations against them, Price and ABS Manager consented to the entry of final judgments in which they have been permanently enjoined from violating the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition, Price and ABS Manager have been ordered, jointly and severally, to pay back$362,648.83 in ill-gotten gains and prejudgment interest, and to pay $150,000 and $725,000 in civil penalties, respectively.

SEC Files Against Michael J. Forster For Failure to Produce Documents

The SEC announced that it has filed a subpoena enforcement action against Michael J. Forster, and that the Court entered an order directing Forster to show cause why he should not be ordered to comply with the subpoena that he received. According to the application and supporting papers, the SEC is investigating whether Forster and others have violated, or are violating anti-fraud or other provisions of the federal securities laws in connection with the touting of several microcap issuers.

The SEC's application alleges that Forster touted the stocks of microcap issuers that were subject to pump-and-dump schemes, and that Forster furthered the schemes by paying undisclosed compensation to others to manipulatively trade in the stocks he was touting.

The SEC's staff is investigating the involvement of other persons and entities in these and related schemes.

As part of its investigation, the staff in the SEC's New York Regional office served Forster with a document subpoena in February 2015. The SEC's application alleges that Forster has repeatedly refused to produce any documents in response to the subpoena, notwithstanding multiple efforts by the SEC to secure his voluntary compliance. The SEC's application seeks an order from the federal district court compelling Forster to comply fully with the subpoena.
The SEC is continuing its fact-finding investigation and, to date, has not concluded that anyone has violated the securities laws.