In the Matter of Pollard Kelley Auditing Services, Inc. and Terance Kelley, CPA
On Jan. 7, 2010, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Rule 102(e) of the Commission's Rules of Practice (Order) against Pollard Kelley Auditing Services, Inc. and Terance Kelley, CPA. The Order finds that Respondents violated numerous professional standards by failing to obtain written representations from the management of Pegasus Wireless Corporation, a public company they audited for the fiscal year ended 2006, and that in 2008 Respondents added additional workpapers to their audit documentation, which masked deficiencies in the audit. Respondents' conduct constituted improper professional conduct within the meaning of the Commission's Rules of Practice.
Based on the above, the Order denies Respondents the privilege of appearing or practicing before the Commission as accountants, with the right to apply for reinstatement after five years from the date of the Order, subject to specified conditions. Respondents consented to the issuance of the Order without admitting or denying any of the findings contained in the Order. (Rel. 34-61315; AAE Rel. 3100; File No. 3-13489)
SEC Charges Massachusetts-Based Operator of Alleged Ponzi Scheme and Obtains Emergency Relief
The Securities and Exchange Commission announced that it filed an emergency enforcement action on Jan. 7, 2010, in federal district court in Massachusetts and obtained a temporary restraining order, asset freeze and other relief against Richard Elkinson in connection with an alleged Ponzi scheme which defrauded investors in at least 12 states. The Commission's complaint alleges that Elkinson, of Framingham, Massachusetts, lured at least 130 investors to invest approximately $28 million with him through his d/b/a Northeast Sales, which he operated out of his home.
The Commission's complaint alleges that since at least 1997, Elkinson offered and sold unregistered securities in the form of promissory notes. According to the complaint, Elkinson falsely told investors that he was in the business of brokering contracts on behalf of a Japanese firm that manufactured uniforms (such as police uniforms and prison uniforms) to be sold to large purchasers such as state and local governments (and even the U.S. Olympic Committee) and that investors' money would be used to help finance specific uniform contracts. The investors received promissory notes signed by Elkinson, with terms that generally required payment within 300 to 330 days and with an interest rate that ranged from 9% to 13%. According to the complaint, however, Elkinson had no relationship with a Japanese uniform manufacturer, and there were no contracts to purchase uniforms. The Commission alleges that, while some investors did receive payments of principal and interest, those payments were made using funds obtained from other investors, and Elkinson was able to keep the scheme going as long as most of the investors kept rolling over their investments. In reality, according to the complaint, Elkinson used most of the investors' money for his own personal purposes, including gambling.
The Commission's complaint alleges that Elkinson violated 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. The Honorable Joseph L. Tauro issued a temporary restraining order against further violations of the securities laws, an order freezing Elkinson's assets, an order freezing all proceeds of the misconduct held by others, an order prohibiting the acceptance of additional investor funds, an accounting of assets and an order prohibiting the alteration or destruction of relevant documents, as well as other relief. The Commission also seeks the entry of a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of civil monetary penalties against Elkinson. [SEC v. Richard Elkinson 10-CA-10015-JLT (D. Mass.)] (LR-21364)
SEC Obtains Emergency Relief to Halt Unregistered Oil and Gas Offering Fraud
On Jan. 7, 2010, the Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California against Thomas A. Labry, a resident of Newport Beach, California, and his Costa Mesa, California-based entity, Cherokee Gas Systems, Inc., for perpetrating an ongoing oil and gas offering fraud that raised at least $1.4 million from investors throughout the United States and Canada. The court entered an order halting the alleged fraud and freezing the assets of Labry and Cherokee.
The SEC's complaint alleges that from December 2008 to the present, the Defendants have been engaged in a fraudulent scheme whereby they solicit investors through cold-calling to invest in an unregistered oil and gas offering. The complaint alleges that Labry, using Cherokee investor monies, purchased dialing software that can automatically place outbound calls from a pre-loaded database of numbers. In these calls, Cherokee representatives allegedly offer investors the opportunity to purchase units in oil and gas wells purportedly owned by Cherokee located on Walters Field in Oklahoma, for $25,000 per unit. According to the complaint, Cherokee representatives tell investors that they will start receiving returns on their investments, paid monthly, within 45 to 60 days of the investment. The complaint alleges that Defendants represent projected minimum monthly returns of $725 per $25,000 unit purchased, or about a 35% annual return. According to the complaint, investor monies are not invested in oil and gas production and investors are not receiving returns. Instead, the SEC alleges that Labry has misappropriated investor funds for his own personal use. Of the $1.4 million raised so far, Labry has withdrawn $268,800 in cash, cashed $148,126 in cashier's checks made out to "SCS" and expended another $466,283 to purchase cashier's checks made payable to various individuals.
