SEC Charges Houston-Based Broker with Defrauding Florida Municipalities
The Securities and Exchange Commission today charged a Houston-based broker with engaging in unauthorized and unsuitable trading on behalf of two Florida municipalities, putting them at risk of losing millions of dollars while he reaped commissions of more than $14 million for himself.
The SEC’s complaint alleges that Harold H. Jaschke, while associated with the brokerage firm First Allied Securities, Inc., churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority and lied to both customers about his trading practices on their behalf. Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commissions and other revenue without regard for the customer’s investment objectives.
“Jaschke was unscrupulous with the municipalities’ funds and ignored their interests for his own personal gain,” said Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office. “He lied to his customers, took advantage of their trust, and risked their financial well-being.”
The SEC’s complaint, filed in federal court in Orlando, Fla., alleges that Jaschke engaged in a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes. For example, if interest rates were to increase by only 1 percent, the value of a 30-year bond could drop by 25 percent.
According to the SEC’s complaint, Jaschke’s risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. Jaschke exposed the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions.
The SEC alleges that Jaschke knew the municipalities’ ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital. Jaschke also knew that the municipalities’ ordinances prohibited the use of repurchase agreements for investment. According to the SEC’s complaint, had the bond market not swung sharply in Jaschke’s favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.
The SEC’s complaint alleges that Jaschke violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of the broker-dealer books and records provisions, Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder. The SEC’s complaint seeks a permanent injunction and disgorgement with prejudgment interest and a financial penalty.
In a related enforcement action, the SEC charged Jeffrey C. Young, First Allied’s former vice president of supervision, for failing to reasonably supervise Jaschke, failing to respond adequately to red flags relating to Jaschke, and failing to take reasonable steps to ensure that First Allied’s procedures regarding suitability were followed. Young agreed to settle the SEC’s enforcement action without admitting or denying the findings. The SEC’s order instituting settled administrative proceedings against Young suspends him from acting in a supervisory capacity for nine months and orders him to pay a $25,000 penalty. See Rel. 34-61247. (Press Rel. 2009-276; LR-21355)
In the Matter of Customer Sports, Inc., et al.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default as to Five Respondents in Customer Sports, Inc., Administrative Proceeding No. 3-13698. The Order Instituting Proceedings alleged that six respondents failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true as to five respondents and revokes the registrations of each class of registered securities of Customer Sports, Inc., General Magic, Inc., SportsPrize Entertainment, Inc., U.S. Interactive, Inc., and USA Biomass Corp. pursuant to Section 12(j) of the Securities Exchange Act of 1934.
The proceeding remains pending as to the sixth Respondent, Leonidas Films, Inc. (n/k/a Consolidated Pictures Group, Inc.). (Rel. 34-61243; File No. 3-13698)
In the Matter of Anna M. Baird, CPA
On December 28, the U.S. Securities and Exchange Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions against Anna M. Baird. The Order finds that Baird was permanently enjoined, by consent, from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Section 13(b)(5) of the Securities Exchange Act of 1934, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. The Order is based on a Final Judgment entered against her on Dec. 8, 2009, in the United States District Court for the Western District of Pennsylvania, in a civil action entitled SEC v. Black Box Corporation, et al., Civil Action No. 09-CV-1591.
The Order finds that from May 1997 until December 2002, Baird was the Chief Financial Officer of Black Box Corporation, a network infrastructure services provider of communication systems. Baird was licensed as a certified public accountant in Pennsylvania from 1982 through early 2003, when her license lapsed. The Order also finds that the Commission’s complaint alleged, among other things, that, while she was the Chief Financial Officer of Black Box, Baird participated in backdating stock options purportedly issued in October 2000 as part of a plan to reduce expenses, and that she knew or should have known that Black Box had failed to properly record compensation expenses for these options, which were granted at below market prices and were, therefore, in-the-money. The complaint further alleged that Baird knew or should have known that certain of Black Box’s filings with the Commission contained materially false and misleading statements.
