UNITED STATES OF AMERICA
In the Matter of
CHARLES K. SEAVEY
|ORDER MAKING FINDINGS AND
IMPOSING SANCTIONS BY DEFAULT
AGAINST ALEXANDER LUSHTAK
The Securities and Exchange Commission (Commission) instituted this proceeding, pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act), on September 29, 2000, with an Order Instituting Proceedings. On January 26, 2001, the Division of Enforcement (Division) filed a Motion to Amend Instituting Order to add the January 24, 2001, conviction of Respondent Alexander Lushtak for money laundering. The Commission granted the motion and issued an Amended Order Instituting Proceedings (OIP). See Charles K. Seavey, 74 SEC Docket 1133 (Feb. 20, 2001). At a prehearing conference on February 2, Lushtak stated that he would not contest the charges in the OIP and would accept a default. Accordingly, Lushtak, who has been incarcerated throughout the pendency of this proceeding, did not appear at the hearing that was held February 13 through 15, 2001.
On July 12, 2001, the Division filed a motion for default. The Division requests a cease and desist order, disgorgement of $239,000 plus prejudgment interest from April 1, 1997, and a bar from association with any investment adviser. Lushtak, consistent with his representation that he would accept a default, did not respond to the motion.
Pursuant to 17 C.F.R. § 201.155(a) a respondent who fails to respond to a dispositive motion, or otherwise to defend the proceeding may be deemed to be in default. The administrative law judge may then determine the proceeding against him upon consideration of the record, including the OIP, the allegations of which may be deemed to be true.
Lushtak is in default within the meaning of 17 C.F.R. § 201.155(a). He failed to respond to a dispositive motion, or otherwise defend the proceeding, and affirmatively stated that he would accept a default. See 17 C.F.R. § 201.155(a). Accordingly, the allegations in the OIP are found to be true.
The OIP charges Lushtak with antifraud violations. Specifically, he is charged with violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and aiding and abetting and causing violations by Morgan Fuller Capital Management, LLC (Morgan Fuller), an investment adviser, of Sections 206(1) and 206(2) of the Advisers Act. The charges arose from Lushtak's role in transactions in which a hedge fund for which Morgan Fuller was investment adviser paid for, but did not receive, shares in Bankas Hermis, a Lithuanian bank.
The motion for default was accompanied by a Declaration of Kashya K. Shei, with one attachment, and a Declaration of Mark J. Fagel, with seven attachments.1 Pursuant to 17 C.F.R. § 201.155(a), the record includes, in addition to the OIP, the following exhibits:
January 24, 2001, sentencing hearing of Lushtak in U.S. District Court for the Northern District of California transcript (Shei Ex. 1);
October 29, 1998, investigative testimony of Charles K. Seavey, transcript pages 40-43 (Fagel Ex. 1);
July 1, 1998, two-page letter from Bank of New York enclosing signature card for Frunzensky Commercial Bancorp (Frunzensky) account, showing Lushtak as an authorized signature (Fagel Ex. 2);
June 27, 1998, two-page letter from Bank of New York enclosing six pages of account statements for Frunzensky for the period January 1 to May 30, 1997 (Fagel Ex. 3);
California Secretary of State two-page record concerning A and A Financial Management showing Lushtak as registered agent (Fagel Ex. 4);
October 21, 1999, fax from Federal Bureau of Investigation, San Francisco, of eight pages of documents in English and Latvian concerning the sale of shares in Bankas Hermis by Lushtak and others (Fagel Ex. 5);
March 23, 2000, certification of true copy of March 4, 1997, agreement by Tanya Khabay to sell Bankas Hermis shares (Fagel Ex. 6);
September 29, 1998, investigative testimony of Lushtak, transcript pages 18-21 (Fagel Ex. 7).
FINDINGS OF FACT
In June 2000, Lushtak pleaded guilty to one count of money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i). He admitted engaging in a scheme to defraud individual investors and to laundering over $6,000,000. Lushtak was convicted on January 24, 2001, and sentenced to seventy-one months of imprisonment, three years of supervised release, restitution of $3,009,468, and a special assessment of $100. His wrongdoing included affinity fraud that targeted immigrants from Russia and neighboring countries. Some lost their life savings, which they had entrusted to Lushtak for investment. OIP ¶ I.1.; Shei Ex. 1.
Lushtak had also been one of three co-owners of Morgan Fuller, an investment adviser, which acted as general partner and investment adviser to the Paradigm Capital Fund, L.P. (the Fund), a hedge fund in which eight individuals invested $941,500. During 1997, Lushtak arranged for the Fund to purchase shares, held in the name of his girlfriend, in Bankas Hermis in a private transaction. Pursuant to Lushtak's instructions, the Fund wire-transferred a total of $239,000 in February and March 1997 to an account, which, unbeknownst to the Fund, Lushtak controlled. Additionally, Lushtak instructed Bankas Hermis to liquidate the shares and transfer the proceeds to a Lithuanian bank account. Thus, Lushtak retained the Fund's $239,000, and did not deliver the shares or the proceeds of their liquidation to the Fund. OIP ¶¶ B.2., C., D.1., E.; Fagel Exs. 1-7.
CONCLUSIONS OF LAW
Lushtak has been convicted, within ten years of the commencement of this proceeding, of a felony that "involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities or substantially equivalent activity" within the meaning of Sections 203(f) and 203(e)(2)(C) of the Advisers Act.
Additionally, the Bankas Hermis transaction was a scheme to deceive and defraud and caused harm to the Fund and to its investors. Lushtak displayed a high degree of scienter. Thus, Lushtak willfully violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted and caused violations by Morgan Fuller of Sections 206(1) and 206(2) of the Advisers Act. His unlawful conduct was recurring and egregious. There are no mitigating circumstances.
The Division requests a cease and desist order, disgorgement of $239,000 plus prejudgment interest from April 1, 1997, and an investment adviser bar. The requested sanctions will serve the public interest and the protection of investors, pursuant to Section 203(f) of the Advisers Act. They accord with Commission precedent and the sanction considerations set forth in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The disgorgement amount is causally related to the proven wrongdoing. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 D.C. Cir. 1989); Hateley v. SEC, 8 F.3d 653, 655-56 (9th Cir. 1993).
IT IS ORDERED that, pursuant to Section 203(k) of the Advisers Act, Alexander Lushtak CEASE AND DESIST from committing or causing any violations or future violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.
IT IS FURTHER ORDERED that, pursuant to Section 203(k)(5) of the Advisers Act, Alexander Lushtak DISGORGE $239,000 plus prejudgment interest at the rate established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice, 17 C.F.R. § 201.600. Pursuant to Rule 600(a), prejudgment interest is due from April 1, 1997, through the last day of the month preceding which payment is made.
IT IS FURTHER ORDERED that, pursuant to Section 203(f) of the Advisers Act, Alexander Lushtak IS BARRED from association with any investment adviser.
Carol Fox Foelak
Administrative Law Judge
|1||Ms. Shei and Mr. Fagel are attorneys in the San Francisco District Office of the Commission.|
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