The complaint further alleges that the Cherokee offering materials are almost identical to the offering materials previously disseminated by an entity Labry controlled, Iron Horse Petroleum, Inc., which had offered similar oil and gas interests in Walters Field in Oklahoma. Five states have issued administrative orders prohibiting Labry and/or Iron Horse from offering or selling securities based on findings that Labry and/or Iron Horse were offering and selling unregistered securities.
In its lawsuit, the SEC obtained an order (1) freezing the assets of Labry and Cherokee; (2) appointing a temporary receiver over Cherokee; (3) preventing the destruction of documents; (4) granting expedited discovery; (5) requiring accountings from Labry and Cherokee; and (6) temporarily enjoining Labry and Cherokee from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and temporarily enjoining Cherokee from future violations of Sections 5(a) and (5) of the Securities Act. The SEC also seeks preliminary and permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against Labry and Cherokee. A hearing on whether a preliminary injunction should be issued against the Defendants and whether a permanent receiver should be appointed is scheduled for January 19, 2010 at 1:30 p.m. [SEC v. Thomas A. Labry and Cherokee Gas Systems, Inc., United States District Court for the Central District of California, Civil Action No. SACV10-00018 JVS(ANX)] (LR-21365)
Securities and Exchange Commission v. Steve W. Salutric
The Securities and Exchange Commission today announced fraud charges and an asset freeze against Steve W. Salutric (Salutric), a resident of Carol Stream, Illinois, for operating a fraudulent scheme in which, through forgery and other fraudulent means, he misappropriated several million dollars from his clients at Results One Financial, LLC, an investment advisory firm in Elmhurst, Illinois.
The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, alleges that Salutric, from at least 2007 through the present, misappropriated over $2 million from at least 17 of his clients to support businesses and entities linked to him and, to make Ponzi-like payments to other clients. According to the SEC complaint, in a particularly egregious example of Salutric's fraudulent conduct, Salutric misappropriated over $400,000 from a 96-year-old client who resides in a nursing home and suffers from dementia.
At the SEC's request for emergency relief, the Hon. William J. Hibbler, United States District Court, Northern District of Illinois, issued a temporary restraining order against Salutric and an order freezing all assets under the control of Salutric, in addition to granting other emergency relief.
According to the allegations in the SEC complaint, Salutric misappropriated client funds by making unauthorized withdrawals from his clients' accounts at another financial institution that served as the custodian of client assets for Results One. To perpetrate his scheme, in a number of instances, Salutric forged client signatures on written withdrawal request forms and submitted the signed written requests to the account custodian. According to the SEC complaint, once client funds were withdrawn from Schwab, Salutric directed the funds to a number of entities related to Salutric including: approximately $259,000 to two local restaurants (one of which is partially owned by Salutric); approximately $610,000 to a film distribution company (Salutric previously co-produced a film called "Madison" with links to this company); and approximately $321,000 to Salutric's church (Salutric is the treasurer for his church and has signatory authority over the church's bank account). Most, if not all, of the other misappropriated funds were used in a Ponzi-like fashion to pay other clients.
According to the SEC complaint, Salutric violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. [SEC v. Steve W. Salutric, Civil Action No. 1:10-CV-00115 (N.D. Ill.)] (LR-21366)
Immediate Effectiveness of Proposed Rule Change
A proposed rule change (SR-FINRA-2009-095) has been filed by the Financial Industry Regulatory Authority pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder regarding a proposal to adopt NASD Rule 2370 (Borrowing From or Lending to Customers) as FINRA Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated FINRA Rulebook. The proposed rule change would also delete Incorporated NYSE Rules 352(e) (Limitations on Borrowing From or Lending to Customers), (f) (Loan Procedures) and (g). Publication is expected in the Federal Register during the week of January 11. (Rel. 34-61302)
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