Based on the above, the Order suspends Baird from appearing or practicing before the Commission as an accountant, with a right to apply for reinstatement after five years from the date of the Order. Baird consented to the issuance of the Order without admitting or denying any of the findings in the Order except as to the entry of the Final Judgment, which she admitted. (Rels. 34-61245; AAER-3090: File No. 3-13729)
In the Matter of Bahram A. Jafari and Mountain Resources, Inc.
On December 28, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) 0f the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Orders against Bahram A. Jafari and Mountain Resources, Inc. (MRI). The Order finds that from 2003 through May of 2005, Jafari solicited “friends and family” shareholders to invest at least $1,948,956 into a proprietary options trading program.
The MRI offering document offered investments by either of two means: (1) purchasing shares of MRI, with the price of the shares based on the total value of MRI’s securities holdings divided by the number of outstanding shares or (2) becoming participative investors where investors held individual trading accounts in their names and gave Jafari/MRI discretionary trading authority over their accounts to trade options. Jafari did not file a registration statement with the Commission to register the offer and sale of MRI shares.
In soliciting investors, Jafari represented that he was a competent and capable options trader who would generate profits for them. From time to time, Jafari also sent investors statements for their accounts showing substantial increases in MRI’s share price. Jafari failed to disclose that his trading in the 1999 through 2002 time-frame produced an average loss of 52% in the ten brokerage accounts through which he made his trades. Jafari failed to disclose that from 2002 on he continued to lose his investors’ funds through his options trading. The account statements that Jafari and MRI sent to investors made baseless and fictitious representations about the number of shares held by the investors and the share price.
As the result of Jafari’s conduct with respect to MRI’s shareholders, he willfully violated and MRI violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. As the result of Jafari’s conduct with respect to the participative investors, he willfully violated and MRI violated Section 10(b) of the Exchange Act and Rule 10b-5. As the result of Jafari’s and MRI’s failure to file a registration statement for the offer and sale of securities by MRI, he willfully violated and MRI violated Sections 5(a) and (c) of the Securities Act. As the result of MRI’s failure to register with the Commission as an investment company, MRI, willfully aided and abetted and caused by Jafari, violated Section 7(a) of the Investment Company Act.
Based on the above, the Order bars Jafari from association with any investment adviser or investment company, and orders Jafari and MRI to cease and desist from committing or causing any violations and any future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 7(a) of the Investment Company Act. Based upon Jafari’s sworn representations in his Statements of Financial Condition dated June 8, 2009, and other documents submitted to the Commission, the Commission is not imposing a penalty against Jafari. Bahram A. Jafari and Mountain Resources, Inc. consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rels. 33-9101; 34-61246; IA-2966; IC-29098; File No. 3-13730)
In the Matter of Jeffrey C. Young
On December 29, the Commission issued an Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940 finding that Jeffrey C. Young failed reasonably to supervise Harold H. Jaschke, a registered representative who, between May 2006 and March 2008, executed unauthorized transactions, made unsuitable recommendations, and churned his customers’ accounts.
During this time Jaschke was associated with First Allied Securities, Inc., a registered broker-dealer for which Young was the vice president of supervision. Jaschke violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by engaging in an unauthorized high risk, short term Treasury bond trading strategy on behalf of two Florida municipalities. The municipalities were required by ordinance to invest their funds in order to provide for safety of capital, liquidity of funds, and investment income, in that order of importance, and were prohibited specifically from using the proceeds of repurchase agreements and reverse repurchase agreements for the purpose of making investments. Despite being aware of the ordinances, Jaschke engaged in a high risk trading strategy and leveraged the municipalities’ accounts in violation of the ordinances. In addition, Jaschke lied to the municipalities to conceal the risky nature of the investments, his use of leverage, and large unrealized losses the accounts experienced as a result of his misconduct.
The Order finds that Young failed reasonably to supervise Jaschke because he did not respond adequately to “red flags” relating to Jaschke and failed to take reasonable steps to ensure that First Allied’s procedures regarding suitability were followed. Young received notices generated by Bear, Stearns Securities Corp., First Allied’s clearing broker, that highlighted declining equity and high turnover in the municipalities’ accounts. However, Young did not contact the municipalities to discuss the account activity. In addition, Young was aware that Jaschke claimed that the Bear Stearns account statements were inaccurate and that Jaschke provided the municipalities with his own trading spreadsheets. While Young himself did not understand Jaschke’s spreadsheets and, in fact, questioned the accuracy of the information contained therein, Young did not ensure that the spreadsheets were accurate, despite knowing that they were being provided to the municipalities. Finally, Young failed to follow First Allied’s procedures regarding suitability determinations. Thus, Young failed reasonably to supervise Jaschke.
The Order requires Young to pay a $25,000 civil penalty. The Order also suspends Young from associating in a supervisory capacity with any broker, dealer or investment adviser for nine months. Young consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rels. 34-61247; IA-2967; File No. 3-13731)
Default Judgment of Permanent Injunction And other Relief Entered Against Defendants Ronnie Eugene Bass, Homepals, LLC and Homepals Investment Club, LLC
The Commission announced that on Dec. 21, 2009, the Honorable Kenneth L. Ryskamp, United States District Court Judge for the Southern District of Florida, entered a default judgment of permanent injunction and other relief against Defendants Ronnie Eugene Bass, HomePals, LLC and HomePals Investment Club, LLC (collectively HomePals). Bass and HomePals defaulted by failing to appear, answer or otherwise plead in response to the Commission’s complaint. The default judgment permanently enjoins Bass and HomePals from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the default judgment enjoins Bass from future violations of Sections 206(1), (2) and (4) of the Investment Advisers Act and Rule 206(4)-8.
On Oct. 16, 2009, the Commission filed its complaint against Bass, HomePals and others alleging that they ran a Ponzi scheme and affinity fraud that targeted Haitian-American investors residing primarily in South Florida. The Commission’s complaint alleged that from April 2008 through December 2008, HomePals, and their principals, Bass, Abner Alabre and Brian J. Taglieri, raised at least $14.3 million through the sale of unsecured notes to hundreds of Haitian-American investors by promising guaranteed returns of 100% every 90 days. The defendants claimed they were able to generate such spectacular returns through. Bass’ purported successful trading of stock options and commodities. The Commission’s complaint further alleged that, in reality, Bass traded no more than $1.2 million of the $14.3 million raised, generated trading losses of 19 percent, and that HomePals used the bulk of the investor funds to repay earlier investors in typical Ponzi scheme fashion. [SEC v. HomePals, LLC, et al., Civil Action No. 09-CV-81524-Ryskamp/Vitunac (S.D. Fla.) (LR-21354)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the New York Stock Exchange relating to the amendment of NYSE Rules 116 and 123C to allow more than one closing print to be reported to the consolidated tape for closing transactions that exceed 99,999,999 Shares (SR-NYSE-2009-126) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 28. (Rel. 34-61235)
A proposed rule change filed by the Chicago Board Options Exchange (SR-CBOE-2009-100) to modify CBSX Rule 51.8 to add pegged cross orders, to add an interpretation regarding pricing of cross orders, and to add greater flexibility to intermarket sweep orders has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 28. (Rel. 34-61241)
Proposed Rule Change
The Commission issued notice of a proposed rule change submitted by NYSEArca (SR-NYSEArca-2009-113) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 for the listing and trading of Sprott Physical Gold Trust. Publication is expected in the Federal Register during the week of December 28. (Rel. 34-61236)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change submitted by NYSE Arca (SR-NYSEArca-2009-101) amending Equities Rule 5.2(j)(3). Publication is expected in the Federal Register during the week of December 28. (Rel. 34-61240)
The Commission approved a proposed rule change filed by Financial Industry Regulatory Authority (SR-FINRA-2009-076), under Section 19(b)(2) of the Securities Exchange Act of 1934 amending the FINRA Rule 9550 series (Expedited Proceedings). Publication is expected in the Federal Register during the week of December 28. (Release No. 34-61242)
SECURITIES ACT REGISTRATIONS
RECENT 8K FILINGS